Supreme Court of India (Full Bench (FB)- Three Judge)

Appeal (Civil), 5869 of 2016, Judgment Date: Jul 05, 2016

                                                                  REPORTABLE

                        IN THE SUPREME COURT OF INDIA

                        CIVIL APPELLATE JURISDICTION

                        CIVIL APPEAL NO. 5869 OF 2016
                 (ARISING OUT OF SLP (CIVIL) NO. 25251/2015)


COMMISSIONER OF INCOME TAX, KOCHI                      .....APPELLANT(S) 
      
                                   VERSUS   
                                                               
TRANS ASIAN SHIPPING SERVICES (P) LTD.                .....RESPONDENT(S)      

                                   W I T H

                        CIVIL APPEAL NO. 5870 OF 2016
                 (ARISING OUT OF SLP (CIVIL) NO. 25252/2015)

                               J U D G M E N T

A.K. SIKRI, J.

Leave granted.  Matter finally  heard  as  the  case  was  fixed  for  final
hearing.

Chapter XIIG of the Income Tax Act, 1961 (hereinafter  referred  to  as  the
'Act') contains special provisions for assessments  relating  to  income  of
shipping companies.  Under this Chapter,  shipping  companies  are  given  a
choice  to  either  get  income  from  the  shipping  business  computed  in
accordance with the provisions contained in the Act  meant  for  computation
of income in respect of business or profession or  opt  for  methodology  of
computing income as per the special formula provided in that  Chapter  which
accords a different treatment and different manner of computation of  income
for the shipping business.

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 under:

“115VA. Computation of profits and gains  from  the  business  of  operating
qualifying ships. - Notwithstanding anything to the  contrary  contained  in
sections 28 to 43C, in the case of a company, the income from  the  business
of  operating  qualifying  ships,  may,  at  its  option,  be  computed   in
accordance with the provisions of this Chapter  and  such  income  shall  be
deemed to be the profits and gains of such business chargeable to tax  under
the head "Profits and gains of business or profession".

As is clear from the bare reading of this Section, option is  given  to  the
shipping company, which is operating “qualifying ships”, to get  its  income
computed in accordance with the provisions of Chapter XIIG, irrespective  of
those  stipulations  otherwise  contained  in  Sections  28   to   43C   for
computation of business income.   Once  such  an  option  is  exercised  and
income is computed in accordance with the provisions of the said Chapter,  a
fiction is created by deeming the said income to be the  profits  and  gains
of such business chargeable to tax under the  head  'Profits  and  Gains  of
Business or Profession'.  To put it otherwise, though  the  income  of  such
shipping company would be computed in  the  manner  provided  under  Chapter
XIIG, the same would be treated as income from business which is  chargeable
to tax as provided  under  the  head  'Profits  and  Gains  of  Business  or
Profession' and would be treated as chargeable to tax under that head.

For a shipping company to be eligible to exercise such an option, there  are
certain conditions to be fulfilled, which are as under:
(i)   In the first place, the assessee has to  be  a  'company'.   The  word
'company' is defined in Section 2(17) of the Act.  Such a company  may  have
various businesses and one such business may be the  business  of  operating
qualifying ships.  However, it is only that income which is  generated  from
'The Business of Operating Qualifying Ships' that will be  computed  as  per
the special provisions in Chapter XIIG.  Income from other  businesses  will
be computed in the same manner as provided in Sections 28 to  43C.  In  case
the business of the company is to operate qualifying ships  only,  then  the
income from that sole business will be under this Chapter.
      (ii)  Income from the business of operating qualifying ships shall  be
computed  under  Chapter  XIIG  only  if  such  an  option  is  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 under the Merchant Shipping  Act,  1958  (44  of
1958), or a ship registered outside India in respect of which a licence  has
been issued by  the  Director-General  of  Shipping  under  section  406  or
section 407 of the Merchant Shipping Act, 1958 (44 of 1958); and

