Tuesday, August 23, 2011

Whether, to avail benefit of tonnage tax, it is necessary for ship to unde

Whether, to avail benefit of tonnage tax, it is necessary for ship to undertake voyage between international ports - NO, transportation between two domestic ports is also entitled: ITAT Third Member

CHENNAI, JULY 29, 2011: THE issues before the Third Member were - Whether, for the purpose of claiming the benefit of tonnage tax scheme under Chapter XII-C of the Act, the ship should always do its voyage between international ports; Whether the ship operated by the assessee company cannot be termed as a qualifying ship u/s 115VD on the ground that the ship operated by the assessee is rendering the same services which could be provided on land also and whether the ship transporting thermal coal from one location to another within the country, is a qualifying ship u/s 115VD of the Act. And the verdict goes in favour of the assessee.

Facts of the case

The assessee company is engaged in the business of shipping/port services. The company filed its return of income for the AY 2006-07 on a tonnage income of Rs. 76,85,246/-. The assessee opted for tonnage tax scheme and worked out the shipping income on tonnage basis as provided in section 115VG. The assessee was a co-owner of the ship "M.V.Gem of Ennore", engaged on a long term charter for transporting thermal coal for Tamil Nadu Electricity Board. The coal was transported from Haldia, Paradip and Vizag ports to Ennore and Tuticorin ports in Tamil Nadu. The assessee exercised its option for tonnage tax scheme for the ship "M.V.Gem of Ennore".

The assessing authority denied the benefit of tonnage tax scheme to the assessee in respect of its operating ship "M.V.Gem of Ennore" by holding that the ship was not a qualifying ship u/s 115VD. The basis of such a finding was that the ship operated by the assessee was transporting thermal coal from Haldia, Paradip and Vizag ports to Ennore and Tuticorin ports in Tamil Nadu, where all the ports were located within the country and well connected by road and rail on land. Therefore, the Assessing Officer held that the transport of coal between these ports can be routed through land either by road or rail transport. As it was possible to transport the coal through land by road or rail transport, the Assessing Officer held that the operating vessel was used for the provision of goods or services normally provided on land. As the transportation of coal between the above ports was possible by land routes, the assessee cannot claim the benefit of tonnage tax scheme.

In its appeal before the CIT(A), the assessee relying on the opinion of one of the Members of the Core Committee, Mr D P Sengupta, who had drafted the Tonnage Tax Scheme, argued that the AO grossly erred in considering `M.V.Gem of Ennore' to be not a qualifying ship. According to the assessee, carrying of cargo from one Indian port to another would not disentitle the assessee from returning the income of a ship under the Tonnage Tax Scheme, especially since, there was no disabling provision in Chapter XIIG of the Act. The CIT(A) allowed the appeal of the assessee and held that the core shipping activity of carrying goods from port to port was carried on by the ship operated by the assessee and only for the reason that it was possible to transport the coal between the places by means of land routes, the assessee cannot be denied the benefit of tonnage tax scheme.

On appeal to the tribunal, there was a conflict of opinion between the members and hence the matter was referred to the Third Member. The AM upheld the order of the CIT (A) holding that the ship operated by the assessee company was a qualified ship and, therefore, the assessee was entitled for the benefit of tonnage tax scheme u/s 115VG of the Act. On the other hand, the JM held that the assessing Officer was justified in holding that the ship "M. V. Gem of Ennore" was not a qualified ship for the benefit of tonnage tax scheme as envisaged under the relevant provisions of law. He held that the United Kingdom law and the Indian law on the subject cannot be considered as analogous for the purpose of interpreting the statutory provisions involved in the present appeal. The JM agreed with the view of the AO that coal can be transported between the concerned ports by land routes and, therefore, what for the assessee's ship was used was for the provision of goods or services of a kind normally provided on land and therefore it was not qualified u/s 115VD of the Act in the light of sub-clause(i) of section 115VD. He opted to allow the appeal filed by the Revenue.

