2014 (12) TMI 858 - HC - Income Tax

Activity amounts to manufacture or not - Whether conversion of pure gold into jewellery amounts to manufacture or processing Held that - Following the decision in Commissioner of Income-tax Versus Lovlesh Jain 2011 (12) TMI 93 - DELHI HIGH COURT - manufacture as well as production of goods, articles or things is covered under Section 10A/10B - The activity for converting gold bricks, biscuit or bars, into jewellery amounts to production or manufacture of a new article - The gold, silver or platinum in bar, biscuit or brick form, is converted by manual labour and by the use of implements/tools or by machinery, culminating into an entirely new article/thing called jewellery or ornaments. Jewellery is a wearable item and is used by both men and women - a commercially different saleable product comes into existence - the activity of the respondent assessee amounts to manufacture or production and, therefore, qualifies for deduction under Section 10A/10B thus, the assessee was engaged in processing of goods or merchandise as activity of converting raw gold into jewellery or ornaments amounts to processing, if not manufacture of goods or merchandise. Jewellery has distinctive name, character and use and is a different and new commercially saleable product. Deductions u/s 80HHC(3)(a) Whether the Tribunal was right in holding that manufacture of gold jewellery on job work basis amounts to manufacturing activity by the assessee entitling it to deductions u/s 80HHC(3)(a) and Whether the assessee was engaged in manufacture or processing of jewellery or was merely procuring jewellery from the market as a trader and thereafter exporting the same Held that - A manufacturer of jewellery or ornaments might not require huge investment in machinery etc. Mode and manner of engaging and undertaking manufacturing activity could be variable - sub-clause (a) to sub-section (3) to Section 80 HHC of the Act, would be applicable in view of the factual finding recorded by the Tribunal that the aforesaid work was undertaken by the job workers under the supervision and control of the assessee and under their directions/check Decided against revenue.

Summary

Issues Involved:
1. Whether the manufacture of gold jewellery on a job work basis amounts to manufacturing activity by the assessee entitling it to deductions under Section 80HHC(3)(a) of the Income Tax Act.

Detailed Analysis:

1. Nature of Manufacturing Activity and Eligibility for Deduction under Section 80HHC(3)(a):

The core issue was whether the assessee's activity of converting gold into jewellery through job work constitutes manufacturing, thereby entitling the assessee to deductions under Section 80HHC(3)(a) of the Income Tax Act. The Tribunal had held in favor of the assessee, stating that the activity did amount to manufacturing, thus making the assessee eligible for deductions.

Relevant Legal Provisions and Interpretations:

- Section 80HHC(3)(a): This clause applies to exporters of goods or merchandise manufactured or processed by the assessee. The profits derived from such export are calculated based on the proportion of export turnover to total turnover.

- Section 80HHC(3)(c): This clause applies when the assessee exports both manufactured/processed goods and trading goods. The profits are computed separately for each category.

- Explanation (f) to Section 80HHC: Defines "trading goods" as goods not manufactured or processed by the assessee.

The court examined whether the conversion of pure gold into jewellery amounts to manufacturing or processing. Citing CIT vs. Lovlesh Jain, it was noted that converting standard gold into ornaments involves reducing purity by mixing other metals, which transforms the raw material into a commercially distinct product. The court referenced several judgments, including Graphic Company India Limited vs. Collector of Customs and Union of India vs. Delhi Cloth and General Mills Company Limited, which define "manufacture" as a transformation resulting in a new, commercially distinct product.

Factual Findings:

- The assessee purchased gold from MMTC and handed it over to job workers with specific designs and directions. The job workers, under the supervision and control of the assessee, converted the gold into jewellery.
- The Tribunal found that the assessee paid labour charges to artisans for the conversion process, which was done under the assessee's supervision and control.

Legal Precedents:

- Orient Longman Ltd. vs. CIT: A publisher who gets books printed and bound by third parties was considered engaged in manufacturing.
- CIT vs. Neo Pharma Private Ltd.: Similar principles were applied, where the assessee was considered a manufacturer even though the manufacturing activities were undertaken by third parties under the assessee's supervision.

Based on these precedents, the court concluded that the assessee's activity of converting gold into jewellery through job work does constitute manufacturing. Consequently, the assessee was entitled to deductions under Section 80HHC(3)(a).

Conclusion:

The court held that sub-clause (a) to sub-section (3) of Section 80HHC applies, given the factual finding that the job work was conducted under the supervision and control of the assessee. The substantial question of law was answered in favor of the assessee, affirming the Tribunal's decision. The appeal by the Revenue was disposed of, and no costs were awarded.