“Whether in the light of peculiar facts and circumstances of the instant case, supporting manufacturer who receives export incentives in the form of duty draw back (DDB), Duty Entitlement Pass Book (DEPB) etc. is entitled for deduction under Section 80HHC of the Income Tax Act, 1961?” 16) Accordingly, we refer this batch of appeals to the larger Bench.

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 4590 OF 2018

(Arising out of Special Leave Petition (C) No. 8368 OF 2009)

Commissioner of Income Tax,

Karnal (Haryana) …..Petitioner(s)

Versus

M/s Carpet India, Panipat (Haryana) ……Respondent(s)

WITH

CIVIL APPEAL NO. 4601 OF 2018

(Arising out of Special Leave Petition (C) No. 7331 OF

2017)

CIVIL APPEAL NO. 4602 OF 2018

(Arising out of Special Leave Petition (C) No. 9284 OF

2017)

CIVIL APPEAL NO. 4591 OF 2018

(Arising out of Special Leave Petition (C) No. 19482 OF

2010)

CIVIL APPEAL NO. 4597 OF 2018

(Arising out of Special Leave Petition (C) No. 20408 OF

2013)

CIVIL APPEAL NO. 4599 OF 2018

(Arising out of Special Leave Petition (C) No. 10542 OF

2013)

CIVIL APPEAL NO. 4592 OF 2018

(Arising out of Special Leave Petition (C) No. 20941 OF

2010)

1

CIVIL APPEAL NO.4593 OF 2018

(Arising out of Special Leave Petition (C) No. 23683 OF

2010)

CIVIL APPEAL NO. 4596 OF 2018

(Arising out of Special Leave Petition (C) No. 3133 OF

2012)

CIVIL APPEAL NO. 4594 OF 2018

(Arising out of Special Leave Petition (C) No. 27636 OF

2010)

CIVIL APPEAL NO. 4603 OF 2018

(Arising out of Special Leave Petition (C) No. 27635 OF

2010)

CIVIL APPEAL NO. 4595 OF 2018

(Arising out of Special Leave Petition (C) No. 29783 OF

2011)

CIVIL APPEAL NO. 4598 OF 2018

(Arising out of Special Leave Petition (C) No. 33058 OF

2012)

J U D G M E N T

R.K.Agrawal, J.

1) Leave granted.

2) The above batch of appeals is related to the interpretation

of the provisions contained in Section 80HHC of the Income

Tax Act, 1961 (in short ‘the IT Act’).

3) SLP (C) 8368 of 2009

(a) M/s. Carpet India (P) Ltd.-the assessee is a partnership

firm deriving income from the manufacturing and sale of

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carpets to M/s. IKEA Trading (India) Ltd. (Export House) as

supporting manufacturer.

(b) The assessee filed a ‘Nil’ return for the Assessment Year

(AY) 2001-2002 on 30.10.2001, inter alia, stating the total

sales amounting to Rs. 6,49,83,432/- with total export

incentives of Rs. 68,82,801/- as Duty Draw Back (DDB) and

claimed deduction under Section 80HHC amounting to Rs.

1,57,68,742/- out of the total profits of Rs. 1,97,10,927/- at

par with the direct exporter.

(c) On scrutiny, the Assessing Officer, vide order dated

25.02.2004, allowed the deduction under Section 80HHC to

the tune of Rs. 1,08,96,505/- instead of 1,57,68,742/- as

claimed by the assessee while arriving at the total income of

Rs. 57,18,040/.

(d) Being aggrieved, the assessee preferred an appeal before

the Commissioner of Income Tax (Appeals) which was allowed

vide order dated 12.08.2004 while holding that the assessee is

entitled to the deduction of export incentives under Section

80HHC at par with the exporter.

(e) The Revenue went in appeal before the Income Tax

Appellate Tribunal (in short ‘the Tribunal’) as well as before

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the High Court but the same got dismissed vide orders dated

23.02.2007 and 13.05.2008 respectively leaving it to take

recourse of this Court by way of special leave.

(f) Since a common question of law has arisen in these

appeals, it will be disposed of by this common order.

4) Heard learned counsel for the parties and perused the

records.

Point(s) for consideration:-

5) The short but important question of law that arises

before this court is whether in the facts and circumstances of

the present case, supporting manufacturer who receives

export incentives in the form of duty draw back (DDB), Duty

Entitlement Pass Book (DEPB) etc., is entitled for deduction

under Section 80HHC of the IT Act at par with the direct

exporter?

Rival contentions:-

6) At the outset, learned counsel for the Revenue submitted

that the assessee deals in the manufacturing of the carpets

which it usually sells to various entities including M/s IKEA

Trading (India) Ltd. (Export House/Trading House) which, in

turn, further exports the goods manufactured by the assessee.

