2016 (7) TMI 341 - SC - Income Tax

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? - Binding nature of CBDT circular upon revenue authorities. Held that - This provision specifically provides 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. 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 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 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. Accordingly, there is no requirement of the certificate under the Scheme in relation to the vessel on which slot charter operations are carried out. The Circular No. 05/2005 clarifies that the Scheme is a preferential regime of taxation . It also clarifies that charging provision is under Section 115VA read with Section 115VF and Section 115VG. Circulars of CBDT explaining the Scheme of the Act have been held to be binding on the Department repeatedly by this Court in a series of judgments. Decided in favor of assessee - Revenue appeal dismissed.

Issues Involved:
1. Eligibility of shipping companies to opt for the Tonnage Tax Scheme (TTS) under Chapter XIIG of the Income Tax Act, 1961.
2. Definition and qualification of "qualifying ships" under Section 115VD.
3. Computation of income from slot charter arrangements under TTS.
4. Requirement of producing a valid certificate for ships under slot charter arrangements.
5. Interpretation of relevant statutory provisions and rules regarding deemed tonnage.

Detailed Analysis:

1. Eligibility of Shipping Companies to Opt for Tonnage Tax Scheme (TTS):
Chapter XIIG of the Income Tax Act, 1961, allows shipping companies to opt for a special method of income computation known as the Tonnage Tax Scheme (TTS). This scheme provides an alternative to the standard provisions for computing business income, specifically tailored for shipping companies. Section 115VA grants this option to companies operating "qualifying ships," allowing their income to be computed under this special regime, which is then deemed as profits and gains of business chargeable to tax under the head "Profits and Gains of Business or Profession."

2. Definition and Qualification of "Qualifying Ships":
For a shipping company to be eligible for TTS, it must meet certain conditions. The company must own at least one "qualifying ship" as defined under Section 115VD. A qualifying ship must be a sea-going vessel of at least fifteen net tonnage, registered under the Merchant Shipping Act, 1958, or a ship registered outside India with a license from the Director-General of Shipping. Specific exclusions apply, such as fishing vessels, factory ships, pleasure crafts, and others. The company must also be an Indian company with effective management in India and primarily engaged in the business of operating ships.

3. Computation of Income from Slot Charter Arrangements under TTS:
The core of the dispute is whether income from slot charter arrangements can be included in the computation of tonnage income under TTS. Section 115VG outlines the method for computing tonnage income, which includes the concept of "deemed tonnage" for slot charters. The High Court held that income from slot charter arrangements qualifies as deemed tonnage and should be included in the computation of tonnage income, even if the slots are on non-qualifying ships.

4. Requirement of Producing a Valid Certificate for Ships under Slot Charter Arrangements:
The Revenue argued that a valid certificate indicating the ship's net tonnage, as required under Section 115VX, must be produced for all ships, including those under slot charter arrangements. However, the High Court and the Supreme Court found that this requirement does not apply to slot charters. Section 115VG(4) and Rule 11Q provide that deemed tonnage includes slot charters, and the computation formula for deemed tonnage does not necessitate a valid certificate for each ship.

5. Interpretation of Relevant Statutory Provisions and Rules Regarding Deemed Tonnage:
The Supreme Court endorsed the High Court's interpretation that the legal fiction created by Section 115VG(4) and Rule 11Q must be given effect. The statutory provisions differentiate between actual tonnage, which requires a valid certificate, and deemed tonnage, which does not. The Court noted that the legislative intent was to provide a simplified and competitive tax regime for the shipping industry, recognizing the practical difficulties in obtaining certificates for slot charters.

Conclusion:
The Supreme Court upheld the High Court's decision, affirming that income from slot charter arrangements should be included in the computation of tonnage income under the TTS, without the need for a valid certificate for each ship involved in such arrangements. This interpretation aligns with the legislative intent to support the competitiveness of the Indian shipping industry through a simplified tax regime. The appeals by the Revenue were dismissed, and the High Court's judgment was affirmed.

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