80HHC deduction entitlement to supporting manufacturer receiving export incentives. Matter referred to CJI

80HHC deduction entitlement to supporting manufacturer who receives export incentives as duty draw back,  Duty Entitlement Pass Book etc.-SC refers the question to larger Bench

The instant judgment was given in a batch of appeals filed by the Revenue in relation to the interpretation of the provisions contained in Section 80HHC of the Income Tax Act, 1961 (‘the Act’) on the question whether 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 at par with the direct exporter?

ABCAUS Case Law Citation:
ABCAUS 2309 (2018) (04) SC

Important Case Laws Cited/relied upon by the parties:
Commissioner of Income Tax, Thiruvantanpuram vs. Baby Marine Exports (2007) 290 ITR 323 (SC)
Commissioner of Income Tax Karnal vs. Sushil Kumar Gupta

80HHC deduction entitlement to supporting manufacturer receiving export incentives 

80HHC deduction entitlement to supporting manufacturer

Against the order of the Assessing Officer, the Commissioner of Income Tax (Appeals) held that the assessee was entitled to the deduction of export incentives under Section 80HHC at par with the exporter. The Revenue went in appeal before the Income Tax Appellate Tribunal (‘the Tribunal’) as well as before the High Court but the same was dismissed and hence the Revenue had filed a special leave petition (SLP) before the Hon’ble Supreme Court.

The Hon’ble Supreme Court observed that the very purpose of Section 80HHC is to promote the export business as well as in order to keep the domestic products competitive in the global market by allowing tax deduction on export profits. Since the inception of Section 80HHC, these 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 Hon’ble Supreme Court  opined that the legislature divided Section 80HHC of the IT Act in two parts for the purpose of deduction, namely, direct exporter and supporting manufacturer. The supporting manufacturer instead of direct export, supply the goods to the Export Houses who eventually export these goods.

The Hon’ble High Court observed that the whole issue revolved around the manner of computation of deduction under section 80HHC of the Act, in the case of supporting manufacturer. The Section 80HHC 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 machinery to compute the deduction is provided in Section 80HHC (3A) of the 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 Act.

It was observed that in Baby Marine Exports case relied upon by the High Court, 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, after having regards to the peculiar facts of the instant case. The aforesaid decision was followed by another Bench of two Judges of the Supreme Court.

The Hon’ble Supreme Court opined that both these cases were not identical and could not be related with the deduction of export incentives by the supporting manufacturer under Section 80HHC of the Act.

Their Lordships expressed their disagreement with above 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, the Hon’ble Court opined that these decisions require re-consideration by a larger Bench since this issue had larger implication in terms of monetary benefits for both the parties.

The Hon’ble Supreme Court framed the following substantial question of law of general importance arising for re-consideration:

“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 Section 80HHC of the Income Tax Act, 1961?”

Accordingly, the batch of appeals were referred to the larger Bench and placing the matters before Hon’ble the Chief Justice of India for appropriate orders.

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