Commissioner of Income-tax, Karnal v. Carpet India
[Citation -2018-LL-0427-2]

Citation 2018-LL-0427-2
Appellant Name Commissioner of Income-tax, Karnal
Respondent Name Carpet India
Court SUPREME COURT
Relevant Act Income-tax
Date of Order 27/04/2018
Judgment View Judgment
Keyword Tags duty entitlement pass book • supporting manufacturer • excise duty drawback • computing deduction • export incentive • export turnover • duty draw back • export house
Bot Summary: 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 Ltd. which, in turn, further exports the goods manufactured by the assessee. 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 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. 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, 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, 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 For the purposes of sub-section, profits derived by a supporting manufacturer from the sale of goods or merchandise shall be:- 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; 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 7 to the total turnover of the business carried on by the assessee. 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 and in Section 80HHC of the IT Act. Direct exporter, being an Indian company or a person resident in India, who directly exports the goods to some other country whereas supporting manufacturer, being an Indian company or a person resident in India, who instead of direct export, supply the goods to the Export Houses who eventually export these goods. 12 13) In Baby Marine Exports, 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.


REPORTABLE IN 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 Signature Not Verified Digitally signed by ASHA SUNDRIYAL 2010) Date: 2018.04.28 12:48:13 IST Reason: 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) JUDGMENT R.K.Agrawal, J. 1) Leave granted. 2) above batch of appeals is related to interpretation of provisions contained in Section 80HHC of Income Tax Act, 1961 (in short IT Act ). 3) SLP (C) 8368 of 2009 (a) M/s. Carpet India (P) Ltd.-the assessee is partnership firm deriving income from manufacturing and sale of 2 carpets to M/s. IKEA Trading (India) Ltd. (Export House) as supporting manufacturer. (b) assessee filed Nil return for Assessment Year (AY) 2001-2002 on 30.10.2001, inter alia, stating 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 total profits of Rs. 1,97,10,927/- at par with direct exporter. (c) On scrutiny, Assessing Officer, vide order dated 25.02.2004, allowed deduction under Section 80HHC to tune of Rs. 1,08,96,505/- instead of 1,57,68,742/- as claimed by assessee while arriving at total income of Rs. 57,18,040/. (d) Being aggrieved, assessee preferred appeal before Commissioner of Income Tax (Appeals) which was allowed vide order dated 12.08.2004 while holding that assessee is entitled to deduction of export incentives under Section 80HHC at par with exporter. (e) Revenue went in appeal before Income Tax Appellate Tribunal (in short Tribunal ) as well as before 3 High Court but 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 common question of law has arisen in these appeals, it will be disposed of by this common order. 4) Heard learned counsel for parties and perused records. Point(s) for consideration:- 5) short but important question of law that arises before this court is whether in facts and circumstances of present case, supporting manufacturer who receives export incentives in form of duty draw back (DDB), Duty Entitlement Pass Book (DEPB) etc., is entitled for deduction under Section 80HHC of IT Act at par with direct exporter? Rival contentions:- 6) At outset, learned counsel for Revenue submitted that assessee deals in manufacturing of carpets which it usually sells to various entities including M/s IKEA Trading (India) Ltd. (Export House/Trading House) which, in turn, further exports goods manufactured by assessee. 4 While filing return, assessee claimed deduction at par with direct exporter under Section 80HHC of IT Act since it receives export incentives in form of duty draw back (DDB) etc. It was further contended that in view of fact that assessee is working as supporting manufacturer and also there is no direct export of goods to foreign constituents by assessee firm, hence, it is not entitled to claim deduction at par with direct exporter. However, High Court erroneously relied on judgment of this Court, namely, Commissioner of Income Tax, Thiruvantanpuram vs. Baby Marine Exports (2007) 290 ITR 323 (SC) and held that assessee is entitled to claim deduction at par with direct exporter which is not sustainable in eyes of law since issues and facts are distinguishable from facts and circumstances of instant case. 7) At this juncture, it was also pointed out that High Court as well as Tribunal erred in law while deciding issue as they treated export incentive at par with premium paid by export houses or trading houses to supporting manufacturer and not appreciated fact that 5 ratio of facts and issues involved in case of assessee-firm are totally different from case of Baby Marine Exports (supra). It was pointed out that said case dealt with issue of eligibility of export house premium for inclusion in business profit and turnover of assessee firm. Hence, in no circumstances, it could be relied upon by High Court. 