COMMISSIONER OF INCOME TAX, KARNAL (HARYANA) versus M/S CARPET INDIA, PANIPAT (HARYANA)
[2019] 12 S.C.R. 607, Supreme Court of India, 2019
Outcome: Disposed off
Segment: Facts
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COMMISSIONER OF INCOME TAX, KARNAL (HARYANA)
v.
M/S CARPET INDIA, PANIPAT (HARYANA)
(Civil Appeal No. 4590 of 2018)
AUGUST 27, 2019
[R. F. NARIMAN, R. SUBHASH REDDY
AND SURYA KANT, JJ.]
Income Tax Act, 1961:
s.80 HHC - Deductions under -  Availability of -  To
supporting manufacturer -  Whether at par with the actual direct
exporter -  Held: Supporting manufacturers stand on completely
different footing from the exporters - The parameters and scheme
for claiming deduction relatable to supporting manufacturers u/s.
80HHC(1A) r/w. (3A) is completely different from that of exporters
u/s. 80HHC(1) r/w (3).
Disposing of the appeals, the Court
HELD: 1.1 Where the assessee has engaged in the
business of export out of India of any goods or merchandise to
which Section 80 HHC(1) of Income Tax Act 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 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.
[Para 3] [614-D-E]
1.2 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
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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). [Para 3] [614-F-H]
1.3 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.
[Para 4] [615-C]
C.I.T. v. Satish Kumar Gupta (C.A. No. 6437/2012)
decided on 12.09.2012 - overruled.
Commissioner of Income Tax, Thiruvananthapuram v.
Baby Marine Exports, Kollam (2007) 4 SCC 555 :
[2007] 4 SCR 628 - distinguished.
Commissioner of Income Tax, Karnal (Haryana) v.
Carpet India, Panipat(Haryana) (2018) 6 SCC 620 :
[2018] 7 SCR 1092 - referred to.
2. In Civil Appeal Nos. 4593, 4594, 4595, 4596, 4597, 4598
and 4599 of 2018, 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. [Paras 7, 8 ]
Case Law Reference
[2007] 4 SCR 628
distinguished
Para 1
[2018] 7 SCR 1092
referred to
Para 5
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CIVIL APPELLATE JURISDICTION : Civil Appeal No. 4590
of 2018.
From the Judgment and Order dated  13.05.2008 of the High
Court of Punjab and Haryana at Chandigarh in I.T.A. No. 544 of 2007.
With
Civil Appeal Nos. 4591, 4599, 4592, 4593, 4594, 4603, 4596, 4595,
4597, 4598 of 2018.
K. Radhakrishnan, Sr. Adv., Rupesh Kumar, M. P. Gupta, Umesh
Kumar Saw, Mrs. Anil Katiyar, Advs. for the Appellant.
Dr. Rakesh Gupta, Ambhoj Kumar Sinha, Ms. Monika Ghai,
Rohit, Anunav Kumar, Jagdish Kumar Chawla, T. Mahipal, /s Lex-peritia
And Co., Advs. for the Respondent.
The Judgment of the Court was delivered by
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 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
COMMISSIONER OF INCOME TAX, KARNAL (HARYANA) v.
CARPET INDIA, PANIPAT (HARYANA)
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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 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.
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(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;
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(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:
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,
COMMISSIONER OF INCOME TAX, KARNAL (HARYANA) v.
CARPET INDIA, PANIPAT (HARYANA) [R. F. NARIMAN, J.]
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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 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:
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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
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,-
COMMISSIONER OF INCOME TAX, KARNAL (HARYANA) v.
CARPET INDIA, PANIPAT (HARYANA) [R. F. NARIMAN, J.]
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(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 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:
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“profits of 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.”
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
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:
COMMISSIONER OF INCOME TAX, KARNAL (HARYANA) v.
CARPET INDIA, PANIPAT (HARYANA) [R. F. NARIMAN, J.]
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“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 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
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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 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.
Kalpana K. Tripathy
Appeals disposed of.
COMMISSIONER OF INCOME TAX, KARNAL (HARYANA) v.
CARPET INDIA, PANIPAT (HARYANA) [R. F. NARIMAN, J.]