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)

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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

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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

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(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

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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

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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.

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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.”

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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

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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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