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TMI Blog2016 (7) TMI 341X X X X Extracts X X X X X X X X Extracts X X X X ..... ically 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting to income of shipping companies. Under this Chapter, shipping companies are given a choice to either get income from the shipping business computed in accordance with the provisions contained in the Act meant for computation of income in respect of business or profession or opt for methodology of computing income as per the special formula provided in that Chapter which accords a different treatment and different manner of computation of income for 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 sections falling under Chapter IV. As far as Income from Profits and Gains of Business or Profession is concerned, Sections 28 to 44DB of the Act contain the procedure for computation of income under this head. Therefore, any person, natura ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness 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 the business of operating qualifying ships shall be computed under Chapter XIIG only if such an option is specifically exercised by the assessee company. This requirement is particularly mentioned in Section 115VP of the Act. Such an option, when given, is to remain in force for a period of ten years from the date on which the said option is exercised, and this period is prescribed in Section 115VQ of the Act. However, it can be renewed within one year from the end of the previous year in which 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-secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce charter or joint charter. The only exception is that if a ship has been chartered out by the company on bareboat charter-cum-demise terms or on bareboat charter terms for a period exceeding three years, then that company shall not be regarded as the operator of that particular ship. (iv) The company operating such ships has to be a qualifying company as defined in clause (g) of 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 company is to carry on the business of operating ships. Explanation.-For the purposes of this section, place of effective management of the company means- (A) the place where the board of directors of the company or its executive directors, as the case may be, make thei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 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 business carried on by the company. The income from this particular business only is to be computed separately from the profits and gains from any other business. The income for this activity under TTS is known as 'tonnage income' (Section 115VF). The computation of tonnage income is to be done in the manner prescribed in Section 115VG. As this is an important provision for the purposes of deciding the instant appeal, same is reproduced below: 115VG. Computation of tonnage income.- (1) The tonnage 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- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er. 9. We would also like to point out at this stage that Section 115V-I deals with 'relevant shipping income' and as per Section 115VF, such relevant shipping income shall not be chargeable to tax. 10. After narrating the scheme of Chapter XIIG containing special provisions for computation of profits and gains from the business of operating qualifying ships by a company, we advert to the precise nature of dispute that has arisen in the instant appeal. As mentioned above, it is only income from the business of operating qualifying ship that has to be computed in accordance 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 'Tonnage Tax Company' be carried on only in 'qualifying ships' to include the income from such oper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 the valid certificate, whereas income of part of the ship is computed as 'deemed tonnage'. This argument was also rejected by the Assessing Officer on the ground 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 TTS. 13. The order of the Assessing Officer was upheld by the Commissioner of Income Tax (Appeals) resulting 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t by adopting the reasons which are given in the impugned judgment. In the process, the learned senior counsel went into the background as to how TTS was introduced in the scheme on the basis of the recommendations contained in the Report given in January, 2002 by the Rakesh Mohan Committee, which was appointed by the Government. He emphasised that the main purpose of introducing TTS was to ameliorate the 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 with Rule 11Q of the Rules had to be given its proper and sensible meaning and read in this manner and the insistence of the Income Tax Authorities requiring production of valid certificates even in respect of slot charter was a totally inappropriate demand and that would render redundant and o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 'qualifying ship' as defined under Section 115VD of the Act. A perusal of the provisions of Section 115VD of the Act would indicate that all the conditions laid down therein are fulfilled by the assessee, except the conditions stipulated in clause (c) which impose an obligation on the assessee to produce a valid certificate in respect of such a ship where slot is chartered, indicating its net tonnage in force. The entire controversy revolves around the production of this certificate. As per the Revenue, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of break-bulk vessel. 21. Aforesaid provision is in two parts insofar as computation of tonnage is concerned. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 23. It would also be pertinent to mention that Note 3 below Form No. 66, in terms of Rule 11D, recognizes the reason for prescribing a separate formula 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ire 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. Thus, a formula has been worked out to convert the slots hired into net tonnage . Similarly, for space charter also, this business aspect has been recognized at Note 4(b) to Form 66 as under: Since the entire vessel is not chartered and only a small space is booked in the vessel, conversion of chartered space into net tonnage is not available. Hence, a conversion formula of cargo carried on a ship to its net tonnage has been worked out . Accordingly, there is no requirement of the certificate under the Scheme in relation to the vessel on which slot charter operations are carried out. 27. We would also like to refer to Circular No. 05/2005 dated 15.07.2005 explaining the need and essence of the introduction of these provisions which was issued contemporaneously by the Central Board of Direct Taxes (CBDT). The Circular clarifies that the Scheme is a preferen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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