Section 80HHC Deduction for Supporting Manufacturers Referred to Larger Bench: Supreme Court in Commissioner of Income Tax vs. M/s Carpet India (27 April 2018)

Date of the Judgment: 27 April 2018

Citation: (2018) INSC 385

Judges: R.K. Agrawal, J. and Abhay Manohar Sapre, J.

Can a supporting manufacturer, who receives export incentives, claim tax deductions under Section 80HHC of the Income Tax Act, 1961, at par with a direct exporter? The Supreme Court of India addressed this crucial question in a batch of appeals, ultimately referring the matter to a larger bench for reconsideration. The core issue revolves around whether export incentives received by supporting manufacturers should be treated the same as those received by direct exporters for the purpose of tax deductions. The judgment was delivered by a two-judge bench comprising Justice R.K. Agrawal and Justice Abhay Manohar Sapre.

Case Background

M/s. Carpet India, a partnership firm, engaged in manufacturing and selling carpets, supplied goods to M/s. IKEA Trading (India) Ltd., an export house. For the Assessment Year 2001-2002, the firm filed a ‘Nil’ return on 30th October 2001, declaring total sales of Rs. 6,49,83,432/- and claiming export incentives of Rs. 68,82,801/- as Duty Draw Back (DDB). They sought a deduction of Rs. 1,57,68,742/- under Section 80HHC of the Income Tax Act, 1961, arguing they should be treated on par with direct exporters. The Assessing Officer allowed a reduced deduction of Rs. 1,08,96,505/-. The Commissioner of Income Tax (Appeals) reversed this decision, granting the full deduction. The Income Tax Appellate Tribunal and the High Court upheld the Commissioner’s decision, leading the Revenue to appeal to the Supreme Court.

Timeline

Course of Proceedings

The Assessing Officer initially allowed a reduced deduction under Section 80HHC of the Income Tax Act, 1961. The Commissioner of Income Tax (Appeals) overturned this decision, holding that the assessee was entitled to the deduction of export incentives at par with the direct exporter. The Income Tax Appellate Tribunal and the High Court upheld the Commissioner’s decision. The Revenue then appealed to the Supreme Court, arguing that the assessee, being a supporting manufacturer, was not entitled to the same benefits as a direct exporter.

Legal Framework

The core of this case revolves around Section 80HHC of the Income Tax Act, 1961, which provides deductions for profits from export business. Specifically:

• Section 80HHC (1): Allows deductions for profits derived from the export of goods or merchandise.
• Section 80HHC (1A): Extends this benefit to supporting manufacturers who sell goods to Export Houses or Trading Houses.
• Section 80HHC (3A): Defines how profits are calculated for supporting manufacturers.
• Explanation (baa) to Section 80HHC: Defines “profits of the business” and specifies that certain receipts, including those mentioned in Section 28 (iiia) to (iiie), should be reduced by 90%.

The relevant clauses of Section 28 of the IT Act are:

• (iiia) profits on sale of a licence granted under the Imports (Control) Order, 1955
• (iiib) cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India
• (iiic) any duty of customs or excise repaid or repayable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971
• (iiid) any profit on the transfer of the Duty Entitlement Pass Book Scheme
• (iiie) any profit on the transfer of Duty Free Replenishment Certificate

These provisions aim to promote export business by allowing tax deductions on export profits, initially for direct exporters and later extended to supporting manufacturers.

Arguments

Arguments by the Revenue:

• The assessee is a supporting manufacturer, not a direct exporter, and thus should not receive the same deduction benefits.
• The export incentives received by the assessee should not be treated at par with the premium paid by export houses to supporting manufacturers.
• The High Court incorrectly relied on the judgment in Commissioner of Income Tax, Thiruvantanpuram vs. Baby Marine Exports (2007) 290 ITR 323 (SC), as the facts and issues in that case were different.
• The case of Baby Marine Exports dealt with the inclusion of export house premium in business profits, not the deduction of export incentives for supporting manufacturers.