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While filing the return, the assessee claimed deduction at par

with the direct exporter under Section 80HHC of the IT Act

since it receives export incentives in the form of duty draw

back (DDB) etc. It was further contended that in view of the

fact that the assessee is working as a supporting

manufacturer and also there is no direct export of the goods to

the foreign constituents by the assessee firm, hence, it is not

entitled to claim the deduction at par with the direct exporter.

However, the High Court erroneously relied on the judgment of

this Court, namely, Commissioner of Income Tax,

Thiruvantanpuram vs. Baby Marine Exports (2007) 290 ITR

323 (SC) and held that the assessee is entitled to claim

deduction at par with the direct exporter which is not

sustainable in the eyes of law since the issues and facts are

distinguishable from the facts and the circumstances of the

instant case.

7) At this juncture, it was also pointed out that the High

Court as well as the Tribunal erred in law while deciding the

issue as they treated the export incentive at par with the

premium paid by the export houses or trading houses to

supporting manufacturer and not appreciated the fact that the

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ratio of the facts and issues involved in the case of the

assessee-firm are totally different from the case of Baby

Marine Exports (supra). It was pointed out that the said case

dealt with the issue of eligibility of export house premium for

inclusion in the business profit and the turnover of the

assessee firm. Hence, in no circumstances, it could be relied

upon by the High Court.

8) Per contra, the stand of leaned counsel for the assessee

was that the assessee is working as supporting manufacturer,

exporting the goods to the foreign constituents through export

houses, therefore, it is legitimately entitled for the deduction of

export incentives in terms of the Section 80HHC of the IT Act

in a similar way to the benefits available to the direct exporter.

It was submitted that the High Court rightly relied on the

judgment of this court in Baby Marine Exports (supra).

Hence, this special leave to appeal deserves to be dismissed.

Discussion:-

9) Before examining the matter, we deem it apposite to refer

to the relevant provisions of Section 80HHC of the IT Act:

“80HHC. Deduction in respect of profits retained for

export business:- (1) Where an assessee, being an Indian

company or a person (other than a company) resident in

India, is engaged in the business of export out of India of any

goods or merchandise to which this section applies, there

6

shall, in accordance with and subject to the provisions of this

section, be allowed, in computing the total income of the

assessee, a deduction to the extent of profits, referred to in

sub-section (1B), derived by the assessee from the export of

such goods or merchandise:

Provided that if the assessee, being a holder of an Export

House Certificate or a Trading House Certificate (hereinafter

in this section referred to as an Export House or a Trading

House, as the case may be), issues a certificate referred to in

clause (b) of sub-section (4A), that in respect of the amount of

export turnover specified therein, the deduction under this

sub-section is to be allowed to a supporting manufacturer,

then the amount of deduction in the case of the assessee

shall be reduced by such amount which bears to the total

profits derived by the assessee from the export of trading

goods, the same proportion as the amount of export turnover

specified in the said certificate bears to the total export

turnover of the assessee in respect of such trading goods.

(1A) Where the assessee, being a supporting manufacturer,

has during the previous year, sold goods or merchandise to

any Export House or Trading House in respect of which the

Export House or Trading House has issued a certificate under

the proviso to sub-section (1), there shall, in accordance with

and subject to the provisions of this section, be allowed in

computing the total income of the assessee, a deduction to

the extent of profits, referred to in sub-section (1B), derived

by the assessee from the sale of goods or merchandise to the

Export House or Trading House in respect of which the

certificate has been issued by the Export House or Trading

House.

(1B) xxx

(2) xxx

(3) xxx

(3A) For the purposes of sub-section (1A), profits derived by a

supporting manufacturer from the sale of goods or

merchandise shall be:-

(a) in a case where the business carried on by the supporting

manufacturer consists exclusively of sale of goods or

merchandise to one or more Export Houses or Trading

Houses, the profits of the business;

(b) in a case where the business carried on by the supporting

manufacturer does not consist exclusively of sale of goods or

merchandise to one or more Export Houses or Trading

Houses, the amount which bears to the profits of the

business the same proportion as the turnover in respect of

sale to the respective Export House or Trading House bears

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to the total turnover of the business carried on by the

assessee.”