(c) a valid certificate in respect of such ship indicating its  net  tonnage
is in force,
but does not include—
(i) a sea going ship or vessel if the main purpose for which it is  used  is
the provision of goods or services of a kind normally provided on land;
(ii) fishing vessels;
(iii) factory ships;
(iv) pleasure crafts;
(v) harbour and river ferries;
(vi) offshore installations;
(vii) (Clause (vii) omitted by the Finance Act, 2005 (18 of 2005),  sec.  36
(w.e.f. 1-4-2006).  Clause (vii), before omission, stood  as  under:  “(vii)
dredgers”.
a qualifying ship which is used as a fishing vessel for  a  period  of  more
than thirty days during a previous year.”

      Which ship should be treated as 'operating ship', is to be  understood
from the prescription thereof as mentioned in Section 115VB which  reads  as
under:

“115VB. Operating ships.- For the purposes of this Chapter, a company  shall
be regarded as operating a ship if it operates any  ship  whether  owned  or
chartered by it and includes a case where even a part of the ship  has  been
chartered in by it in an arrangement such as slot charter, space charter  or
joint charter :

            Provided that a company shall not be regarded  as  the  operator
of a ship which has been chartered out by it on bareboat  charter-cum-demise
terms or on bareboat charter terms for a period exceeding three years.”

            As per this, a ship would be treated as 'operating  ship'  if  a
company:
      (a)   operates any ship, whether owned or chartered by it;
      (b)   where even a part  of  the  ship  has  been  chartered  by  that
company in an arrangement such as  slot  charter,  space  charter  or  joint
charter.  The only exception is that if a ship has  been  chartered  out  by
the company on bareboat charter-cum-demise  terms  or  on  bareboat  charter
terms for a period exceeding three years, then that  company  shall  not  be
regarded as the operator of that particular ship.
(iv)  The company operating such ships has to be a “qualifying  company”  as
defined in clause (g) of Section 115V  of  the  Act  which  says  qualifying
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  company  with
effective management of the company in  India  and  main  objective  of  the
company is to carry on business of operating ships,  the  other  significant
condition is that the company itself should own  'at  least  one  qualifying
ship'.  The description of qualifying ship is contained  in  Section  115VD,
as already noted above, and  owning at least one qualifying ship is  one  of
the eligibility conditions for  getting  the  income  computed  under  these
special provisions.

Once aforesaid conditions are fulfilled, the income  from  the  business  of
operating qualifying ships is  to  be  computed  under  Chapter  XIIG.   The
manner of computation of such income, as provided under this Act,  is  under
'TTS'.  Clause (m) of Section 115V defines TTS as under:

“(m) "tonnage tax scheme" means a scheme  for  computation  of  profits  and
gains of business of operating qualifying  ships  under  the  provisions  of
this Chapter.”

The provisions for TTS are contained  in  Section  115VE  onwards.  For  our
purposes, it is not necessary to take stock of all these provisions.  As  we
are primarily concerned with Section 115VE and Section 115VG of the Act,  we
shall discuss the schemes with  reference  to  these  provisions.   The  TTS
talks of 'Tonnage Income' which is to be computed under Section 115VG  of  a
Tonnage Tax Company.  This Tonnage Income, as per Section 115VG of the  Act,
is the income of each qualifying ship.   The  formula  of  calculating  this
Tonnage Income of each qualifying ship is  stipulated  in  sub-sections  (2)
and  (3)  of  Section  115VG.  Sub-section  (4)  of  Section  115VG  defines
'Tonnage' to mean tonnage of a ship indicated in  the  certificate  referred
to in Section 115VX  and  'includes  the  deemed  tonnage  computed  in  the
prescribed  manner'.   Explanation  to  sub-section  (4)  of  Section  115VG
clarifies that deemed  tonnage  shall  be  the  tonnage  in  respect  of  an
arrangement of purchase  of  slots,  slot  charter  and  an  arrangement  of
sharing of break-bulk vessel.

