FLAWLESS DIAMOND (INDIA) LTD, MUMBAI V. ACIT RG 5(1), MUMBAI

ITA 5617/MUM/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 75422 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 5 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-02-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 20-01-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 05-09-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAJESH RANJAN PRASAD
• Keywords: Additional evidence; Question of law
• Section: 143(3); 234B; 80IB

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL F BENCH, MUMBAI . . , , , BEFORE SHRI R.C. SHARMA , ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA , JUDICIAL MEM BER . / ITA NO. 2886 /MUM./ 2012 ( / ASSESSMENT YEAR : 20 0 8 09 ) . / ITA NO. 5617 /MUM./ 2012 ( / ASSESSMENT YEAR : 2009 10 ) M/S . FLAWLESS DIAMOND (INDIA) LTD. OPERA HOUSE, MUMBAI 400 004 . . / APP ELLANT V/S ADDL . COMMISSIONER OF INCOME TAX RANGE 5 ( 1 ), MUMBAI .... / RESPONDENT ./ PERMANENT ACCOUNT NUMBER AA AC F 0778R / ASSESSEE BY : MR. VIJAY MEHTA / RE VE NUE BY : MR. RAJESH RANJAN PRASAD / DATE OF HEARING 2 0 .0 1 .201 4 / DATE OF ORDE R 14.02.2014 / ORDER , / PER AMIT SHUKLA , J.M. THE PRESENT APPEAL S HA VE BEEN PRE FERRED BY THE ASSESSEE CHALLENGING THE IMPUGNED ORDER DATED 2 ND MARCH 2012 , FOR THE ASSESSMENT YEAR 2008 09 AND ORDER DATED 9 TH JANUARY 2012, FOR THE M/S. FLAWLESS DIAMOND (INDIA) LTD. 2 ASSESSMENT YEAR 2009 10, PASSED BY THE LEARNED COMMISSIONER (APPEALS) IX , MUMBAI, FOR THE QUANTUM OF ASSES SMENT 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 CONVENIENC E, THESE APPEALS WERE HEARD TOG ETHER 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 T HEY APPEAR IN THE APPEAL IN ITA NO. 2886/MUM./2012 , FOR A.Y. 20 08 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 80IC OF ` 18,41,14,136 , AS AGAINST THE CLAIM OF ` 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 TRA DING IN JEWELLERY AND POLISHED DIAMONDS FOR WHICH IT HAS SET UP 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. T HE PROFITS DERIVED FROM SUCH UNITS HAVE BEEN CLAIMED AS DEDUCTION UNDER SECTION 80IC TO THE TUNE OF ` 19,27,51,144, BEING 100% OF THE PROFIT. THE ASSESSING OFFICER REQUIRED THE ASSESSEE TO SUBSTANTIATE THE CLAIM OF DEDUCTION M ADE UNDER SECTION 80IC , SPECIFICALLY IN VIEW OF THE DECISION OF THE H ON'BLE SUPREME COURT IN GEM INDIA MFG. CO., [ 2001 ] 249 ITR 307 (SC). IN RESPONSE, THE ASSESSEE, VIDE LETTER DATED 28 TH DECEMBER 2010, SUBMITTED THAT THE DECISION OF THE HON'BLE SUPREME COURT IN GEM INDIA M/S. FLAWLESS DIAMOND (INDIA) LTD. 3 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 DETAIL PROCESS WHICH IS REQUIRED F OR CUTTING AND MANUFACTURING OF RAW DIAMOND AND CONVERTING THE SAME INTO A POLISHED DIAMOND. THESE PROCESS ES , AS ELABORATED BY THE ASSESSEE, ARE REPRODUCED HEREIN BELOW BECAUSE THE SAME HAS A G REAT SIGNIFICANCE ON THE ISSUE INVOLVED. UPON REACHING ITS DE STINATION 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 STONES SIZE AND SHAPE ARE DETERMINED, TAKING INTO CONSIDERATION THE ROUGHS SHAPE, AS W EL L 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 SER IES 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 SHAP ED TO RETAIN THE UTMOST WEIGHT WITH THE MOST BRILLIANT