IT: Cutting and polishing of diamond amounts to manufacturing or production of article or thing and, therefore, an assessee, engaged in said activity, is entitled to claim deduction under section 80-IC
■■■
[2014] 45 taxmann.com 67 (Mumbai - Trib.)
IN THE ITAT MUMBAI BENCH 'F'
Flawless Diamond (India) Ltd.
v.
Additional Commissioner of Income-tax, Range -5(1), Mumbai*
AND AMIT SHUKLA, JUDICIAL MEMBER
IT APPEAL NOS. 2886 & 5617 (MUM.) OF 2012
[ASSESSMENT YEARS 2008-09 TO 2009-10]
FEBRUARY 14, 2014
Section 80-IC of the Income-tax Act, 1961 - Deductions - Special provisions in respect of certain undertakings or enterprises in certain special category States (Manufacturing) - Assessment years 2008-09 and 2009-10 - Whether cutting and polishing of diamond amounts to manufacturing or production of article or thing and, therefore, an assessee, engaged in said activity, is entitled to claim deduction under section 80-IC - Held, yes [Para 16] [In favour of assessee]
FACTS
| ■ | The assessee-company was engaged in the business of cutting and polishing of diamond. The profits derived from such units was claimed as deduction under section 80-IC. | |
| ■ | The Assessing Officer held that the cutting and polishing of the diamond was nothing but processing which did not amount to manufacturing so as to the eligible for deduction under section 80-IC. Accordingly, assessee's claim was rejected. | |
| ■ | The Commissioner (Appeals) confirmed the order of Assessing Officer. |
On second appeal:
HELD
| ■ | In order to determine whether the cutting and polishing of diamond amounts to manufacturing or production of any article or thing, various process through which the rough diamond undergoes to become a polished diamond, has to be examined. Here in this case before the Assessing Officer, the assessee has demonstrated the various process of diamond cutting and polishing along with the various stages and machinery involved. Further, before the Commissioner (Appeals) also, the assessee has furnished various additional evidences including the list of machineries and the photographs of various machineries involved in the process of cutting and polishing which have also been examined by the Assessing Officer. | |
| ■ | In fact, there is no counter-opinion or rebuttal on this score by the department. It has not been the revenue's case that various processes and the staging of cutting and polishing of diamond does not result into a separate and distinct entity, which is polished diamond. The conversion of a rough raw diamond involves different processing and several stages to become into a polished diamond, which is entirely a different product, and is mainly used in manufacturing of jewellery and also as an independent item of sale, whereas the raw diamond has only industrial usage. | |
| ■ | The market value of a rough diamond and polished diamond is also at great variance, as polished diamond is far more expensive than, the rough diamond. Looking from the angle of usage, shape, size and colour, the rough diamond converts into entirely a different and distinct product all together which has a different character and usage. [Para 12] | |
| ■ | Even going by the new definition of 'manufacture' as envisaged in section 2(29BA), the process of transformation of rough diamond into polished diamond, results into a new and distinct article having different name and use. Thus, the entire process of transformation in this case can be held as manufacturing within the ambit of section 80-IC. [Para 13] | |
| ■ | Thus, it can be safely inferred that, what is required to be examined is the process undertaken for conversion of raw/rough diamonds into superior or polished diamond. In this case, the assessee has duly placed on record the entire process and the stages through which the rough diamond undergoes for becoming the polished diamond, which is a separate and distinct product and has a different usage. Such a process has neither been rebutted by the revenue nor any other-counter opinion have been sought to contradict the assessee's version of the process. | |
| ■ | Thus, once the entire process of cutting and polishing of diamond have not been rebutted and also the fact that the rough and polished diamond are two distinct commodities having different usage, not only in the common parlance but also in real sense, then it has to be understood that the cutting and polishing of diamond amounts to manufacturing or production of article or thing as envisaged for the purpose of claiming deduction under section 80-IC. [Para 16] | |
| ■ | In the result, assessee's appeal is allowed. |
CASES REFERRED TO
CIT v. Gem India Mfg. Co. [2001] 249 ITR 307/117 Taxman 368 (SC) (para 3), ITO v. Arihant Tiles and Marbles [2007] 320 ITR 79/186 Taxman 439 (SC) (para 3), S. Rajiv Mfg. Co. v. Jt. CIT [2007] 12 SOT 237 (Mum.) (para 4), CIT v. Paul Bros [1995] 216 ITR 548/79 Taxman 378 (Bom.) (para 7), CITv. Fateh Granite (P.) Ltd. [2009] 314 ITR 32 (Bom.) (para 7), CIT v. A.R.J. Security Printers [2003] 264 ITR 276/131 Taxman 297 (Delhi) (para 7), Sheetal Diamonds Ltd. v. ITO [2011] 47 SOT 75/12 taxmann.com 123 (Mum.) (para 8), ITO v. Heaven Diamonds (P.) Ltd. [IT Appeal No. 2504 & 281/71 (Mum.) of 2014, dated 26-2-2009] (para 8) Bhansali & Co. v. Asstt. CIT [IT Appeal No. 7352 (Mum.) of 2012] (para 9), Aspinwall & Co. Ltd. v. CIT [2001] 251 ITR 323/118 Taxman 771 (SC) (para 10),Dy. CST v. PIO Food Packers [1989] Supp. SCC 174 (para 10) and CIT v. Emptee Poly Yarn (P.) Ltd.[2010] 320 ITR 665/188 Taxman 188 (SC) (para 11).