(4) xxx

(4A) xxx

(4B) xxx

(4C) xxx

Explanation:- For the purposes of this section:-

(a) “convertible foreign exchange” means foreign

exchange which is for the time being treated by the

Reserve Bank of India as convertible foreign exchange

for the purposes of the Foreign Exchange

Management Act, 1999 (42 of 1999), and any rules

made thereunder;

(aa) “export out of India” shall not include any transaction

by way of sale or otherwise, in a shop, emporium or

any other establishment situate in India, not involving

clearance at any customs station as defined in the

Customs Act 1962 (52 of 1962);

(b) “export turnover” means the sale proceeds received in,

or brought into India by the assessee in convertible

foreign exchange in accordance with clause (a) of

sub-section (2) of any goods or merchandise to which

this section applies and which are exported out of

India, but does not include freight or insurance

attributable to the transport of the goods or

merchandise beyond the customs station as defined

in the Customs Act, 1962;

(ba) “total turnover” shall not include freight or insurance

attributable to the transport of the goods or

merchandise beyond the customs station as defined

in the Customs act, 1962 (52 of 1962):

Provided that in relation to any assessment year

commencing on or after the 1st day of April, 1991, the

expression “total turnover” shall have effect as if it

also excluded any sum referred to in clauses (iiia),

(iiib), (iiic), (iiid) and (iiie) of section 28.”

(baa) “profits of the business” means the profits of the

business as computed under the head “Profits and

gains of business or profession” as reduced by –

(1) ninety per cent. of any sum referred to in

clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of

section 28 or of any receipts by way of

brokerage, commission, interest, rent, charges

or any other receipt of a similar nature included

in such profits; and

(2) the profits of any branch, office, warehouse or

any other establishment of the assessee situate

outside India;

(c) xxx

8

(d) xxx

(e) xxx

Clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of Section 28 of IT Act read

as follows:

“28. Profits and gains of business or profession:- The

following income shall be chargeable to income-tax under

the head “Profits and gains of business or profession:-

(i) xxx

(ii) xxx

(iii) xxx

(iiia) profits on sale of a licence granted under the

Imports (Control) Order, 1955, made under the

Imports and Exports (Control) Act, 1947 (18 of

1947);

(iiib) cash assistance (by whatever name called)

received or receivable by any person against

exports under any scheme of the Government of

India;

(iiic) any duty of customs or excise repaid or repayable

as drawback to any person against exports under

the Customs and Central Excise Duties Drawback

Rules, 1971;

(iiid) any profit on the transfer of the Duty Entitlement

Pass Book Scheme, being the Duty Remission

Scheme under the export and import policy

formulated and announced under section 5 of the

Foreign Trade (Development and Regulation) Act,

1992 (22 of 1992);

(iiie) any profit on the transfer of Duty Free

Replenishment Certificate being the Duty

Remission Scheme under the export and import

policy formulated and announced under section 5

of the Foreign Trade (Development and

Regulation) Act, 1992 (22 of 1992).”

10) The very purpose of Section 80HHC of the IT Act is to

promote the export business as well as in order to keep the

domestic products competitive in the global market by

allowing tax deduction on export profits. Since the inception of

Section 80HHC of the IT Act, these benefits were available only

to the direct exporter which later on extended to the

9

supporting manufacturer who is selling goods or merchandise

to an Export House/Trading House by inserting sub-Section

(1A) and (3A) in Section 80HHC of the IT Act. The legislature

divided Section 80HHC of the IT Act in two parts for the

purpose of deduction, namely, direct exporter and supporting

manufacturer. Direct exporter, being an Indian company or a

person (other than company) resident in India, who directly

exports the goods to some other country whereas supporting

manufacturer, being an Indian company or a person (other

than company) resident in India, who instead of direct export,

supply the goods to the Export Houses who eventually export

these goods. However, clauses (ba) and (baa) of the

Explanation to Section 80HHC defines “total turnover” and

what items are not included therein and “profits of the

business” to be reduced by ninety percent of any sum referred

to in clauses (iiia) to (iiie) of Section 28 of the IT Act. Clauses

(iiia) to (iiie) of Section 28 specifically refers to profits on sale of

import license, cash assistance received or receivable against

exports, duty drawback against export (Customs & Central

Excise Duty Drawback Rules), any profit on the transfer of

Duty Entitlement Pass Book (Duty Remission Scheme) and

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any profit on the transfer of Duty Free Replenishment

Certificate.

11) It is well known fact that there can be diverse sources of

income. These sources of income are clubbed together in order

to find out the gross total income on which tax can be levied.

However, the IT Act provides for allowing of certain deductions

from the gross total income of the assessee. Broadly speaking,

deductions reduce the taxable income. In the case at hand, it

is evident that the total income of the assessee for the

concerned Assessment Year was Rs 1,97,10,927/- out of

which it claimed deduction to the tune of Rs. 1,57,68,742/-

under Section 80HHC of the IT Act which was partly

disallowed by the Assessing Officer and deduction was allowed

only to the tune of Rs 1,08,96,505/-. However, the assessee

claimed the deduction at par with the direct exporter under

Section 80HHC of the IT Act which has been eventually upheld

by the High Court.