EFFECT. M/S. FLAWLESS DIAMOND (INDIA) LTD. 4 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 D ESIRED 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 BAS IC 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 CLE AVED 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 WH ILE ANOTHER DIAMOND IS FORCED AGAINST IT, GRADUALLY FORMING THE ROUNDED OUTLINE. ESSENTIALLY, ONE DIAMOND IS USED TO SHAPE THE OTHER. M/S. FLAWLESS DIAMOND (INDIA) LTD. 5 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 DIAMONDS PERFORMANCE BECAUSE IT ESTABLISHES THE DIAMONDS BASK SYMMETRY, DURING THE BLOCKING STAGE, THE FIRST 17 OR 18 FACETS ARE MADE, CREATING A SI NG 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 FI RE 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 SEMICONDUCTOR 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 JEWELRY. THE POLISHED DIAMOND IS ALTOGETHER A DIFFERENT PRODUCT THAN TO ROUGH DIAMOND. THE ROUGH HAS THE INDUSTRY USE WHEREAS THE POLISHED M/S. FLAWLESS DIAMOND (INDIA) LTD. 6 DIAMONDS ARE USED FOR JEWELRY MAKING. THE ROUGH DIAMONDS CANNOT BE USED FOR THE MAKING FOR JEWELRY VARIOUS DECISIONS WERE ALSO RELIED UPON TO EXPLAIN THE MEANING OF THE WORD MANUFACTURING ESPECIALLY THE DECISION OF THE HON'BLE SUPREME COURT IN ITO V/S ARIHANT TILES AND MARBLES, [2007] 320 ITR 79 (SC) . 4 . THE ASSESSING OFFICER REJECTED THE ASSESSEES 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 ELIGI BLE FOR DEDUCTION UNDER SECTION 80IC. 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/S JCIT, 12 SOT 37 (SC). THUS, HE ONLY ALLOWED THE CLAI M OF DEDUCTION UNDER SECTION 80IC 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) ` 165,70,49 ,443 PROFIT (B) ` 19,27,51,144 SALE OF JEWELLERY (C) ` 7,42,50,925 DEDUCTION ALLOWABLE U/S 80IC (B) X (C) A ` 86,37,008 5 . THE ASSESSEE, BEFORE THE LEARNED COMMISSIONER (APPEALS), REITERATED THAT THE DIAMOND CUTTING AND POLISHING INVOLVED A VERY LEN GTHY PROCESS AND REQUIRES SPECIAL SKILLS TO CONVERT ROUGH DIAMOND M/S. FLAWLESS DIAMOND (INDIA) LTD. 7 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 TH E FACTS OF THE ASSESSEES 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 TH E HON'BLE SUPREME COURT IN ARIHANT TILES AND 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 13 TH 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 MANUF ACTURE INTRODUCED BY THE EVIDENCE ACT, 2009, IN SECTION 2(29BA) AND SUBMITTED THAT THE DECISION OF THE HON'BLE SUPREME COURT IN ARIHANT TILES AND MARBLES (SUPRA) WILL NOT BE APPLICABLE IN THE LIGHT OF THE NEW DEFINITION . THE ASSESSING OFFICER ALSO OBSERVE D 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 80IC. 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 PAGE 8 TO 14 OF THE APPELLATE ORDER. THE ASSESSEE, IN RESPONSE, SUBMITTED ITS COUNTER COMMENTS, M/S. FLAWLESS DIAMOND (INDIA) LTD. 8 REBUT TING 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 TH AT 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 HO N'BLE SUPREME COURT, HE HELD THAT THE ASSESSEES 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 ASSESSEES SIMILAR CLAIM FOR DEDUCTION UNDER SECTION 80IC ON ACCOUNT OF CUTTING AND POLISHING OF DIAMOND HAS BEEN ACCEPTED BY THE ASSESSING OFFICER IN THE EARLIER ASSESSMENT YEAR THAT IS 2007 08 A