Section 115VE deals with the manner of computation of income under TTS.   In
nutshell, such company which has exercised  option  under  this  Chapter  is
known as a 'Tonnage Tax  Company'  and  its  income  from  the  business  of
operating qualifying ships  shall  be  considered  as  a  separate  business
distinct from all other  activities  of  the  business  carried  on  by  the
company.  The income from this particular 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).


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.

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
shall be the amount specified in the corresponding entry in  column  (2)  of
the Table:

|Table                                      |
|Qualifying ship      |Amount of daily       |
|having net tonnage   |tonnage income        |
|(1)                  |(2)                   |
|up to 1,000          |Rs. 70 for each 100   |
|                     |tons                  |
|exceeding 1,000 but  |Rs 700 plus Rs. 53 for|
|not more than 10,000 |each 100 tons         |
|                     |exceeding 1,000 tons  |
|exceeding 10,000 but |Rs. 5,470 plus Rs. 42 |
|not more than 25,000 |for each 100 tons     |
|                     |exceeding 10,000 tons |
|exceeding 25,000     |Rs. 11,770 plus Rs. 29|
|                     |for each 100 tons     |
|                     |exceeding 25,000      |
|                     |tons.]                |

(4) For the purposes of this Chapter, the tonnage shall mean the tonnage  of
a ship indicated in  the  certificate  referred  to  in  section  115VX  and
includes the deemed tonnage computed in the prescribed manner.
Explanation.—For the purposes of this sub-section,  "deemed  tonnage"  shall
be the tonnage in respect of an  arrangement  of  purchase  of  slots,  slot
charter and an arrangement of sharing of break-bulk vessel.

The tonnage shall be rounded off to the nearest  multiple  of  hundred  tons
and for this purpose any tonnage consisting of kilograms  shall  be  ignored
and thereafter if such tonnage is not a multiple of hundred,  then,  if  the
last figure in that amount is fifty tons  or  more,  the  tonnage  shall  be
increased to the next higher tonnage which is a multiple of hundred  and  if
the last figure is less than fifty tons, the tonnage  shall  be  reduced  to
the next lower tonnage which is a multiple of hundred; and  the  tonnage  so
rounded off shall be the tonnage of  the  ship  for  the  purposes  of  this
section.

(6) Notwithstanding anything contained in any other provision of  this  Act,
no deduction or set off shall be allowed in  computing  the  tonnage  income
under this Chapter.”

We would also like to point out at this  stage  that  Section  115V-I  deals
with 'relevant shipping income' and as  per  Section  115VF,  such  relevant
shipping income shall not be chargeable to tax.

After narrating the scheme of Chapter  XIIG  containing  special  provisions
for computation  of  profits  and  gains  from  the  business  of  operating
qualifying ships by a company, we advert to the precise  nature  of  dispute
that has arisen in the instant appeal.   As  mentioned  above,  it  is  only
income from the business  of  operating  qualifying  ship  that  has  to  be
computed in accordance with the provisions of Chapter XIIG.  As per  Section
115VB of the Act, 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?

As a matter of fact, 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, i.e., it is neither from the ship owned by  the  assessee
nor from the entire ship chartered by the assessee.  He took the  view  that
in order to avail the benefit of Chapter XIIG, the assessee was supposed  to
show that the ship operated by it was qualifying ship and for  this  purpose
it  was  incumbent  upon  the  assessee  to  produce  a  'valid  certificate
indicating its net tonnage' as provided in Section 115VX(1)(b) of  the  Act.
However, the assessee had submitted such valid certificate only  in  respect
of its own ship and did not submit the same in respect of ship chartered  by
the assessee under the slot charter  arrangement.   The  contention  of  the
assessee was that the requirement of producing 'valid certificate' is to  be
insisted only for assessee's own ships and for the ships hired fully.   This
contention was not accepted by the  Assessing  Officer.   The  assessee  had
also argued that as per the method of  computation  provided  under  Section
115VG of the Act read with Rule 11Q of the Rules income for full ship is  to
be computed on the basis of 'net tonnage' shown in  the  valid  certificate,
whereas income of part of the ship is computed as  'deemed  tonnage'.   This
argument was also rejected by the  Assessing  Officer  on  the  ground  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.

