By TIOL News Service

AHMEDABAD, MAY 11, 2018: THE ISSUE BEFORE THE COURT IS - Whether the process undertaken for cutting and polishing the diamonds amounts to manufacture or production of new article eligible for deduction u/s 10B of Act. YES IS THE VERDICT.

Facts of the case:

The assessee, partnership firm engaged in the business of import of rough diamonds and export of finished diamonds after cutting and polishing them, had filed the return for relevant AY. The assessee claimed deduction u/s 10B of the Act. During assessment, AO noted that the assessee firm had its manufacturing unit at Surat, Ahmedabad and Visnagar. It had also started a separate manufacturing unit at Surat which was a hundred percent export oriented unit. Income from such activity was claimed exempt u/s 10B of the Act. After completing assessment, the AO reopened the assessment by issuing notice u/s 148 of the Act on the ground that section 10B was amended by which explanation 4 was inserted by the Finance Act, 2003, providing that for the purposes of the said section "manufacture or produce" would include cutting and polishing of precious stones and semiprecious stones. The AO was therefore, of the opinion that such activity of cutting and polishing of diamonds would qualify for deduction u/s 10B of the Act only after such amendment and not for the period prior thereto. The AO passed order u/s 143(3) read with section 147 of the Act and did not allowed deduction u/s 10B of Act. However, he accepted the assessee's alternative contention and held that the assessee would be eligible for deduction u/s 80HHC of the Act. On appeal, CIT(A) and Tribunal upheld the order of AO.

High Court held that,

++ even if explanation 4 to section 10B was meant to be prospective, in absence of any such provision, the assessee succeeds in establishing that activity of cutting and polishing diamonds amounted to manufacture or production of article or thing, and automatically qualify for deduction u/s 10B of the Act. In case of Grasim Industries Limited it was observed that term 'manufacture' includes any process incidental or ancillary to completion of manufactured product. Same can be a process in manufacture or process in relation to manufacture of the end product, which involves bringing some kind of change to raw material at various stages by different operations. Process must have effect of bringing change or transformation in raw material and also lead to creation of any new and distinct and excisable product;

++ it is undisputable that the rough diamonds are subjected to the process of cutting and polishing to bring into existence the polished diamonds. Such process has been noted by the Tribunal in the judgment in case of Flawless Diamond (India) Ltd. Counsel for the assessee placed reliance on the Article by one Akiva Caspi titled as "Modern Diamond Cutting And Polishing". This Article essentially aims to explain the complexities involved in the process and the sophistication required to carry out such process in order to optimize the value and quantity of the polished diamonds that may emerge out of such process. Whether carried out manually or through sophisticated machines, it is impossible to deny that the process of cutting and polishing diamonds is a complex one requiring specialized knowledge and expertise at every step. Rough unpolished diamond on one hand and cut and polished diamond on the other differ completely in appearance, value and uses. Thus this process of cutting and polishing diamonds brings into existence a new product which has totally different marketable commodity. From such Article, it was gathered that cutting and polishing diamonds have sparkle and definite desired shapes. Through this process thus a completely new commodity having a different market is brought into existence. The assessee is held entitled to deduction under section 10B of the Act.

(See 2018-TIOL-881-HC-AHM-IT)