1 REPORTABLE IN 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 judgment passed by High Court of Punjab and Haryana at Chandigarh in Signature Not Verified Digitally signed by R NATARAJAN Date: 2019.09.04 17:24:13 IST Reason: which Appeals preferred by Revenue have been dismissed relying upon Commissioner of Income Tax, Thiruvananthapuram vs. Baby Marine Exports, Kollam (2007) 4 2 SCC 555 in order to arrive at conclusion that supporting manufacturer is at par with actual direct exporter of goods when it comes to deductions that are available under Section 80HHC of Income Tax Act, 1961 (in short Act ). 2) It is unnecessary to go into facts of each of these cases as it is undisputed that assessee in each of these cases is supporting manufacturer. scheme insofar as Section 80HHC of Act is concerned is crystal clear. marginal note to Section 80HHC reads - Deduction in respect of profits retained for export business. 80HHC. (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 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 (hereafter 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 3 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. Xxx xxx xxx (3) For purposes of sub-section (1), (a) where export out of India is of goods or merchandise manufactured or processed by assessee, profits derived from such export shall be amount which bears to profits of business, same proportion as export turnover in respect of such goods bears to total turnover of business carried on by assessee; (b) where export out of India is of trading goods, profits derived from such export shall be export turnover in respect of such trading goods as reduced by direct costs and indirect costs attributable to such export; (c) where export out of India is of goods or merchandise manufactured or processed by assessee and of trading goods, profits derived from such export shall, (i) in respect of goods or merchandise manufactured or processed by assessee, be amount which bears to adjusted profits of business, same proportion as adjusted export turnover in respect of such goods bears to adjusted total turnover of business carried on by assessee; and (ii) in respect of trading goods, be export turnover in respect of such trading goods as reduced by direct and indirect costs attributable to export of such trading goods: 4 Provided that profits computed under clause (a) or clause (b) or clause (c) of this sub-section shall be further increased by amount which bears to ninety per cent of any sum referred to in clause (iiia) (not being profits on sale of licence acquired from any other person), and clauses (iiib) and (iiic) of section 28, same proportion as export turnover bears to total turnover of business carried on by assessee: Provided further that in case of assessee having export turnover not exceeding rupees ten crores during previous year, profits computed under clause (a) or clause (b) or clause (c) of this sub-section or after giving effect to first proviso, as case may be, shall be further increased by amount which bears to ninety per cent of any sum referred to in clause (iiid) or clause (iiie), as case may be, of section 28, same proportion as export turnover bears to total turnover of business carried on by assessee: Provided also that in case of assessee having export turnover exceeding rupees ten crores during previous year, profits computed under clause (a) or clause (b) or clause (c) of this sub-section or after giving effect to first proviso, as case may be, shall be further increased by amount which bears to ninety per cent of any sum referred to in clause (iiid) of section 28, same proportion as export turnover bears to total turnover of business carried on by assessee, if assessee has necessary and sufficient evidence to prove that, (a) he had option to choose either duty drawback or Duty Entitlement Pass Book Scheme, being Duty Remission Scheme; and (b) rate of drawback credit attributable to customs duty was higher than rate of credit allowable under Duty Entitlement Pass Book Scheme, being Duty Remission Scheme : Provided also that in case of assessee having export turnover exceeding rupees ten crores during previous year, profits computed under clause (a) or clause (b) or clause (c) of this sub-section or after giving effect to first proviso, as case may 5 be, shall be further increased by amount which bears to ninety per cent of any sum referred to in clause (iiie) of section 28, same proportion as export turnover bears to total turnover of business carried on by assessee, if assessee has necessary and sufficient evidence to prove that, (a) he had option to choose either duty drawback or Duty Free Replenishment Certificate, being Duty Remission Scheme; and (b) rate of drawback credit attributable to customs duty was higher than rate of credit allowable under Duty Free Replenishment Certificate, being Duty Remission Scheme. Explanation. For purposes of this clause, rate of credit allowable means rate of credit allowable under Duty Free Replenishment Certificate, being Duty Remission Scheme calculated in manner as may be notified by Central Government: Provided also that in case computation under clause (a) or clause (b) or clause (c) of this sub-section is loss, such loss shall be set off against amount which bears to ninety per cent of (a) any sum referred to in clause (iiia) or clause (iiib) or clause (iiic), as case may be, or (b) any sum referred to in clause (iiid) or clause (iiie), as