ND, THEREFORE, SAME CANNOT BE WITHD RAWN IN THE ASSESSMENT YEAR 2008 09. THE SAID CLAIM FOR DEDUCTION UNDER SECTION 80IC 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 CIRCUMSTA NCES, THEN THE SAME SHOULD BE ALLOWED IN THE SUBSEQUENT YEARS ALSO. HE MAINLY RELIED UPON THE FOLLOWING DECISIONS. M/S. FLAWLESS DIAMOND (INDIA) LTD. 9 I ) CIT V/S PAUL BROTHERS, [1995] 216 ITR 548 (BOM.); II ) CIT V/S FETEH GRANITE PVT. LTD., [2009] 314 ITR 32 (BOM.); III ) CIT V/S A.R.J. SECURITY PRINT ERS, [2003] 264 ITR 276 (DEL.). 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 ASSESSEES CASE. I N 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 TH E HON'BLE SUPREME COURT IN GEM INDIA MFG. CO. (SUPRA). THUS, IT CANNOT BE HELD THAT A GENERAL PROPOSITION HAS BEEN LAID DOWN BY THE HON'BLE SUPREME COURT THAT IN EVERY CASE EVEN WHERE THE ENTIRE PROCESS OF MANUFACTURING HAS BEEN EXPLAINED, THEN ALSO THE SA ID JUDGMENT WOULD BE APPLICABLE. HE FURTHER SUBMITTED THAT T HE SAID DECISION OF THE HON'BLE SUPREME COURT HAS COME FOR CONSIDER ATION BEFORE THE TRIBUNAL, MUMBAI BENCH, IN SHEETAL DIAMONDS LTD. V/S ITO, [2011] 47 SOT 75 (SC), WHEREIN THE TRIBUNAL HAS DISCUS SED THE DETAIL 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 DISTINGU ISHED 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 TH E SAID M/S. FLAWLESS DIAMOND (INDIA) LTD. 10 DECISION. HE FURTHER MADE A VERY IMPORTANT SUBMISSION THAT IN THE ANOTHER CASE, THE TRIBUNAL IN ITO V/S HEAVEN DIAMONDS PVT. LTD., ITA NO.2817 & 2504/MUM./2004, ORDER DATED 26 TH FEBRUARY 2009, HA S DECIDED THIS ISSUE AGAINST THE ASSESSEE STRICTLY FOL LOWING THE DECISION OF THE HON'BLE SUPREME COURT IN GEM INDIA MFG. CO. (SUPRA). THE SAID DECISION OF THE TRIBUNAL WAS ALSO UPHELD BY THE HIGH COURT VIDE ORDER DATED 17 TH SEPTEMBER 2009 IN ITA NO.1759 OF 2009. THEREAFTER, THE ASSESSEE PREFERRED AN APPEAL BE FORE THE HON'BLE SUPREME COURT BEING CIVIL APPEAL NO.9936 OF 2012. THE HON'BLE 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 T HE SAID CASE THE ASSESSEE COULD NOT DEMONSTRATE THE PROCESS UNDERTAKEN BY IT TO CONVERT THE RAW MATERIAL INTO A SUPERIOR COMMODITY. THE HON'BLE SUPREME COURT REMITTED THE MATTER BACK TO THE TRIBUNAL TO CATEGORICALLY CONSIDER WHETHER THE PROCESS UNDERTAKEN BY THE ASSESSEE CONSTITUTE S MANUFACTURE OR NOT . THUS, HE SUBMITTED THAT THE HON'BLE SUPREME COURT HAS ITSELF CLARIFIED THAT THE DECISION OF GEM INDIA MFG. CO. (SUPRA) CANNOT BE APPLIED IN ALL THE CASES. THE PROCESS OF CONVERSION OF RAW DIAMOND INTO A POLIS HED DIAMOND HAS TO BE EXAMINED IN A GIVEN CASE AND HERE THE ASSESSEE HAS SUBMITTED A DETAIL 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 UNDERTAKE N 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 TH AT THE DEFINITION OF MANUFACTURE AS BROUGHT IN THE STATUTE W.E.F. 1 ST APRIL 2009 IN SECTION 2( 29BA ) WILL ALSO GO TO ASSIST THE ASSESSEES CASE EVEN THOUGH THE SAID PROVISION IS APPLICABLE FROM THE M/S. FLAWLESS DIAMOND (INDIA) LTD. 11 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 ASSESSEES CLAIM OF DEDUCTION UNDER SECTION 80IC CANNOT BE DENIED IN THIS CASE. LASTLY, HE SUBMITTED THAT PROVISIONS OF S ECTION 80IC 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 PRO FIT OF THE UNDERTAKING HAS TO BE ALLOWED AS DEDUCTION , EVEN THOUGH PART