2009 (10) TMI 649 - AT - Income Tax

Tribunal affirms drilling rig as 'qualifying ship' under tax scheme

Additional Commissioner of Income-tax, Range-4, New Delhi Versus Jagson International Ltd.

Additional Commissioner of Income-tax, Range-4, New Delhi Versus Jagson International Ltd. - [2010] 35 SOT 285 (DELHI) Issues Involved:1. Whether the drilling rig qualifies as a 'qualifying ship' under section 115VD of the Income-tax Act, 1961.2. The relevance of registration under the Merchant Shipping Act, 1958 for the drilling rig.3. The applicability of the Tonnage Tax Scheme under sections 115VP/115VR of the Income-tax Act, 1961.Detailed Analysis:Issue 1: Qualifying Ship under Section 115VDThe primary contention revolves around whether the drilling rig can be classified as a 'qualifying ship' under section 115VD of the Income-tax Act, 1961. The Assessing Officer (AO) initially rejected the assessee's application for the Tonnage Tax Scheme, arguing that the drilling rig did not meet the definition of a 'qualifying ship' and was instead an 'offshore installation,' which is explicitly excluded from the definition under section 115VD.The CIT(A) overturned the AO's decision, noting that the drilling rig had received a license under section 407 of the Merchant Shipping Act, 1958, and should be considered a 'qualifying ship.' The CIT(A) emphasized that the drilling rig is not an 'offshore installation' because it is built as an integrated unit and moves from one location to another without being dismantled, unlike offshore installations which are fixed and later dismantled.The Tribunal supported this view, citing the lack of a clear definition of 'offshore installation' in the Income-tax Act and relying on dictionary definitions. It concluded that the drilling rig, being a movable entity integrated with its equipment, qualifies as a ship and not an offshore installation.Issue 2: Relevance of Registration under Merchant Shipping ActThe AO argued that the drilling rig's registration under the Merchant Shipping Act was irrelevant to its classification under the Income-tax Act. However, the CIT(A) and the Tribunal found this registration significant. The drilling rig received a license under section 407 of the Merchant Shipping Act, which the CIT(A) and Tribunal deemed as recognition by a competent authority that the rig is a ship.The Tribunal further noted that the Merchant Shipping Act applies to sea-going ships with mechanical propulsion, which aligns with the characteristics of the drilling rig. Therefore, the registration under the Merchant Shipping Act supports the classification of the rig as a ship.Issue 3: Applicability of Tonnage Tax SchemeGiven the classification of the drilling rig as a 'qualifying ship,' the Tribunal upheld the CIT(A)'s direction to allow the assessee's application for the Tonnage Tax Scheme under sections 115VP/115VR. The Tribunal referenced previous judicial decisions, including a Delhi High Court ruling that classified the assessee's vessel as a ship for the purposes of section 33AC, reinforcing the view that the rig qualifies for the Tonnage Tax Scheme.The Tribunal dismissed the revenue's appeal, affirming that the drilling rig meets the criteria for a 'qualifying ship' and is eligible for the Tonnage Tax Scheme, given its registration and operational characteristics.Conclusion:The Tribunal upheld the CIT(A)'s decision, classifying the drilling rig as a 'qualifying ship' under section 115VD and allowing the assessee's application for the Tonnage Tax Scheme under sections 115VP/115VR. The registration under the Merchant Shipping Act was deemed relevant and supportive of this classification, and previous judicial rulings were considered to reinforce this position. The revenue's appeal was dismissed, affirming the eligibility of the drilling rig for the Tonnage Tax Scheme.