Vijay Mehta for the Appellant. Rajesh Ranjan Prasad for the Respondent.
ORDER
Amit Shukla, Judicial Member - The present appeals have been preferred by the assessee challenging the impugned order dated 2nd March, 2012, for the assessment year 2008-09 and order dated 9th January, 2012, for the assessment year 2009-10, passed by the learned Commissioner (Appeals)-IX, Mumbai, for the quantum of assessment passed under section 143(3) of the Income-tax Act, 1961 (for short "the Act"). Since both these appeals pertain to the same assessee involving common issues arising out of identical set of facts and circumstances, therefore, as a matter of convenience, these appeals were heard together and are being disposed of by way of this consolidated order. However, in order to understand the implication, it would be necessary to take note of the facts of one appeal. We are, accordingly, narrating the facts, as they appear in the appeal in ITA No. 2886/Mum./2012, for A.Y. 2008-09.
2. The assessee, for the A.Y. 2008-09, by way of various grounds of appeal, has challenged the disallowance of claim of deduction u/s 8O-IC of Rs. 18,41,14,136, as against the claim of Rs. 19,27,51,144, mainly on the ground that cutting and polishing of the diamonds do not amount to manufacturing or production of "article" or "thing".
3. The assessee company is engaged in the business of cutting and polishing of diamond and trading in jewellery and polished diamonds for which it has setup its unit at Selaqui, District Dehradoon. From this unit, the assessee has been carrying out the activity of cutting and polishing of diamonds manufacturing of jewellery. The profits derived from such units have been claimed as deduction under section 80-IC to the tune of Rs. 19,27,51,144, being 100% of the profit. The Assessing Officer required the assessee to substantiate the claim of deduction made under section 80-IC, specifically in view of the decision of the Supreme Court in CIT v. Gem India Mfg. Co. [2001] 249 ITR 307/117 Taxman 368. In response, the assessee, vide letter dated 28th December, 2010, submitted that the decision of the Supreme Court in Gem India Mfg. Co. (supra) will not apply to the facts of the present case as in that case, there was no material on record upon which any conclusion could have been reached that the diamond cutting and polishing tantamount to manufacturing activity. It was submitted that the diamond cutting and polishing involves a very long process which requires special skill to make rough diamond into polished diamond. The rough diamond and polished diamond have altogether different use, purpose and value in the market. The assessee explained the detailed process which is required for cutting and manufacturing of raw diamond and converting the same into a polished diamond. These processes, as elaborated by the assessee, are reproduced herein below because the same has a great significance on the issue involved.
"Upon reaching its destination the rough diamond is carefully examined, nowadays with the help of computers, decisions are made on how it should be cut to yield the greatest value. After the stone's size and shape are determined, taking into consideration the rough's shape, as well as the quantity and position of its internal inclusions, the stone is marked and usually sawed. The stone then goes through a series of diamond cutters who each have inclusions, the stone is marked and usually sawed. The stone then goes through a series of diamond cutters who each have their own specialty, finally, the diamond is polished and cleaned, all ready for sale.
2. The rough diamond is given to the splitter and it is he who determines the future of the stone. He decides how it should be shaped to retain the utmost weight with the most brilliant effect.
3. From the splitter the diamond passes to the cutter. His expertise lies in giving the stones the definite form which they are to preserve.
4. After a gemstone is sawed and ground to the desired shape and sanded to remove rough marks left by coarser grits, it is usually polished to a mirror-like finish to aid light reflection from the surface of the stone (or refraction through the stone, in the case of transparent materials).
The four basic steps for Diamond Cutting are:
Planning
The planner must consider the size, clarity and crystal direction when deciding where to mark the diamond rough. Incorrectly marking a diamond by a fraction of a millimeter can make a difference of thousands of doilars in some cases. In addition, if one attempts to cleave a diamond in the wrong position, the diamond could shatter and become worthless.