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 was not appropriate.  In other words, the  High  Court  has  held
that the assessee is eligible for tonnage on  slot  charter  related  income
also.  This view taken by  the  High  Court  is  under  examination  in  the
present proceedings.

Mr. Rohatgi, learned Attorney  General  who  appeared  for  the  Income  Tax
Department/Revenue, at the  outset  referred  to  the  reasoning  which  was
adopted by the ITAT and submitted that the ITAT had rightly interpreted  the
provisions even in respect  to  deemed  tonnage  and  came  to  the  correct
conclusion that even slot charter arrangement has to  be  in  respect  of  a
qualifying ship.  He read  out  the  relevant  portions  of  the  discussion
contained in the order of ITAT in this behalf and submitted  that  in  order
to get a particular income covered under these special  provisions,  it  was
necessary to fulfill all the conditions  which  are  stipulated  in  various
provisions of this Chapter.  His argument was that it is only  the  business
of  operation  of  qualifying  ships  that  was  covered  by  the   Chapter.
Therefore, even the slot  charter  arrangement  had  to  necessarily  be  in
respect of 'qualifying ship'.  It was submitted that unless  this  threshold
is crossed and the test of eligibility  as  per  the  conditions  stipulated
under Section 115VA to Section 115VE of the Act are fulfilled, the  question
of crossing over to the second stage of computation of  income  as  per  the
method of determination of tonnage would  not  arise.   On  that  basis,  he
argued that the entire approach of the High Court  by  solely  relying  upon
explanation to sub-section (4) of Section 115VG was erroneous.

Per contra, Shri Porus Kaka, senior advocate  appearing  for  the  assessee,
made an endeavour to justify the view taken by the High  Court  by  adopting
the reasons which are given in the impugned judgment.  In the  process,  the
learned  senior  counsel  went  into  the  background  as  to  how  TTS  was
introduced in the scheme on the basis of the  recommendations  contained  in
the Report given in January, 2002 by the Rakesh Mohan Committee,  which  was
appointed by the  Government.   He  emphasised  that  the  main  purpose  of
introducing TTS was to ameliorate  the  hardships  suffered  by  the  Indian
shipping companies vis-a-vis foreign shipping lines  because  of  the  stiff
competition faced by the Indian companies  and  also  to  ensure  an  easily
acceptable  fixed  rate  low  tax  regime  for  shipping   companies.    His
submission  was  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.

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 of slot charter even  on  non-qualifying  ship  are
statutorily included within the ambit of the term 'income from the  business
of operating qualifying ship'.

We have given our earnest consideration to the respective submissions.

To recapitulate briefly, the assessee is a company as defined under  Section
2(17) of the Act and  is  also  in  the  business  of  operating  qualifying
ship(s).  It is also not in dispute that  it  owns  a  qualifying  ship  and
fulfillment of this condition permits the assessee to  exercise  its  option
for computation of income from the business of  operating  qualifying  ships
under Chapter XIIG of the Act.  The assessee exercised the  option  in  this
behalf, as per Section 115VP of the Act in respect of  Assessment  Years  in
question.  Therefore, the assessee is a 'qualifying company'  under  Section
115VC of  the  Act.   In  fact,  the  income  that  is  generated  from  the
qualifying ship owned by the assessee is also  assessed  under  the  special
provisions contained in Chapter XIIG of  the  Act.   The  dispute,  however,
pertains to  the  income  from  the  slot  charter  arrangements  which  the
assessee has made in other ships  during  the  concerned  Assessment  Years.
The ships where slot charter are arranged are obviously  not  owned  by  the
assessee. Further, as only some slots are  chartered,  full  ships  are  not
chartered.
      In this context, the first question would be  as  to  whether  such  a
slot charter can be treated as  'operating  ships'  within  the  meaning  of
Section 115VB of the Act?  This provision  specifically  provides  that  for
the purpose of Chapter XIIG, a company would  be  regarded  as  operating  a
ship 'if it operates any ship whether owned or chartered by it and  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'.   It  is
clear from the above that  slot  charter  is  specifically  included  as  an
instance of a ship chartered by the company.

