By TIOL News Service

NEW DELHI, JULY 05, 2016: THE issue is - Whether, for a shipping company qualifying under Sec 115VD, the purchase of slot charter is to be construed as deemed tonnage which does not require furnishing of a 'valid certificate' as per Sec 115VX. YES is the verdict of the Apex Court Larger bench.

Facts of the case   

The assessee is a shipping company that owns a 'qualifying ship' and fulfills all other conditions to be 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 had exercised the requisite option in this behalf. However, in addition to operating its qualifying ship, in the relevant Assessment Years it had also 'slot charter' arrangements in other ships. In the relevant income tax returns, the assessee also included the income earned from such slot charter arrangements for the purpose of computation thereof under Chapter XIIG.

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 the assessee. The CIT(A) upheld the order of the AO. Even the Tribunal accepted the view of the AO. But the assessee got relief before the High Court.

On appeal, the Apex Court held that,

++ this argument of the Revenue seems to be convincing in the first blush as requirement of producing a valid certificate is specified in Section 115VD as well as in sub-section (4) of Section 115VG. However, a little closer scrutiny of the provisions would take away the sheen of this submission 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;

++ the provision of Sec 115VG(4) 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, contemplates the situation in which entire ship is either owned 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 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;

++ we may also point out that in terms of Section 115VI(2), relevant shipping income of a Tonnage Tax Company means its profits from core activities and its profits from incidental activities. Core activities of a Tonnage 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;

++ 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;

++ 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 "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.

(See 2016-TIOL-97-SC-IT-LB)