Cleaving or sawing
Once the planner decides where the diamond should be cut, the diamond is either manually cleaved or sawed. Sawing can be done with a diamond-coated rotary saw or a laser.
Bruting
Bruting forms the basic face-up outline of a round diamond to prepare it for faceting. During the bruting phase the diamond being bruted is spun on a rotating lathe while another diamond is forced against it, gradually forming the rounded outline. Essentially, one diamond is used to shape the other.
Polishing
Polishing is the final stage of the cutting process, giving the diamond its finished proportions. The first and perhaps most crucial polishing stage is blocking. This step lays the foundation for the potential of the diamond's performance because it establishes the diamond's bask symmetry, During the blocking stage, the first 17 or 18 facets are made, creating a sing cut. For some very small diamonds, the process stops here. Larger diamonds go on to the brillianteering stage. In this process a specialist called a brillianteer, polishes the final facets. It is this stage that will determine how much brilliance and fire a diamond displays. Minor inconsistencies in symmetry and proportions can make the difference between a gorgeous diamond and a dull, lifeless stone. The Hearts and Arrows in our beautiful diamonds are the result of a skilled and mastered brililanteer."
Further, the assessee also explained the purpose for which rough diamond is used and also the usage of polished diamond in the following manner:—
"The rough diamond is used for following purposes:
| 1. | To cut, polish or wear away any material including other diamonds. | |
| 2. | Use of diamond powder as an abrasive. | |
| 3. | Use in laboratories as containment for high pressure experiments, high performance bearings used in specialized windows. | |
| 4. | Use of diamond as semieonductor suitable to build microchips. | |
| 5. | Use as heat sink in electronics. |
The polished diamond is used for following purpose:
1. Used in the manufacturing of jewellery.
The polished diamond is altogether a different product than to rough diamond. The rough has the industry use whereas the polished diamonds are used for Jewellery making. The rough diamonds cannot be used for the making for Jewellery."
Various decisions were also relied upon to explain the meaning of the word "manufacturing" especially the decision of the Supreme Court in ITO v. Arihant Tiles and Marbles [2007] 320 ITR 79/186 Taxman 439.
4. The Assessing Officer rejected the assessee's contention and held that the cutting and polishing of the diamond is nothing but processing which does not amount to manufacturing so as to the eligible for deduction under section 80-IC. He strongly relied upon the decision of the Hon'ble Supreme Court in Gem India Mfg. Co. (supra), wherein, it has been categorically held by the Hon'ble Supreme Court that cutting and polishing of raw and uncut diamonds does not amount to manufacture or production of goods. He further noted that the said decision of the Hon'ble Supreme Court as also being followed by the Tribunal, Mumbai Bench, in S. Rajiv Mfg. Co. v. Jt. CIT [2007] 12 SOT 237. Thus, he only allowed the claim of deduction under section 80-IC on manufacturing and sale of jewellery but disallowed the claim of deduction on account of cutting and polishing of diamond. The proportionate disallowance as worked out by him is as under:—
| Total turnover | (A) | Rs. 165,70,49,443 |
| Profit | (B) | Rs. 19,27,51,144 |
| Sale of jewellery | (C) | Rs. 7,42,50,925 |
| Deduction allowable u/s 80-IC | (B) × (C) A | Rs. 86,37,008 |
5. The assessee, before the learned Commissioner (Appeals), reiterated that the diamond cutting and polishing involved a very lengthy process and requires special skills to convert rough diamond into polished diamond and both are different products recognised in the market. The implication of the judgment of Gem India Mfg. Co. (supra) was also explained and was distinguished from the facts of the assessee's case. The assessee also filed photographs of the various machinery used and the tools utilised along with the process of converting the rough diamond into polished diamond. The assessee also placed reliance upon the decision of the Hon'ble Supreme Court in Arihant Tiles & Marbles (supra). Since the additional evidence was filed in the form of list of machinery, photographs of machinery, describing the entire process, the learned Commissioner (Appeals) called for the remand report from the Assessing Officer. The Assessing Officer, in the remand report dated 13th January, 2012, by and large, reiterated the observations and conclusions drawn by him in the assessment order. He also strongly relied upon the definition of the word"manufacture" introduced by the Evidence Act, 2009, in section 2(29BA) and submitted that the decision of the Hon'ble Supreme Court in Arihant Tiles & Marbles (supra) will not be applicable in the light of the new definition. The Assessing Officer also observed that for making the finished diamond, number of process are though involved, however, such activities cannot constitute manufacturing for the purpose of being eligible for deduction under section 80-IC. He also referred to the definition of manufacturing and definition given in exim policy and section 2(r) of Special Economic Zone Act, 2005. He again reiterated the applicability of the judgment of the Hon'ble Supreme Court in Gem India Mfg. Co. (supra) to contend that this issue has been set at rest by the Apex Court. The detailed explanation given in the remand report by the Assessing Officer has been incorporated by the learned Commissioner (Appeals) from Pages-8 to 14 of the appellate order. The assessee, in response, submitted its counter-comments, rebutting the various observations and the conclusion given by the Assessing Officer in the remand report.
