I-T - Whether, for purpose of Sec 80HHC benefits, supporting manufacturer is to be put at par with direct exporter - Issue referred to Larger Bench: SC
By TIOL News Service
NEW DELHI, APRIL 30, 2018: THE ISSUE BEFORE THE BENCH IS - Whether, for the purpose of Sec 80HHC benefits, supporting manufacturer is to be put at par with direct exporter. Division Bench refers the Issue to Larger Bench of the Apex Court.
Facts of the case
The assessee is a partnership firm deriving income from manufacturing and sale of carpets to M/s. IKEA Trading (India) Ltd. (Export House) as supporting manufacturer. The assessee filed a 'Nil' return for the Assessment Year (AY) 2001-2002, stating the 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 the total profits of Rs. 1,97,10,927/- at par with the direct exporter. On scrutiny, the Assessing Officer, vide order dated 25.02.2004, allowed the deduction under Section 80HHC to the tune of Rs. 1,08,96,505/- instead of 1,57,68,742/- as claimed by the assessee while arriving at the total income of Rs. 57,18,040/. On appeal, the CIT(A) allowed the assessee's claims for exports benefits. Revenue's appeal was not supported by both the ITAT and the High Court.
On appeal before the Apex Court the Revenue argued that the High Court as well as the Tribunal erred in law while deciding the issue as they treated the export incentive at par with the premium paid by the export houses or trading houses to supporting manufacturer and not appreciated the fact that the ratio of the facts and issues involved in the case of the assessee-firm were totally different from the case of Baby Marine Exports. It was pointed out that the said case dealt with the issue of eligibility of export house premium for inclusion in the business profit and the turnover of the assessee firm.
Taking a contrary stand, the counsel for the assessee pleaded that the assessee was working as supporting manufacturer, exporting the goods to the foreign constituents through export houses, therefore, it was 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.
Held that,
++ since the inception of Section 80HHC, the benefits were available only to the direct exporter which later on extended to the supporting manufacturer who is selling goods or merchandise to an Export House/Trading House by inserting sub-Section (1A) and (3A) in Section 80HHC of the IT Act. The legislature divided Section 80HHC in two parts for the purpose of deduction, namely, direct exporter and supporting manufacturer. Direct exporter, being an Indian company or a person (other than company) resident in India, who directly exports the goods to some other country whereas supporting manufacturer, being an Indian company or a person (other than company) resident in India, who instead of direct export, supply the goods to the Export Houses who eventually export these goods. However, clauses (ba) and (baa) of the Explanation to Section 80HHC defines "total turnover" and what items are not included therein and "profits of the business" to be reduced by ninety percent of any sum referred to in clauses (iiia) to (iiie) of Section 28 of the 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 the transfer of Duty Entitlement Pass Book (Duty Remission Scheme) and any profit on the transfer of Duty Free Replenishment Certificate;
++ there can be diverse sources of income. These sources of income are clubbed together in order to find out the gross total income on which tax can be levied. However, the IT Act provides for allowing of certain deductions from the gross total income of the assessee. Broadly speaking, deductions reduce the taxable income. In the case at hand, it is evident that the total income of the assessee for the concerned Assessment Year was Rs 1,97,10,927/- out of which it claimed deduction to the tune of Rs. 1,57,68,742/- under Section 80HHC of the IT Act which was partly disallowed by the Assessing Officer and deduction was allowed only to the tune of Rs 1,08,96,505/-. However, the assessee claimed the deduction at par with the direct exporter under Section 80HHC of the IT Act which has been eventually upheld by the High Court;
++ the whole issue revolves around the manner of computation of deduction under section 80HHC of the IT Act, in the case of supporting manufacturer. On perusal of various provisions of the IT Act, it is clear that Section 80HHC of the 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 the case of supporting manufacturer. 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 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. In other words, the machinery to compute the deduction is provided in Section 80HHC (3A) of the IT Act and after computing such deduction, such amount of deduction is required to be deducted from the gross total income of the assessee in order to arrive at the taxable income/total income of the assessee, as contemplated by Section 80HHC (1A) of the IT Act;
++ 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?". 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;
++ we are of the view that both the cases (Baby Marine Exports & Sushil Kumar Gupta) are not identical and cannot be related with the deduction of export incentives by the supporting manufacturer under Section 80HHC of the IT Act;
++ 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 substantial question of law of general importance arises for re-consideration by this Court. Accordingly, we refer this batch of appeals to the Larger Bench.
(See 2018-TIOL-166-SC-IT)
