“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?” 16) Accordingly, we refer this batch of appeals to the larger Bench.

 REPORTABLE
 IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 4590 OF 2018
(Arising out of Special Leave Petition (C) No. 8368 OF 2009)
Commissioner of Income Tax,
Karnal (Haryana) …..Petitioner(s)
 Versus
M/s Carpet India, Panipat (Haryana) ...…Respondent(s)
WITH
CIVIL APPEAL NO. 4601 OF 2018
(Arising out of Special Leave Petition (C) No. 7331 OF
2017)
CIVIL APPEAL NO. 4602 OF 2018
(Arising out of Special Leave Petition (C) No. 9284 OF
2017)
CIVIL APPEAL NO. 4591 OF 2018
(Arising out of Special Leave Petition (C) No. 19482 OF
2010)
CIVIL APPEAL NO. 4597 OF 2018
(Arising out of Special Leave Petition (C) No. 20408 OF
2013)
CIVIL APPEAL NO. 4599 OF 2018
(Arising out of Special Leave Petition (C) No. 10542 OF
2013)
CIVIL APPEAL NO. 4592 OF 2018
(Arising out of Special Leave Petition (C) No. 20941 OF
2010)
1
CIVIL APPEAL NO.4593 OF 2018
(Arising out of Special Leave Petition (C) No. 23683 OF
2010)
CIVIL APPEAL NO. 4596 OF 2018
(Arising out of Special Leave Petition (C) No. 3133 OF
2012)
CIVIL APPEAL NO. 4594 OF 2018
(Arising out of Special Leave Petition (C) No. 27636 OF
2010)
CIVIL APPEAL NO. 4603 OF 2018
(Arising out of Special Leave Petition (C) No. 27635 OF
2010)
CIVIL APPEAL NO. 4595 OF 2018
(Arising out of Special Leave Petition (C) No. 29783 OF
2011)
CIVIL APPEAL NO. 4598 OF 2018
(Arising out of Special Leave Petition (C) No. 33058 OF
2012)
J U D G M E N T
R.K.Agrawal, J.
1) Leave granted.
2) The above batch of appeals is related to the interpretation
of the provisions contained in Section 80HHC of the Income
Tax Act, 1961 (in short ‘the IT Act’).
3) SLP (C) 8368 of 2009
(a) M/s. Carpet India (P) Ltd.-the assessee is a partnership
firm deriving income from the manufacturing and sale of
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carpets to M/s. IKEA Trading (India) Ltd. (Export House) as
supporting manufacturer.
(b) The assessee filed a ‘Nil’ return for the Assessment Year
(AY) 2001-2002 on 30.10.2001, inter alia, 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.
(c) 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/.
(d) Being aggrieved, the assessee preferred an appeal before
the Commissioner of Income Tax (Appeals) which was allowed
vide order dated 12.08.2004 while holding that the assessee is
entitled to the deduction of export incentives under Section
80HHC at par with the exporter.
(e) The Revenue went in appeal before the Income Tax
Appellate Tribunal (in short ‘the Tribunal’) as well as before
3
the High Court but the same got dismissed vide orders dated
23.02.2007 and 13.05.2008 respectively leaving it to take
recourse of this Court by way of special leave.
(f) Since a common question of law has arisen in these
appeals, it will be disposed of by this common order.
4) Heard learned counsel for the parties and perused the
records.
Point(s) for consideration:-
5) The short but important question of law that arises
before this court is whether in the facts and circumstances of
the present 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 IT Act at par with the direct
exporter?
Rival contentions:-
6) At the outset, learned counsel for the Revenue submitted
that the assessee deals in the manufacturing of the carpets
which it usually sells to various entities including M/s IKEA
Trading (India) Ltd. (Export House/Trading House) which, in
turn, further exports the goods manufactured by the assessee.
4
While filing the return, the assessee claimed deduction at par
with the direct exporter under Section 80HHC of the IT Act
since it receives export incentives in the form of duty draw
back (DDB) etc. It was further contended that in view of the
fact that the assessee is working as a supporting
manufacturer and also there is no direct export of the goods to
the foreign constituents by the assessee firm, hence, it is not
entitled to claim the deduction at par with the direct exporter.
However, the High Court erroneously relied on the judgment of
this Court, namely, Commissioner of Income Tax,
Thiruvantanpuram vs. Baby Marine Exports (2007) 290 ITR
323 (SC) and held that the assessee is entitled to claim
deduction at par with the direct exporter which is not
sustainable in the eyes of law since the issues and facts are
distinguishable from the facts and the circumstances of the
instant case.
7) At this juncture, it was also pointed out 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
5
ratio of the facts and issues involved in the case of the
assessee-firm are totally different from the case of Baby
Marine Exports (supra). 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. Hence, in no circumstances, it could be relied
upon by the High Court.
