UNIQUE GEM & JEWELLERY,MUMBAI vs. ACIT 24(3),

The facts relating to the issue cited above are discussed in brief. The assessee is a partnership firm formed with the objective of 2 manufacture of Diamond studded gold jewellery. The assessee is approved as 100% EOU by the Development Commissioner, SEEPZ, SEZ, Government of India, vide letter of Permission No. PER:16(2008)/ SEEPZ/EOU/IA-II/34/08-09/10046 dated 15.12.2008 for manufacture and export of Plain/or studded handmade jewellery studded with diamonds, precious, semi precious and non-precious stones manufactured out of gold, silver, platinum metal. During the year under consideration, the assessee claimed deduction u/s 10B of the Act to the tune of Rs.14.31 crores. The assessing officer examined the said claim of the assessee and took the view that the assessee has not carried out any manufacturing activity and accordingly held that the assessee is not eligible for deduction u/s 10B of the Act. The grounds on which such a view was entertained by the assessing officer have been summarized as under in the assessment order:-

The assessing officer, in the alternative, has taken the view that the activities claimed to have been carried on by the assessee cannot also be considered as eligible manufacturing activity as per the definition of the term “manufacture” given under SEZ Act and his discussions in this regard are extracted below:-

There is no doubt that the assessee has not satisfied that the very essential conditions, laid down in the section 10B of the Act, of carrying out eligible manufacturing activity, hence the deduction under section 10B of the Act claimed by the assessee is disallowed and added back to the income of the assessee.”

The Ld CIT(A) also confirmed the view taken by the AO. The Ld CIT(A) also referred to the statements recorded from employees of the 5 assessee and observed that all the workers of the assessee are actually employed in another concern named M/s Blackstone Gem & Jewellery, Surat. Accordingly the Ld CIT(A) dismissed the appeal of the assessee. Aggrieved, the assessee has filed this appeal before us.

The Ld A.R submitted that the assessee is manufacturing only handmade diamond jewellery of standard designs and hence it does not require huge machineries. He submitted that the assessee has been granted permission by SEEPZ, SEZ only to manufacture and export Plain or studded Handmade Jewellery only. He further submitted that the assessee is importing diamonds and the gold bars are purchased locally. He submitted that the import of diamonds is carried out at the control and supervision of Customs and Excise authorities and they affix their signatures in the purchase register maintained by the assessee.

The Ld A.R submitted that the assessee gets the gold melting work and conversion of 24K gold into 14K/18K gold are done through third parties on job work basis. Then the required dies are prepared in wax and 6 required mounting is produced there from. The mountings so produced are cut into pieces then scrubbed to bring them into proper shapes. Wherever necessary, required welding is also done. Thereafter diamond is fitted therein at its place. He submitted that the assessee has maintained proper registers to record the receipt of materials and manufacture of jewelleries. Accordingly he submitted that the evidences furnished by the assessee clearly prove that the assessee has manufactured handmade jewellery and exported the same. He submitted that the assessing officer has rejected the claim of manufacture only on the reasoning that correct details of workers were not given to him and the charges for gold casting and wages are low. Further the AO noticed that the addresses given by the workers were wrong. He submitted that the assessee has furnished only the details available with it, which was furnished by the concerned labourers. Hence the assessee should not be found fault with, if the worker was not available at the given address. He submitted that the jewellery is manufactured under hand process and the same is supervised by its staff. He submitted that the assessing officer did not comment upon anything on the import of diamonds, purchase of gold and export of jewellery. He submitted that the assessee could not export the jewellery without manufacturing the same. The Ld A.R also brought a worker before the bench and he explained as to how he manufactures the gold jewellery. The Ld A.R further submitted that the diamond is studded into the gold jewellery so manufactured. He further submitted that the Superintendent of Central Excise has conducted audit with regard to MOT charges, which is paid to the Central excise department for deputing an officer to accompany the goods at the time of its movement outside the official hours. The relevant audit report is attached at page 380 of the paper book. He submitted that the MOT charges so paid further vindicate the point that the assessee has actually manufactured jewellery. He further submitted that the Central Excise department has accepted that 7 the assessee is manufacturer of jewellery. Accordingly he submitted that the tax authorities are not justified in rejecting the explanations given and evidences furnished by the assessee. The Ld A.R further placed his reliance on the following case law:- i) ITO V/s AAR ESS Exim (P) Ltd (2013) 157 TTJ 98 (Delhi_Tribunal); ii) Girnar Industries V/s CIT (2011) 338 ITR 227 (Kerala High Court); iii) ITO V/s Ektara Exports (P) Ltd (2006) 152 Taxman 18 (Kolkata Tribunal); iv) CIT V/s M/s Ektara Exports (P) Ltd ITA No.657 of 2008 (Calcutta High Court): and v) T.Two International (P) Ltd. V/s ITO (2010) 122 ITR 255 (Mumbai)