case may be, of section 28, as applicable in case of assessee referred to in second or third or fourth proviso, as case may be, same proportion as export turnover bears to total turnover of business carried on by assessee. Explanation. For purposes of this sub-section, (a) adjusted export turnover means export turnover as reduced by export turnover in respect of trading goods; (b) adjusted profits of business means profits of business as reduced by profits derived from business of export out of India of trading goods as computed in 6 manner provided in clause (b) of sub-section (3); (c) adjusted total turnover means total turnover of business as reduced by export turnover in respect of trading goods; (d) direct costs means costs directly attributable to trading goods exported out of India including purchase price of such goods; (e) indirect costs means costs, not being direct costs, allocated in ratio of export turnover in respect of trading goods to total turnover; (f) trading goods means goods which are not manufactured or processed by assessee. (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 to total turnover of business carried on by assessee. 3) It will be noticed on analysis of Section 80HHC(1) that where assessee has engaged in business of export out of India of any goods or merchandise to which this section applies, what shall be allowed in computing total income of assessee, is deduction to extent of profits, referred to in sub-section (1B), and derived by assessee from export of such goods or 7 merchandise. So far as supporting manufacturers are concerned, under Section 80HHC(1A), where any Export House or Trading House has issued certificate that supporting manufacturer has, in fact, supplied such goods or merchandise for export, they shall also be allowed deduction to extent of profits referred to derived by assessee from sale of goods or merchandise to Export House or Trading House. manner of deduction, insofar as 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 manner provided by first proviso; and where export turnover does not exceed rupees ten crores, in manner provided by second proviso; and where export turnover exceeds rupees ten crores, in manner provided by third proviso. What is conspicuous by their absence is any of provisos in sub-section (3) insofar as sub-section (3A) is concerned, which makes it clear that profits derived by supporting manufacturer shall be strictly in accordance with provisions contained in Section 80HHC (3A) read with explanation to section, which then defines Profits of business under explanation (baa) as follows: profits of business means profits of business as computed under head Profits and gains of business or profession as reduced by- 8 (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. 4) Given this statutory scheme, it is clear that exporter stands on completely different footing from supporting manufacturer as 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 bench of three judges by judgment in Commissioner of Income Tax, Karnal (Haryana) vs. Carpet India, Panipat (Haryana) (2018) 6 SCC 620, where this Court analysed provisions of Section 80HHC (3A) and thereafter adverted to decision in Baby Marine Exports (supra) as follows:- 15) 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 9 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. 16) 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. 17. 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 vs. 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 10 related with deduction of export incentives by supporting manufacturer under Section 80HHC of IT Act. 18) 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 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? 6) We agree with reasoning and analysis of referring judgment, namely, that Baby Marine Exports (supra) dealt with issue related to eligibility of export house premium for inclusion in business profit for purpose of deduction under Section 80HHC of Act. Whereas in present appeals, point for consideration is completely different, being as to whether assessees being supporting manufacturers, are to be treated on par with direct exporter for purpose of deduction of export incentives under Section 80HHC of Act. We, therefore, answer question referred to us by stating that Baby Marine Exports (supra) deals with entirely different question and cannot be relied upon to arrive at 11 conclusion that supporting manufacturers are to be treated on par with direct exporter for purpose of deduction under Section 80HHC of Act, as has been pointed out by us herein above. Consequently, 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 case, we allow these appeals in favour of Revenue and set aside impugned judgment(s). Civil Appeal Nos. 4593, 4594, 4595, 4596, 4597, 4598 and 4599 of 2018: 8) In these appeals also impugned judgments are set aside. However, it will be open for respondent in above cases to show, by adducing necessary facts, that they are direct exporters as well and can therefore avail of deduction available under Section 80HHC (1) read with (3). For this purpose, these matters stand remanded to Appellate Tribunal. Accordingly, these appeals stand disposed of. .......................... J. (ROHINTON FALI NARIMAN) .......................... J. (R. SUBHASH REDDY) .......................... J. (SURYA KANT) New Delhi; August 27, 2019. Commissioner of Income-tax, Karnal (Haryana) v. Carpet India