Next comes the issue as to whether it would  be  treated  as  a  'qualifying
ship' as defined  under  Section  115VD  of  the  Act.   A  perusal  of  the
provisions of  Section  115VD  of  the  Act  would  indicate  that  all  the
conditions laid down therein are  fulfilled  by  the  assessee,  except  the
conditions stipulated in clause  (c)  which  impose  an  obligation  on  the
assessee to produce a valid certificate in respect  of  such  a  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,—

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 international  tonnage
certificate issued  under  the  provisions  of  the  Convention  on  Tonnage
Measurement of Ships, 1969, as specified in the Merchant  Shipping  (Tonnage
Measurement of Ship) Rules, 1987 made under the Merchant Shipping Act,  1958
(44 of 1958);

(ii) in case of ships registered outside India,  a  licence  issued  by  the
Director-General of Shipping  under  section  406  or  section  407  of  the
Merchant Shipping Act, 1958 (44 of 1958) specifying the net tonnage  on  the
basis of Tonnage Certificate issued by the Flag State  Administration  where
the ship is registered or any other evidence  acceptable  to  the  Director-
General of Shipping produced by the ship owner while seeking permission  for
chartering in the ship.”

This argument seems to be convincing in the first blush  as  requirement  of
producing a valid certificate is specified in Section 115VD as  well  as  in
sub-section (4) of Section 115VG.  However, a little closer scrutiny of  the
aforesaid provisions would take  away  the  sheen  of  this  submission  and
negate the contention of the Revenue, thereby persuading us  to  accept  the
reasoning given by the High Court as well as the manner in  which  aforesaid
statutory provisions are interpreted by it. In  this  behalf,  we  reproduce
sub-section (4) of Section 115VG of the Act which is a  provision  regarding
computation of tonnage income:

(4) For the purposes of this Chapter, the tonnage shall mean the tonnage  of
a ship indicated in  the  certificate  referred  to  in  section  115VX  and
includes the deemed tonnage computed in the prescribed manner.
Explanation.—For the purposes of this sub-section,  "deemed  tonnage"  shall
be the tonnage in respect of an  arrangement  of  purchase  of  slots,  slot
charter and an arrangement of sharing of break-bulk vessel.

Aforesaid provision is in two parts insofar as  computation  of  tonnage  is
concerned.  When it comes to tonnage of a ship, a certificate  as  mentioned
in Section 115VX is to be produced. Second  part  of  this  provision  talks
about  'deemed  tonnage'  in  contradistinction  to  the  'actual   tonnage'
mentioned in the certificate.  Thus, it is not only the actual tonnage  that
is mentioned in the certificate referred to in  Section  115VX  of  the  Act
which this provision deals with.  In addition, deemed tonnage is also to  be
included if there is such a deemed tonnage, and that deemed  tonnage  is  to
be added 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  an
arrangement of sharing of break-bulk vessel.  The contention of  the  senior
counsel for the assessee is right that the legal  fiction  created  by  sub-
section (4) of Section  115VG  is  to  be  given  its  proper  and  sensible
meaning.  This position becomes abundantly clear by reading Rule 11Q of  the
Rules which specifies the  basis/formula  of  computing  deemed  tonnage  in
respect of arrangement of slot charter and reads as under:

“11Q. (1) For the purpose of the Explanation to sub-section (4)  of  section
115VG, deemed tonnage in respect of an arrangement of purchase of slots  and
slot charter shall  be  computed  (illustrative  formula  given  in  Note  3
appearing after the corresponding Form No. 66) on the following basis :