OF THE MANUFACTURING INVOLVED F OR CUTTING AND POLISHING OF DIAMOND IS NOT CONSIDERED AS MANUFACTURING BY THE DEPARTMENT . ON THIS GROUND ALSO, THE ASSESSEES CLAIM IS LIABLE TO BE ALLOW ED. 9 . PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE FIRST PROPOSITION OF THE LEARNED COUNSEL, SUBMITTED THAT EVEN THOUGH THE ASSESSEES 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. O N MERITS, HE SUBMITTED THAT ONCE THE SUPREME COURT HAS DIRECTLY ANSWERED THE QUESTION THAT CUTTING AND POLISHING OF DIAMOND DO ES NOT AMOUNTS TO MANUFACTURE THEN IT IS LAW OF THE LAND A ND 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/S ACIT, ITA NO.7352/MUM./2012, WHEREIN THE TRIBUNAL HAS STRONGLY RELIED UPON THE DECISION OF THE HON 'BLE SUPREME COURT IN M/S. FLAWLESS DIAMOND (INDIA) LTD. 12 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 REL EVANT 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 O R THING AS ENVISAGED IN SECTION 80IC AND S ECONDLY , WHETHER THE DECISION OF THE HON'BLE SUPREME COURT I N 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 B EEN 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 COMMOD ITY CH ANGES 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 OF ASPIN WALL & CO. LTD. V/S CI T, [2001] 251 ITR 323 (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 M/S. FLAWLESS DIAMOND (INDIA) LTD. 13 OR MACHINES. IF THE CHANGE MADE IN THE ARTICLE RESULTS IN A NEW AND DIFFERENT ARTICLES, THEN IT WOULD AMOUNT TO MANUFACTURING ACTIVITIES. T HE SUPREME COURT ALSO QUOTED THE OBSERVATIONS MADE IN DY. CST V/S PIO FOOOD 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 T HE 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 DETAIL 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/S EMPTEE POLY YARN PVT. LTD., [2010] 320 ITR 665 (SC), CAME VERY HEAVILY IN STRESSIN G TH E FACT THAT THE REVENUE MUST EXAMINE THE PROCESS APPLICABLE TO THE PRODUCT IN QUESTION AND NOT T O GO ONLY BY DICTIONARY MEANING FOR DECIDING THIS ISSUE. 12 . THUS, TO DETERMINE WHETHER THE CUTTING AND POLISHING OF DIAMOND AMOUNT S 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 . H ERE IN THIS CASE B EFORE THE ASSESSING OFFICER, THE ASSESSEE HAS DEMONSTRATED THE VARIOUS PROCESS OF DIAMOND CUTTING AND P OLISHING ALONG WITH THE VARIOUS STAGES AND M/S. FLAWLESS DIAMOND (INDIA) LTD. 14 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 EVIDENCE S INCLUDIN G THE LIST OF MACHINER IES AND THE PHOTOGRAPHS OF VARIOUS MACHINER IES INVOLVED IN THE PROCESS OF CUTTING AND POLISHING WHICH HA VE 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 REVENUES 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 PROCESS ING AND SEVERAL STAGES TO BECOME INTO A POLISHED DIAM OND, 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 INDUSTRI AL USAGE. THE MARKET VALUE OF A ROUGH DIAMOND AND POLISHED DIAMOND IS ALSO AT GREAT VARIANCE , A S POLISHED DIAMOND IS FAR MORE EXPENSIVE TH A N , THE ROUGH DIAMOND. LOOKING FROM THE ANGLE OF USAGE, SHAPE, SIZE AND COLOUR, THE ROUGH DIAMOND CONVERTS INTO ENTIRE LY 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 SAK E 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. COUNS EL 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 2 C.M. LD. COUNSEL M/S. FLAWLESS DIAMOND (INDIA) LTD. 