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CIT vs. Trans Asian Shipping Services (P) Ltd. (2016) 385
ITR 637 (SC)
The question that arose before the Supreme Court
for consideration pertained to “slot charter”, i.e. should the “slot charter”
operations of “tonnage tax company” be carried on only in “qualifying ships” to
include the income from such operations to determine the “tonnage income” under
“tonnage tax scheme” in terms of the provisions of Chapter XII-G 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 “tonnage
tax scheme” 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?
The
Supreme Court noted the tonnage tax Scheme, namely, Chapter XII-G of the
income-tax act, 1961 (the “act”) which 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.
U/s.115VA
option is given to the shipping
company, which is operating “qualifying ships”, as defined in certain
115 VD, to get its income computed in
accordance with the provisions of Chapter XII-G, 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”.
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 business 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 XII-G. Income from other
business 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 XII-G only if such an option is specifically
exercised by the assessee-company. This requirements 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 clause (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.
The
Supreme Court observed that it is only income from the business of operating
qualifying ship that has to be computed in accordance with the provisions of
Chapter XII-G. 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 joint charter, etc.
The
Supreme Court further noted that the respondent assessee owned a qualifying
ship and fulfilled all other conditions as well as to make it a qualifying
company u/s. 115VC. The income that was
generated from the said qualifying ship was exigible to tax as per the special
provisions contained in Chapter XII-G, as the assessee had exercised the
requisite option in this behalf. However, in addition to operating its
qualifying ship, in the relevant assessment years, i.e., 2005-06 and 2008-09 it
had also “slot charter” arrangements in other ships. In the relevant income-tax
return 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 XII-G. it was in this context the question had 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 XII-G 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
of the benefit of Chapter XII-G, 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 u/s. 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 tonnage tax scheme.
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
income-tax appellate tribunal 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 u/s. 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 had
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 115VG of the
act, and, therefore, exclusion of this
while assessing the same under the said special provisions was not appropriate.
in other words, the high Court held that the assessee was eligible for tonnage
on slot charter related income also.
On
appeal by the revenue, the Supreme Court noted that the assessee was a company
as defined u/s. 2(17) of the act and was also in the business of operating
qualifying ship(s). it was also not in dispute that it owned a qualifying ship
and fulfillment of this condition permitted the assessee to exercise its option
for computation of income from the business of operating qualifying ships under
Chapter XII-G 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 was a qualifying
company u/s. 115VC of the act. In fact, the income that was generated from the
qualifying ship owned by the assessee was also assessed under the special
provisions contained in Chapter XII-G of the act. The dispute, however,
pertained to the income from the slot charter arrangements which the assessee
had made in other ships during the concerned assessment years. The ships where
slot charter were arranged were obviously not owned by the assessee.
Further, as only some slots were
chartered, full ships were not chartered.
According
to the
Supreme Court, in
this context, the first question
would be as to whether such a slot charter could be treated as “operating
ships” within the meaning of section 115VB of the Act? This provision
specifically provides that for the purpose of Charter XII-G, 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”. The Supreme Court held that it was clear from the above that slot
charter was specifically included as an instance of a ship chartered by the
company.
Further, the Supreme Court observed that
section 115VG(4) was in two parts
in so far as computation of tonnage was concerned. When it came to tonnage of a
ship, a certificate as mentioned in 115VX was to be produced. The second part
of this provision talks about “deemed tonnage” in contradistinction to the
“actual tonnage” mentioned in the
certificate. The Supreme Court
held that thus, it was not only the actual tonnage that was mentioned in the
certificate referred to in 115VX of the act which this provision dealt with. In
addition, deemed tonnage was also to be included if there was such a deemed
tonnage, and that deemed tonnage was to be added to the actual tonnage which is
indicated in the certificate. Explanation to s/s. (4), inter alia, mentions
that in so far as slot charter arrangements are concerned, purchase of such
slot charter should be treated as deemed tonnage. according to the Supreme
Court the legislature had, thus, clearly
visualied that in so far as deemed tonnage was concerned, there would not be
any possibility of producing a certificate referred to in section 115VX of the
act. When the provision is read in this manner, it becomes amply clear that section
115Vd of the act which talks of a qualifying ship, contemplates the situation
in which the 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
Supreme Court further held that 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 form 66. Thus, the act and the
rules for computation on tonnage tax specifically and categorically
differentiate the requirement of the certificate with regard to owned ship and
slot charter. In law, the said rule also recognises that identification of the
vessel for slot charter cannot be done. Also, note 3 below form no.66, in terms
of rule 11T, recognises the reason for prescribing a separate formula for slot
charter.
The
Supreme Court agreed with the decision of the high Court and dismissed the
appeal of the revenue.
