TONNAGE SCHEME FOR SHIPPING COMPANIES

[Mr. M. GOVINDARAJAN]

Tonnage Tax Scheme

Section 115V(m) of Income Tax Act,1961 defines the expression ‘tonnage tax scheme’ (‘Scheme’ for short) as a scheme for computation of profits and gains of business of operating qualifying ships under the provisions of this Chapter.

Operating ships

A company shall be regarded as operating a ship if it operates any ship whether owned or chartered by it and includes a case where even a part of the ship has been chartered in by it in an arrangement such as slot charter, space charter or joint charter but excludes chartered out by it on bareboat charter-cum-demise terms or on bareboat charter terms for a period exceeding three years.

Qualifying company

A company is a qualifying company if-

• it is an Indian company;
• the place of effective management of the company is in India;
• it owns at least one qualifying ship; and
• the main object of the company is to carry on the business of operating ships.

Place of effective management of the company

The expression ‘place of effective management of the company’ means the place where the board of directors of the company or its executive directors make their decisions; or in a case where the board of directors routinely approve the commercial and strategic decisions made by the executive directors or officers of the company, the place where such executive directors or officers of the company perform their functions.

Qualifying ship

A ship is a qualifying ship if-

•  it is a sea going ship or vessel of fifteen net tonnage or more;
• it is a ship registered under the Merchant Shipping Act, 1958 or a ship registered outside India in respect of which a licence has been issued by the Director-General of Shipping under section 406 or section 407 of the Merchant Shipping Act, 1958; and
• a valid certificate in respect of such ship indicating its net tonnage is in force, but does not include-

• a sea going ship or vessel if the main purpose for which it is used is the provision of goods or services of a kind normally provided on land;
• fishing vessels;
• factory ships;
• pleasure crafts;
•  harbour and river ferries;
• offshore installations;
• a qualifying ship which is used as a fishing vessel for a period of more than thirty days during a previous year.

Option

The tonnage tax scheme shall apply only if an option to that effect is made by any existing qualifying company to the Joint Commissioner having jurisdiction over the company in the form No. 65 and shall be verified in the manner provided therein.  The application shall be made within three months of the date of its incorporation or the date on which it became a qualifying company.

On receipt of an application for option for tonnage tax scheme the Joint Commissioner may call for such information or documents from the company as he thinks necessary in order to satisfy himself about the eligibility of the company and after satisfying himself about such eligibility of the company to make such option for tonnage tax scheme, he-

• shall pass an order in writing approving the option for tonnage tax scheme; or
• shall, if he is not so satisfied, pass an order in writing refusing to approve the option for tonnage tax scheme, and a copy of such order shall be sent to the applicant after giving him a reasonable opportunity.

The said order shall be passed within one month from the end of the month in which the application was received.

Validity

An option for tonnage tax scheme, after it has been approved shall remain in force for a period of ten years from the date on which such option has been exercised.

Effective date

Where an order granting approval is passed by the Joint Commissioner, the provisions of this scheme shall apply from the assessment year relevant to the previous year in which such option is exercised. 

Amalgamation

In case of amalgamation, the tonnage scheme shall be applicable to the amalgamated company if it is a qualifying company.  If the amalgamated company is not a tonnage tax company, it shall exercise an option for tonnage tax scheme within three months from the date of the approval of the scheme of amalgamation.

If the amalgamating companies are tonnage tax companies, the scheme shall apply to the amalgamated company for such period as the option for tonnage tax scheme which has the longest unexpired period continues to be in force.  If one of the amalgamating companies is a qualifying company as on the 01.10.2004 and which has not exercised the option for tonnage tax scheme within the initial period, the scheme shall not apply to the amalgamated company and the income of the amalgamated company from the business of operating qualifying ships shall be computed in accordance with the other provisions of this Act.

Demerger

Where in a scheme of demerger, the demerged company transfers its business to the resulting company before the expiry of the option for tonnage tax scheme, then, the tonnage tax scheme shall, as far as may be, apply to the resulting company for the unexpired period if it is a qualifying company.

Ceasing of scheme

The scheme shall cease to have effect from the assessment year relevant to the previous year in which-

•  the qualifying company ceases to be a qualifying company;
• a default is made in complying with the provisions contained in-

• section 115VT  - Transfer of profit to Tonnage Reserve Account; or
• section 115VU  - Minimum training requirement for tonnage company; or
• section 115VV – Limit in charter in of tonnage;

• the tonnage tax company is excluded from the tonnage tax scheme under section 115VZC;
• the qualifying company furnishes to the Assessing Officer, a declaration in writing to the effect that the provisions of this Chapter may not be made applicable to it, and the profits and gains of the company from the business of operating qualifying ships shall be computed in accordance with the other provisions of this Act.