The ld D.R, on the contrary, submitted that the survey operations conducted by the revenue at the Bombay premises and Surat premises clearly proved that the assessee does not possess any machinery at both the places. Further, the assessee has claimed to have engaged only four workers. However, the said workers were not available at the given addresses. Further the assessee has accounted for labour charges of Rs.1,18,918/- and Salary and wages of Rs.2.75 lakhs only and the same is very meagre when compared to the sale figure of Rs.79.81 crores. Further the assessee has not booked any expenditure on consumables like Lacquer, Plaster of paris, heating oil/coal, polish, soldering material or packing material. He submitted that the assessee has purchased 24K gold, but the jewellery was claimed to have been manufactured in 18K/14K gold. For converting the gold into 18k/14K, the assessee is required to add silver/copper. However, the assessee has not accounted for expenditure towards silver/copper. Accordingly he submitted that the above said deficiencies clearly prove the assessee has not carried out any manufacturing activity.

He further submitted that the assessee had prepared a Project report for obtaining approval from SEZ, wherein the estimated cost of 8 imported capital goods was shown at Rs.60.00 lakhs. However, the assessee has shown a sum of Rs.1.35 lakhs only as its fixed assets and the said assets mainly consisted of Office equipments, weighing scale and air conditioner. The assessee does not possess any tools or machines or melting/casting ovens, purity checking machines etc. The assessee has not claimed hallmark expenses, charges for certification etc. He submitted that the assessee should have incurred all the above said expenses, if it had really carried on manufacturing activities. He further submitted that the tax auditor has stated the nature of business of the assessee as “Trading-Others”, which further strengthens the claim of the revenue. He further submitted that though the partner of the assessee firm explained the process of manufacturing at the time of survey, yet there are no evidences to back the said claim of the partner.

The Ld D.R submitted that the partner of the assessee firm submitted during the course of survey that the labourers manufacturing gold portion of the jewellery are given the details of height and width of the diamond so that they can manufacture the gold portion accordingly. However, the labourer who was produced before the bench admitted that no such details are given to him. He further submitted that the four workers who were claimed to be fitting the diamonds were found to be the employees of another firm named M/s Blackstone Gem & Jewellery located at Surat. He further submitted that the survey operations conducted by the revenue proved that the assessee did not carry on any manufacturing activity. The manager of the assessee firm, Shri M.H. Gandhi, admitted that he was not aware of manufacturing activity and he could not furnish the labourer details. He further submitted that the paper documents maintained by the assessee only show the receipt and outgo of the materials/goods and they are not sufficient to prove the „manufacturing activity‟ in terms of sec. 10B of the Act.

He further submitted that the assessing officer has taken alternative view that the manufacturing work done through job work given to outsiders who carry out the work at outside the premises of the assessee would not fall under the category of “manufacturing” under SEZ Act.

In the rejoinder, the ld.AR submitted that the firm Blackstone Gem was started in the year 2012 only and hence finding that the workers are employed therein has employed in that firm does not have bearing for the year under consideration.

We have heard the rival contentions and perused the record. We notice that the tax authorities have doubted the claim of manufacture of jewellery for the reasons that the expenditure booked by the assessee on labour and wages are not proportionate to the volume of sales declared by the assessee. During the course of hearing, the Ld. DR also pointed out that the assessee has not incurred any expenditure towards the consumables. Further, the survey carried out by the Revenue authorities revealed that the assessee did not possess any machinery. On the basis of the above stated facts, the tax authorities have come to the conclusion that the assessee has not carried on any manufacturing activity. Accordingly, they have rejected the claim for deduction u/s 10B of the Act.

It is pertinent to note that the deduction u/s 10B of the Act is allowed to a hundred percent export oriented undertaking deriving profit from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software. Hence the one of the conditions to be satisfied in order to avail deduction u/s 10B

With regard to the contentions of the revenue, the ld. AR has submitted that the jewellery manufactured by the assessee consisted of simple design jewellery. The Ld A.R also explained the manufacturing process involved in the manufacture of gold jewellery. It is further submitted that the permission was granted to the assessee by the Government of India only to manufacture handmade jewelleries.