12) In the instant case, the whole issue revolves around the

manner of computation of deduction under section 80HHC of

the IT Act, in the case of supporting manufacturer. On perusal

of various provisions of the IT Act, it is clear that Section

11

80HHC of the IT Act provides for deduction in respect of

profits retained from export business and, in particular,

sub-Section (1A) and sub-Section (3A), provides for deduction

in the case of supporting manufacturer. The “total turnover”

has to be determined as per clause (ba) of the Explanation

whereas “Profits of the business” has to be determined as per

clause (baa) of the Explanation. Both these clauses provide

for exclusion and reduction of 90% of certain receipts

mentioned therein respectively. The computation of deduction

in respect of supporting manufacturer, is contemplated by

Section 80HHC (3A), whereas the effect to be given to such

computed deduction is contemplated under Section 80HHC

(1A) of the IT Act. In other words, the machinery to compute

the deduction is provided in Section 80HHC (3A) of the IT Act

and after computing such deduction, such amount of

deduction is required to be deducted from the gross total

income of the assessee in order to arrive at the taxable

income/total income of the assessee, as contemplated by

Section 80HHC (1A) of the IT Act.

12

13) In Baby Marine Exports (supra), the question of law

involved was “whether the export house premium received by

the assessee is includible in the “profits of the business” of the

assessee while computing the deduction under Section 80HHC

of the Income Tax Act, 1961?”. The said case mainly dealt with

the issue related with the eligibility of export house premium

for inclusion in the business profit for the purpose of

deduction under Section 80HHC of the IT Act. Whereas in the

instant case, the main point of consideration is whether the

assessee-firm, being a supporting manufacturer, is to be

treated at par with the direct exporter for the purpose of

deduction of export incentives under Section 80HHC of the IT

Act, after having regards to the peculiar facts of the instant

case.

14) While deciding the issue in Baby Marine Exports

(supra), a two Judge Bench of this Court held as under:

“39. On plain construction of Section 80HHC(1-A), the

respondent is clearly entitled to claim deduction of the

premium amount received from the export house in

computing the total income. The export house

premium can be included in the business profit

because it is an integral part of business operation of

the respondent which consists of sale of goods by the

respondent to the export house.”

13

The aforesaid decision has been followed by another Bench of

two Judges of this Court in Special Leave to Appeal (Civil) No.

7615 of 2009, Civil Appeal No. 6437 of 2012 and Others,

Commissioner of Income Tax Karnal vs. Sushil Kumar

Gupta decided on September 12, 2012. The question

considered in the aforesaid case is reproduced below:

“3. In these civil appeals the common question which arises

for determination is as follows:

“Whether 90% of export benefits disclaimed in

favour of a supporting manufacturer (assessee

herein) have to be reduced in terms of Explanation

(baa) of Section 80HHC of the Income Tax Act,

1961, while computing deduction admissible to

such supporting manufacturer under Section

80HHC(3A) of the Act?”

4. This question has been answered in favour of the assessee

and against the Department in the case of CIT v. Baby Marine

Exports [2007] 290 ITR 323/160 Taxman 160.

5. The civil appeals filed by the Department are, accordingly,

dismissed.”

Broadly speaking, we are of the view that both these cases are

not identical and cannot be related with the deduction of

export incentives by the supporting manufacturer under

Section 80HHC of the IT Act.

15) However, we are not in the agreement with these

decisions and as Explanation (baa) of Section 80HHC

specifically reduces deduction of 90% of the amount referable

to Section 28 (iiia) to (iiie) of the IT Act, hence, we are of the

14

view that these decisions require re-consideration by a larger

Bench since this issue has larger implication in terms of

monetary benefits for both the parties. After giving our

thoughtful consideration, the following substantial question of

law of general importance arises for re-consideration by this

Court:

“Whether in the light of peculiar facts and

circumstances of the instant case, supporting

manufacturer who receives export incentives in

the form of duty draw back (DDB), Duty

Entitlement Pass Book (DEPB) etc. is entitled for

deduction under Section 80HHC of the Income

Tax Act, 1961?”

16) Accordingly, we refer this batch of appeals to the larger

Bench. Let the matters be placed before Hon’ble the Chief

Justice of India for appropriate orders.

………..…………………………………J.

(R.K. AGRAWAL)

…….…………….………………………J.

(ABHAY MANOHAR SAPRE)

NEW DELHI;

APRIL 27, 2018.

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