Temporary ceasing

A temporary cessation of operating any qualifying ship by a company shall not be considered as a cessation of operating of such qualifying ship and the company shall be deemed to be operating such qualifying ship for the purposes of this Chapter.

Renewal

The scheme may be renewed within one year from the end of the previous year in which the option ceases to have effect.  The provisions for approval shall apply in relation to a renewal of the option for tonnage tax scheme in the same manner as they apply in relation to the approval of option for tonnage tax scheme.  The renewal period is for ten years.

Prohibition

A qualifying company, which, on its own, opts out of the tonnage tax scheme or makes a default in complying with the provisions of-

• section 115VT  - Transfer of profit to Tonnage Reserve Account ;or
• section 115VU -  Minimum training requirement for tonnage company; or
• section 115VV - Limit in charter in of tonnage ;or

whose option has been excluded from tonnage tax scheme in pursuance of an order shall not be eligible to opt for tonnage tax scheme for a period of ten years from the date of opting out or default or order, as the case may be.

Training requirement

 A tonnage tax company, after its option has been approved shall comply with the minimum training requirement in respect of trainee officers in accordance with the guidelines framed by the Director-General of Shipping and notified in the Official Gazette by the Central Government.  The company shall be required to furnish a copy of the certificate issued by the Director-General of Shipping along with the return of income to the effect that such company has complied with the minimum training requirement in accordance with the guidelines for the previous year.

If the minimum training requirement is not complied with for any five consecutive previous years, the option of the company for tonnage tax scheme shall cease to have effect from the beginning of the previous year following the fifth consecutive previous year in which the failure to comply with the minimum training requirement had occurred.

Income of company

The income derived by a company operating qualifying ship shall be considered as a separate business distinct from all other activities or business carried on by the company.   The profits shall be computed separately from the profits and gains from any other business.

The relevant shipping income of a tonnage tax company means-

1. its profits from core activities;
2. its profits from incidental activities.

Where the aggregate of all such incomes specified in clause (ii) exceeds 0.25% of the turnover from core activities such excess shall not form part of the relevant shipping income for the purposes of this Chapter and shall be taxable under the other provisions of this Act.

Core activities

The core activities shall be-

•  its activities from operating qualifying ships; and
•  other ship-related activities mentioned as under-

•  shipping contracts in respect of-

• earning from pooling arrangements (an agreement between two or more persons for providing services through a pool or operating one or more ships and sharing earnings or operating profits on the basis of mutually agreed terms);
•  contracts of affreightment (a service contract under which a tonnage tax company agrees to transport a specified quantity of specified products at a specified rate, between designated loading and discharging ports over a specified period);

•  specific shipping trades, being-

• on-board or on-shore activities of passenger ships comprising of fares and food and beverages consumed on board;
•  slot charters, space charters, joint charters, feeder services, container box leasing of container shipping.

Incidental activities

The incidental activities shall be the activities which are incidental to the core activities and which may be prescribed for the purpose.  The incidental activities shall be the following-

• maritime consultancy charges;
•  income from loading or unloading of cargo;
• ship management fees or remuneration received for managed vessels; and
• maritime education or recruitment fees.

Deemed tonnage

Deemed tonnage shall be the tonnage in respect of an arrangement of purchase of slots, slot charter and an arrangement of sharing of break-bulk vessel.  Deemed tonnage shall be calculated on the following basis-

• 2.5 TEU = 1 Net Tonnage (1 NT)

where TEU is Twenty foot Equivalent Unit (Container of this size)

• Computation of deemed tonnage  in respect of an arrangement of sharing of break-bulk vessel shall be made on the following basis :

• in case where cargo is restricted by volume :

• 19 cubic meter (cbm) = 1 net tonnage (1 NT); and

• in case where cargo is restricted by weight-

• 14 metric tons = 1 net tonnage (1 NT)

Determination of tonnage

 The tonnage of a ship shall be determined in accordance with the valid certificate indicating its tonnage.  Valid certificate means-

• in case of ships registered in India-

• having a length of less than twenty-four metres, a certificate issued under the Merchant Shipping (Tonnage Measurement of Ship) Rules, 1987;
• having a length of twenty-four metres or more, an international tonnage certificate issued under the provisions of the Convention on Tonnage Measurement of Ships, 1969, as specified in the Merchant Shipping (Tonnage Measurement of Ship) Rules, 1987

• in case of ships registered outside India-

• a licence issued by the Director-General of Shipping under section 406 or section 407 of the Merchant Shipping Act, 1958 specifying the net tonnage on the basis of Tonnage Certificate issued by the Flag State Administration where the ship is registered or any other evidence acceptable to the Director-General of Shipping produced by the ship owner while seeking permission for chartering in the ship.

Computation of income under this scheme

The manner of computation of income under this scheme is as detailed below-

• The company opting under this scheme shall compute profits from this business under this scheme.
• This business shall be considered as a separate business distinct from all other activities or business carried on by the company.
• Where a company engaged in the business of operating qualifying ships is not covered under the tonnage tax scheme or, has not made an option to that effect, as the case may be, the profits and gains of such company from such business shall be computed in accordance with the other provisions of this Act.

The tonnage income shall be computed under the following procedure-

• The tonnage income of a tonnage tax company for a previous year shall be the aggregate of the tonnage income of each qualifying ship.
• The tonnage income of each qualifying ship shall be the daily tonnage income of each such ship multiplied by-

• the number of days in the previous year; or
• the number of days in part of the previous year in case the ship is operated by the company as a qualifying ship for only part of the previous year, as the case may be.

• The daily tonnage income of a qualifying ship having tonnage shall be the amount specified as below-

• net tonnage-

• up to 1000 – daily tonnage income ₹ 70 for each 100 tons;
• exceeding 1,000 but not more than 10,000 - ₹ 700 plus ₹ 53 for each 100 tons exceeding 1,000 tons
• exceeding 10,000 but not more than 25,000 - ₹ 5,470 plus ₹ 42 for each 100 tons exceeding 10,000 tons;
• exceeding 25,000 - ₹ 11,770 plus ₹ 29 for each 100 tons exceeding 25,000 tons.

• The tonnage of a ship includes the deemed tonnage computed in the prescribed manner.
• The tonnage shall be rounded off to the nearest multiple of hundred tons and for this purpose any tonnage consisting of kilograms shall be ignored and thereafter if such tonnage is not a multiple of hundred, then, if the last figure in that amount is fifty tons or more, the tonnage shall be increased to the next higher tonnage which is a multiple of hundred and if the last figure is less than fifty tons, the tonnage shall be reduced to the next lower tonnage which is a multiple of hundred; and the tonnage so rounded off shall be the tonnage of the ship for the purposes of this section.
• No deduction or set off shall be allowed in computing the tonnage income.

 Joint operation

If a qualifying ship is operated by two or more companies by way of joint interest in the ship or by way of an agreement for the use of the ship and their respective shares are definite and ascertainable, the tonnage income of each such company shall be an amount equal to a share of income proportionate to its share of that interest.

Where two or more companies are operators of a qualifying ship, the tonnage income of each company shall be computed as if each had been the only operator.

Transfer of business

Where any goods or services held for the purposes of tonnage tax business are transferred to any other business carried on by a tonnage tax company, or where any goods or services held for the purposes of any other business carried on by such tonnage tax company are transferred to the tonnage tax business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the tonnage tax business does not correspond to the market value of such goods or services as on the date of the transfer, then, the relevant shipping income under this section shall be computed as if the transfer, in either case, had been made at the market value of such goods or services as on that date.

Common costs

Where a tonnage tax company also carries on any business or activity other than the tonnage tax business, common costs attributable to the tonnage tax business shall be determined on a reasonable basis.

Where any asset, other than a qualifying ship, is not exclusively used for the tonnage tax business by the tonnage tax company, depreciation on such asset shall be allocated between its tonnage tax business and other business on a fair proportion to be determined by the Assessing Officer, having regard to the use of such asset for the purpose of the tonnage tax business and for the other business.

Depreciation

• The depreciation for the first previous year of the tonnage tax scheme shall be computed on the written down value of the qualifying ships.
• The written down value of the block of assets, being ships, as on the first day of the first previous year, shall be divided in the ratio of the book written down value of the qualifying ships  and the book written down value of the non-qualifying ships .
• The block of qualifying assets as determined above shall constitute a separate block of assets.
• The book written down value of the block of qualifying assets and the block of other assets shall be computed in the following manner,-

• The book written down value of each qualifying asset and each other asset as on the first day of the previous year and which form part of the block of assets to be divided shall be determined by taking the book written down value of each asset appearing in the books of account as on the last day of the preceding previous year.
•  The book written down value of all the qualifying assets and other assets shall be aggregated.
•  The ratio of the aggregate book written down value of the qualifying assets to the aggregate book written down value of the other assets shall be determined.
• Where an asset forming part of a block of qualifying assets begins to be used for purposes other than the tonnage tax business, an appropriate portion of the written down value allocable to such asset shall be reduced from the written down value of that block and shall be added to the block of other assets.
• Where an asset forming part of a block of other assets begins to be used for tonnage tax business, an appropriate portion of the written down value allocable to such asset shall be reduced from the written down value of the block of other assets and shall be added to the block of qualifying asset.
• The depreciation computed for the previous year shall be allocated in the ratio of the number of days for which the asset was used for the tonnage tax business and for purposes other than tonnage tax business.

Deduction and set off

• Every loss, allowance or deduction and relating to or allowable for any of the relevant previous years, had been given full effect to for that previous year itself.
• No loss relating to the business of operating qualifying ships of the company, shall be carried forward or set off where such loss relates to any of the previous years when the company is under the tonnage tax scheme.
•  No deduction shall be allowed under Chapter VI-A in relation to the profits and gains from the business of operating qualifying ships.
•  The written down value of any asset used for the purposes of the tonnage tax business shall be computed as if the company has claimed and has been actually allowed the deduction in respect of depreciation for the relevant previous years.

Exclusion

The book profit or loss derived from the activities of a tonnage tax company shall be excluded from the book profit of the company for the purposes of section 115JB.

Limit for charter in of tonnage

• A company which has opted for tonnage tax scheme, not more than forty-nine per cent of the net tonnage of the qualifying ships operated by it during any previous year shall be chartered in (exclude a ship chartered in by the company on bareboat charter-cum-demise terms).
• The proportion of net tonnage in respect of a previous year shall be calculated based on the average of net tonnage during that previous year.
• The average of net tonnage shall be computed in such manner as may be prescribed in consultation with the Director-General of Shipping.
• Where the net tonnage of ships chartered in exceeds the limit during any previous year, the total income of such company in relation to that previous year shall be computed as if the option for tonnage tax scheme does not have effect for that previous year.
• Where the limit had exceeded in any two consecutive previous years, the option for tonnage tax scheme shall cease to have effect from the beginning of the previous year following the second consecutive previous year in which the limit had exceeded.

Transfer of profits

The company shall create a Tonnage Tax Reserve Account.  A tonnage tax company shall be required to credit to a reserve account an amount not less than 20% of the book profit derived from the activities in each previous year.   A tonnage tax company may transfer a sum in excess of 20% of the book profit.

Where the company has book profit from the business of operating qualifying ships and book loss from any other sources, and consequently, the company is not in a position to create the full or any part of the reserves the company shall create the reserves to the extent possible in that previous year and the shortfall, if any, shall be added to the amount of the reserves required to be created for the following previous year and such shortfall shall be deemed to be part of the reserve requirement of that following previous year.

Utilization of reserve

The amount credited to the Tonnage Tax Reserve Account shall be utilised by the company before the expiry of a period of eight years next following the previous year in which the amount was credited-

• for acquiring a new ship for the purposes of the business of the company; and
• until the acquisition of a new ship, for the purposes of the business of operating qualifying ships other than for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India.

Audit of Accounts

An option for tonnage tax scheme by a tonnage tax company shall not have effect in relation to a previous year unless such company-

• maintains separate books of account in respect of the business of operating qualifying ships; and
•  furnishes, before the specified date referred to in section 44AB, the report of an accountant, in the prescribed form duly signed and verified by such accountant.

The report of audit of accounts of a qualified company shall be in Form No. 66.

Abuse of the scheme

The tonnage tax scheme shall not apply where a tonnage tax company is a party to any transaction or arrangement which amounts to an abuse of the tonnage tax scheme.

A transaction or arrangement shall be considered an abuse if the entering into or the application of such transaction or arrangement results, or would but for this section have resulted, in a tax advantage being obtained for-

•  a person other than a tonnage tax company; or
• a tonnage tax company in respect of its non-tonnage tax activities.

The tax advantage include-

•  the determination of the allowance for any expense or interest, or the determination of any cost or expense allocated or apportioned, or, as the case may be, which has the effect of reducing the income or increasing the loss, as the case may be, from activities other than tonnage tax activities chargeable to tax, computed on the basis of entries made in the books of account in respect of the previous year in which the transaction was entered into; or
•  a transaction or arrangement which produces to the tonnage tax company more than ordinary profits which might be expected to arise from tonnage tax activities.

Exclusion from the scheme

Where a tonnage tax company is a party to the abuse of the scheme the Assessing Officer shall, by an order in writing, exclude such company from the tonnage tax scheme after giving a reasonable opportunity by serving a show cause notice why it should not be excluded from the tonnage tax scheme.

The exclusion order shall be passed with the previous approval of the Principal Chief Commissioner or Chief Commissioner.  On passing such order the option for tonnage tax scheme shall cease to be in force from the first day of the previous year in which the transaction or arrangement was entered into.