2011 (12) TMI 93 - HC - Income Tax

Exemption u/s 10A/10B - conversion of standard gold into ornaments is manufacture or production of articles or things Revenue contention -assessee had not exported gold ornaments as ownership does not lie with him - Held that - Whether or not assessee s activity was manufacture or not, was independent of the question of ownership of the gold. In present case the primary gold was put to mechanical, physical and chemical process before it was converted into gold jewelery. Such conversion of standard gold into ornaments or jewelery undertaken by the assessee amounts to manufacture/production and qualifies for deduction under Section 10A/10B of the Act, if other conditions stipulated in the said Section are duly satisfied. Mere ownership is not the sole criteria to determine whether a person is an importer or exporter. A person who holds himself out as an importer or exporter is also an importer or exporter. The activity undertaken i.e. export/import is important and the person involved and associated with the said activity is important/relevant. Further the expression exported or imported goods has reference to the nature of the goods as in the case of expressions import or export , and not a person/owner.-Decided in favor of the assessee.

Issues Involved:
1. Whether the assessee is an undertaking engaged in the manufacture or production of articles or things.
2. Whether the assessee has earned profits/gains as are derived by an undertaking from the export of articles/things.

Detailed Analysis:

Issue 1: Whether the assessee is an undertaking engaged in the manufacture or production of articles or things.
The court examined whether the conversion of standard gold into ornaments constitutes "manufacture" or "production" under Sections 10A and 10B of the Income Tax Act, 1961. The Revenue contended that the conversion did not amount to "manufacture" or "production" as the primary material remained gold, and no new product with different chemical composition or attributes came into existence.

The court clarified that the term "manufacture" can have both wider and narrower connotations. In a wider sense, it means to make or fabricate an article or product by physical labor or mechanical power. In a narrower sense, it involves transforming raw material into a commercial product, which has a new, separate entity. The Supreme Court's interpretations in various cases were cited, emphasizing that "manufacture" involves transformation into a new commodity with a distinct character, use, and name.

The court further referenced the Supreme Court's elucidation in Commissioner of Income Tax, Kerala v. Messrs Tara Agencies, which defined "manufacture" as a process resulting in a commercially new article. The term "production" was deemed broader than "manufacture" and includes bringing into existence new goods by a process that may or may not amount to manufacture.

The activity of converting gold bricks, biscuits, or bars into jewelry was held to be "production or manufacture" of a new article. The court noted that jewelry has a distinct identity, treated as a new article, and not the same as raw gold. Thus, the conversion process results in a commercially different saleable product, qualifying for deduction under Sections 10A/10B.

Issue 2: Whether the assessee has earned profits/gains as are derived by an undertaking from the export of articles/things.
The Revenue argued that the assessee did not export jewelry as they were not the owners of the imported gold or exported jewelry and were paid making charges. The term "export" was not defined in the Act, so the court referred to its ordinary dictionary meaning and interpretations in other enactments like the Customs Act, 1962, which defines "export" as taking out of India to a place outside India.

The court emphasized that the concept of ownership is not central to the definition of "export." The assessee was shown as the consignee and importer when the gold was imported and as the consignor when the jewelry was exported. The assessee complied with various formalities and had physical possession and control over the gold, making them liable in case of loss.

The court concluded that the assessee's activities amounted to exporting articles or things. The term "exporter" includes any owner or person holding themselves out to be the exporter. The court rejected the Revenue's reliance on Commissioner of Income Tax v. Ravindranathan Nair, distinguishing it based on the facts that the assessee in the present case had indeed exported the ornaments.

Conclusion:
The court held that the conversion of standard gold into ornaments amounts to manufacture/production, qualifying for deductions under Sections 10A/10B. It also held that the assessee had exported the jewelry, earning profits derived from the export of articles/things. The appeals by the Revenue were dismissed.

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