6. The learned Commissioner (Appeals), after considering the entire facts and the submissions made by the Assessing Officer as well as the assessee, held that the decision of the Hon'ble Supreme Court in Gem India Mfg. Co. (supra) still holds good insofar as deciding the issue, whether the cutting and polishing of diamond amounts to manufacturing or not. Ultimately, after analysing the said decision of the Hon'ble Supreme Court, he held that the assessee's claim for deduction cannot be allowed on the cutting and polishing of the diamond as it does not amount to manufacturing.
7. Before us, the learned counsel, Mr. Vijay Mehta, on behalf of the assessee, first of all, submitted that the assessee's similar claim for deduction under section 80-IC on account of cutting and polishing of diamond has been accepted by the Assessing Officer in the earlier assessment year that is 2007-08 and, therefore, same cannot be withdrawn in the assessment year 2008-09. The said claim for deduction under section 80-IC has been allowed by the Department in the scrutiny proceedings passed under section 143(3). Therefore, in the subsequent year, the same very claim for deduction cannot be disallowed on the ground that in this year cutting and polishing of the diamond do not amount to manufacturing. In support of his contention that if the claim for deduction in Chapter VIA, has been allowed in the earlier year on similar facts and circumstances, then the same should be allowed in the subsequent years also. He mainly relied upon the following decisions.
| (i) | CIT v. Paul Bros. [1995] 216 ITR 548/79 Taxman 378 (Bom.); | |
| (ii) | CIT v. Fateh Granite (P.) Ltd. [2009] 314 ITR 32 (Bom.); | |
| (iii) | CIT v. A.R.J. Security Printers, [2003] 264 ITR 276/131 Taxman 297 (Delhi). |
8. On merits, he submitted that before the Assessing Officer as well as before the learned Commissioner (Appeals), the entire process through which rough diamond is converted into polished diamond has been explained in detail and there is no rebuttal or counter-opinion by the Department. Both the authorities have heavily relied upon the decision of the Hon'ble Supreme Court in Gem India Mfg. Co. (supra) which cannot be held to be applicable in assessee's case. In that case, the Hon'ble Supreme Court categorically held that there was no material available on record to establish that cutting and polishing of diamonds amounts to manufacturing or production of new article or thing. He drew our attention to the said observation of the Supreme Court Hon'ble in Gem India Mfg. Co. (supra). Thus, it cannot be held that a general proposition has been laid down by the Supreme Court Hon'ble that in every case even where the entire process of manufacturing has been explained, then also the said judgment would be applicable. He further submitted that the said decision of the Supreme Court Hon'ble has come for consideration before the Tribunal, Mumbai Bench, in Sheetal Diamonds Ltd. v. ITO [2011] 47 SOT 75/12 taxmann.com 123, wherein the Tribunal has discussed the detailed process through which rough diamond is converted into polished diamond and both are commercially different commodity. The Tribunal has also referred to the decision of the Hon'ble Supreme Court in Gem India Mfg. Co. (supra) and also distinguished on the basis that once the entire material has been placed with regard to the process of manufacturing, then the said decision cannot be held to be applicable. He drew our attention to the various observations and findings given by the Tribunal in the said decision. He further made a very important submission that in the another case, the Tribunal in ITO v.Heaven Diamonds (P.) Ltd. IT Appeal Nos. 2817 & 2504/Mum./2004, dated 26th February, 2009, has decided this issue against the assessee strictly following the decision of the Supreme Court in Hon'ble Gem India Mfg. Co. (supra). The said decision of the Tribunal was also upheld by the High Court vide order dated 17th September, 2009 in ITA No.1759 of 2009. Thereafter, the assessee preferred an appeal before the Supreme Court being Civil Appeal No.9936 of 2012. The Supreme Court, while granting leave, has categorically held that simple reliance on the judgment of Gem India Mfg. Co. (supra) may not be correct for the simple reason that in the said case the assessee could not demonstrate the process undertaken by it to convert the raw material into a superior commodity. The Supreme Court Hon'ble remitted the matter back to the Tribunal to categorically consider whether the process undertaken by the assessee constitutes manufacture or not. Thus, he submitted that the Supreme Court Hon'ble has itself clarified that the decision ofGem India Mfg. Co. (supra) cannot be applied in all the cases. The process of conversion of raw diamond into a polished diamond has to be examined in a given case and here the assessee has submitted a detailed process as to how a rough diamond has been converted into polished diamond which involves various stages through which cutting and polishing of diamond is undertaken for making altogether different product. The case of the assessee is thus, purely distinguishable from the decision of Gem India Mfg. Co. (supra) inasmuch as the assessee has fully