A Larger Bench Should Decide if Supporting Manufacturers are entitled to Deductions at par with Direct Exporters: SC [Read Judgment]

The Supreme Court has referred Commissioner of Income Tax vs. M/s Carpet India to a larger bench for reconsideration.

The issue before the apex court was whether the supporting manufacturer who receives export incentives in the form of duty drawback (DDB), Duty Entitlement Pass Book (DEPB) etc., is entitled to deductions under Section 80HHC of the Income Tax Act at par with the direct exporter.

In the instant case, the assessee, a partnership firm acting as supporting manufacturer, engaged in the manufacturing and sale of carpets to M/s IKEA Trading (India) Ltd. (Export house). The assessee filed a NIL return for the assessment year 2001-02 and received export incentives in the form of DDB. The assessee sought deduction under Section 80HHC of the Income Tax Act, 1961 amounting to Rs.1.57 Crores at par with the direct exporter. However, the Assessing Officer (A.O) partly allowed the deduction to the tune of Rs.1.08 Crores. Aggrieved, the assessee appealed to the Commissioner of Income Tax (Appeals) (CIT(A)). The CIT(A) ruled that the assessee is entitled to the deduction of export incentives under Section 80HHC of the Income Tax Act,1961 at par with the exporter. The Revenue appealed against the order before the Tribunal as well as the High Court., but the same got dismissed. By way of special leave, the Revenue approached the Supreme Court.

The Counsel for the Revenue argued that since there was no direct export of goods by the assessee and that the assessee was only a supporting manufacturer deduction of export incentives could not be made at par with the direct exporter. It was further contended by him 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 are totally different from the case of Commissioner of Income Tax, Thiruvantanpuram vs. Baby Marine Exports.

The Counsel for the assessee submitted that the assessee is working as supporting manufacturer, exporting the goods to the foreign constituents through export houses and is therefore legitimately entitled for the deduction of export incentives under Section 80HHC of the Income Tax Act,1961 similarly to the benefits available to the direct exporter.

The bench comprising of Justice R.K. Agrawal and Justice Abhay Manohar Sapre said “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: “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. Let the matters be placed before Hon’ble the Chief Justice of India for appropriate orders.”