COMMISSIONER OF INCOME TAX, KOCHI Vs. TRANS ASIAN SHIPPING SERVICES (P) LTD.
Supreme Court of India (Full Bench (FB)- Three Judge)
Appeal (Civil), 5869 of 2016, Judgment Date: Jul 05, 2016
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 5869 OF 2016
(ARISING OUT OF SLP (CIVIL) NO. 25251/2015)
COMMISSIONER OF INCOME TAX, KOCHI .....APPELLANT(S)
VERSUS
TRANS ASIAN SHIPPING SERVICES (P) LTD. .....RESPONDENT(S)
W I T H
CIVIL APPEAL NO. 5870 OF 2016
(ARISING OUT OF SLP (CIVIL) NO. 25252/2015)
J U D G M E N T
A.K. SIKRI, J.
Leave granted. Matter finally heard as the case was fixed for final
hearing.
Chapter XIIG of the Income Tax Act, 1961 (hereinafter referred to as the
'Act') contains special provisions for assessments relating 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.
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, natural or
juristic, who earns income from business in India is supposed to get the
income from the said business computed in the manner provided in those
sections. However, Chapter XIIG makes an exception thereto by carving out
special provisions relating to income 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 computed in
accordance with the provisions of this Chapter and such income shall be
deemed to be the profits and gains of such business chargeable to tax under
the head "Profits and gains of business or profession".
As is clear from the bare reading of this Section, option is given to the
shipping company, which is operating “qualifying ships”, to get its income
computed in accordance with the provisions of Chapter XIIG, irrespective of
those stipulations otherwise contained in Sections 28 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 from business which is chargeable
to tax as provided under the head 'Profits and Gains of Business or
Profession' and would be treated as chargeable to tax under that head.
For a shipping company to be eligible to exercise such an option, there are
certain conditions to be fulfilled, which are as under:
(i) In the first place, the assessee has to be a 'company'. The word
'company' is defined in Section 2(17) of the Act. Such a company may have
various businesses and one 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 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-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
“operating qualifying ships” that is eligible for computation under this
Chapter.
“115VD. Qualifying ship.- For the purposes of this Chapter, a ship is a
qualifying ship if—
(a) it is a sea going ship or vessel of fifteen net tonnage or more;
(b) it is a ship registered under the Merchant Shipping Act, 1958 (44 of
1958), or a ship registered outside India in respect of which a licence has
been issued by the Director-General of Shipping under section 406 or
section 407 of the Merchant Shipping Act, 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). Clause (vii), before omission, stood as under: “(vii)
dredgers”.
a qualifying ship which is used as a fishing vessel for a period of more
than thirty days during a previous year.”
Which ship should be treated as 'operating ship', is to be understood
from the prescription thereof as mentioned in Section 115VB which reads as
under:
“115VB. Operating ships.- For the purposes of this Chapter, a company shall
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 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 it;
(b) where even a part of the ship has been chartered by that
company in an arrangement such as slot charter, space 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 their decisions; or
(B) in a case where the board of directors routinely approve the commercial
and strategic decisions made by the executive directors or officers of the
company, the place where such executive directors or 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 above, and owning at least one qualifying ship is one of
the eligibility conditions for getting the income computed under these
special provisions.
Once aforesaid conditions are fulfilled, the income from the business of
operating qualifying ships is to be computed under Chapter XIIG. The
manner of computation of such income, as provided under this Act, is under
'TTS'. Clause (m) of Section 115V defines TTS as under:
“(m) "tonnage tax scheme" means a scheme for computation of profits and
gains of business of operating qualifying ships under the provisions of
this Chapter.”
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. This Tonnage Income, as per Section 115VG of the Act,
is the income of each qualifying ship. The formula of calculating this
Tonnage Income of each qualifying ship is stipulated in sub-sections (2)
and (3) of Section 115VG. Sub-section (4) of Section 115VG defines
'Tonnage' to mean tonnage of a ship indicated in the certificate referred
to in Section 115VX and 'includes the deemed tonnage computed in the
prescribed manner'. Explanation to sub-section (4) of Section 115VG
clarifies that 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.
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 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).
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 qualifying ship for only part of the previous
year, as the case may be.
For the purposes of sub-section (2), the daily tonnage income of a
qualifying ship having tonnage referred to in column (1) of the Table below
shall be the amount specified in the corresponding entry in column (2) of
the Table:
|Table |
|Qualifying ship |Amount of daily |
|having net tonnage |tonnage income |
|(1) |(2) |
|up to 1,000 |Rs. 70 for each 100 |
| |tons |
|exceeding 1,000 but |Rs 700 plus Rs. 53 for|
|not more than 10,000 |each 100 tons |
| |exceeding 1,000 tons |
|exceeding 10,000 but |Rs. 5,470 plus Rs. 42 |
|not more than 25,000 |for each 100 tons |
| |exceeding 10,000 tons |
|exceeding 25,000 |Rs. 11,770 plus Rs. 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, "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.
The tonnage shall be rounded off to the nearest multiple of hundred tons
and for this purpose any tonnage consisting of kilograms shall be ignored
and thereafter if such tonnage is not a multiple of hundred, then, if the
last figure in that amount is fifty tons or more, the tonnage shall be
increased to the next higher tonnage which is a 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.”
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.
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
operations to determine the 'tonnage income' under 'TTS' in terms of the
provisions of Chapter XIIG of the Act? In other words, is the income
derived from 'slot charter' operations of a 'Tonnage Tax Company' liable to
be excluded while determining the 'Tonnage Income' under the 'TTS' if such
operations are carried on in ships which are not 'qualifying ships' in
terms of the provisions of that Chapter of the Act and the relevant
provisions of the Income Tax Rules, 1962?
