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REPORTABLE IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 4590 OF 2018

COMMISSIONER OF INCOME TAX, KARNAL (HARYANA)  Appellant(s)

VERSUS

M/S CARPET INDIA, PANIPAT (HARYANA)           Respondent(s)

WITH

CIVIL APPEAL NO. 4591 OF 2018

CIVIL APPEAL NO. 4592 OF 2018

CIVIL APPEAL NO. 4593 OF 2018

CIVIL APPEAL NO. 4594 OF 2018

CIVIL APPEAL NO. 4595 OF 2018

CIVIL APPEAL NO. 4596 OF 2018

CIVIL APPEAL NO. 4597 OF 2018

CIVIL APPEAL NO. 4598 OF 2018

CIVIL APPEAL NO. 4599 OF 2018

CIVIL APPEAL NO. 4603 OF 2018

J U D G M E N T

   R.F. Nariman, J.

Civil Appeal Nos. 4590, 4591, 4592 and 4603 of 2018:

1) This batch of appeals arises from a judgment passed

by the High Court of Punjab and Haryana at Chandigarh in

which  the  Appeals  preferred  by  the  Revenue  have  been

dismissed  relying  upon  Commissioner  of  Income  Tax,

Thiruvananthapuram vs. Baby Marine Exports, Kollam (2007) 4

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SCC  555  in  order  to  arrive  at  a  conclusion  that  the

supporting manufacturer is at par with the actual direct

exporter of goods when it comes to deductions that are

available under Section 80HHC of the Income Tax Act, 1961

(in short ‘the Act’).

2) It is unnecessary to go into the facts of each of

these cases as it is undisputed that the assessee in each

of these cases is a supporting manufacturer.  The scheme

insofar as Section 80HHC of the Act is concerned is crystal

clear.   The  marginal  note  to  Section  80HHC  reads  -

Deduction  in  respect  of  profits  retained  for  export

business.   

“80HHC. (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 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  (hereafter  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 the 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

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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.

Xxx xxx xxx

(3) For the purposes of sub-section (1),—

(a) where the export out of India is of goods or merchandise manufactured or processed by the assessee, the profits derived from such export shall be the amount which bears to the profits of  the  business,  the  same  proportion  as  the export turnover in respect of such goods bears to the   total turnover of the business carried on by the assessee;

(b) where the export out of India is of trading goods,  the  profits  derived  from  such  export shall be the export turnover in respect of such trading goods as reduced by the direct costs and indirect costs attributable to such export;

(c) where the export out of India is of goods or merchandise manufactured or processed by the assessee  and  of  trading  goods,  the  profits derived from such export shall,—

(i)  in  respect  of  the  goods  or  merchandise manufactured or processed by the assessee, be the amount which bears to the adjusted profits of  the  business,  the  same  proportion  as  the adjusted   export turnover in respect of such goods bears to the adjusted total turnover of the business    carried on by the assessee; and

(ii) in respect of trading goods, be the export turnover in respect of such trading goods as reduced  by  the  direct  and  indirect  costs attributable to export of such trading goods:

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Provided that the profits computed under clause (a)  or  clause  (b)  or  clause  (c)  of  this sub-section shall be further increased by the amount which bears to ninety per cent of any sum  referred  to  in  clause  (iiia)  (not  being profits on sale of a licence acquired from any other person), and clauses (iiib) and (iiic) of section 28, the same proportion as the export turnover  bears  to  the  total  turnover  of  the business carried on by the assessee:

Provided  further  that  in  the  case  of  an assessee having export turnover not exceeding rupees ten crores during the previous year, the profits   computed under clause (a) or clause (b) or clause (c) of this sub-section or after giving effect to the first proviso, as the case may  be,  shall  be  further  increased  by  the amount which bears to ninety per cent of any sum  referred  to  in  clause  (iiid)  or  clause (iiie), as the case may be, of section 28, the same proportion as the export turnover bears to the total turnover of the   business carried on by the assessee:

Provided also that in the case of an assessee having  export  turnover  exceeding  rupees  ten crores during the previous year, the profits computed  under clause (a) or clause (b) or clause (c) of this sub-section or after giving effect to the first proviso, as the case may be, shall be    further increased by the amount which  bears  to  ninety  per  cent  of  any  sum referred to in clause (iiid) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee, if the assessee has necessary and sufficient evidence to prove that,—

(a) he had an option to choose either the duty drawback  or  the  Duty  Entitlement  Pass  Book Scheme, being the Duty Remission Scheme; and

(b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit  allowable  under  the  Duty  Entitlement Pass  Book  Scheme,  being  the  Duty  Remission Scheme :

Provided also that in the case of an assessee having  export  turnover  exceeding  rupees  ten crores during the previous year, the profits computed  under clause (a) or clause (b) or clause (c) of this sub-section or after giving effect to the first proviso, as the case may

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be, shall be    further increased by the amount which  bears  to  ninety  per  cent  of  any  sum referred to in clause (iiie) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee, if the assessee has necessary and sufficient evidence to prove that,—

(a) he had an option to choose either the duty drawback  or  the  Duty  Free  Replenishment Certificate, being the Duty Remission Scheme; and

(b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit  allowable  under  the  Duty  Free Replenishment  Certificate,  being  the  Duty Remission Scheme.