Arguments by the Assessee:

• As a supporting manufacturer exporting goods through export houses, the assessee is entitled to the deduction of export incentives under Section 80HHC of the IT Act, similar to direct exporters.
• The High Court correctly relied on the judgment in Baby Marine Exports.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether, in the facts and circumstances of the present case, a 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 IT Act at par with the direct exporter?

Treatment of the Issue by the Court

Authorities

Judgment

How each authority was viewed by the Court:

• Commissioner of Income Tax, Thiruvantanpuram vs. Baby Marine Exports (2007) 290 ITR 323 (SC): The Court held that this case was not applicable to the present matter as the issue was different. The Court stated that the said case dealt with the inclusion of export house premium in business profits and not the deduction of export incentives by the supporting manufacturer.
• Commissioner of Income Tax Karnal vs. Sushil Kumar Gupta: The Court stated that this case followed the decision in Baby Marine Exports. However, the Court expressed disagreement with these decisions and referred the matter to a larger bench.

What weighed in the mind of the Court?

The Supreme Court’s decision to refer the matter to a larger bench was influenced by several factors. The primary concern was the interpretation of Section 80HHC of the Income Tax Act, 1961, specifically concerning the deductions available to supporting manufacturers. The Court noted that while the provision aims to promote exports, the specific calculation of deductions for supporting manufacturers, particularly concerning export incentives like duty drawbacks, required a more thorough examination. The Court also highlighted that the earlier decisions in Baby Marine Exports and Sushil Kumar Gupta were not directly applicable to the issue at hand, as those cases dealt with different aspects of export benefits. The court felt that the issue had larger implications in terms of monetary benefits for both the parties.

The Court’s reasoning can be summarized as follows:

The Court highlighted that the core issue was the manner of computation of deduction under Section 80HHC of the IT Act, in the case of supporting manufacturers. The Court observed that while Section 80HHC provides for deduction in respect of profits retained from export business, sub-Section (1A) and sub-Section (3A) provides for deduction in the case of supporting manufacturer. The Court noted that the “total turnover” has to be determined as per clause (ba) of the Explanation whereas “Profits of the business” has to be determined as per clause (baa) of the Explanation. Both these clauses provide for exclusion and reduction of 90% of certain receipts mentioned therein respectively. The Court observed that the computation of deduction in respect of supporting manufacturer, is contemplated by Section 80HHC (3A), whereas the effect to be given to such computed deduction is contemplated under Section 80HHC (1A) of the IT Act. The court also stated that the issue has larger implication in terms of monetary benefits for both the parties.

The Court explicitly stated: “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.”

Key Takeaways

• The Supreme Court has referred the issue of tax deductions for supporting manufacturers under Section 80HHC of the Income Tax Act, 1961, to a larger bench.
• The core question is whether supporting manufacturers should receive the same tax benefits as direct exporters, particularly concerning export incentives like duty drawbacks.
• The Court disagreed with the High Court’s reliance on the Baby Marine Exports case, stating that the facts and issues were different.
• The Court highlighted the need for a thorough examination of the computation of deductions for supporting manufacturers under Section 80HHC.
• The decision has significant implications for supporting manufacturers and the tax revenue department.

Directions

The Supreme Court directed that the matter be placed before the Hon’ble Chief Justice of India for appropriate orders to constitute a larger bench.

Development of Law

The ratio decidendi of this case is that the issue of tax deductions for supporting manufacturers under Section 80HHC of the Income Tax Act, 1961, needs to be reconsidered by a larger bench. The Supreme Court disagreed with the previous decisions in Baby Marine Exports and Sushil Kumar Gupta, indicating a potential shift in the interpretation of Section 80HHC concerning supporting manufacturers. This referral to a larger bench signifies a potential change in the legal position regarding the tax benefits available to supporting manufacturers.

Conclusion

The Supreme Court’s decision to refer the case to a larger bench highlights the complexities in interpreting Section 80HHC of the Income Tax Act, 1961, particularly concerning the deductions for supporting manufacturers. The court’s disagreement with previous decisions and its emphasis on the need for a thorough examination of the issue indicate a potential shift in the legal landscape. The final outcome of this case will have significant implications for both supporting manufacturers and the tax revenue department.