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. However, in
addition to operating its qualifying ship, in the relevant Assessment Years
i.e. 2005-2006 and 2008-2009 it had also 'slot charter' arrangements in
other ships. In the relevant income tax returns filed by the assessee, the
assessee had also included the income earned from such slot charter
arrangements for the purpose of computation thereof under Chapter XIIG. It
is in this context the question has arisen as to whether the assessee was
eligible to include the income derived from activities through 'slot
charter' arrangements as relevant shipping income to determine the deemed
tonnage in terms of Rule 11Q of the Income Tax Rules.
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. He took the view that
in order to avail the benefit of Chapter XIIG, the assessee was supposed to
show that the ship operated by it was qualifying ship and for this purpose
it was incumbent upon the assessee to produce a 'valid certificate
indicating its net tonnage' as provided in Section 115VX(1)(b) of the Act.
However, the assessee had submitted such valid certificate only in respect
of its own ship and did not submit the same in respect of ship chartered by
the assessee under 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.
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
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 order dated 23.01.2015, has allowed the appeal of the assessee
holding that the income earned by the assessee under slot charter
arrangement comes under the definition of 'deemed tonnage tax' as per
explanation to sub-section (4) of Section 115 VG of the Act and, therefore,
exclusion of this income while assessing the same under the said special
provisions was not appropriate. In other words, the High Court has held
that the assessee is eligible for tonnage on slot charter related income
also. This view taken by the High Court is under examination in the
present proceedings.
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 of the discussion
contained in the order of ITAT in this behalf and submitted that in order
to get a particular income covered under these special provisions, it was
necessary to fulfill all the conditions which are stipulated in various
provisions of this Chapter. His argument was that it is only the business
of operation of qualifying ships that was covered by the Chapter.
Therefore, even the slot charter arrangement had to necessarily be in
respect of 'qualifying ship'. It was submitted 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.
Per contra, Shri Porus Kaka, senior advocate appearing for the assessee,
made an endeavour to justify the view taken by the High Court 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 otiose many provisions of this
Chapter.
Dilating the aforesaid submissions, he argued that explanation to Section
115VG(4) which clarifies 'deemed tonnage' to include slot charter had to be
read 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 are
statutorily included within the ambit of the term 'income from the business
of operating qualifying ship'.
We have given our earnest consideration to the respective submissions.
To recapitulate briefly, the assessee is a company as defined under Section
2(17) of the Act and is also in the business of operating qualifying
ship(s). It is also not in dispute that it owns a qualifying ship and
fulfillment of this condition permits the assessee to exercise its option
for computation 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,
pertains to the income from the slot charter arrangements which the
assessee has made in other ships during the concerned Assessment Years.
The ships where slot charter are arranged are obviously not owned by the
assessee. Further, as only some slots are chartered, full ships are not
chartered.
In this context, the first question would be as to whether such a
slot charter can be treated as 'operating ships' within the meaning of
Section 115VB of the Act? 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.
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 mean tonnage of a ship indicated in the certificate referred to in
Section 115VX. This Section makes the following reading:
“115VX. (1) For the purposes of this Chapter,—
(a) the tonnage of a ship shall be determined in accordance with the valid
certificate indicating its tonnage;
(b) "valid certificate" means,—
in case of ships registered in India—
(a) having a length of less than twenty-four metres, a certificate issued
under the Merchant Shipping (Tonnage Measurement of Ship) Rules, 1987 made
under the Merchant Shipping Act, 1958 (44 of 1958);
(b) having a length of twenty-four metres or more, an international 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 issued by the Flag State Administration where
the ship is registered or any other evidence acceptable to the Director-
General of Shipping produced by the ship owner while seeking permission for
chartering in the ship.”
This argument 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
aforesaid 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. 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 deemed tonnage computed in the prescribed manner.
Explanation.—For the purposes of this sub-section, "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.
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,
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 and reads as under:
“11Q. (1) 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 :
TEU = 1 Net Tonnage (1 NT)
where TEU is Twenty foot Equivalent Unit (Container of this size)
Computation of deemed tonnage (illustrative formula given in Note 4
appearing after the corresponding Form No. 66) in respect of an arrangement
of sharing of break-bulk vessel shall be made on the following basis :
(i) in case where cargo is restricted by volume:
19 cubic meter (cbm) = 1 net tonnage (1 NT); and
(ii) in case where cargo is restricted by weight
14 metric tons = 1 net tonnage (1 NT)”
In Karimtharuvi Tea Estates Ltd. v. State of Kerala and Ors.[1], a
Constitution Bench of this Court, while interpreting conflicting tax
provisions held that the Rules made under the Act, must 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. 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.
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 slot is hired. Thus, a formula has been
worked out to convert the slots hired into net tonnage.”
The position is taken beyond any pale of doubt with the following Note in
Form No. 66:
“There is no need to mention the name of the ship, income from which is
computed on deemed tonnage basis.”
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. 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. This peculiarity has been duly
recognized at Note 3 of Form 66 and reproduced as under:
“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. 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.
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 repeatedly by this Court in a series of judgments including
Azadi Bachao Andolan v. Union of India[2], Navnit Lal Jhaveri v. K.K.
Sen[3], and UCO Bank v. CIT[4].
We, thus, agree with the decision of the High Court and find no merit in
the instant appeals. The same are hereby dismissed. There shall, however,
be no order as to cost.
.......................................C.J.I.
(T.S. THAKUR)
.............................................J.
(A.K. SIKRI)
.............................................J.
(R. BANUMATHI)
NEW DELHI;
JULY 05, 2016
-----------------------
[1] (1968) 48 ITR (SC) 28
[2] 263 ITR 706
[3] IAC 56 ITR 198 SC
[4] 237 ITR 889 SC
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