Explanation.—For the purposes of this clause, “rate of credit allowable” means the rate of credit  allowable  under  the  Duty  Free Replenishment  Certificate,  being  the  Duty Remission Scheme    calculated in the manner as may be notified by the Central Government:

Provided  also  that  in  case  the  computation under clause (a) or clause (b) or clause (c) of this sub-section is a loss, such loss shall be set  off  against  the  amount  which  bears  to ninety per cent of—

(a) any sum referred to in clause (iiia) or clause (iiib) or clause (iiic), as the case may be, or

(b) any sum referred to in clause (iiid) or clause (iiie), as the case may be, of section 28, as   applicable in the case of an assessee referred to in the second or the third or the fourth proviso, as the case may be,

the  same  proportion  as  the  export  turnover bears  to  the  total  turnover  of  the  business carried on by the assessee.

Explanation.—For  the  purposes  of  this sub-section,—

(a) “adjusted export turnover” means the export turnover as reduced by the export turnover in respect of trading goods;

(b) “adjusted profits of the business” means the profits of the business as reduced by the profits derived from the business of export out of India of trading goods as computed in the

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manner provided in clause (b) of sub-section (3);

(c) “adjusted total turnover” means the total turnover  of  the  business  as  reduced  by  the export turnover in respect of trading goods;

(d)  “direct  costs”  means  costs  directly attributable to the trading goods exported out of India including the purchase price of such goods;

(e)  “indirect  costs”  means  costs,  not  being direct  costs,  allocated  in  the  ratio  of  the export turnover in respect of trading goods to the total turnover;

(f) “trading goods” means goods which are not manufactured or processed by the assessee.

(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 to the total turnover of the business carried on by the assessee.”

3) It will be noticed on an analysis of Section 80HHC(1)

that where the assessee has engaged in the business of

export out of India of any goods or merchandise to which

this section applies, what shall be allowed in computing

the total income of the assessee, is a deduction to the

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

derived by the assessee from the export of such goods or

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merchandise.   So  far  as  “supporting  manufacturers”  are

concerned, under Section 80HHC(1A), where any Export House

or  Trading  House  has  issued  a  certificate  that  the

supporting manufacturer has, in fact, supplied such goods

or merchandise for export, they shall also be allowed a

deduction to the extent of profits referred to derived by

the assessee from the sale of goods or merchandise to the

Export House or Trading House.  The manner of deduction,

insofar as the exporter is concerned, is laid down in sub-

section (3) which when read together with its provisos make

it clear that profits that are derived from such export

shall be further increased in the manner provided by the

first proviso; and where export turnover does not exceed

rupees ten crores, in the manner provided by the second

proviso; and where the export turnover exceeds rupees ten

crores, in the manner provided by the third proviso.  What

is conspicuous by their absence is any of the provisos in

sub-section (3) insofar as sub-section (3A) is concerned,

which  makes  it  clear  that  the  profits  derived  by  a

supporting  manufacturer  shall  be  strictly  in  accordance

with the provisions contained in Section 80HHC (3A) read

with the explanation to the section, which then defines

“Profits  of  the  business”  under  explanation  (baa)  as

follows:

“profits of business” means the profits of the business as computed under the head “Profits and gains of business or profession” as reduced by-

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(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.”  

4) Given this statutory scheme, it is clear that the

exporter stands on a completely different footing from the

supporting manufacturer as the parameters and scheme for

claiming deduction relatable to exporters under 80HHC(1)

read  with  (3)  is  completely  different  from  that  of

supporting manufacturers under Section 80HHC (1A) read with

(3A) thereof.  

5) We may mention in passing that this matter has been

placed before a bench of three judges by the judgment in

Commissioner of Income Tax, Karnal (Haryana) vs.  Carpet

India, Panipat (Haryana) (2018) 6 SCC 620, where this Court

analysed  the  provisions  of  Section  80HHC  (3A)  and

thereafter adverted to the decision in Baby Marine Exports

(supra) as follows:-

“15)  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

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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.  

16)  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.”  

17. 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 vs. 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

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related with the deduction of export incentives by  the  supporting  manufacturer  under  Section 80HHC of the IT Act.  

18) 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  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?”  

6) We  agree  with  the  reasoning  and  analysis  of  the

referring  judgment,  namely,  that  Baby  Marine  Exports

(supra) dealt with an issue related to the eligibility of

export house premium for inclusion in business profit for

the purpose of deduction under Section 80HHC of the Act.

Whereas in the present appeals, the point for consideration

is completely different, being as to whether the assessees

being supporting manufacturers, are to be treated on par

with the direct exporter for the purpose of deduction of

export incentives under Section 80HHC of the Act.  We,

therefore, answer the question referred to us by stating

that  Baby Marine Exports (supra) deals with an entirely

different question and cannot be relied upon to arrive at

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the conclusion that the supporting manufacturers are to be

treated on par with the direct exporter for the purpose of

deduction  under  Section  80HHC  of  the  Act,  as  has  been

pointed out by us herein above.  Consequently, the decision

in  C.I.T. vs.  Satish  Kumar  Gupta (C.A.  No.  6437/2012)

decided on 12.09.2012 is over ruled.  

7) This being the case, we allow these appeals in favour

of the Revenue and set aside the impugned judgment(s).

Civil Appeal Nos. 4593, 4594, 4595, 4596, 4597, 4598 and

4599 of 2018:

8) In these appeals also the impugned judgments are set

aside.  However, it will be open for the respondent in the

above cases to show, by adducing the necessary facts, that

they are direct exporters as well and can therefore avail

of the deduction available under Section 80HHC (1) read

with (3).  For this purpose, these matters stand remanded

to  the  Appellate  Tribunal.   Accordingly,  these  appeals

stand disposed of.

   .......................... J.     (ROHINTON FALI NARIMAN)

   .......................... J.          (R. SUBHASH REDDY)

   .......................... J.          (SURYA KANT)

New Delhi; August 27, 2019.