The tonnage tax scheme was introduced in 2004 through chapter XII-G of the Income Tax Act, 1961, to provide incentives for the shipping industry. The scheme allows Indian shipping companies to compute corporate income tax on a notional income, as a factor of the net tonnage of a ship. Under the scheme, a “qualifying company” is eligible for the preferential tax system if it owns at least one “qualifying ship”. A qualifying ship is one having a “valid certificate”, i.e. a licence or certificate issued under the Merchant Shipping Act, 1958 (MSA).
In the chapter, by specific inclusion, the operation of slots (spaces for containers on a ship) which are chartered in is covered within the scheme, and slot charters are not required to be operated on qualifying ships. Yet, the Cochin bench of the Income Tax Appellate Tribunal (ITAT) in July held that slot charters are required to be operated on qualifying ships having valid certificates to be eligible under the scheme.
The ITAT reasoned that: chapter XII-G is applicable only to the “income from the business of operating qualifying ships” – a term used in section 115VA, which sets out the coverage of the scheme; the benefit of the scheme is available only to qualifying ships (having a valid certificate), and this applies to ships on which slots are chartered; section 115VI(6) provides that the income attributable to operating a non-qualifying ship must be computed in accordance with other provisions of the act, i.e. those not in chapter XII-G.
Issues to consider
In rendering this decision, the ITAT appears not to have dealt with the following issues:
(1) The scheme, being a beneficial one, ought to be given a purposive interpretation to give effect to the specific inclusion of slot charter in the scheme.
(2) The term “business”, in “business from operating qualifying ships” under section 115VA, is susceptible to a wider interpretation and therefore the scheme should cover business income from slot charter operation even on non-qualifying ships.
(3) There is no explicit requirement that slot charters be operated on qualifying ships, and it is impermissible to read in such a condition, which the legislature has deliberately not incorporated.
(4) The use of the word “includes” in the computation provision (section 115VG(4)) indicates that tonnage under the chapter means tonnage as indicated in the valid certificate (contained in the descriptive part of the provision), as well as “deemed tonnage” (contained in the inclusive part).
(5) Under section 115VI, “activities from operating qualifying ships” are understood separately from “slot charters”, which indicates that the lawmakers understood slot charter differently from operation of qualifying ships.
(6) Procedurally, there is no requirement to produce valid certificates for slot charter operations. The prescribed audit report form does not require disclosure of even the name of the ship in slot charter operations.
(7) The computation of income from the operation of owned or chartered ships is based on the net tonnage in the valid certificate. Income from slot charter operations is unconnected with a valid certificate, and is based on “deemed tonnage”, computed by converting container size into net tonnage.
(8) The benefit of the scheme is extended to fully operated foreign ships, which are required to obtain a valid certificate under the MSA to operate in India. It is incongruous to deny the benefit to partly operated foreign ships that generate and receive revenue from slot charter.
(9) The MSA and other regulations applicable to the shipping industry do not require any licence or certificate for operating slot charter, so no such requirement can be read into the Income Tax Act.
It appears that the ITAT was not sensitized to the fact that a formula was prescribed to convert slots hired into net tonnage because it is impractical to identify the particular vessel on which a slot is operated and in many cases a slot is operated on more than one vessel. Under the terms of the trade, goods may be transferred from one vessel to another without prior notice, and the shipping company does not have any control over which vessel is used for carriage of the goods. Further, owing to logistic exigencies, foreign ships (which are not required under law to obtain licences or certificates) are often engaged to complete the voyage between foreign terminals.
Had the ITAT been fully presented with and considered the above indications of the legislative intent to grant the benefit of the scheme to slot charters operated on non-qualifying ships, and commercial realities, a balanced and practical view could have been formulated, not requiring the assessee to undertake the impossible.
Economic Laws Practice is a full-service law ﬁrm with headquarters in Mumbai and ofﬁces in New Delhi, Pune and Ahmedabad. Ranjeet Mahtani is a senior associate at the firm and Stella Joseph is an associate.
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