8) Per contra, stand of leaned counsel for assessee was that assessee is working as supporting manufacturer, exporting goods to foreign constituents through export houses, therefore, it is legitimately entitled for deduction of export incentives in terms of Section 80HHC of IT Act in similar way to benefits available to direct exporter. It was submitted that High Court rightly relied on judgment of this court in Baby Marine Exports (supra). Hence, this special leave to appeal deserves to be dismissed. Discussion:- 9) Before examining matter, we deem it apposite to refer to relevant provisions of Section 80HHC of IT Act: 80HHC. Deduction in respect of profits retained for export business:- (1) Where assessee, being Indian company or person (other than company) resident in India, is engaged in 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 provisions of this section, be allowed, in computing total income of assessee, deduction to extent of profits, referred to in sub-section (1B), derived by assessee from export of such goods or merchandise: Provided that if assessee, being holder of Export House Certificate or Trading House Certificate (hereinafter in this section referred to as Export House or Trading House, as case may be), issues certificate referred to in clause (b) of sub-section (4A), that in respect of amount of export turnover specified therein, deduction under this sub-section is to be allowed to supporting manufacturer, then amount of deduction in case of assessee shall be reduced by such amount which bears to total profits derived by assessee from export of trading goods, same proportion as amount of export turnover specified in said certificate bears to total export turnover of assessee in respect of such trading goods. (1A) Where assessee, being supporting manufacturer, has during previous year, sold goods or merchandise to any Export House or Trading House in respect of which Export House or Trading House has issued certificate under proviso to sub-section (1), there shall, in accordance with and subject to provisions of this section, be allowed in computing total income of assessee, deduction to extent of profits, referred to in sub-section (1B), derived by assessee from sale of goods or merchandise to Export House or Trading House in respect of which certificate has been issued by Export House or Trading House. (1B) xxx (2) xxx (3) xxx (3A) For purposes of sub-section (1A), profits derived by supporting manufacturer from sale of goods or merchandise shall be:- (a) in case where business carried on by supporting manufacturer consists exclusively of sale of goods or merchandise to one or more Export Houses or Trading Houses, profits of business; (b) in case where business carried on by supporting manufacturer does not consist exclusively of sale of goods or merchandise to one or more Export Houses or Trading Houses, amount which bears to profits of business same proportion as turnover in respect of sale to respective Export House or Trading House bears 7 to total turnover of business carried on by assessee. (4) xxx (4A) xxx (4B) xxx (4C) xxx Explanation:- For purposes of this section:- (a) convertible foreign exchange means foreign exchange which is for time being treated by Reserve Bank of India as convertible foreign exchange for purposes of 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 shop, emporium or any other establishment situate in India, not involving clearance at any customs station as defined in Customs Act 1962 (52 of 1962); (b) export turnover means sale proceeds received in, or brought into India by 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 transport of goods or merchandise beyond customs station as defined in Customs Act, 1962; (ba) total turnover shall not include freight or insurance attributable to transport of goods or merchandise beyond customs station as defined in Customs act, 1962 (52 of 1962): Provided that in relation to any assessment year commencing on or after 1 st day of April, 1991, 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 business means profits of business as computed under 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 similar nature included in such profits; and (2) profits of any branch, office, warehouse or any other establishment of 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:- following income shall be chargeable to income-tax under head Profits and gains of business or profession:- (i) xxx (ii) xxx (iii) xxx (iiia) profits on sale of licence granted under Imports (Control) Order, 1955, made under 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 Government of India; (iiic) any duty of customs or excise repaid or repayable as drawback to any person against exports under Customs and Central Excise Duties Drawback Rules, 1971; (iiid) any profit on transfer of Duty Entitlement Pass Book Scheme, being Duty Remission Scheme under export and import policy formulated and announced under section 5 of Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992); (iiie) any profit on transfer of Duty Free Replenishment Certificate being Duty Remission Scheme under export and import policy formulated and announced under section 5 of Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992). 