There is no requirement of the certificate under Tonnage Tax Scheme u/s 115VD in relation to the vessel on which slot charter operations are carried out – Supreme Court
ABCAUS Case Law Citation:
967 2016 (07) SC
Question before the Court:
Is the income derived from ‘slot charter’ operations of a ‘Tonnage Tax Company’ liable to be excluded while determining the ‘Tonnage Income’ under the ‘TTS’ if such operations are carried on in ships which are not ‘qualifying ships’ in terms of the provisions of Chapter XIIG and the relevant Income Tax Rules, 1962?
Important Judgments cited:
Karimtharuvi Tea Estates Ltd. v. State of Kerala and Ors (1968) 48 ITR (SC) 28
Brief Facts of the Case:
The respondent-assessee owned a qualifying ship and fulfilled all other conditions for a qualifying company under Section 115VC of the Income Tax Act, 1961. The income generated from the said qualifying ship was exigible to tax as per the special provisions contained in Chapter XIIG and the assessee had exercised the requisite option u/s 115VP in this behalf. However, in addition to operating its qualifying ship, in the relevant Assessment Years the assessee had also ‘slot charter’ arrangements in other ships. In the income tax returns filed by the assessee, the assessee had also included the income earned from such slot charter arrangements for the purpose of computation thereof under Chapter XIIG. Thus the question arose as to whether the assessee was eligible to include the income derived from activities through ‘slot charter’ arrangements as relevant shipping income to determine the deemed tonnage in terms of Rule 11Q of the Income Tax Rules.
The Assessing Officer was of the view that the income earned under slot charter arrangement did not qualify for coverage to be given special treatment in Chapter XIIG as this income was not generated by the assessee from its own ship. According to the AO, in order to avail the benefit of Chapter XIIG, the assessee was supposed to show that the ship operated by it was qualifying ship and for this purpose it was incumbent upon the assessee to produce a ‘valid certificate indicating its net tonnage’ as provided in Section 115VX(1)(b) of the Income Tax Act. The assessee was of the view that the requirement of producing ‘valid certificate’ was applicable only for owned ships and for the ships hired fully. The assessee had also argued that as per the method of computation provided under Section 115VG read with Rule 11Q, income for full ship was to be computed on the basis of ‘net tonnage’ shown in the valid certificate, whereas income of part of the ship was to be computed as ‘deemed tonnage’. However these argument(s) were rejected by the Assessing Officer holding that there was a requirement of producing valid certificate even for part of the ship and in the absence thereof income from slot charter arrangement could not be included for the purpose of computation of tonnage income under the Tonnage Tax Scheme (TTS).
The order of the Assessing Officer was upheld by the Commissioner of Income Tax (Appeals) and also by the ITAT.
However, the High Court, allowed the appeal of the assessee holding that the income earned by the assessee under slot charter arrangement came under the definition of ‘deemed tonnage tax’ as per explanation to sub-section (4) of Section 115 VG and, therefore, exclusion of this income was not appropriate. In other words, the High Court has held that the assessee is eligible for tonnage on slot charter related income also.
The Hon’ble Supreme Court answered the question(s) of Law as under:
Whether slot charter can be treated as ‘operating ships’ within the meaning of Section 115VB of the Act?
Slot charter is specifically included as an instance of a ship chartered by the company.
Whether slot charter would be treated as a ‘qualifying ship’ as defined under Section 115VD? Whether assessee is required to produce a valid certificate in respect of such a ship where slot is chartered, indicating its net tonnage in force.
There is no requirement of the certificate under the Scheme in relation to the vessel on which slot charter operations are carried out.
Important Excepts from the Judgment:
…… When it comes to tonnage of a ship, a certificate as mentioned in Section 115VX is to be produced. Second part of this provision talks about ‘deemed tonnage’ in contradistinction to the ‘actual tonnage’ mentioned in the certificate. Thus, it is not only the actual tonnage that is mentioned in the certificate referred to in Section 115VX of the Act which this provision deals with. In addition, deemed tonnage is also to be included if there is such a deemed tonnage, and that deemed tonnage is to be added to the actual tonnage which is indicated in the certificate. Explanation to sub-section (4), inter alia, mentions that insofar as slot charter arrangements are concerned, purchase of such slot charter shall be treated as deemed tonnage. The Legislature has, thus, clearly visualised that insofar as deemed tonnage is concerned, there would not be any possibility of producing a certificate referred to in Section 115VX of the Act. When we read the provision in this manner, it becomes amply clear that Section 115VD of the Act which talks of a qualifying ship, contemplates the situation in which entire ship is either owned or chartered. Similar is the position which inheres in Section 115VX of the Act as it refers to ‘the tonnage of a ship’. Therefore, whenever the question of a tonnage of a ship crops up and the said tonnage is to be determined, it has to be in accordance with the valid certificate indicating its tonnage and it is a compulsory obligation of the assessee to produce such a certificate. However, this requirement of producing a certificate would not apply when entire ship is not chartered and the arrangement pertains only to purchase of slots, slot charter and an arrangement of sharing of break-bulk vessel. The contention of the senior counsel for the assessee is right that the legal fiction created by sub-section (4) of Section 115VG is to be given its proper and sensible meaning. This position becomes abundantly clear by reading Rule 11Q of the Rules which specifies the basis/formula of computing deemed tonnage in respect of arrangement of slot charter ……
……. The calculation of income arising from carriage of goods on slot basis has, in the wisdom of the Legislature, been disconnected from the capacity of a ship, on account of impossibility of getting such information in relation to ships on which slot charter is undertaken. This aspect has due recognition in Note 3 of the said Form 66. Thus, the Act and the Rules for computation on tonnage tax specifically and categorically differentiate the requirement of the Certificate with regards to owned ship and slot charter. In law, the said Rule also recognizes that identification of the vessel for slot charter cannot be done.
When the scheme of the aforesaid special provision for computation of income under TTS is exempted, we find the balance tilted in favour of the assessee as that was the precise purpose in introducing TTS in India. It may be stated in brief that in view of the stiff competition faced by the Indian shipping companies vis-a-vis foreign shipping lines, and in order to ensure an easily accessible, fixed rate, low tax regime for shipping companies, the Rakesh Mohan Committee in its report (of January, 2002) recommended the introduction of the TTS in India, which was similar to, and adopted some of the best global practices prevalent. The whole purpose of introduction of the Scheme was to make the Indian shipping industry more competitive in the global space by rationalising its tax cost. For the reason that it is impossible to cater to all shipping routes on owned ships, it is an accepted and widely prevalent practice globally and in India that shipping companies engage in slot charter operations. If such slot charter arrangements are not entered into, then Indian shipping companies will not be able to take up contract of affreightments and these contracts would have fallen to only foreign shipping lines thereby making Indian shipping industry uncompetitive. Such slot charter arrangements being with a shipping company but not in relation to or for a particular ship, it is impossible for the Indian shipping company to identify the cargo ship, which carried the goods. This peculiarity has been duly recognized at Note 3 of Form 66…..
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