FACTS OF THE CASE

  • ITA No. 1223/2011 (Lovlesh Jain): The assessee received standard gold (24-carat bars, bricks, or biscuits) supplied free of cost by Ramdan Jewellery, Dubai. The assessee converted this raw gold into finished jewellery and "exported" it back to Ramdan Jewellery, Dubai. Ramdan Jewellery remained the absolute legal owner of the gold throughout the transaction. The assessee paid no purchase consideration for the gold and was compensated purely via conversion/making charges for the services and job work executed as per the client's specifications.
  • ITA Nos. 67/2010 & 458/2010 (Shashi Kant Mittal): For Assessment Years 2002-03 and 2004-05, the assessee operated a gold jewellery manufacturing unit within the Noida Special Economic Zone (NSEZ). The assessee received standard gold of 0.995 or 0.999 purity free of cost from M/s Onrich Jewellery (LLC) / Conrich Jewellery (LLC), Dubai, UAE. The assessee processed the standard gold into 22/21-carat finished ornaments and exported them back to the foreign supplier or to a third party in London upon the foreign supplier’s explicit instructions. The assessee was compensated via making/conversion charges and claimed statutory deductions under Section 10B (for AY 2002-03) and Section 10A (for AY 2004-05).
  • Adjudication History: The Assessing Officers disallowed the claims under Sections 10A and 10B across all cases, asserting that the assessees did not own the raw gold, received only making charges rather than full sale consideration, and were merely executing service-based job work that did not amount to "manufacture" or "production" of articles or things. On appeal, the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal (ITAT) overturned the assessment orders, ruling in favor of the assessees. The Revenue subsequently preferred the present appeals before the High Court.

ISSUES INVOLVED

  1. Whether the physical and chemical conversion of imported standard gold (purity of 0.995/0.999) into finished gold ornaments/jewellery of a lower purity (22/21 carats) constitutes "manufacture" or "production" of articles or things within the statutory meaning of Sections 10A and 10B of the Income Tax Act, 1961?
  2. Whether an assessee is disentitled from claiming export deductions under Sections 10A and 10B if the underlying raw material (standard gold) is owned by a non-resident foreign entity and the assessee is compensated through making/conversion charges rather than receiving the full commercial sale proceeds of the exported commodity?

PETITIONER’S (REVENUE'S) ARGUMENTS

  • The Revenue contended that the terms "manufacture or production" under Sections 10A and 10B must be given a strict and restrictive interpretation. Since the primary core component remains gold before and after processing, no new product with a completely distinct chemical composition or molecular attribute comes into existence.
  • It was urged that the assessees did not "export" gold ornaments in the commercial sense because the ownership of the standard gold rested entirely with the third-party foreign residents. The assessees never acquired title to the raw material.
  • The Revenue underscored that the assessees received mere "making charges" or job-work compensation rather than traditional "sale consideration." They further highlighted Section 10A(3), which mandates that "sale proceeds" must be brought into India, arguing that making charges cannot be equated with sale proceeds.

RESPONDENT’S (ASSESSEE'S) ARGUMENTS

  • The assessees maintained that the transformation of raw gold bars into complex, designed ornaments involves intensive chemical, physical, and mechanical operations that fundamentally change the character, name, commercial identity, and marketability of the article.
  • It was argued that the question of ownership of the underlying raw material is completely distinct and independent from whether a physical activity amounts to "manufacture" or "production."
  • The assessees relied heavily on established judicial precedents, including the Gujarat High Court decision in CIT v. J.B. Kharwar & Sons and the Madras High Court decision in Taj Fire Works Industries, to demonstrate that processing raw materials owned by third parties qualifies as manufacturing for fiscal incentive provisions.

COURT ORDER / FINDINGS

  • The Delhi High Court analysed the wider and narrower connotations of the word "manufacture." It recalled the landmark Supreme Court rulings in Union of India v. Delhi Cloth and General Mills Co. Ltd. (AIR 1963 SC 791) and Graphic Company India Ltd. v. Collector of Customs ((2001) 1 SCC 549), affirming that "manufacture" signifies the transformation of goods into a new, commercially distinct commodity possessing its own separate character, name, and specific use.
  • The Court referenced CIT v. Messrs Tara Agencies ((2007) 292 ITR 444 SC), noting that while the Income Tax Act did not explicitly define "manufacture" during the relevant period, the term implies an alteration that yields a commercially new article, which must be evaluated on the specific facts and context of each individual case.
  • The High Court took note of the rigorous mechanical and chemical processing involved in jewellery making: raw gold of 0.995/0.999 purity is highly malleable, soft, and completely unfit for wear; it must be melted via heat application, alloyed with metals like copper or silver to reduce purity to 22/21 carats for strength, poured into custom dyes, drawn into fine wires, and soldered by human craftsmanship into final ornaments. This renders the material fit for a specialized use for which it was previously entirely unfit.
  • The Court upheld the findings of the lower appellate authorities, determining that the final gold ornaments are entirely distinct commercial products from standard gold bricks. Consequently, the activity fully satisfies the criteria of "manufacture" or "production" under Sections 10A and 10B of the Act. The Court thus disposed of the appeals by a common order, affirming the eligibility of the assessees to the claimed deductions.

IMPORTANT CLARIFICATION

  • The High Court effectively clarified that the entitlement to export incentives under Section 10A and Section 10B is completely decoupled from the ownership of the raw materials. The statutory focus is on whether the process undertaken within the specialized industrial zone results in the "manufacture or production" of an article or thing that is subsequently exported. Undertaking job work on raw materials supplied free of cost by overseas clients and receiving making/conversion charges meets the criteria for export profits derived by the industrial undertaking.

SECTION INVOLVED

  • Section 10A and Section 10B of the Income Tax Act, 1961 (pertaining to statutory deductions from profits and gains derived by an industrial undertaking from the export of articles, things, or computer software).

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2011:DHC:12032-DB/SKN20122011ITA4582010_151711.pdf

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