10) very purpose of Section 80HHC of IT Act is to promote export business as well as in order to keep domestic products competitive in global market by allowing tax deduction on export profits. Since inception of Section 80HHC of IT Act, these benefits were available only to direct exporter which later on extended to 9 supporting manufacturer who is selling goods or merchandise to Export House/Trading House by inserting sub-Section (1A) and (3A) in Section 80HHC of IT Act. legislature divided Section 80HHC of IT Act in two parts for purpose of deduction, namely, direct exporter and supporting manufacturer. Direct exporter, being Indian company or person (other than company) resident in India, who directly exports goods to some other country whereas supporting manufacturer, being Indian company or person (other than company) resident in India, who instead of direct export, supply goods to Export Houses who eventually export these goods. However, clauses (ba) and (baa) of Explanation to Section 80HHC defines total turnover and what items are not included therein and profits of business to be reduced by ninety percent of any sum referred to in clauses (iiia) to (iiie) of Section 28 of 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 transfer of Duty Entitlement Pass Book (Duty Remission Scheme) and 10 any profit on 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 gross total income on which tax can be levied. However, IT Act provides for allowing of certain deductions from gross total income of assessee. Broadly speaking, deductions reduce taxable income. In case at hand, it is evident that total income of assessee for concerned Assessment Year was Rs 1,97,10,927/- out of which it claimed deduction to tune of Rs. 1,57,68,742/- under Section 80HHC of IT Act which was partly disallowed by Assessing Officer and deduction was allowed only to tune of Rs 1,08,96,505/-. However, assessee claimed deduction at par with direct exporter under Section 80HHC of IT Act which has been eventually upheld by High Court. 12) In instant case, whole issue revolves around manner of computation of deduction under section 80HHC of IT Act, in case of supporting manufacturer. On perusal of various provisions of IT Act, it is clear that Section 11 80HHC of 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 case of supporting manufacturer. total turnover has to be determined as per clause (ba) of Explanation whereas Profits of business has to be determined as per clause (baa) of Explanation. Both these clauses provide for exclusion and reduction of 90% of certain receipts mentioned therein respectively. computation of deduction in respect of supporting manufacturer, is contemplated by Section 80HHC (3A), whereas effect to be given to such computed deduction is contemplated under Section 80HHC (1A) of IT Act. In other words, machinery to compute deduction is provided in Section 80HHC (3A) of IT Act and after computing such deduction, such amount of deduction is required to be deducted from gross total income of assessee in order to arrive at taxable income/total income of assessee, as contemplated by Section 80HHC (1A) of IT Act. 12 13) In Baby Marine Exports (supra), question of law involved was whether export house premium received by assessee is includible in profits of business of assessee while computing deduction under Section 80HHC of Income Tax Act, 1961? . said case mainly dealt with issue related with eligibility of export house premium for inclusion in business profit for purpose of deduction under Section 80HHC of IT Act. Whereas in instant case, main point of consideration is whether assessee-firm, being supporting manufacturer, is to be treated at par with direct exporter for purpose of deduction of export incentives under Section 80HHC of IT Act, after having regards to peculiar facts of instant case. 14) While deciding issue in Baby Marine Exports (supra), two Judge Bench of this Court held as under: 39. On plain construction of Section 80HHC(1-A), respondent is clearly entitled to claim deduction of premium amount received from export house in computing total income. export house premium can be included in business profit because it is integral part of business operation of respondent which consists of sale of goods by respondent to export house. 13 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. question considered in aforesaid case is reproduced below: 3. In these civil appeals common question which arises for determination is as follows: Whether 90% of export benefits disclaimed in favour of supporting manufacturer (assessee herein) have to be reduced in terms of Explanation (baa) of Section 80HHC of Income Tax Act, 1961, while computing deduction admissible to such supporting manufacturer under Section 80HHC(3A) of Act? 4. This question has been answered in favour of assessee and against Department in case of CIT v. Baby Marine Exports [2007] 290 ITR 323/160 Taxman 160. 5. civil appeals filed by Department are, accordingly, dismissed. Broadly speaking, we are of view that both these cases are not identical and cannot be related with deduction of export incentives by supporting manufacturer under Section 80HHC of IT Act. 15) However, we are not in agreement with these decisions and as Explanation (baa) of Section 80HHC specifically reduces deduction of 90% of amount referable to Section 28 (iiia) to (iiie) of IT Act, hence, we are of 14 view that these decisions require re-consideration by larger Bench since this issue has larger implication in terms of monetary benefits for both parties. After giving our thoughtful consideration, following substantial question of law of general importance arises for re-consideration by this Court: Whether in light of peculiar facts and circumstances of instant case, supporting manufacturer who receives export incentives in form of duty draw back (DDB), Duty Entitlement Pass Book (DEPB) etc. is entitled for deduction under Section 80HHC of Income Tax Act, 1961? 16) Accordingly, we refer this batch of appeals to larger Bench. Let matters be placed before Hon ble Chief Justice of India for appropriate orders. ..... J. (R.K. AGRAWAL) . . J. (ABHAY MANOHAR SAPRE) NEW DELHI; APRIL 27, 2018. 15 Commissioner of Income-tax, Karnal v. Carpet India
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