Trans Asian Shipping Services Pvt. Ltd. vs. Commissioner of Income Tax1– Kerala High Court
In the Income Tax Appeals filed by Trans Asian Shipping Services Private Limited (“TASS”), the Hon’ble Kerala High Court has held that slot charter operations would not be denied the benefit of the Tonnage Tax Scheme under Chapter XII-G of the Income-tax Act, 1961 (“the Act”), on the ground that these operations are carried out on non-“Qualifying Ships”. Consequently, assesses are not required to submit “Valid Certificates” for their slot charter operations.
- The appellant, a “Qualifying Company”2, had opted into the Tonnage Tax Scheme from Assessment Year (“AY”) 2005-06 onwards. Benefit of this Scheme was claimed for the income derived from the operations of “Qualifying Ship”3as well as the income derived from slot charter operations on non-“Qualifying Ships”.
- The Tonnage Tax Scheme as contained under Chapter XII-G (Sections 115V to 115VZC) of the Act is a beneficial presumptive tax regime extended to the shipping industry. The benefit of the Tonnage Tax Scheme is extended to a “Qualifying Company”, which is defined to mean an Indian Company which owns at least one “Qualifying Ship”. The term “Qualifying Ship” is defined to include a vessel, for which a “Valid Certificate” is issued. “Valid Certificate” is a defined4 to include license/certification under the prescribed legislations (including those made under the Merchant Shipping Act, 1956). Besides tonnage on the Qualifying Ship, by way of deeming fiction, the benefit of the Tonnage Tax Scheme has been extended to “deemed tonnage”, which includes slot charter operations.
- Shipping companies in commercial activities hire slots (space) on ships not owned by them, which ply on various routes (on which routes, their owned ships do not ply). In cases of slot charter operations, it is practically difficult to identify the ships on which slots are hired.
- The Tax Department had denied the benefit of the Scheme to the extent of the appellant’s income from slot charter operations, on the premise that in order to avail the benefit of the provisions of Chapter XII-G in relation to slot charter arrangements, it is necessary to show that the ships in which the appellant has operations under slot charter arrangements, are also ‘Qualifying Ships’ and that such operations have to be evidenced by producing a ‘Valid Certificate’.
The Hon’ble Court while allowing the appeals (for the two AYs), set aside the decisions of the lower authorities (Income Tax Appellate Tribunal and the Commissioner of Income Tax (Appeals)) in the matter and directed the assessing officers to modify the assessment orders on the basis of the law as stated above. The Hon’ble Court inter-alia held that:
- Sections 115VB, 115VC and 115VD clearly show that income derived from slot charter operations is to be included to determine the tonnage even if such operations are carried on in ships which are not “Qualifying Ships” in terms the provisions of Chapter XII G of the Act.
- The provision in Section 115VG(4) explicitly demonstrates that what is included as deemed tonnage computed in the manner prescribed under Rule 11Q of the Income-tax Rules, 19625 is not necessarily referable to the tonnage of a ship.
- There is nothing in the Act or rules which even faintly indicate that the arrangements which fall within the basket of the provision ‘deemed tonnage’ would be operative only if such arrangements are carried out through Qualifying Ships. In this context, the High Court reiterated the settled position in law that when the Legislature has deemed a particular situation and has created a deeming provision, the said deeming provision should be permitted to permeate to the extent within which the deeming provision stands.
- Due importance is to be accorded to the Explanatory Note 3 of Form 66, which is the prescribed audit form which is required to be filed yearly by assessees availing the benefit of the Scheme. The Note recognizes that 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. And it is for this reason that a formula has been worked out (as provided under Rule 11Q of the Income-tax Rules, 1962) to convert the slots hired into net tonnage. This clinchingly concludes the issue in favour of the appellant, even going by the Rules and Forms.
This elegant judgement is the first on the specific issue of eligibility of slot charter operations on non-Qualifying Ships under the Scheme and is landmark given the approach to facilitate the intention of the beneficiation of the Scheme. The decision will provide relief to players in the shipping industry who ply their vessels in international waters and derive majority of their income from slot charter operations on ships which are not Qualifying Ships and where it is not practicable for the assessee to indentify such ships and procure Valid Certificates for the same.
ELP has advised and represented the appellant before the Hon’ble Kerala High Court, and in connected matters, before the Income Tax Appellate Tribunal and lower Income-tax authorities.