COMMISSIONER OF INCOME TAX, KARNAL (HARYANA) versus M/S CARPET INDIA, PANIPAT (HARYANA) on 27 August 2019

1. This batch of appeals arises from a judgment passed by theHigh Court of Punjab and Haryana at Chandigarh in which the Appealspreferred by the Revenue have been dismissed relying uponCommissioner of Income Tax, Thiruvananthapuramvs. BabyMarine Exports, Kollam(2007) 4 SCC 555 in order to arrive at aconclusion that the supporting manufacturer is at par with the actualdirect exporter of goods when it comes to deductions that are availableunder 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 casesas it is undisputed that the assessee in each of these cases is a supportingmanufacturer. The scheme insofar as Section 80HHC of the Act isconcerned 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 ora person (other than a company) resident in India, is engaged inthe business of export out of India of any goods ormerchandise to which this section applies, there shall, inaccordance with and subject to the provisions of this section, be A

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allowed, in computing the total income of the assessee, adeduction to the extent of profits, referred to in sub-section (1B),derived by the assessee from the export of such goods ormerchandise:

Provided that if the assessee, being a holder of an Export HouseCertificate or a Trading House Certificate (hereafter in thissection referred to as an Export House or a Trading House, asthe case may be,) issues a certificate referred to in clause (b)of sub-section (4A), that in respect of the amount of the exportturnover specified therein, the deduction under this sub-sectionis to be allowed to a supporting manufacturer, then the amountof deduction in the case of the assessee shall be reduced by suchamount which bears to the total profits derived by the assesseefrom the export of trading goods, the same proportion as theamount of export turnover specified in the said certificate bearsto the total export turnover of the assessee in respect of suchtrading goods.

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(1A) Where the assessee, being a supporting manufacturer, hasduring the previous year, sold goods or merchandise to any ExportHouse or Trading House in respect of which the Export Houseor Trading House has issued a certificate under the proviso toEsub-section (1), there shall, in accordance with and subject tothe provisions of this section, be allowed in computing the totalincome of the assessee, a deduction to the extent of profits,referred to in sub-section (1B), derived by the assessee from thesale of goods or merchandise to the Export House or TradingFHouse in respect of which the certificate has been issued by theExport House or Trading House.

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

(a) where the export out of India is of goods or merchandisemanufactured or processed by the assessee, the profits derivedfrom such export shall be the amount which bears to the profitsof the business, the same proportion as the export turnover inrespect of such goods bears to the total turnover of the businesscarried on by the assessee; H

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

(c) where the export out of India is of goods or merchandisemanufactured 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 orprocessed by the assessee, be the amount which bears tothe adjusted profits of the business, the same proportion asthe adjusted export turnover in respect of such goods bearsto the adjusted total turnover of the business carried on bythe assessee; and

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

Provided that the profits computed under clause (a) or clause(b) or clause (c) of this sub-section shall be further increasedby the amount which bears to ninety per cent of any sum referredto in clause (iiia) (not being profits on sale of a licence acquiredfrom any other person), and clauses (iiib) and (iiic) of section28, the same proportion as the export turnover bears to the totalturnover of the business carried on by the assessee:

Provided further that in the case of an assessee having exportturnover not exceeding rupees ten crores during the previousyear, 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 amountwhich 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 sameproportion as the export turnover bears to the total turnover ofthe business carried on by the assessee:

Provided also that in the case of an assessee having exportturnover 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, A

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as the case may be, shall be further increased by the amountwhich bears to ninety per cent of any sum referred to in clause(iiid) of section 28, the same proportion as the export turnoverbears to the total turnover of the business carried on by theassessee, if the assessee has necessary and sufficient evidenceto prove that,- B

(a) he had an option to choose either the duty drawback or theDuty Entitlement Pass Book Scheme, being the DutyRemission Scheme; and (b) the rate of drawback credit attributable to the customs dutywas higher than the rate of credit allowable under the DutyEntitlement Pass Book Scheme, being the Duty RemissionScheme :

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Provided also that in the case of an assessee having exportturnover exceeding rupees ten crores during the previous year,Dthe 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 amountwhich bears to ninety per cent of any sum referred to in clause(iiie) of section 28, the same proportion as the export turnoverEbears to the total turnover of the business carried on by theassessee, if the assessee has necessary and sufficient evidenceto prove that,- D

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

(b) the rate of drawback credit attributable to the customs dutywas higher than the rate of credit allowable under the DutyFree Replenishment Certificate, being the Duty RemissionScheme.

