TaxTMI 
TaxTMI 
2016 (7) TMI 341
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....ss. 3. 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 unde....
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....s 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 u....
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....fying 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 com....
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....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). (2) 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. (3) 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....
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....t, 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? 11. As a matter of fact, the respondent-assessee owns a qualifying ship and fulfills all other conditions as well to make it a qualifyi....
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....d 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. 13. 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....
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....s 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. 16. 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....
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....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,- (i) 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....
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....ded 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 a....
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....ow 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." 24. 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." 25. 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 in....