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TMI Blog2018 (4) TMI 1634X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. The appellant assessee is a registered partnership firm and is engaged in the business of import of rough diamonds and export of finished diamonds after cutting and polishing them. For the assessment year 20012002, the assessee had filed the return of income declaring total income of Rs. 18.28 lacs (rounded off). The assessee had claimed deduction of Rs. 68.74 lacs (rounded off) under section 10B of the Income Tax Act, 1961. The Assessing Officer framed scrutiny assessment under section 143(3) of the Act on 28.2.2003. In such order, he noted that the assessee firm has its manufacturing unit at Surat, Ahmedabad and Visnagar. It had also started a separate manufacturing unit at Surat which was a hundred percent export oriented unit. Income from such activity was claimed exempt under section 10B of the Act and that present one was a second year of such EOU. After completing such assessment, the Assessing Officer reopened the assessment by issuing notice under section 148 of the Act on the ground that section 10B was amended by which explanation 4 was inserted by the Finance Act, 2003, providing that for the purposes of the said section "manufacture or produce" would include c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a manufacturing activity. From the rough diamonds, the processed and polished diamond is brought into existence through a complex and sophisticated process. The original product i.e. rough diamond and the end product i.e. cut and polished diamonds are two entirely different commodities having different uses, different markets and different values. Uncut and unpolished diamond is put only to industrial uses. Polished diamond is principally used for gems and jewellery. (3) Counsel pointed out that Bombay High Court in case of Commissioner of Incometax v. Fateh Granite (P) Ltd reported in (2009) 222 CTR 638 (Bombay), held that cutting and polishing of granites amount to manufacture or production of article or thing. It was observed that the expression "produce" is wider than "manufacture". It was noticed that Section 10B of the Act uses expression "manufacture or produce". (4) Counsel pointed out that the decision in case of Gem India Mfg. Co.(supra), was considered in the later judgment by the Supreme Court in case of Heaven Diamonds (P) Ltd. (judgment dated 18.11.2011) explaining its earlier judgment and remitted the matter back to the Tribunal to reconsider whether the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Gem India Mfg. Co.(supra). It was a case in which in the context of deduction under section 80I of the Act, the question cropped up whether cutting and polishing diamonds amounted to manufacture or production of article or thing. The Tribunal and the High Court having accepted the assessee's stand, the Supreme Court reversed the same making the following observations : "6. There can be a little difficulty in holding that the raw and uncut diamond is subjected to a process of cutting and polishing which yields the polished diamond, but that is not to say that the polished diamond is a new article or thing which is the result of manufacture or production. There is no material on the record upon which such a conclusion can be reached." 9. Two things thus emerge from this judgment. One that the Supreme Court readily accepted that the raw and uncut diamonds is subjected to a process of cutting and polishing which yields the polished diamond. However this would not be synonyms to saying that polished diamond is a new article or thing which is the result of manufacture or production. In absence of any material on record, upon which, such a conclusion can be reached, the Suprem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cut diamond. We therefore, do not believe that by virtue of judgment in case of Gem India Mfg. Co.(supra), any further discussion or inquiry is impermissible. 12. We may now test the assessee's contention that explanation 4 to section 10B was either clarificatory or having retrospective effect. Section 10B of the Act, as is wellknown, provides for deduction of profits and gains derived by a hundred per cent exportoriented undertaking from export of articles or things for a specified period from the time undertaking begins to manufacture or produce articles or things. Explanation 4 which was added to the said section with effect from 1.4.2004 provides that for the purposes of this section, "manufacture or produce' shall include the cutting and polishing of precious and semiprecious stones. In plain terms, this provision has been made applicable without any retrospectivity. The language of the provision also does not make it clarificatory. The budget speech of the Finance Minister explaining introduction of the said provision would also not help the assessee. In such speech, while allying the fears of gem and jewellery industry about withdrawal of benefits under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mounts to manufacture or production of article or thing. 14. The question whether a particular process amounts to manufacture has occupied the attention of the Courts on numerous occasions. Such a question typically arises in the background of exciseability of the product. The Supreme Court has laid down certain principles and guidelines to ascertain whether a particular activity amounts to manufacture. In case of India Cine Agencies v. Commissioner of Incometax reported in (2009) 308 ITR 98(SC), the Supreme Court considered the question whether conversion of jumbo rolls of photographic films into small flats and rolls of desired sizes amounted to production. In this background, it was observed as under : 5. 