8) Per contra, the stand of leaned counsel for the assessee
was that the assessee is working as supporting manufacturer,
exporting the goods to the foreign constituents through export
houses, therefore, it is 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.
It was submitted that the High Court rightly relied on the
judgment of this court in Baby Marine Exports (supra).
Hence, this special leave to appeal deserves to be dismissed.
Discussion:-
9) Before examining the matter, we deem it apposite to refer
to the relevant provisions of Section 80HHC of the IT Act:
“80HHC. Deduction in respect of profits retained for
export business:- (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
6
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 export of
such goods or merchandise:
 Provided that if the assessee, being a holder of an Export
House Certificate or a Trading House Certificate (hereinafter
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
export turnover specified therein, the deduction under this
sub-section 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 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 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 House in respect of which the
certificate has been issued by the Export House or Trading
House.
(1B) xxx
(2) xxx
(3) xxx
(3A) For the purposes of sub-section (1A), profits derived by a
supporting manufacturer from the sale of goods or
merchandise shall be:-
(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
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
7
to the total turnover of the business carried on by the
assessee.”
(4) xxx
(4A) xxx
(4B) xxx
(4C) xxx
Explanation:- For the purposes of this section:-
(a) “convertible foreign exchange” means foreign
exchange which is for the time being treated by the
Reserve Bank of India as convertible foreign exchange
for the purposes of the Foreign Exchange
Management Act, 1999 (42 of 1999), and any rules
made thereunder;
(aa) “export out of India” shall not include any transaction
by way of sale or otherwise, in a shop, emporium or
any other establishment situate in India, not involving
clearance at any customs station as defined in the
Customs Act 1962 (52 of 1962);
(b) “export turnover” means the sale proceeds received in,
or brought into India by the assessee in convertible
foreign exchange in accordance with clause (a) of
sub-section (2) of any goods or merchandise to which
this section applies and which are exported out of
India, but does not include freight or insurance
attributable to the transport of the goods or
merchandise beyond the customs station as defined
in the Customs Act, 1962;
(ba) “total turnover” shall not include freight or insurance
attributable to the transport of the goods or
merchandise beyond the customs station as defined
in the Customs act, 1962 (52 of 1962):
Provided that in relation to any assessment year
commencing on or after the 1st day of April, 1991, the
expression “total turnover” shall have effect as if it
also excluded any sum referred to in clauses (iiia),
(iiib), (iiic), (iiid) and (iiie) of section 28.”
(baa) “profits of the business” means the profits of the
business as 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 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;
(c) xxx
8
(d) xxx
(e) xxx
Clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of Section 28 of IT Act read
as follows:
“28. Profits and gains of business or profession:- The
following income shall be chargeable to income-tax under
the head “Profits and gains of business or profession:-
(i) xxx
(ii) xxx
(iii) xxx
(iiia) profits on sale of a licence granted under the
Imports (Control) Order, 1955, made under the
Imports and Exports (Control) Act, 1947 (18 of
1947);
(iiib) cash assistance (by whatever name called)
received or receivable by any person against
exports under any scheme of the Government of
India;
(iiic) any duty of customs or excise repaid or repayable
as drawback to any person against exports under
the Customs and Central Excise Duties Drawback
Rules, 1971;
(iiid) any profit on the transfer of the Duty Entitlement
Pass Book Scheme, being the Duty Remission
Scheme under the export and import policy
formulated and announced under section 5 of the
Foreign Trade (Development and Regulation) Act,
1992 (22 of 1992);
(iiie) any profit on the transfer of Duty Free
Replenishment Certificate being the Duty
Remission Scheme under the export and import
policy formulated and announced under section 5
of the Foreign Trade (Development and
Regulation) Act, 1992 (22 of 1992).”
10) The very purpose of Section 80HHC of the IT Act 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 of the IT Act, these benefits were available only
to the direct exporter which later on extended to the
9
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 of the IT Act 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
10
any profit on the transfer of Duty Free Replenishment
Certificate.
11) It is well known fact that 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.
12) In the instant case, 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
11
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.
12
13) 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 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.
14) While deciding the issue in Baby Marine Exports
(supra), a two Judge Bench of this Court held as under:
“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
respondent to the export house.”
13
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 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:
“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?”
4. This question has been answered in favour of 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 appeals filed by the Department are, accordingly,
dismissed.”
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.
15) However, 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
14
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?”
16) Accordingly, we refer this batch of appeals to the larger
Bench. Let the matters be placed before Hon’ble the Chief
Justice of India for appropriate orders.
…….....…………………………………J.
 (R.K. AGRAWAL)
 …….…………….………………………J.
 (ABHAY MANOHAR SAPRE)
NEW DELHI;
APRIL 27, 2018.
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