demonstrated the entire process of manufacturing. He further submitted that the definition of manufacture as brought in the statute w.e.f. 1st April, 2009 in section 2(29BA) will also go to assist the assessee's case even though the said provision is applicable from the assessment year 2009-10 inasmuch as the process of cutting and polishing of diamond brings into existence all together a new and distinct commodity having different character and use. Thus, the assessee's claim of deduction under section 80-IC cannot be denied in this case. Lastly, he submitted that provisions of section 80-IC provides that the deduction is allowed on the profits derived by undertaking and it does not envisages about part of manufacturing. Once the Assessing Officer has accepted the manufacturing of jewellery from the said undertaking, the entire profit of the undertaking has to be allowed as deduction, even though part of the manufacturing involved for cutting and polishing of diamond is not considered as manufacturing by the Department. On this ground also, the assessee's claim is liable to be allowed.
9. Per contra, the learned Departmental Representative, on the first proposition of the learned counsel, submitted that even though the assessee's claim has been allowed in the previous assessment year, the same cannot be held to be res judicata in this year as the claim for deduction under Chapter VIA has to be allowed in view of the statutory provisions and the formalities prescribed therein. The doctrine of consistency cannot be held on the question of law because if something is unsustainable in law, then definitely a different view can be taken from the earlier year. On merits, he submitted that once the Supreme Court has directly answered the question that cutting and polishing of diamond does not amounts to "manufacture" then it is law of the land and qua that issue it has attained finality and becomes binding upon all the Courts. He further relied upon the decision of the Tribunal in Bhansali & Co. v. Asstt. CIT [IT Appeal No.7352 (Mum.) of 2012], wherein the Tribunal has strongly relied upon the decision of the Hon'ble Supreme Court in Gem India Mfg. Co. (supra) to decide the similar issue against the assessee. He also brought to our notice that one of us (J.M) is a co-author in the said decision and, therefore, different view cannot be taken. Further on merits, he strongly relied upon the reasons given by the Assessing Officer in the assessment order as well as in the remand report and also the conclusion drawn by the learned Commissioner (Appeals).
10. We have carefully considered the rival contentions perused the relevant findings of the authorities below and also the material placed on record. The main issue before us is, firstly, whether the cutting and polishing of diamond amounts to manufacturing or production of article or thing as envisaged in section 80-IC and secondly, whether the decision of the Hon'ble Supreme Court in Gem India Mfg. Co. (supra) has set at rest the said issue and is no longer res integra. The activities which can be considered to be manufacturing or production of article or thing or not, has been the subject-matter of the judicial scrutiny and analysis in several cases. In majority of the judicial pronouncements, the emphasis on the term "manufacture" has been understood as the end-result of one or more process through which the original commodity changes or converts into a distinct article having different name, characteristic, use, etc. The Hon'ble Supreme Court has always opined to examine the process involved for manufacturing of a product in question. In case ofAspinwall & Co. Ltd. v. CIT [2001] 251 ITR 323/118 Taxman 771 (SC), the Apex Court held that in the absence of a definition of the word "manufacture" it has to be given a meaning as it is understood in common parlance. It is to be understood as meaning, the production of article for use from raw material or prepared materials by giving such materials new forms, qualities or combinations whether by hand labour or machines. If the change made in the article results in a new and different articles, then it would amount to manufacturing activities. The Supreme Court also quoted the observations made in Dy. CST v. PIO Food Packers [1989] Supp. SCC 174 are as under:—
"Commonly manufacture is the end-result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another and indeed there be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognised as a new and distinct article that a manufacturer can be said to take place."
11. Further, the Hon'ble Supreme Court in Arihant Tiles and Marbles (supra) has cited catena of case laws on this subject and observed that the detailed process undertaken for the purpose of production or manufacturing or article or thing has to be examined for coming or reaching to any conclusion. The Supreme Court also referred to the new definition brought in statute in section 2(29BA). Similarly, the Hon'ble Supreme Court in CIT v. Emptee Poly Yarn (P.) Ltd. [2010] 320 ITR 665/188 Taxman 188, came very heavily in stressing the fact that the Revenue must examine the process applicable to the product in question and not to go only by dictionary meaning for deciding this issue.