15 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 DIAMOND S 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 CENTERS 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 PURPOS E 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 LUSTER, AND AN EXTREMELY HIGH DEGREE OF HARDNESS. LUSTER 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 SU RFACE 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 CUTTERS JOB IS TO ACHIEVE A FINE BALANCE BETWEEN THE TWO. THE DIAMOND CUTTER IS KNOWN IN THE TRADE AS A DIAMOND MA NUFACTURER, 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 ME THOD SIMILAR TO GRINDING. 17. WE ALSO USED INTER NET TO FIND OUT SCIENTIFIC INFORMATION ON THE PROCESS INVOLVED IN MAKING OUT FIND DIAMOND. WE COULD GET WIKEPEDIA ENCYCLOPEDIA ON NET IN WHICH VARIOUS STAGES INVOLVED IN MAKING OF A DIAMOND ARE DESCRI BED. THE PROCESS OF CUTTING AND POLISHING OF DIAMONDS AS DESCRIBED IN THE WIKEPEDIA ENCYCLOPEDIA IS AS UNDER: M/S. FLAWLESS DIAMOND (INDIA) LTD. 16 DIAMOND CUTTING IS THE ART, SKILL AND, INCREASINGLY, SCIENCE OF CHANGING A DIAMOND FROM A ROUGH STONE INTO AFACETED GEM. CUTTING DIAMOND REQUIRE S 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 H ARD 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 DIAM OND 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 AR T 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 FA CTORS 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 PE R CARAT VALUE. FOR INSTANCE, A 2.20 CARAT (440 MG) OCTAHEDRON MAY PROD UCE (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 TH E 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 M/S. FLAWLESS DIAMOND (INDIA) LTD. 17 WEIGHT RETENTION TH E 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 V ALUE 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 CUTT ING 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 PER - CARAT 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 BU Y 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 COLORED DIAMONDS, CUTTING CAN INFLUENCE THE COLOR GRADE OF THE DIAMOND, THEREBY RAISING ITS V ALUE. CERTAIN CUT SHAPES ARE USED TO INTENSIFY THE COLOR OF THE DIAMOND. THE RADIANT CUT IS AN EXAMPLE OF THIS TYPE OF CUT. NATURAL GREEN COLOR DIAMONDS MOST OFTEN HAVE MERELY A SURFACE COLORATION CAUSED BY NATURAL IRRADIATION, WHICH DOES NOT EXTEND THROUG H 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 COLOR TO THE DIAMOND. TURNAROUND MINIMIZATION THE OTHER CON SIDERATION 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 M/S. FLAWLESS DIAMOND (INDIA) LTD. 18 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 D IAMOND INTO A ROUND SHAPE. THIS CAN ALSO BE KNOWN AS GIRDLING. POLISHING POL ISHING 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 TH OROUGHLY CLEANING THE DI AMOND IN ACIDS, AND EXAMINING THE DIAMO ND TO SEE WHETHER IT MEETS THE Q UALITY STANDARDS OF THE MANUFACTURER. CUTTING PROCESS IT IS POSSIBLE ONLY BECAUSE THE HARDNESS OF DIAMOND VARIES WIDELY ACCORDING TO THE DIRECTION IN WHICH O NE 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 HOL DING 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. TRANS FERRING 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 M/S. FLAWLESS DIAMOND (INDIA) LTD. 19 COLOURS, WHEREAS THE