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Explanation.-For the purposes of this clause, "rate of creditallowable" means the rate of credit allowable under the Duty FreeReplenishment Certificate, being the Duty Remission Schemecalculated in the manner as may be notified by the CentralHGovernment:

Provided also that in case the computation under clause (a) orclause (b) or clause (c) of this sub-section is a loss, such lossshall be set off against the amount which bears to ninety per centof- (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 thecase may be, of section 28, as applicable in the case of anassessee referred to in the second or the third or the fourthproviso, as the case may be, the same proportion as the export turnover bears to the totalturnover of the business carried on by the assessee.

Explanation.-For the purposes of this sub-section,- (a) “adjusted export turnover” means the export turnover asreduced by the export turnover in respect of trading goods; (b) “adjusted profits of the business” means the profits of thebusiness as reduced by the profits derived from the businessof export out of India of trading goods as computed in themanner provided in clause (b) of sub-section (3);

(c) “adjusted total turnover” means the total turnover of thebusiness as reduced by the export turnover in respect oftrading goods; (d) “direct costs” means costs directly attributable to the tradinggoods exported out of India including the purchase price ofsuch goods; (e) "indirect costs” means costs, not being direct costs,allocated in the ratio of the export turnover in respect oftrading goods to the total turnover; (f) "trading goods” means goods which are not manufacturedor processed by the assessee.

(3A) For the purposes of sub-section (1A), profits derived by asupporting manufacturer from the sale of goods or merchandiseshall be,-

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A(a) in a case where the business carried on by the supportingmanufacturer consists exclusively of sale of goods ormerchandise to one or more Export Houses or TradingHouses, the profits of the business; (b) in a case where the business carried on by the supportingBmanufacturer does not consist exclusively of sale of goodsor merchandise to one or more Export Houses or TradingHouses, the amount which bears to the profits of thebusiness the same proportion as the turnover in respect ofsale to the respective Export House or Trading House bearsCto the total turnover of the business carried on by theassessee.”

3. It will be noticed on an analysis of Section 80HHC(1) thatwhere the assessee has engaged in the business of export out of Indiaof any goods or merchandise to which this section applies, what shallDbe allowed in computing the total income of the assessee, is a deductionto the extent of profits, referred to in sub-section (1B), and derived bythe assessee from the export of such goods or merchandise. So far as“supporting manufacturers” are concerned, under Section 80HHC(1A),where any Export House or Trading House has issued a certificate thatEthe supporting manufacturer has, in fact, supplied such goods ormerchandise for export, they shall also be allowed a deduction to theextent of profits referred to derived by the assessee from the sale ofgoods or merchandise to the Export House or Trading House. Themanner of deduction, insofar as the exporter is concerned, is laid downin sub-section (3) which when read together with its provisos make itFclear that profits that are derived from such export shall be furtherincreased in the manner provided by the first proviso; and where exportturnover does not exceed rupees ten crores, in the manner providedby the second proviso; and where the export turnover exceeds rupeesten crores, in the manner provided by the third proviso. What isGconspicuous by their absence is any of the provisos in sub-section (3)insofar as sub-section (3A) is concerned, which makes it clear that theprofits derived by a supporting manufacturer shall be strictly inaccordance with the provisions contained in Section 80HHC (3A) readwith the explanation to the section, which then defines “Profits of theHbusiness” under explanation (baa) as follows:

“profits of business” means the profits of the business ascomputed under the head “Profits and gains of business orprofession” 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 wayof brokerage, commission, interest, rent, charges or anyother receipt of a similar nature included in such profits; and

(2) the profits of any branch, office, warehouse or any otherestablishment of the assessee situate outside India.”

4. Given this statutory scheme, it is clear that the exporter standson a completely different footing from the supporting manufacturer asthe parameters and scheme for claiming deduction relatable to exportersunder 80HHC(1) read with (3) is completely different from that ofsupporting manufacturers under Section 80HHC (1A) read with (3A)thereof.