12. Thus, to determine whether the cutting and polishing of diamond amounts to manufacturing or production of any article or thing, various process through which the rough diamond undergoes to become a polished diamond, has to be examined. Here in this case before the Assessing Officer, the assessee has demonstrated the various process of diamond cutting and polishing along with the various stages and machinery involved. These processes have already been discussed in the forgoing paragraphs. Further, before the learned Commissioner (Appeals) also, the assessee has furnished various additional evidences including the list of machineries and the photographs of various machineries involved in the process of cutting and polishing which have also been examined by the Assessing Officer. In fact, there is no counter-opinion or rebuttal on this score by the Department. It has not been the Revenue's case that various processes and the staging of cutting and polishing of diamond does not result into a separate and distinct entity, which is polished diamond. The conversion of a rough raw diamond as explained by the assessee, involves different processing and several stages to become into a polished diamond, which is entirely a different product, and is mainly used in manufacturing of jewellery and also as an independent item of sale, whereas the raw diamond has only industrial usage. The market value of a rough diamond and polished diamond is also at great variance, as polished diamond is far more expensive than, the rough diamond. Looking from the angle of usage, shape, size and colour, the rough diamond converts into entirely a different and distinct product all together which has a different character and usage. The Tribunal in Sheetal Diamonds Ltd. (supra) has discussed the various stages and process involved for cutting and polishing of diamond in detail which for the sake of understanding the entire process and the different attributes of the rough and polished diamond is reproduced herein below:—
'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 diamonds in the size of 10 cents to 1 carat, which were looking sparkling white. It was explained before us with reference to the procedure for cutting and polishing or processing of the diamonds as listed out by one Mr. Kantilal Chhotalal in the book titled as 'Diamonds From Mines To Markets'. In this book after stating that diamond cutting is a labour incentive industry and India was one of the main centres for the cutting. The process has been briefly discussed as under:
"The ultimate value of a diamond depends, among other factors, on its make, that is, the quality of the finished product. A "good make" refers to a stone that is of fine proportions, symmetrical, and well-polished. The purpose of cutting, faceting and polishing is to bring out the best in a diamond in terms of brilliance and purity, which results from the refraction and reflection of light. It is also necessary to preserve as much of the original weight as possible.
Diamond has some special properties which are not common to other transparent minerals. These are a high refractive index, a high degree of clarity, colour dispersion, reflectivity and lustre, and an extremely high degree of hardness. Lustre is the characteristic of reflecting light from the surface. In the diamond, this is unique.
Besides reflecting light from its surface, some of the light is partly absorbed before reflection. Most transparent minerals are not very reflective, but diamond is exceptional, its surface reflects 17 per cent of the light falling on it, in comparison to glass which reflects only 5 per cent.
A diamond is cut and polished to give maximum brilliance which in turn depends on the light reflected back to the viewer [life] and the flashes of colour [fire] when light is split into the colours of the spectrum. But maximum fire is not consistent with maximum life, and the diamond cutter's job is to achieve a fine balance between the two. The diamond cutter is known in the trade as a diamond manufacturer, for he manufactures polished goods from rough diamonds.
Diamond cutting includes: Cleaving, splitting the stone along a place of cleavage; Sawing, dividing a crystal by a diamond saw; Bruting or Girdling, removing a portion of the crystal by rubbing or grinding it with another diamond, as for instance, the girdle of a brilliant; Grinding and polishing, making a flat surface or facet on 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 used to cut them. The first major development in diamond cutting came with the "Point Cut" during the latter half of the 14th century: the Point Cut follows the natural shape of an octahedral raw diamond crystal, eliminating some waste in the cutting process.
Further, various tests have been explained as under:
Planning Diamond manufacturers analyze diamond rough from an economic perspective, with two objectives steering decisions made about how a faceted diamond will be cut. The first objective is that of maximum return on investment for the piece of diamond rough. The second is how quickly the finished diamond can be sold. Scanning devices are used to get 3-dimensional computer model of the rough stone. Also, inclusions are photographed and placed on the 3D model, which is then used to find an optimal way to cut the stone.
