Expert Advisory Committee

2.6 Query

Passing on of deduction u/s 80 HHC by Export House to supporting manufacturers.

1. The querist has drawn the attention of the Expert Advisory Committee to Circular No. 466, dated 14.8.1986, issued by the Central Board of Direct Taxes, containing some provisions of passing on of deduction by the Export House to supporting manufacturers. The querists have sought the opinion of the Expert Advisory Committee on the following issues in this regard:

(a) When the passing on of the deduction should take place? Whether in the previous year to which the deduction relates or after the end of this previous year. According to the querist, in case it is to be passed on in the previous year, the Export House cannot validly calculate the deduction allowable due to non-ascertainment of the profits before the end of the previous year.

(b) From the wording of the aforesaid Circular, it appears to the querist that the deduction should be passed on by way of absolute grant to the exporting manufacturer. Since the Export House will be itself losing its part of the deduction then for what consideration a prudent Export House will give this absolute grant to the exporting manufacturer. Should this provision of passing on of this benefit, therefore, be incorporated in the agreement by the Export House with the supporting manufacturer?

(c) The tax benefit which will be passed on by the Export House to the supporting manufacture will be allowed a deduction in computing the profits of the assessee. Since this is dependent on the profits from business and the deduction calculation under section 80 HHC, should the amount in respect of the deduction to be passed on be allowed from the profits arrived at after deduction under section 80 HHC from the profits calculated normally?

(d) Since the quantum of tax benefit to be passed on to the exporting manufacturer is not specified in the Circular, what criteria should be adopted to determine eligibility of different exporting manufacturers to get this amount? In other words, is it correct for a Export House to pass on tax benefit of say Rs. 50,000/- though he may have purchased the goods from this concern manufactured only for say Rs. 1 lac and this will be far in excess of the proportion of the benefit to be passed on if calculated on the basis of amount of goods received from different manufacturers and which may also leave some manufacturers not getting any benefit passed on to them.

Opinion September 18, 1988

1. The Committee notes that paras 3 and 4 of the said Circular provide as below:

“3. The matter has been examined by the Board. It has been decided that if any export house/trading house holding a certificate in this regard issued by the Ministry of Commerce for the relevant accounting period passes on to the manufacturer part of the amount of tax benefit derived by the former on account of deductions under section 80HHC, then the amount of actual payment made to the manufacturer for passing on the tax benefit may, subject to the limit laid down hereinafter, be treated as business expenditure and be allowed as deduction in the computation of the total income to the export house/trading house.

“4. The total amount of the tax benefit on account of deduction under section 80HHC and the tax benefit on account of the deduction in paragraph 3 above shall, in no case, exceed the maximum amount of tax benefit available under section 80HHC, to the export house/trading house. For computing the maximum amount of tax benefit under section 80HHC, however, the ‘profits’ as referred to in that section, will be determined after taking into account the deduction referred to in paragraph 3 above.”

2. On the basis of the above, the opinion of the Expert Advisory Committee on the issues raised by the querists, is as below:

(a) Though the amount for passing on the deduction u/s 80HHC to the manufacturer may be ascertained after the end of the previous year, but such passing on would relate to the said previous year in view of para 4 of the Circular which prescribes computation of maximum amount of deduction u/s 80HHC,apparently for the relevant previous year.

(b) It is upto the Export House and the supporting manufacturer whether to include a clause regarding passing on of deduction u/s 80HHC, in the agreement.

(c) According to clause 3 of the said Circular, the amount of actual payment made to the manufacturer for passing on the tax benefit may be treated as business expenditure and be allowed as deduction in the computation of the total income. Also, as per clause 4, the ‘profits’ as referred to under section 80HHC, will be determined after taking into account the deduction passed on to the manufacturer. In view of this, the said deduction has to be allowed as per the Circular before deducting the deduction under section 80HHC. However, the Committee notes that the proviso to new sub-section (1) of section 80 HHC, substituted for the existing subsection (1) by the Finance Act, 1988, w.e.f. 1-4-1989, prescribes that “the amount of deduction in the case of the assessee shall be reduced by such amount which bears to the total profits of the export business of the assessee the same proportion as the amount of export turnover specified in the said certificate bears to the total export turnover specified in the said certificate bears to the total export turnover of the assessee”. In view of this, the deduction under section 80 HHC has to be reduced by the amount of deduction passed on to the manufacturer. Thus, the question raised by the querist does not arise in this case.

(d) As far as the Circular is concerned, apart from prescribing the maximum limit of deduction, no criteria have been prescribed. Therefore, it is between the parties concerned to agree to the amount of deduction to be passed on. However, the Committee notes that in the proviso to the new sub-section, the relevant portion of which is reproduced in (c) above, the criterion has been prescribed for passing on the deduction to the supporting manufacturer.