TEU = 1 Net Tonnage (1 NT)

where TEU is Twenty foot Equivalent Unit (Container of this size)

Computation  of  deemed  tonnage  (illustrative  formula  given  in  Note  4
appearing after the corresponding Form No. 66) in respect of an  arrangement
of sharing of break-bulk vessel shall be made on the following basis :


(i)  in case where cargo is restricted by volume:

19 cubic meter (cbm) = 1 net tonnage (1 NT); and

(ii)  in case where cargo is restricted by weight
14 metric tons = 1 net tonnage (1 NT)”

In Karimtharuvi  Tea  Estates  Ltd.  v.  State  of  Kerala  and  Ors.[1],  a
Constitution  Bench  of  this  Court,  while  interpreting  conflicting  tax
provisions held that the Rules made under the  Act,  must  be  taken  to  be
prescribed by the Act and the definitions contained therein  must  apply  to
other provisions.  In the same judgment, it was held that if two  provisions
are in conflict, they must be  interpreted  in  a  harmonious  manner.   The
calculation of income arising from carriage of goods on slot basis  has,  in
the wisdom of the Legislature, been disconnected  from  the  capacity  of  a
ship, on account of impossibility of getting such  information  in  relation
to ships  on  which  slot  charter  is  undertaken.   This  aspect  has  due
recognition in Note 3 of the said Form 66.  Thus, the Act and the Rules  for
computation on tonnage tax specifically and categorically differentiate  the
requirement of the Certificate with regards to owned ship and slot  charter.
 In law, the said Rule also recognizes that  identification  of  the  vessel
for slot charter cannot be done.

It would also be pertinent to mention that Note 3  below  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.”

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.”

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
include its activities  from  operating  qualifying  ships  and  other  ship
related activities including slot charter.

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 precise purpose 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  on  owned
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.   This  peculiarity  has  been  duly
recognized at Note 3 of Form 66 and reproduced as under:

“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”.

      Similarly, for space charter  also,  this  business  aspect  has  been
recognized at Note 4(b) to Form 66 as under:

“Since the entire vessel is not chartered and only a small space  is  booked
in the vessel, conversion  of  chartered  space  into  net  tonnage  is  not
available.  Hence, a conversion formula of cargo carried on a  ship  to  its
net tonnage has been worked out”.

      Accordingly, there is no requirement  of  the  certificate  under  the
Scheme in relation to the  vessel  on  which  slot  charter  operations  are
carried out.

We would also like  to  refer  to  Circular  No.  05/2005  dated  15.07.2005
explaining the need and essence of  the  introduction  of  these  provisions
which was issued contemporaneously by the  Central  Board  of  Direct  Taxes
(CBDT).  The Circular clarifies that the Scheme is  a  “preferential  regime
of taxation”.  It also clarifies that “charging provision is  under  Section
115VA read with  Section  115VF  and  Section  115VG.”   Circulars  of  CBDT
explaining the Scheme of the Act  have  been  held  to  be  binding  on  the
Department repeatedly by this Court  in  a  series  of  judgments  including
Azadi Bachao Andolan v. Union  of  India[2],  Navnit  Lal  Jhaveri  v.  K.K.
Sen[3], and UCO Bank v. CIT[4].

We, thus, agree with the decision of the High Court and  find  no  merit  in
the instant appeals.  The same are hereby dismissed. There  shall,  however,
be no order as to cost.

                               .......................................C.J.I.
                                                         (T.S. THAKUR)


                             .............................................J.
                                                          (A.K. SIKRI)


                             .............................................J.
                                                        (R. BANUMATHI)

NEW DELHI;
JULY 05, 2016

-----------------------
[1]   (1968) 48 ITR (SC) 28
[2]   263 ITR 706
[3]   IAC 56 ITR 198 SC
[4]   237 ITR 889 SC