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Commissioner of Income Tax, Kochi Versus Trans Asian Shipping Services (P) Ltd.

2016 (7) TMI 341 - SUPREME COURT

Assessment of income of shipping companies - Qualifying ship - whether a slot charter can be treated as 'operating ships' within the meaning of Section 115VB of the Act? - The question that has arisen for consideration pertains to 'slot charter' i.e. should the 'slot charter' operations of a 'Tonnage Tax Company' be carried on only in 'qualifying ships' to include the income from such operations to determine the 'tonnage income' under 'TTS' in terms of the provisions of Chapter XIIG of the Act? .....

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p chartered by the company. - Non Production of valid certificate - Whether it would be treated as a 'qualifying ship' as defined under Section 115VD of the Act? - Held that:- 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 app .....

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lot charter - 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 r .....

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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 good .....

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of judgments. - Decided in favor of assessee - Revenue appeal dismissed. - Civil Appeal No. 5869 of 2016 (ARISING OUT OF SLP (CIVIL) NO. 25251/2015), Civil Appeal No. 5870 of 2016(ARISING OUT OF SLP (CIVIL) NO. 25252/2015) - Dated:- 5-7-2016 - C.J.I. T.S. Thakur , A. K. Sikri And R. Banumathi, JJ. JUDGMENT A. K. Sikri, J. Leave granted. Matter finally heard as the case was fixed for final hearing. 2. Chapter XIIG of the Income Tax Act, 1961 (hereinafter referred to as the 'Act') cont .....

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r the shipping business. 3. Chapter IV of the Act deals with 'Computation of Total Income' and as per the scheme of the Act, such a computation of total income is governed by five heads which are provided in Section 14 of the Act. These are: (i) Salaries; (ii) Income from House Property; (iii) Profits and Gains of Business or Profession; (iv) Capital Gains and (v) Income from Other Sources. Thereafter, manner of computation of the income under the aforesaid heads is stipulated in various .....

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e of shipping companies. It would mean that those companies which are shipping companies are permissible to get their income computed under the said Chapter. Section 115VA of the Act gives this option and reads as under: 115VA. Computation of profits and gains from the business of operating qualifying ships. - Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of a company, the income from the business of operating qualifying ships, may, at its option, be compu .....

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8 to 43C for computation of business income. Once such an option is exercised and income is computed in accordance with the provisions of the said Chapter, a fiction is created by deeming the said income to be the profits and gains of such business chargeable to tax under the head 'Profits and Gains of Business or Profession'. To put it otherwise, though the income of such shipping company would be computed in the manner provided under Chapter XIIG, the same would be treated as income fr .....

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such business may be the business of operating qualifying ships. However, it is only that income which is generated from 'The Business of Operating Qualifying Ships' that will be computed as per the special provisions in Chapter XIIG. Income from other businesses will be computed in the same manner as provided in Sections 28 to 43C. In case the business of the company is to operate qualifying ships only, then the income from that sole business will be under this Chapter. (ii) Income from .....

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the option ceases to have effect (Section 115VR). In certain circumstances stipulated in Section 115VS of the Act, there is a prohibition to opt for the scheme. The scheme that is to be opted for computation of income under this Chapter is known as 'Tonnage Tax Scheme' (for short 'TTS') as defined in sub-section (m) of Section 115V of the Act. (iii) Though, these special provisions relate to income of shipping companies, it is only that income which is received from business of .....

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1958 (44 of 1958); and (c) a valid certificate in respect of such ship indicating its net tonnage is in force, but does not include- (i) 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; (ii) fishing vessels; (iii) factory ships; (iv) pleasure crafts; (v) harbour and river ferries; (vi) offshore installations; (vii) (Clause (vii) omitted by the Finance Act, 2005 (18 of 2005), sec. 36 (w.e.f. 1-4-2006). C .....

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d 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 : Provided that a company shall not be regarded as the operator of a ship which has been chartered out by it on bareboat charter-cum-demise terms or on bareboat charter terms for a period exceeding three years. As per this, a ship would be treated as 'operating ship' if a company: (a) operates any ship, whether owned or chartered by .....

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Section 115V of the Act which says qualifying company means a company referred to in Section 115VC of the Act. Section 115VC lays down certain conditions to be fulfilled for a company to be qualifying company. It reads as under: 115VC. Qualifying company. - For the purposes of this Chapter, a company is a qualifying company if- (a) it is an Indian company; (b) the place of effective management of the company is in India; (c) it owns at least one qualifying ship; and (d) the main object of the co .....

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officers of the company perform their functions. As may be seen from the reading of the aforesaid provision, apart from the conditions that a company has to be an Indian company with effective management of the company in India and main objective of the company is to carry on business of operating ships, the other significant condition is that the company itself should own 'at least one qualifying ship'. The description of qualifying ship is contained in Section 115VD, as already noted a .....

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profits and gains of business of operating qualifying ships under the provisions of this Chapter. 7. The provisions for TTS are contained in Section 115VE onwards. For our purposes, it is not necessary to take stock of all these provisions. As we are primarily concerned with Section 115VE and Section 115VG of the Act, we shall discuss the schemes with reference to these provisions. The TTS talks of 'Tonnage Income' which is to be computed under Section 115VG of a Tonnage Tax Company. Thi .....

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hat 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. 8. Section 115VE deals with the manner of computation of income under TTS. In nutshell, such company which has exercised option under this Chapter is known as a 'Tonnage Tax Company' and its income from the business of operating qualifying ships shall be considered as a separate business distinct from all other activities of the busin .....

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nnage income of a tonnage tax company for a previous year shall be the aggregate of the tonnage income of each qualifying ship computed in accordance with the provisions of sub-sections (2) and (3). (2) For the purposes of sub-section (1), the tonnage income of each qualifying ship shall be the daily tonnage income of each such ship multiplied by- (a) the number of days in the previous year; or (b) the number of days in part of the previous year in case the ship is operated by the company as a q .....

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h 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.] (4) For the purposes of this Chapter, the tonnage shall mean the tonnage of a ship indicated in the certificate referred to in section 115VX and includes the deemed tonnage computed in the prescribed manner. Explanation.-For the purposes of this sub-section, "d .....

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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. (6) Notwithstanding anything contained in any other provision of this Act, no deduction or set off shall be allowed in computing the tonnage income under this Chapter. 9. We would also like to point out at this stage that Section 115V-I deals wit .....

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dance with the provisions of Chapter XIIG. As per Section 115VB of the Act, a company is regarded as operating a ship if it operates any ship which is owned by it or a ship which is chartered by it and it also includes a case where even a part of the ship has been chartered by it in an arrangement such as slot charter, space charter or joint charter etc. The question that has arisen for consideration pertains to 'slot charter' i.e. should the 'slot charter' operations of a 'T .....

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qualifying ships' in terms of the provisions of that Chapter of the Act and the relevant provisions of the Income Tax Rules, 1962? 11. As a matter of fact, the respondent-assessee owns a qualifying ship and fulfills all other conditions as well to make it a qualifying company under Section 115VC. The income that is generated from the said qualifying ship is exigible to tax as per the special provisions contained in Chapter XIIG, as assessee has exercised the requisite option in this behalf. .....

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rom activities through 'slot charter' arrangements as relevant shipping income to determine the deemed tonnage in terms of Rule 11Q of the Income Tax Rules. 12. 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, i.e., it is neither from the ship owned by the assessee nor from the entire ship chartered by th .....

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nder the slot charter arrangement. The contention of the assessee was that the requirement of producing 'valid certificate' is to be insisted only for assessee's own ships and for the ships hired fully. This contention was not accepted by the Assessing Officer. The assessee had also argued that as per the method of computation provided under Section 115VG of the Act read with Rule 11Q of the Rules income for full ship is to be computed on the basis of 'net tonnage' shown in t .....

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esulting into dismissal of appeal filed by the assessee. Even the ITAT accepted the view taken by the Assessing Officer and dismissed the appeal filed before it by the assessee thereby upholding the order of the Assessing Officer. However, in further appeal that was preferred by the assessee to the High Court under Section 260A of the Act, the assessee has succeeded in getting its way through as the High Court has found merit in its contention. Thus, the High Court, vide impugned judgment and or .....

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lso. This view taken by the High Court is under examination in the present proceedings. 14. Mr. Rohatgi, learned Attorney General who appeared for the Income Tax Department/Revenue, at the outset referred to the reasoning which was adopted by the ITAT and submitted that the ITAT had rightly interpreted the provisions even in respect to deemed tonnage and came to the correct conclusion that even slot charter arrangement has to be in respect of a qualifying ship. He read out the relevant portions .....

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ed that unless this threshold is crossed and the test of eligibility as per the conditions stipulated under Section 115VA to Section 115VE of the Act are fulfilled, the question of crossing over to the second stage of computation of income as per the method of determination of tonnage would not arise. On that basis, he argued that the entire approach of the High Court by solely relying upon explanation to sub-section (4) of Section 115VG was erroneous. 15. Per contra, Shri Porus Kaka, senior adv .....

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he hardships suffered by the Indian shipping companies vis-a-vis foreign shipping lines because of the stiff competition faced by the Indian companies and also to ensure an easily acceptable fixed rate low tax regime for shipping companies. His submission was that Chapter XIIG incorporating this TTS which was introduced by the Finance Act, 2004, had to be interpreted keeping in view the aforesaid objective. He also argued that the legal fiction created by sub-section (4) of Section 115VG along w .....

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along with Circular No. 05/2005 which was a contemporaneous expositio circular issued after inserting the said Chapter and clarifies that the tonnage income shall be further increased by the deemed tonnage which is to be computed in the manner prescribed in Rule 11Q. Deemed tonnage means the tonnage in respect of an arrangement of purchase of slots, slot charter, and an arrangement of sharing of break-bulk vessels. He, thus, argued that arrangements of slot charter even on non-qualifying ship ar .....

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of income from the business of operating qualifying ships under Chapter XIIG of the Act. The assessee exercised the option in this behalf, as per Section 115VP of the Act in respect of Assessment Years in question. Therefore, the assessee is a 'qualifying company' under Section 115VC of the Act. In fact, the income that is generated from the qualifying ship owned by the assessee is also assessed under the special provisions contained in Chapter XIIG of the Act. The dispute, however, per .....

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that for the purpose of Chapter XIIG, a company would 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 by it in an arrangement such as slot charter, space charter or joint charter'. It is clear from the above that slot charter is specifically included as an instance of a ship chartered by the company. 19. Next comes the issue as to whether it would be treated as a 'qualifyin .....

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e, this is an essential requirement contained in Section 115VD of the Act which cannot be done away with because of the formula that is contained in Section 115VG of the Act for the computation of Tonnage Income. It is argued that computation of Tonnage Income under TTS has to be as for the provisions of Section 115VG and sub-section (4) thereof defines 'Tonnage' to mean tonnage of a ship indicated in the certificate referred to in Section 115VX. This Section makes the following reading: .....

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ernational 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 made under the Merchant Shipping Act, 1958 (44 of 1958); (ii) 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 (44 of 1958) specifying the net tonnage on the basis of Tonnage Certificate is .....

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bmission and negate the contention of the Revenue, thereby persuading us to accept the reasoning given by the High Court as well as the manner in which aforesaid statutory provisions are interpreted by it. In this behalf, we reproduce sub-section (4) of Section 115VG of the Act which is a provision regarding computation of tonnage income: (4) For the purposes of this Chapter, the tonnage shall mean the tonnage of a ship indicated in the certificate referred to in section 115VX and includes the d .....

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emed 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 insof .....

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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 an .....

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) For the purpose of the Explanation to sub-section (4) of section 115VG, deemed tonnage in respect of an arrangement of purchase of slots and slot charter shall be computed (illustrative formula given in Note 3 appearing after the corresponding Form No. 66) on the following basis : 2.5 TEU = 1 Net Tonnage (1 NT) where TEU is Twenty foot Equivalent Unit (Container of this size) (2) Computation of deemed tonnage (illustrative formula given in Note 4 appearing after the corresponding Form No. 66) .....

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be taken to be prescribed by the Act and the definitions contained therein must apply to other provisions. In the same judgment, it was held that if two provisions are in conflict, they must be interpreted in a harmonious manner. 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. .....

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mula for slot charter by mentioning: 3. Formula for conversion of TEUs into NT (Slot Charter) (i) In addition to loading containers on their own container vessels, shipping companies also hire slots on container ships (not owned by them) plying on various routes. These slots could be hired for a sector voyage or on long term basis, all round the year, in various vessels and in varying numbers and thus cannot be converted to net tonnage identifying the particular vessel on which the slot is hired .....

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e Tax Company have been specified in sub-section (2) of the said section. These include its activities from operating qualifying ships and other ship related activities including slot charter. 26. 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 shipp .....

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ason 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 .....

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