Maximizing value
The process of maximizing the value of finished diamonds, from a rough diamond into a polished gemstone, is both an art and a science. The choice of cut is influenced by many factors. Market factors include the exponential increase in value of diamonds as weight increases, referred to as weight retention, and the popularity of certain shapes amongst consumers. Physical factors include the original shape of the rough stone, and location of the inclusions and flaws to be eliminated. Weight retention
The weight retention analysis studies the diamond rough to find the best combination of finished stones as it relates to per carat value. For instance, a 2.20 carat (440 mg) octahedron may produce (i) either two half carat (100 mg) diamonds whose combined value may be higher than that of (ii) a 0.80 carat (160 mg) diamond + 0.30 carat (60 mg) diamond that could be cut from the same rough diamond.
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 Weight retention The weight retention analysis studies the diamond rough to find the best combination of finished stones as it relates to per carate value. For instance, a 2.20 carat (440 mg) octahedron may produce (i) either two half carat (100 mg) diamonds whose combined value may be higher than that of (ii) a 0.80 carat (160 mg) diamond + 0.30 carat (60 mg) diamond that could be cut from the same rough diamond.
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 colour of the diamond. The radiant cut is an example of this type of cut. Natural green colour diamonds most often have merely a surface colouration caused by natural irradiation, which does not extend through the stone. For this reason green diamonds are cut with significant portions of the original rough diamond's surface (naturals) left on the finished gem. It is these naturals that provide the colour to the diamond.
Turnaround minimization
The other consideration of diamond planning is how quickly a diamond will sell. This consideration is often unique to the type of manufacturer. While a certain cutting plan may yield a better value, a different plan may yield diamonds that will sell sooner, and thereby returning the investment sooner. Cleaving or sawing Cleaving is the separation of a piece of diamond rough into separate pieces, to be finished as separate gems. Sawing is the use of a diamond saw or laser to cut the diamond rough into separate pieces.
Bruting
Bruting is the process whereby two diamonds are set onto spinning axles turning in opposite directions, which are then set to grind against each other to shape each diamond into a round shape. This can also be known as girdling.
Polishing
Polishing is the name given to process whereby the facets are cut onto the diamond and final polishing is performed. The process takes the steps blocking, faceting, also called "brillianteering", and Polishing.
Final inspection
The final stage involves thoroughly cleaning the diamond in acids, and examining the diamond to see whether it meets the quality standards of the manufacturer.
Cutting process
It is possible only because the hardness of diamond varies widely according to the direction in which one is trying to cut or grind.
A simplified round brilliant cut process includes the following stages:
| ♦ | Sawing the rough stone. | |
| ♦ | Table setting where one facet is created. The table facet is then used to attach the stone into a dop (a lapidary tool holding gemstones for cutting or polishing). | |
| ♦ | Bruting the girdle. | |
| ♦ | Blocking four main pavilion facets. | |
| ♦ | Transferring to another dop in order to rotate the stone. | |
| ♦ | Blocking four main crown facets. | |
| ♦ | Cutting and polishing all pavilion facets. | |
| ♦ | Transferring to another dop. | |
| ♦ | Cutting and polishing all crown facets |
This is just one, although a fairly common way of creating a round brilliant cut. The actual 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 into smaller pieces and in that case it has to be finished as such. But a plain look at rough diamond and finished diamond would show that they are totally different products.'
13. The aforesaid judgment has been quoted solely for the purpose of explaining the entire process through which rough diamond undergoes to become a separate and distinct product of being a polished diamond and we need not reiterate again. The same process and explanation has been given by the assessee before the Assessing Officer as well as before the learned Commissioner (Appeals), which has not been rebutted at all. Even going by the new definition of "manufacture" as envisaged in section 2(29BA), the process of transformation of rough diamond into polished diamond, results into a new and distinct or article having different name and use. Thus, the entire process of transformation in this case can be held as manufacturing within the ambit of section 80-IC.
14. Now coming to the decision of the Hon'ble Supreme Court in Gem India Mfg. Co. (supra), it is seen that the Hon'ble Supreme Court has categorically held that in the said case, there was no material on record before the Tribunal to come to the conclusion that the raw diamonds are not the same thing as polished and cut diamonds. The relevant observations and the conclusion of the Hon'ble Supreme Court based on such facts are as under:—
'The Tribunal took the view that it did because in "common parlance and commercial sense raw diamonds are not the same thing as polished and cut diamonds. The two are different entities in the commercial world. Though the chemical composition remains the same the physical characteristics of shape and class, etc. are substantially different". It would appear that no material had been placed on the record before the Tribunal upon which it could have reached the conclusions that, either in common or in commercial parlance, raw diamonds were not the same thing as polished and cut diamonds, and that they were different entities in the commercial world. An ipse dixit of the Tribunal is not the best foundation for a decision.