5. We may mention in passing that this matter has been placedbefore a bench of three judges by the judgment in Commissioner ofIncome Tax, Karnal (Haryana)vs. Carpet India, Panipat (Haryana)(2018) 6 SCC 620, where this Court analysed the provisions of Section80HHC (3A) and thereafter adverted to the decision in Baby MarineExports (supra) as follows:-

“15) In Baby Marine Exports (supra), the question of law involvedwas “whether the export house premium received by theassessee is includible in the “profits of the business” of theassessee while computing the deduction under Section80HHC of the Income Tax Act, 1961?”. The said case mainlydealt with the issue related with the eligibility of export housepremium for inclusion in the business profit for the purpose ofdeduction under Section 80HHC of the IT Act. Whereas in theinstant case, the main point of consideration is whether theassessee-firm, being a supporting manufacturer, is to be treatedat par with the direct exporter for the purpose of deduction ofexport incentives under Section 80HHC of the IT Act, afterhaving regards to the peculiar facts of the instant case.

16) While deciding the issue in Baby Marine Exports (supra), atwo Judge Bench of this Court held as under:

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“39. On plain construction of Section 80HHC (1-A), therespondent is clearly entitled to claim deduction of the premiumamount received from the export house in computing the totalincome. The export house premium can be included in thebusiness profit because it is an integral part of business operationof the respondent which consists of sale of goods by therespondent to the export house.”

17. The aforesaid decision has been followed by another Benchof 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 Guptadecided on September 12, 2012. The question considered in theaforesaid case is reproduced below:

“3. In these civil appeals the common question which arises fordetermination is as follows:

“Whether 90% of export benefits disclaimed in favour of asupporting manufacturer (assessee herein) have to be reducedin terms of Explanation (baa) of Section 80HHC of the IncomeTax Act, 1961, while computing deduction admissible to suchsupporting manufacturer under Section 80HHC (3A) of the Act?”

4. This question has been answered in favour of the assesseeand against the Department in the case of CIT vs. Baby MarineExports [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 arenot identical and cannot be related with the deduction of exportincentives by the supporting manufacturer under Section 80HHCof the IT Act.

18) However, we are not in the agreement with these decisionsand as Explanation (baa) of Section 80HHC specifically reducesdeduction of 90% of the amount referable to Section 28 (iiia) to(iiie) of the IT Act, hence, we are of the view that these decisionsrequire re-consideration by a larger Bench since this issue haslarger implication in terms of monetary benefits for both theparties. After giving our thoughtful consideration, the following substantial question of law of general importance arises forre-consideration by this Court:

“Whether in the light of peculiar facts and circumstances of theinstant case, supporting manufacturer who receives exportincentives in the form of duty draw back (DDB), DutyEntitlement Pass Book (DEPB) etc. is entitled for deduction underSection 80HHC of the Income Tax Act, 1961?”

6. We agree with the reasoning and analysis of the referringjudgment, namely, that Baby Marine Exports (supra) dealt with anissue related to the eligibility of export house premium for inclusion inbusiness profit for the purpose of deduction under Section 80HHC ofthe Act. Whereas in the present appeals, the point for consideration iscompletely different, being as to whether the assessees being supportingmanufacturers, are to be treated on par with the direct exporter forthe purpose of deduction of export incentives under Section 80HHCof the Act. We, therefore, answer the question referred to us by statingthat Baby Marine Exports (supra) deals with an entirely differentquestion and cannot be relied upon to arrive at the conclusion that thesupporting manufacturers are to be treated on par with the directexporter for the purpose of deduction under Section 80HHC of the Act,as has been pointed out by us herein above. Consequently, the decisionin C.I.T.vs. Satish Kumar Gupta(C.A. No. 6437/2012) decided on12.09.2012 is over ruled.

7. This being the case, we allow these appeals in favour of theRevenue and set aside the impugned judgment(s).

Civil Appeal Nos. 4593, 4594, 4595, 4596, 4597, 4598 and 4599of 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 welland can therefore avail of the deduction available under Section 80HHC(1) read with (3). For this purpose, these matters stand remanded tothe Appellate Tribunal. Accordingly, these appeals stand disposed of.

Appeals disposed of.

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