2018 (5) TMI 65 - SC - Income Tax

Deduction u/s 80HHC - profits retained for export business - Interpretation of the provisions contained in Section 80HHC - manner of computation of deduction under section 80HHC - 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 of the IT Act at par with the direct exporter? - Held that - 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 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, we refer this batch of appeals to the larger Bench.

Summary

Issues Involved:
1. Interpretation of Section 80HHC of the Income Tax Act, 1961.
2. Eligibility of supporting manufacturers for deductions under Section 80HHC.
3. Applicability of previous judgments, particularly Baby Marine Exports, to the current case.
4. Computation of deductions for supporting manufacturers under Section 80HHC.

Issue-wise Detailed Analysis:

1. Interpretation of Section 80HHC of the Income Tax Act, 1961:
The primary issue in this judgment revolves around the interpretation of Section 80HHC of the Income Tax Act, 1961, which deals with deductions in respect of profits retained for export business. The section was originally intended to benefit direct exporters, but was later extended to include supporting manufacturers through sub-sections (1A) and (3A). The court examined the legislative intent behind these provisions, focusing on promoting export businesses by allowing tax deductions on export profits.

2. Eligibility of supporting manufacturers for deductions under Section 80HHC:
The court considered whether a supporting manufacturer, who receives export incentives such as duty drawback (DDB) and Duty Entitlement Pass Book (DEPB), is entitled to deductions under Section 80HHC on par with direct exporters. The assessee, a partnership firm manufacturing and selling carpets, claimed deductions under Section 80HHC, which were partially disallowed by the Assessing Officer but upheld by the High Court. The Revenue argued that since the assessee was not directly exporting goods but supplying them to an Export House, it should not be entitled to the same deductions as direct exporters.

3. Applicability of previous judgments, particularly Baby Marine Exports, to the current case:
The High Court had relied on the Supreme Court's judgment in Commissioner of Income Tax, Thiruvananthapuram vs. Baby Marine Exports, which dealt with the inclusion of export house premium in the business profits for deductions under Section 80HHC. The Revenue contended that the facts and issues in Baby Marine Exports were distinguishable from the present case, as it dealt with the eligibility of export house premium, not the deductions for supporting manufacturers. The court noted that the High Court and the Tribunal erred in equating the two cases.

4. Computation of deductions for supporting manufacturers under Section 80HHC:
The court discussed the methodology for computing deductions for supporting manufacturers under Section 80HHC. It emphasized that the "total turnover" and "profits of the business" must be determined as per clauses (ba) and (baa) of the Explanation to Section 80HHC, which exclude certain receipts from the computation. The court highlighted that the machinery for computing deductions is provided in Section 80HHC (3A), and the effect of such computed deductions is contemplated under Section 80HHC (1A).

Discussion and Conclusion:
The court noted that the purpose of Section 80HHC is to promote export businesses by allowing deductions on export profits. However, it found that the High Court's reliance on Baby Marine Exports was misplaced, as the issues in that case were different. The court also observed that the current case required a re-examination of whether supporting manufacturers should be treated on par with direct exporters for the purpose of deductions under Section 80HHC.

Referral to Larger Bench:
Given the significant monetary implications and the need for a thorough examination, the court decided to refer the matter to a larger Bench. The substantial question of law identified for re-consideration is whether supporting manufacturers who receive export incentives like DDB and DEPB are entitled to deductions under Section 80HHC.

Conclusion:
The judgment concluded by referring the batch of appeals to a larger Bench for re-consideration of the substantial question of law regarding the eligibility of supporting manufacturers for deductions under Section 80HHC of the Income Tax Act, 1961. The matters were placed before the Chief Justice of India for appropriate orders.