FINAL PRODUCT OF DIAMOND IS A MUCH SMALLER PIECE AND GENERALLY SPA RKLING 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 N OT 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 H AS 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 TRANSFORM ATION 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 80IC. 14 . NOW COMING TO TH E DECISION OF THE HON'BLE SUPREME COURT IN GEM INDIA MFG. CO. (SUPRA), IT IS SEEN THAT THE HON 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 A RE 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 D IAMONDS 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 M/S. FLAWLESS DIAMOND (INDIA) LTD. 20 DIFFERENT'. IT WOU LD 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 CIT VS. 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 HEL D 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 MATERIA L ON THE RECORD UPON WHICH SUCH A CONCLUSION CAN BE REACHED. 15 . LATER ON, THE SUPREME COURT IN THE JUDGMENT AND ORDER DATED 18 TH NOVEMBER 2011, PASSED BY THE DIVISION BENCH OF THREE JUDGES IN HEAVEN DIAMONDS PVT. LTD. (SUPRA) , HAVE CATEGORICALLY HELD THAT T HE 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 80IB OF THE ACT. THE ASSESSEE IMPRTS RAW DIA MONDS 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 M/S. FLAWLESS DIAMOND (INDIA) LTD. 21 MARKETABLE COMMODITY. DETAILED PROCEDURE HAS BEEN SET OUT IN THE PAPER BO OK. THE TRIBUNAL OUGHT TO HAVE EXAMINED THE PROCESS AS TO WHETHER SUCH PROCESS WOULD CONSTITUTE MANUFACTURE UNDER SECTION 80IB. 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. RE PORTED IN [2001], 2 49 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 REQUIRE D TO BE EXAMINE D 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 S TA GES THROUGH WHICH THE ROUGH DIAMOND UND ERGOES 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 HA VE BEEN SOUGHT TO CONTRADICT THE ASSESSEES 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 M/S. FLAWLESS DIAMOND (INDIA) LTD. 22 THE COMMON PARLANCE BUT ALSO IN R E AL 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 80IC. 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 ASSESSEES CLAIM FOR DEDUCTION UN DER SECTION 80IC IS ALLOWED. 17 . SINCE WE HAVE ALLOWED THE ASSESSEES 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 NO.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 ASSESSEES CLAIM FOR DEDUCTION UNDER SECTION 80IC 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. M/S. FLAWLESS DIAMOND (INDIA) LTD. 23 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 A SSESSEE KEEPING IN VIEW OUR FINDINGS GIVEN ABOVE AND IN ACCORDANCE WITH THE PROVISIONS OF LAW. 21 . 2008 09 2009 10 2 1. IN THE RESULT, ASSESSEES APPEAL S FOR THE ASSESSMENT YEAR 2008 09 AND 2009 10 ARE ALLOWED. 14 TH FEBRUARY 2014 ORDER PRONOUNC ED IN THE OPEN COURT ON 14 TH FEBRUARY 2014 SD/ - . . R.C. SHARMA ACCOUNTANT MEMBER SD/ - AMIT SHUKLA JUDICIAL MEMBER MUMBAI, DATED : 14 TH FEBRUARY 2014 / COPY OF THE ORDER FORWARDED TO : ( 1 ) / THE ASSESSEE ; ( 2 ) / THE REVENUE; ( 3 ) ( ) / THE CIT(A ) ; ( 4 ) / THE CIT, MUMBAI CITY CONCERNED ; ( 5 ) , , / THE DR, ITAT, MUMBAI ; ( 6 ) / GUARD FILE . / TRUE COPY / BY ORDER . / PRADEEP J. CHOWDHURY / SR. PRIVATE SECRETARY / / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI