5106/1992. - Income Tax - 5106/1992

INSTRUCTION NO. 5106/1992 Dated: November 17, 1992 Section(s) Referred: 172 Statute: Income - Tax Act, 1961 Please refer to the petition cited above, addressed to the Board. 2. A copy of report C. No. 302/T.II-I/92-93 dated 17-11-92 of the CIT, TN-I, Madras along with a copy of the report dated 16-11-92 of the Income-tax Officer, having jurisdiction over non-resident Shipping Companies, is enclosed. 3. The short question which has been dealt with by the CIT and the AC is whether the charges said by the non-resident owners of the mother ships, carrying goods from intermediate ports to destination ports, to the owners of Feeder ships for carrying goods from Indian ports to the intermediate ports can be allowed as a "deduction" in computing the income of the mother ships u/s. 172(2) of the Act. 4. There appears to have been a change in the pattern of shipping goods from and to Indian ports in the last few years when large bulk carriers are being employed by the International Shipping Companies who find it uneconomical to move the entire large ship to an Indian port to deliver or to take in a considerably small quantity of cargo. These large ships call on either at Singapore or at Colombo and smaller feeder ships operating between Singapore/Colombo and the Indian ports like Madras, carry the goods from such large ships to India or from India to such large ships calling at Singapore or Colombo. The agent of the large mother ship contacts for the transhipment between Madras and Singapore/Colombo. The agent of the mother ship pays the charges to the agent of the feeder ship. A Bill of Lading is prepared by the feeder vessel between Madras and Singapore/Colombo and showing the freight earned. Tax is paid by the feeder vessel on this freight charges. The agent of the mother ship also prepares a separate combined Bill of Lading showing the names of both the ships and showing Madras and the ultimate destination, say Tokyo and the freight charges for the entire transhipment from Madras to Tokyo which is the sum of the charged for Madras to Singapore and for Singapore to Tokyo. This Bill of Lading, it is believed, is designed by the master of the mother ship and used for discounting etc. Since the feeder ship pays the tax on the shipping charges received by it for transporting from Madras to Singapore/Colombo, the agent of mother ship was originally declaring the shipping charges between Singapore/Colombo and the ultimate destination as receipts liable to Indian tax at 7 1/2%. The local Assessing Officers insisted that they should declare the entire shipping charges shown in the combined Bill of Lading and pay tax thereon irrespective of whether tax has already been paid on a part of the freight charges shown in the service Bill of Lading relating to the feeder ship. There can be no doubt that there is double taxation on the freight charges paid for the transhipment between Madras and Singapore/Colombo. 5. If the freight paid to the feeder ship is seen as a payment made or expenditure incurred by the mother ship, then as has been rightly pointed out in the assessment order in the case of M/s. Evergreen Marine Corporation enclosed to the petition, the income charged to tax u/s.172(2) of the Act is a deemed income, estimated at 7.5% of the freight charges received or receivable in India by the Non-resident ship owner. As the section stands today, there is no scope for allowing any deductions for any expenditure or outgoing from such an estimated income. Unless the Act is suitably amended, no such deduction can be made, since it has to be presumed that while prescribing the rate at 7.5%, the Government had taken into account all probable expenses and outgoings that would be reasonably incurred by the non-resident Shipping Companies for the purpose of earning the income including such "pre-shipping" expenses. In the circumstances the petitioner's request for a separate deduction of the freight charges paid by the non-resident ship owners to similar owners of feeder ships cannot appear to be a permissible claim for deduction. However if the entire issue is considered not as one relating to allowing certain deductions from the freight charges earned by the mother ship, then the nature of the issue changes considerably. The basic principle underlying section 172 is to tax the freight charges earned from transporting goods between say from Madras to the destination, say Tokyo, by one or more ships. If one ship transports from Singapore to Tokyo the total freight charges paid on the transported goods remain the entity but gets apportioned for the two segments of shipping. If tax is collected on the first segment of shipping from one ship, then the tax leviable on the second segment of shipping should be only on that part of the freight charges apportioned and paid to that ship. The second ship cannot be said to have earned any freight charges than the one that is apportioned for the shipping between Singapore and Tokyo. If the matter is viewed as one of apportionment in which the feeder ship received certain freight charges and the mother ship receives certain other freight charges, the total of which is shown in the combined Bill of Lading, then the tax liability u/s.172, can be cast only on the apportioned amounts. For transporting say 1000 tons of iron ore from Madras to Tokyo, involving total freight charges of say Rs. 100 lakhs, the tax leviable in India cannot be Rs. 7.5 lakhs if one ship carries all through from Madras to Tokyo and about Rs. 10 lakhs, if two ships carry, one upto Singapore earning 1/3 and another from Singapore to Tokyo earning 2/3 of the total freight charges of Rs. 100 lakhs. If the issue is viewed as only one of apportionment of single freight charges and not as deduction, then the Board can issue a classificatory circular that taxes be levied u/s.172(2) only on the actual freight charges earned by each ship. [CC-Id's, Madras Lr.No. CC-II/C(34)/92-93