The High Court, as aforestated, concluded that the case was covered by its decision in the case of CITvs. London Star Diamond Co. (I) Ltd. (supra). It was not pointed out to the High Court that the question in that case was whether the assessee was an industrial company within the meaning of s. 2(8) of the Finance Act, 1975, and that, in answering that question, the High Court had held that raw diamonds and cut and polished diamonds were different and distinct marketable commodities having different uses; therefore, a company engaged in cutting and polishing raw diamonds for the purpose of export was engaged in the "processing of goods" to convert them into marketable form. The question that the High Court and we are here concerned with is whether, in cutting and polishing diamonds, the assessee manufactures or produces articles or things. There can be 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 raw 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.'
15. Later on, the Supreme Court in the judgment and order dated 18th November, 2011, passed by the Division Bench of Three Judges in Heaven Diamonds (P.) Ltd. (supra), have categorically held that the reliance on the decision of Gem India Mfg. Co. (supra) may not be correct as in that case the assessee could not demonstrate the process undertaken by it to convert raw diamond into a superior commodity. The entire judgment of the Hon'ble Supreme Court for the sake of ready reference is reproduced herein below:—
'We find from the impugned order of the Tribunal that there is no discussion on the process undertaken by the assessee, who claims benefit of section 80-IB of the Act. The assessee imports raw diamonds and applies thereon the process of sawing, turning, profiling, cutting, drilling, polishing, etc., by the use of sophisticated machineries resulting in production of a superior marketable commodity. Detailed procedure has been set out in the paper book. The Tribunal ought to have examined the process as to whether such process would constitute "manufacture" under section 80-IB. That exercise has not been undertaken. The reliance on the judgment of this Court in the case of CIT v/s Gem India Mfg. Co. [2001] 249 ITR 307 may not be correct for the simple reason that in that case, the Revenue succeeded as Gem India Mfg. Co. Was not able to demonstrate the process undertaken by it to convert raw diamonds into a superior commodity. Moreover, the High Court has also not gone into that aspect. The High Court should have remitted the case to the Tribunal to consider whether the process undertaken by the assessee constituted "manufacture". Under the above circumstances, the impugned order of the High Court and the Tribunal are set aside and the matter is remitted to the Tribunal for de novo consideration in the light of what we have stated hereinabove.' [Emphasis added]
16. Thus, from the aforesaid decision, it can be safely inferred that, what is required to be examined is the process undertaken for conversion of raw / rough diamonds into superior or polished diamond. In this case, as stated above, the assessee has duly placed on record the entire process and the stages through which the rough diamond undergoes for becoming the polished diamond, which is a separate and distinct product and has a different usage. Such a process has neither been rebutted by the Revenue nor any other counter-opinion have been sought to contradict the assessee's version of the process. Thus, in our opinion, once the entire process of cutting and polishing of diamond have not been rebutted and also the fact that the rough and polished diamond are two distinct commodity having different usage, not only in the common parlance but also in real sense, then it has to be understood that the cutting and polishing of diamond amounts to manufacturing or production of article or thing as envisaged for the purpose of claiming deduction under section 80-IC. Thus, the contention raised by the learned counsel before us is accepted that simply relying on the decision of Gem India Mfg. Co. (supra) by the Revenue to deny the claim of deduction is uncalled for in the present case, especially in the wake of later decision of the Hon'ble Supreme Court in Heavens Diamond (supra) which has clarified this point. Accordingly, the decision and the conclusion drawn by the learned Commissioner (Appeals) for the year under appeal i.e., assessment year 2008-09 are set aside and assessee's claim for deduction under section 80-IC is allowed.
17. Since we have allowed the assessee's claim on merits, therefore, we are not expressing any opinion raised by the learned counsel that if the claim for deduction has been allowed in the earlier year, the same should be allowed in this year also. Thus, the ground Nos. 1 to 5 raised by the assessee are treated as allowed.
18. In the appeal for the assessment year 2009-10, exactly same issue has been raised which are arising out of similar facts and findings of the learned Commissioner (Appeals). Therefore, the findings given above will apply mutatis mutandis in this appeal also and consequently, the assessee's claim for deduction under section 80-IC is allowed.
19. The next common issue raised by the assessee in both the years under appeal relates to charging of interest under sections 234B and 234D.
20. Both the parties admitted before us that this ground is consequential in nature. Accordingly, we direct the Assessing Officer to give consequential effect while re computing the income of the assessee keeping in view our findings given above and in accordance with the provisions of law.
21. In the result, assessee's appeals for the assessment years 2008-09 and 2009-10 are allowed.
SUNIL__._,_.___
No comments:
Post a Comment