We notice that the tax authorities have not expressed any adverse view on the import of diamonds, purchase of gold and export of jewellery. The ld. AR has further submitted that the import of diamonds and export of jewellery are monitored by Central Excise and Customs Authorities. He has also submitted that the import of diamonds, purchase of jewellery have duly been established by the assessee with the help of Bond Register and DPCC Register maintained as per the provisions of the Central Excise and Customs Act. Before us, the assessee also furnished copies of bond register, DPCC register; Finished goods register to substantiate the claim of purchase of diamonds and gold and manufacture

In our view, the absence of huge plant and machinery in the premises of the assessee cannot be a ground to suspect the claim of manufacturing, since the assessee has explained that the gold melting and mounting work have been outsourced. Only the shaping work and fitting of diamonds is carried out at its place. At the time of hearing before us, one of the workers was produced and he showed us the gold portion produced out of die process. The ld D.R also cross examined him and asked a specific question as to whether the assessee gives the details relating to the size of the diamonds, he gave negative reply. However, the contentions of the assessee that it has purchased gold bars locally and converted the same into gold mountings through outsourcing activities

Since the labour charges and wages were found to be lower vis-a- vis the export value of jewelleries, the tax authorities have doubted about the claim of manufacture. However, we notice that the tax authorities have not brought any material on record to disprove the records maintained by the assessee. They have also not taken any steps to ascertain the fair market value of labour charges and wages. In our view, if the labour charges and wages booked by the assessee are considered to be low, then an addition towards suppression of expenditure, having regard to the fair market value of such services, may be called for and the same would not give rise to the presumption that the assessee did not carry on any manufacturing activity. Similarly the non-accounting of consumables in the books of account may also warrant an addition. However, it is pertinent to note that the assessing officer has not rejected the books of accounts nor did he point out any defects in the books of account, meaning thereby, even though the assessing officer had commented upon the expenditure incurred by the assessee, he did think it necessary to examine about the adequacy of expenditure booked by the assessee.

The tax authorities have also pointed out that the assessee could not furnish copies of standard designs of jewellery and hence they have taken adverse view. However, the fact that the assessee has exported jewellery has not been disputed and hence the non-furnishing of designs may not, in our view, militate against the assessee. The ld D.R also referred to the report given by the Tax auditor, wherein the activities of the assessee was stated to have been stated as trading. However, the activities carried on by the assessee, i.e., purchase of gold/diamonds and export of jewellery contradicts the said observation of the tax auditor. The 13 assessee has also furnished copy of audit report given by the tax auditor for AY 2011-12, wherein the tax auditor has stated the nature of business as “Manufacturing Industry – Others”.

We may now refer to some of the decision relied upon by the assessee. In the case of Ekta Exports Pvt Ltd (supra), the Hon‟ble taxmann.com 366), the Hon‟ble Delhi High Court has held that the conversion of pure gold into jewellery amounts to manufacture. In the case before Hon‟ble Delhi High Court, the assessee got the gold from Non- resident, but the ownership of the gold remained with the non-resident. The assessee therein converted the gold into jewellery and exported the same to non-resident upon receipt of conversion charges. It was held that the assessee is entitled to deduction u/s 10A of the Act. In the case of ITO Vs. Aar ESS Exim (P) Ltd (supra), the various components and assemblies were manufactured outside the premises of the assessee and they were assembled at the premises of the assessee. Thereafter the same was exported. It was held that the assessee is a manufacturer and is eligible for deduction u/s 10B of the Act.

In the instant case also, the assessee has imported diamonds, purchased gold locally and exported the jewellery. Thus, the articles purchased and the articles exported are two different articles. The export of jewellery cannot be carried out without manufacturing the same. The assessee has also explained about its manufacturing process. Even though the conversion of gold into mountings is carried out through outsourcing, final shaping of jewellery and fitting of diamonds were carried

In view of the foregoing discussions, we set aside the order of Ld CIT(A) and direct the assessing officer to allow deduction u/s 10B of the Act.

In the result, the appeal filed by the assessee is allowed.

DR, ITAT, Mumbai concerned गार्व पाईर / Guard file. 6. आदेशानुसाय/ BY ORDER,सहामक ऩिंजीकाय (Asstt.