After hearing the parties, the Third Member held that,

++ shipping companies are given option to pay tax as per normal provisions of computation or on the basis of presumptive tax regime described as `Tonnage Tax Scheme'. The income arising from operation of qualifying ship is determined based on the tonnage tax scheme. Normally a shipping company is to be assessed at the normal corporate tax rate. If the assessee chooses for tonnage tax scheme, it pays tax at a prescribed rate with reference to the tonnage of the ship. The actual loss or profit of the shipping company is not taken into consideration. Irrespective of the other factors, income is always computed but at a tonnage rate, de facto much lower to normal corporate tax rate. The accounting or actual income is replaced by a notional income. The business of operating a qualifying ship is treated as a separate business and income is also computed on stand-alone basis;

++ the conditions are that it must be a sea going ship; it must have a net tonnage of 15 tons or more; it must be a ship registered under the Merchant Shipping Act and it must possess a valid certificate from the Director-General of Shipping. The assessee must be a company engaged in the business of operating qualifying ship and income from the business of operating of qualifying ship would be deemed to be chargeable to tax under the head profits and gains of business or profession. The assessee has complied with the above conditions;

++ the contention of the assessing authority that the ship was excluded from the ambit of tonnage tax scheme mainly for the reason that the ship is rendering services only between Indian ports, which would have also been rendered on land by road or rail, is too far-fetched. There is no such stipulation anywhere in law. The tonnage tax scheme does not distinguish ships operating in coastal waters ad ships operating in international waters. There is no bar on the coastal shipping for the tonnage tax scheme. If the contention of the assessing authority is accepted, the income from coastal shipping would be outside the purview of tonnage tax scheme;

++ the normal activities of operating a sea going ship is to carry passengers, carry cargo, to do towage, salvage or other marine assistance or transport in connection with other services of kind necessarily provided at sea. The restriction has to be looked into in the above background. The restriction is that the vessel is not a qualifying ship for the purpose of section 115VD if the main purpose for which it is used is the provision of goods or services of a kind normally provided on land. It is to be seen that no services can be rendered by ships on land. If that is the case wherever land routes are available one has to presume that an assessee cannot opt for sea routes and cannot claim the benefit of tonnage tax scheme. The law is not making any reference to any other alternative method available for transportation of goods and cargo from destination to destination. The law only says that an assessee company is entitled for opting for tonnage tax scheme if it is operating qualifying ship and satisfies other conditions provided therein. The law does not say that the ship should always do its voyage between international ports. The law does not say anything about the distance to be covered by ship in a single voyage. The law presumes that the benefit of tonnage tax scheme is available to all sea going ships satisfying the condition where it is operated between Indian ports or between Indian ports and foreign ports. The operation of a sea going ship does not assume any different character only for the reason that the ship is operating between two Indian ports. The character of operating a ship does not assume any other dimension only for the reason that the ship is operated between one Indian port and another foreign port. These are all matters never construed in the scheme of the Act providing the benefit of tonnage tax scheme to the assessees who are in the shipping industry and operating qualifying ships;

++ this is not an issue particular to India. World over countries are providing such incentives to shipping industry for their own economic advantage. The policy of giving such incentives to shipping industry is a matter of larger policies relating to economic priorities. If the intent of the law is interpreted in such a manner to arrive at an erratic conclusion, that interpretation must always be avoided;

++ the only provocation for the Assessing Officer to hold that the ship operated by the assessee company is not a qualifying ship is that the ship operated by the assessee is doing the same services that could be provided on land also. It is in that context that the CIT(A) has made a reference to the English law on the subject. The United Kingdom law while using the same phraseology in drafting the law in the matter of tonnage tax scheme has provided certain examples. It says what could be those items coming under the provisions provided to restrict the abuse of the tax incentive. The examples given in the English law states the examples such as business that could be provided on land or retailers, restaurants, hotels, radio stations, casinos, etc. Only for the reason that examples have been taken from English law it does not mean that it is not relevant to Indian law. The normal interpretation of the provision makes it clear that the restriction provided in sub section (i) applies only to those provisions of goods or services unrelated to the core activities of operating ship. Even though the ship operated by the assessee is transporting thermal coal from Indian ports to Indian ports, the ship is performing exactly the core function of a ship of carrying bulk cargo from port to port. There may be alternative means available for transportation of thermal coal on land route by truck or train. Theoretically speaking, even transport planes can carry coal from one destination to another destination. These kinds of extreme views are not at all called for in interpreting a beneficial provision couched in simple language. The assessing Officer is trying to bring in additional conditions which have never been contemplated in drafting the law;

++ on the facts and circumstances of the case, the TM agreed with the view of the AM to hold that the ship operated by the assessee "M.V.Gem of Ennore" transporting thermal coal from one location to another location within the country, is a qualifying ship u/s 115VD of the Act and the assessee is entitled for the benefit of tonnage tax scheme provided under Chapter XII-C of the Act


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