COMMISSIONER OF INCOME TAX, KARNAL (HARYANA)versusM/S CARPET INDIA, PANIPAT (HARYANA)

                        [2019] 12 S.C.R. 607                         607


 COMMISSIONER OF INCOME TAX, KARNAL (HARYANA)                        A
                                v.
         M/S CARPET INDIA, PANIPAT (HARYANA)
                  (Civil Appeal No. 4590 of 2018)
                        AUGUST 27, 2019                              B
           [R. F. NARIMAN, R. SUBHASH REDDY
                   AND SURYA KANT, JJ.]
     Income Tax Act, 1961:
       s.80 HHC - Deductions under - Availability of - To            C
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).                                               D

     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        E
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        F
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]
                                                                     G
      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
                                                                     H
                               607
608           SUPREME COURT REPORTS                   [2019] 12 S.C.R.


A     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
B
      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
C     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.
D     [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 :
E          [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.

F           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
G     purpose, these matters stand remanded to the Appellate
      Tribunal. [Paras 7, 8 ]
                           Case Law Reference
      [2007] 4 SCR 628                distinguished      Para 1
H     [2018] 7 SCR 1092               referred to        Para 5
COMMISSIONER OF INCOME TAX, KARNAL (HARYANA) v.                                609
        CARPET INDIA, PANIPAT (HARYANA)

      CIVIL APPELLATE JURISDICTION : Civil Appeal No. 4590                     A
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                                                                     B
      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.
                                                                               C
       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.                                                        D

      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                      E
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’).          F
        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.                G
      “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        H
610      SUPREME COURT REPORTS                         [2019] 12 S.C.R.


A     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
B     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
C     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
D     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
E     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
F     House in respect of which the certificate has been issued by the
      Export House or Trading House.
      Xxx xxx xxx
      (3) For the purposes of sub-section (1),-
G     (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
H     carried on by the assessee;
COMMISSIONER OF INCOME TAX, KARNAL (HARYANA) v.                            611
CARPET INDIA, PANIPAT (HARYANA) [R. F. NARIMAN, J.]

    (b) where the export out of India is of trading goods, the profits     A
    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,        B
    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       C
         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:              D

    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       E
    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    F
    (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       G
    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,   H
612      SUPREME COURT REPORTS                         [2019] 12 S.C.R.


A     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
B     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
C          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,
D
      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
E     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
F
           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
G          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
H     Government:
COMMISSIONER OF INCOME TAX, KARNAL (HARYANA) v.                           613
CARPET INDIA, PANIPAT (HARYANA) [R. F. NARIMAN, J.]

    Provided also that in case the computation under clause (a) or        A
    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

    (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,
                                                                          C
    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
                                                                          D
        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);                 E
    (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       F
        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;
                                                                          G
     (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,-                                                            H
614            SUPREME COURT REPORTS                        [2019] 12 S.C.R.


A            (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
B                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
C                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
D     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
E     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
F
      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
G     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
H     business” under explanation (baa) as follows:
COMMISSIONER OF INCOME TAX, KARNAL (HARYANA) v.                                615
CARPET INDIA, PANIPAT (HARYANA) [R. F. NARIMAN, J.]

      “profits of business” means the profits of the business as               A
      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            B
           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
                                                                               C
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.
                                                                               D
      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:-                                                   E
      “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                F
      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         G
      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:                             H
616      SUPREME COURT REPORTS                         [2019] 12 S.C.R.


A     “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
B
      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
C
      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:
D     “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?”
E     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.”
F
      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
G     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
H     parties. After giving our thoughtful consideration, the following
 COMMISSIONER OF INCOME TAX, KARNAL (HARYANA) v.                               617
 CARPET INDIA, PANIPAT (HARYANA) [R. F. NARIMAN, J.]

       substantial question of law of general importance arises for            A
       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       B
       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            C
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              D
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               E
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:                                                                       F
       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           G
the Appellate Tribunal. Accordingly, these appeals stand disposed of.


Kalpana K. Tripathy                                     Appeals disposed of.

                                                                               H