'Manufacture' is a transformation of an article, which is commercially different from the one, which is converted. The essence of manufacture is the change of one object to another for the purpose of making it marketable. The essential point thus is that, in manufacture something is brought into existence, which is different from that, which originally existed in the sense that the thing produced is by itself a commercially different commodity whereas in the case of pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of any new and distinct and excisable product. 16. In case of ServoMed Industries Pvt. Ltd v. Commissioner of C. Ex. Mumbai reported in 2015 (319) ELT 578 (SC) in a detailed analysis of the case law, it was held that sterilization of syringes and needles though involved process of removal of foreign matter from goods and unsterilized syringes and needles were of no commercial use without sterilization, the process of sterilization did not amount to manufacture. 17. It is undisputable that the rough diamonds are subjected to the process of cutting and polishing to bring into existence the polished diamonds. Such process has been noted by the Tribunal in the judgment in case of Flawless Diamond (India) Ltd(supra) as under : "'16. As far as the issue whether cutting and polishing of diamonds would constitute manufacturing or not, before us ld. Counsel of the assessee had produced rough diamonds which are just like ordinary stones or more precisely coloured glass type with uneven surface and were of uneven shape. All the samples were of dark brownish / greenish/bluish colour measuring about 1 c.m. To 2½ c.m. ld. Counsel of the assessee produced cut and polished ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a rotating wheel or lap coated with diamond powder; Polishing, preparing the finely ground or facet, by a method similar to grinding." 17. We also used Inter net to find out scientific information on the process involved in making out fine diamond. We could get Wikepedia encyclopedia on 'Net' in which various stages involved in making of a 'diamond' are described. The process of cutting and polishing of diamonds as described in the Wikepedia encyclopedia is as under: Diamond cutting is the art, skill and, increasingly. science of changing a diamond from a rough stone into a faceted gem. Cutting diamond requires specialized knowledge, tools, equipment, and techniques because of its extreme hardness. The first guild of diamond cutters and polishers (diamantaire) was formed in 1375 in Nuremberg, Germany, and led to the development of various types of 'Cut'. This has two meanings in relation to diamonds. The first is the shape: square, oval, and so on. The second relates to the specific quality of cut within the shape, and the quality and price will vary greatly based on the cut quality. Since diamonds are very hard to cut, special diamond bladed edges are u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. The round brilliant cut and square brilliant cuts are preferred when the crystal is an octahedron, as often two stones may be cut from one such crystal. Oddly shaped crystals, such as macles are more likely to be cut in a fancy cut that is, a cut other than the round brilliant which the particular crystal shape lends itself to. Even with modern techniques, the cutting and polishing of a diamond crystal always results in a dramatic loss of weight, about 50%. Sometimes the cutters compromise and accept lesser proportions and symmetry in order to avoid inclusions or to preserve the weight. Since the percarat price of a diamond shifts around key milestones (such as 1.00 carat), many one carat (200 mg) diamonds are the result of compromising Cut quality for Carat weight. Some jewelry experts advise consumers to buy a 0.99 carat (198 mg) diamond for its better price or buy a 1.10 carat (220 mg) diamond for its better cut, avoiding a 1.00 carat (200 mg) diamond, which is more likely to be a poorly cut stone. Colour retention In coloured diamonds, cutting can influence the colour grade of the diamond, thereby raising its value. Certain cut shapes are used to intensify the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tual process also includes many more stages depending on the size and quality of the rough stone. For example, bigger stones are first scanned to get the three dimensional shape, which is then used to find the Optimal usage. The scanning may be repeated after each stage and bruting may be done in several steps, each bringing the girdle closer to the final shape. The various processes like cleaving and splitting, bruting and girdling of diamond and polishing and cutting have been discussed in further detail in the book, but we feel there is no need to highlight the technical aspects. Sufficient it to say that rough diamonds looks like a stones (or glass) of uneven shape which, as mentioned earlier, were looking highly coloured, particularly like brownish/greenish/bluish colours, whereas the final product of diamond is a much smaller piece and generally sparkling white in colour. It was explained to us that size of the final product i.e. 'polished diamond' depends on many factors and while buying rough diamonds only an expert can evaluate as to which size the final product would be and even such opinion is not final because while cutting, the rough diamond may get cut ..... 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