ACIT vs Sheena Industries & Anr.

“1.

This batch o f appe als arises fro m a judgment passed by the High Co urt of Punjab and Haryana at Chandigarh in which the Appeals preferre d by the Revenue have been dismisse d re lying upon CIT, v. Baby Mar ine Exports [2007] 160 Taxman 160 (SC) in order to ar rive at a conclusion that the supporting manufacturer is at par with the actual direct exporter o f go ods when it comes to deductio ns that are available under Section 80HHC of the Income Tax Act, 1961 ( in sho rt 'the Act').

2.

It is unnecessary to go into the facts o f each o f these cases as it is undispute d that the assessee in each of these cases is a supporting manufacturer . The sche me insofar as Sectio n 80HHC of the Act is concerned is crystal clear. The marginal note to S ection 80HHC re ads -

Deductio n in re spect o f profits retained fo r export business.—

'80HHC. (1) Where an assessee, being an Indian company or a pe rson (othe r than a company) resident in India, is engaged in the business o f export out of India of any goods o r merchandise to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowe d, in computing the total income of the assessee, a deduction to the extent of profits, referred to in sub- section (1B) , derived by t he assessee from the expor t of such goods or merchandise:

Pro vide d that if the assessee, being a holder of an Export House Certificate or a Tr ading House Certificate (hereafter in this section re fer red to as an Expo rt Ho use or a Trading Ho use, as the case may be,) issues a certificate referred to in clause ( b) of sub-section (4A), that in respect o f the amount of the expo rt turnover specifie d the rein, the de duction under this sub-section is to be allowed to a supporting manufacturer, then the amount o f de duction in the case of the assessee shall be reduce d by such amount which bears to the total pro fits derived by the assessee from the export of trading goods, the same proportion as the amount o f export turnover specified in the said certificate bears to the total expo rt turno ver of the assess ee in respect of such trading goods.

(1A) Whe re the assessee , being a supporting manufacturer, has during the previous year, sold go ods or merchandise to any Export House or Trading Ho use in respect of which the Expo rt House or Trading House has issued a certificate under the proviso to sub-sectio n (1), there shall, in accordance with and subject to the provisio ns of this section, be allowed in computing the total income of the assessee, a deductio n to the exte nt of pro fits, re ferred to in sub-sectio n (1B), derive d by the assessee from the sale of goods or merchandise to the Expo rt House or Trading House in respect of which the certificate has been issued by the Export Ho use or Trading House .

** ** **

(3)

Fo r the purposes of sub-section (1),—

(a)

where the expor t out o f India is of goods or merchandise manufactured o r pro cessed by the assessee, the pro fits derived from such expo rt shall be the amount w hich bears to the pro fi ts of the business, the same propo rtion as the expo rt turnover in respect of such goods be ars to the total turnover of the business carried on by the assessee;

(b)

where the e xpo rt out o f India is o f tr ading goods, the profits derived from such export shall be the export turnover in respect of such trading goods as reduce d by the direct costs and indirect costs attributable to such expor t;

(c)

where the expor t out o f India is of goods or merchandise manufactured o r pro cessed by the assessee and of trading goods, the profits der ive d from such export shall,—

(i)

in respect o f the goo ds or merchandise manufactured or processe d by the assessee, be the amount which bears to the adjusted pro fits of the business, the same pro po rtio n as the adjusted e xpo rt tur nover in res pect of such goods bears to the adjusted total turnover of the business car ried o n by the assessee; and

(ii)

in respect of tr ading goods, be the e xpo rt turnover in respe ct of such trading goods as reduce d by the direct and indirect costs attributable to e xport of such trading goods:

Pro vide d that the profits computed unde r clause (a) or clause (b) or clause (c) of this sub-section shall be furthe r increased by the amount which bears to nine ty per cent of any sum referred to in clause (iiia) (not being pro fits o n sale of a licence acquired from any other person) , and clauses ( iiib) and (iiic) o f section 28, the same propo rtion as the export turnove r bears to the total turno ver o f the business car ried on by the assessee:

Pro vide d further that in the case of an assessee having e xpo rt turnover no t exceedi ng rupees ten crores during the previous ye ar , the pro fits computed under clause (a) or clause (b) or clause (c) of this sub-sec tio n or after giving effect to the first proviso, as the case may be, shall be furthe r increased by the amount which bears to nine ty per cent of any sum referred to in clause (iiid) o r clause (iiie), as the case may be, of sectio n 28, the same propo rtio n as the export turno ver be ars to the to tal turnover of the business car ried o n by the assessee:

Pro vide d also that in the c ase of an assessee having export turnove r exceeding rupees ten crores during the previous ye ar , the pro fits computed under clause (a) or clause (b) or clause (c) of this sub-sec tio n or after giving effect to the first proviso, as the case may be, shall be furthe r increased by the amount which bears to nine ty per cent of any sum referred to in clause (iiid) of section 28, the same propo rtion as the export turnove r bears to the total turno ver o f the business car ried on by the assessee, if the assessee has necessary and sufficient evide nce to pro ve that,—

(a)

he had an opt ion to choose either the duty drawback or the Duty Entitlement Pass Book Scheme, be ing the Duty Remission Scheme; and

(b)

the rate of drawback credit attributable to the customs duty was higher than the r ate of cre dit allo w able under the Duty Entitlement Pass Book Scheme, be ing the Duty Remission Scheme :

Pro vide d also that in the case of an assessee having expor t turnove r e xceeding rupees ten cro res during the previo us year, the profits computed under clause (a) or clause (b) or clause (c) of this sub-section or after giving e ffect to the first proviso, as the case may be, shall be further increased by the amount w hich bears to ninety per cent o f any sum referred to in clause (iiie) of section 28, the same proportio n as the export turno ver bears to the total turnover of the business carrie d on by the as sessee, if the assessee has necessar y and suffic ient evide nce to pro ve that,—

(a)

he had an opt ion to choose either the duty drawback or the Duty Free Replenishment Certificate, be ing the Duty Remission Scheme; and

(b)

the rate of drawback credit attributable to the customs duty was higher than the r ate of credit allowable under the Duty Free Replenishment Ce rtificate , being the Duty Remission Scheme .

Explanation.—For the purposes of this clause , "rate of cr edit allowable" me ans the rate of credit allowable under the Duty Free Replenishment Ce rtificate , being the Duty Remission Scheme calculated in the manner as may be notified by the Central Government:

Pro vide d also that in case the computation under clause (a) or clause (b) or clause (c) of this sub-section is a loss, such loss shall be set off against the amount which bears to nine ty per cent of—

(a)

any sum refe rred to in clause ( iiia) o r clause (iiib) o r clause ( iiic), as the case may be, or

(b)

any sum re ferred to in clause (iiid) o r 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 thir d or the fourth proviso, as the case may be, the same pro portion as the export turnover bears to the total turnover of the business carried on by the assessee.

Explanation.—For the purposes o f this sub-section,—

(a)

"adjusted export turnove r" means the export turnove r as reduced by the expo rt turnover in respect o f trading goods;

(b)

"adjusted profits o f the business" means the profits of the business as reduced by the profits derived fro m the business of export out of India of trading goods as compute d in the manne r pro vided in clause (b) of sub-section (3);

(c)

"adjusted total turno ver" means the total turnover of the business as reduced by the export turno ver in respect of trading goods;

(d)

"direct costs" means costs directly attributable to the trading goods expor ted out of India including the purchase price of such goods;

(e)

"indirect costs" means costs, no t being direct costs, allocated in the r atio of the export turnover in respect o f trading goods to the total turno ver;

(f)

"tr ading goo ds" m eans goods which are no t manufactured or processed by the assessee.

(3A) For the purposes of sub-sectio n (1A), profits derive d by a supporting manufacturer fro m the sale of goods or merchandise shall be, —

(a)

in a case where the business carried on by the suppo rting manufacturer consists exclusively o f sale of goods or merchandise to one or more Export Houses or Trading Houses, the pro fits of the business;

(b)

in a case where the business carried on by the suppo rting manufacturer do es not consis t exclusively of sale of goods or merchandise to one or more Export Houses or Trading Ho uses, the amount which bears to the profits of the business the same propo rtion as the turnover in respe ct of sale to the respective Expo rt House o r Trading House bears to the total turno ver of the business car ried o n by the assessee .'

3.

It will be noticed on an analysis of Section 80HHC(1) that w here the assessee has engaged in the business of export out o f India of any goo ds or merchandise to which this section applie s, what shall be allowe d in computing the total income of the assessee , is a deduction to the extent of pro fits, referred to in sub-section (1B) , and derived by the assessee from the export of such goods or merchandise. So far as "suppor ting manufacturers" are concerne d, under Section 80HHC(1A ), where any Export House or T rading House has issued a certificate that the suppo rting manufacturer has, in fact, supplie d such goods or merchandise for expor t, they shall also be allo wed a de duction to the extent of pro fits refe rre d to derived by the assessee from the sale o f goods or merchandise to the Expo rt House o r Trading House . T he manner o f deduction, inso far as the expor ter is concerne d, is laid down in sub-sec tion (3) which when read toge ther with its pro visos mak e it cle ar that pro fi ts that are derive d from such export shall be fur ther incre ased in the manner provided by the first proviso; and whe re expo rt turno ver does not exceed rupees ten crores, in the manner provided by the second proviso; and where the expor t turno ver exceeds rupees ten crores, in the manner provide d by the third pro viso. What is conspicuous by the ir absence is any of the provisos in sub-se ction (3) inso far as sub-section ( 3A) is concerne d, w hich makes it clear that the pro fits derived by a suppo rting manufacturer shall be strictly in accordance with the provisions contained in Section 80HHC ( 3A) read with the explanatio n to the section, which then defines "Profits of t he business" under Explanation (baa) as follows:

'"pro fits of business" means the pro fits of the business as computed unde r the head "Pro fits and gains of business or profession" as r educed by— (1) ninety per cent o f any sum re ferred to in clauses (iiia), (iiib) , (ii ic), (iiid) and (iiie) o f section 28 or of any rece ipts by way of broke rage, commissio n, interest, rent, charges or any other receipt of a similar nature included i n such profits; and

(2)

the pro fits of any branch, o ffice, warehouse or any other establishment of the assessee situate outside India."'

4.

Given this statutory scheme , it is clear that the exporter stands on a completely diffe rent footing from the suppor ting manufacturer as the parameters and scheme for claim ing deduction relatable to exporters under 80HHC( 1) read w ith (3) is completely diffe rent from that of supporting manufacturers under Section 80HHC (1A) read with ( 3A) thereo f.

5.

We may mentio n in passing that this matte r has be en place d before a be nch o f three judges by the j udgment in CIT v. Carpe t India [ 2018] 93 taxmann.com 434/ 255 Taxman 438/405 ITR 469 (SC), where this Court analysed the pro visions o f Sectio n 80HHC (3A) and thereafter adverted to the decision in Baby Marine Expo rts case (supra) as follo ws:—

'(15) In Baby Marine Exports (supr a) , the question of law invo lved was "whether the expo rt house premium receive d by the assessee is includible in the "profits of the business" of the assessee while computing the deductio n under Section 80HHC o f the Income Tax Act, 1961?". The said case mainly de alt with the issue related with the eligibility of expor t 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 conside ration is whethe r the assessee-firm, being a supporting manufacturer, is to be treated at par with the direct exporter for the purpos e of deductio n o f export ince ntives under Section 80HHC of the IT Act, afte r having regards to the peculiar facts of the instant case.

(16)

While deciding the issue in Baby Marine Exports (supra), a two Judge Bench o f this Court he ld as under:

"39.

On plain co nstruction o f Section 80HHC (1-A), the respondent is clear ly entitled to claim deductio n of the premium amount received from the expor t house in computi ng the total inco me. The export house premium can be inc lude d in the business profit because it is an integral part of business operation of the respondent which consists of sale of goo ds by the respondent to the export ho use."

(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 Appe al No . 6437 of 2012 and Others, Commissioner o f Income Tax Karnal v. Sushil Kumar Gupta decided on September 12, 2012. T he question considered in the afo resaid case is re pro duced below:

"3.

In these civil appe als the common question which ar ises for determination is as follows:

"Whether 90% o f export be nefits disclaimed in favour of a supporting manufacturer (assessee herein) have to be reduced in term s of Explanation (baa) of Se ctio n 80HHC of the Income Tax Act, 1961, while computing deduction admissible to such suppo rting manufacture r under Section 80HHC (3A) of the Act?"

4.

T his question has been answered in favo ur o f the assessee and against the Department in the case of CIT v. Baby Marine Exports [2007] 290 ITR 323/ 160 Taxman 160.

5.

The civil appe als filed by the Department are, accordingly, dismissed."

Broadly spe aking, we are o f the view that both these cases are no t ide ntical and cannot be related with the deductio n of export incentives by the suppo rting manufacturer under Section 80HHC of the IT Act.

(18)

Howe ver, we are not in the agreement with these decisions and as Explanation (baa) of Section 80HHC specifically reduces deduction o f 90% of the amo unt referable to Section 28 (iiia) to ( iiie) of the IT A ct, hence, we are of the view that these decisions re quire re-consideration by a larger Bench since this issue has larger implication in te rms of mone tary benefits fo r both the parties. After giving our thoughtful consideration, the following substantial question of law o f general importance arises for re-conside ratio n by this Court:

"Whether in the light of peculiar facts and circumstances of the instant case, suppo rting manufacturer who receives e xport incentives in the form of duty draw back ( DDB), Duty Entitlement Pass Book (DEPB ) etc. is entitled for deductio n under Section 80HHC of the Income Tax Act, 1961?"