BHAVANI GEMS,MUMBAI vs. DCIT 16(3), MUMBAI

4 & 6437/Mum/2011 (A.Ys. 2006-07 & 2007-08) M/s. Bhavani Gems vs. Dy. CIT  Bruiting: Bruiting involves the face up outline of a round diamond for facing. In bruiting process, diamond being bruited is spun on lathe while another diamond is forced against it, forming rounded outline i.e. one diamond is used to shape another.  Polishing: It involves blocking which establishes diamond's basic symmetry thereafter facets are created to get polished diamonds.  Boiling and other Chemical Processing of Polished diamonds to weed out any impurities, stains etc, before the same is considered for its sale Thus the manufacturing of polished diamond involves various process as mentioned above. In manufacturing process, rough diamonds are the basic raw material, which, after passing through above processes, become the polished diamond. We found that these processes of the assessee firm was accepted as manufacturing process from the' beginning & the same was verified and affirmed by the Hon'ble ITAT, in the course of block proceedings after detailed verification. This fact is accepted again and again in every year’s scrutiny assessment.

6 & 6437/Mum/2011 (A.Ys. 2006-07 & 2007-08) M/s. Bhavani Gems vs. Dy. CIT “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.”

7 & 6437/Mum/2011 (A.Ys. 2006-07 & 2007-08) M/s. Bhavani Gems vs. Dy. CIT 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 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 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 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 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 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 surface reflects 17 per cent of the light falling on it, in comparison to glass which reflects only 5 per cent. A diamond is 8 & 6437/Mum/2011 (A.Ys. 2006-07 & 2007-08) M/s. Bhavani Gems vs. Dy. CIT 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.”

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

9 & 6437/Mum/2011 (A.Ys. 2006-07 & 2007-08) M/s. Bhavani Gems vs. Dy. CIT 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 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 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 M/s. Flawless Diamond (India) Ltd. 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.

10 & 6437/Mum/2011 (A.Ys. 2006-07 & 2007-08) M/s. Bhavani Gems vs. Dy. CIT 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 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 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 colored diamonds, cutting can influence the color grade of the diamond, thereby raising its value. 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 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 color 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

11 & 6437/Mum/2011 (A.Ys. 2006-07 & 2007-08) M/s. Bhavani Gems vs. Dy. CIT 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.

12 & 6437/Mum/2011 (A.Ys. 2006-07 & 2007-08) M/s. Bhavani Gems vs. Dy. CIT 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.

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 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.”

14 & 6437/Mum/2011 (A.Ys. 2006-07 & 2007-08) M/s. Bhavani Gems vs. Dy. CIT book. 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. Reported in [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]

15 & 6437/Mum/2011 (A.Ys. 2006-07 & 2007-08) M/s. Bhavani Gems vs. Dy. CIT 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 no.1 to 5 raised by the assessee are treated as allowed.

16 & 6437/Mum/2011 (A.Ys. 2006-07 & 2007-08) M/s. Bhavani Gems vs. Dy. CIT diamond converts into entirely a different and distinct product all together which has a different character and usage.

11. In the A.Y. 2007-08, the assessee is also aggrieved for disallowance of telephone and mobile expenses, motor car expenses and staff welfare expenses. We have considered the rival contentions and found that the assessee’s claim of telephone and mobile expenses, motor car expenses was disallowed by the A.O. on ad hoc basis @ 10% of expenditure so claimed. We found that the assessee has filed full details of this expenditure, keeping in view the nature of the assessee’s business we restrict the disallowance to the extent of 5%. We direct accordingly.

12. The A.O. has also disallowed 10% of the staff welfare expenses on the plea that no details were filed by the assessee. Nothing was brought on record by the ld. AR during the course of hearing before us so as to persuade us to deviate from the findings recorded by the lower authorities. Accordingly, we confirm the disallowance so made on account of staff welfare expenses.