Purchase of ‘Slot Charter’ must be treated as Deemed Tonnage even in the absence of a “Valid Certificate”: SC

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In a recent ruling, the division bench of Supreme Court has ruled that, Purchase of ‘Slot Charter’ must be treated as Deemed Tonnage even in the absence of a “Valid Certificate” in case of a Shipping Company qualified under Chapter XIIG.

The facts of the case are the following. The respondent-assessee owns a qualifying ship and fulfills all other conditions as well to make it a qualifying company under Section 115VC. The income that is generated from the said qualifying ship is exigible to tax as per the special provisions contained in Chapter XIIG, as assessee has exercised the requisite option in this behalf. However, in addition to operating its qualifying ship, in the relevant Assessment Years i.e. 2005 2006 and 2008-2009 it had also ‘slot charter’ arrangements in other ships.In the relevant income tax returns 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 XIIG. It is in this context the question has 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 XIIG as this income was not generated by the assessee from its own ship. On appeal, both the CIT(A) and the Tribunal upheld the view of the Assessing Officer. Therefore, the appellant has approached the High Court seeking relief and theCourt decided in favor of the assesse.

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?

The Supreme Court while upholding the Order of the High Court held that the assessee falls within the ambit of Chapter XIIG. The Court observed that “when the scheme of the aforesaid special provision for computation of income under TTS is exempted, we find the balance tilted in favour of the assessee as that was the precisepurpose in introducing TTS in India. It may be stated in brief that in view of the stiff competition faced by the Indian shipping companies vis-a-vis foreign shipping lines, and in order to ensure an easily accessible, fixed rate, low tax regime for shipping companies, the Rakesh Mohan Committee in its report (of January, 2002) recommended the introduction of the TTS in India, which was similar to, and adopted some of the best global practices prevalent. The whole purpose of introduction of the Scheme was to make the Indian shipping industry more competitive in the global space by rationalising its tax cost. For the reason that it is impossible to cater to all shipping routes onowned ships, it is an accepted and widely prevalent practice globally and in India that shipping companies engage in slot charter operations. If such slot charter arrangements are not entered into, then Indian shipping companies will not be able to take up contract of affreightments and these contracts would have fallen to only foreign shipping lines thereby making Indian shipping industry uncompetitive. Such slot charter arrangements being with a shipping company but not in relation to or for a particular ship, it is impossible for the Indian shipping company to identify the cargo ship, which carried the goods”. Hence, the matter was decided in favor of the assesse.

Read the full text of the Judgment below.