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,—
(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 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 1 15VX 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 11 5VX 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 11 5VD 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 :
2.5 TEU = 1 Net Tonnage (1 NT)
where TEU is Twenty foot Equivalent Unit (Container of this size)
(2) 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. (1968) 48 ITR (SC) 28, 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 263 ITR 706 , Navnit Lal Jhaveri v. K.K. Sen IAC 56 ITR 198 SC
, and UCO Bank v. CIT 237 ITR 889 SC.