Tonnage tax scheme in respect of a qualifying ship cannot be denied merely because it is used for transportation of cargo between Indian ports which are connected by rail / road

ACIT Vs M/s West Asia Maritime Ltd

Decided by – ITAT Chennai (Third Member )

I.T.A. No. 1195(Mds)/2010

Assessment Year: 2006- 07

O R D E R

PER Dr. O.K. NARAYANAN, VICE-PRESIDENT:

This appeal is filed by the Revenue. The relevant assessment year is 2006-07. The appeal is directed against the order passed by the Commissioner of Income-tax(Appeals)-III, at Chennai, dated 21-4-2010. The appeal arises out of the assessment completed under section 143(3) of the Income-tax Act, 1961.

2. The assessee company is engaged in the business of shipping/port services. The company filed its return of income for the assessment year 2006-07 on a tonnage income of Rs. 76,85,246/-.

3. Chapter XII-G of the Income-tax Act, 1961 provides for special provisions relating to income of shipping companies. This chapter comprises of sections 11 5V to 11 5VZC. Section 11 5VA provides an option to an assessee carrying on the business of operating qualifying ships to compute its shipping income on a tonnage basis, instead of computing the income under the conventional method provided in sections 28 to 43C. Tax is levied under the tonnage scheme on the basis of the net tonnage of every qualifying ship. In the case of a qualifying ship having net tonnage up to 1,000, the daily income presumed is Rs. 46/- for each 100 tons. In the case of a qualifying ship having net tonnage in excess of 1000 tons but less than 10,000, the daily income will be Rs. 460/- plus Rs. 35/- for each 100 tons exceeding 1,000 tons. In the case of a qualifying ship having net tonnage exceeding 10,000 but not more than 25,000, the rate of income is Rs. 3,610/- plus Rs. 28/- for each 100 tons exceeding 10,000 tons. In the case of qualifying ships having net tonnage exceeding 25,000 tons, the daily rate of income is Rs. 7,810/- plus Rs.  19/- for each 100 tons exceeding 25,000 tons.

4. As already stated, an assessee engaged in the business of operating qualifying ships has to opt for payment of taxes under the tonnage tax scheme as provided under section 115VP. In the present case the assessee has opted for tonnage tax scheme and has worked out the shipping income on tonnage basis as provided in section 115VG. The tonnage income for a previous year shall be the aggregate of the tonnage income of each qualifying ship. It is on the basis of the above provisions of law that the assessee has returned a tonnage income of Rs. 76,85,246/-.

5. The return was initially processed under section 143(1). Later on the case was selected for scrutiny and the assessment was completed under section 143(3) through the order dated 31 -12-2008.

6. The assessee is 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 is transported from Haldia, Paradip and Vizag ports to Ennore and Tuticorin ports in Tamil Nadu. The assessee has exercised its option for tonnage tax scheme for the above ship “M.V.Gem of Ennore”.

7. In order to claim the benefit of tonnage tax scheme, it is necessary that the operating ship of an assessee must be qualified under section 11 5VD. The conditions stated therein are that the ship is a sea going ship or vessel of fifteen net tonnage or more; that the ship is registered under the Merchant Shipping Act, 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; holding a valid certificate in respect of such ship indicating its net tonnage . The law has also provided certain exclusions under the same section 11 5VD. Accordingly a ship cannot be treated as a qualifying ship if the main purpose for which it is used is the provision of goods or services of a kind normally provided on land; as fishing vessels; factory ships; pleasure crafts; harbour and river ferries; offshore installations and a qualifying ship which is used as a fishing vessel for a period of more than thirty days during a previous year.

8. In the course of the assessment proceedings, the Assessing Officer held that the assessee’s ship cannot be treated as a qualifying ship for the reason that the case of the assessee is hit by clause(i) of section 115VD. The said sub clause describes the first item of disqualification, which has already been mentioned. The statutory expression is reproduced below:-

“115VD. For the purpose of this Chapter, a ship is a qualifying ship if—

(a) ….

(b) ……

(c) ……..

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.”

9. 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 is not a qualifying ship under section 115VD. The basis of such a finding is the observation of the assessing authority that the ship operated by the assessee is transporting thermal coal from Haldia, Paradip and Vizag ports to Ennore and Tuticorin ports in Tamil Nadu, where all the ports are 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 is possible to transport the coal through land by road or rail transport, the Assessing Officer held that the operating vessel of the assessee company is used for the provision of goods or services normally provided on land. As the transportation of coal between the above ports is possible by land routes, the assessee cannot claim the benefit of tonnage tax scheme.

10. In first appeal the Commissioner of Income Tax (Appeals) considered the matter in detail. The Commissioner of Income Tax (Appeals) after considering the facts of the case and submissions placed before him, held that the core shipping activity of carrying goods from port to port is carried on by the ship operated by the assessee and only for the reason that it is possible to transport the coal between the places by means of land routes, the assessee cannot be denied the benefit of tonnage tax scheme. The Commissioner of Income Tax (Appeals) examined the restriction given in the statute under clause(i) of section 11 5VD, i.e. provision of goods or services of a kind normally provided on land.  On the basis of the details and explanations and opinion placed before him, the Commissioner of Income Tax (Appeals) found that the tonnage tax legislation in India is based on the British model, which itself is based on the tonnage tax regime in Netherlands. He further observed that the language used in the Indian legislation for the restrictive provision provided in clause(i) of section 11 5VD is exactly the same as provided in the United Kingdom legislation. In the United Kingdom legislation also a vessel is not a qualifying ship for the purposes of the scheme if the main purpose for which it is used is the provision of goods or services of a kind normally provided on land. The United Kingdom law has provided examples of such provision of goods or services normally provided on land. Those examples are as follows:-

• Retailers(including shops and supermarkets)
• Restaurants
• Hotels
• Prisons
• Radio Stations
• Casinos
• Financial service providers
• Offices.

It is also stated that the list is not exhaustive.

11. The Commissioner of Income Tax (Appeals) found that the purpose of the legislation being the same and the language employed also the same, those items in the nature of the examples provided under the United Kingdom law alone could be construed as provision of goods or services of a kind normally provided on land. He held that those examples equally apply to Indian context as well. He held that there is nothing in the enabling provision of law to state that a ship operating in coastal waters of India cannot opt for the benefit of tonnage tax scheme. Finally he held that the ship operated by the assessee as “M.V.Gem of Ennore” is a qualifying ship under section 11 5VD and the assessee is entitled for the benefit of tonnage tax claimed under section 11 5VG of the Income-tax Act, 1961. The Commissioner of Income-tax(Appeals) accepted the contention of the assessee on this point.

12. Aggrieved by the above decision of the Commissioner of Income Tax (Appeals) the Revenue has come in appeal before the Tribunal, as already stated in ITA No.11 95(Mds)/201 0. When the matter was heard by the B-Bench of this Tribunal, there arose a difference of opinion between the two Members constituting the Bench. The learned Accountant Member, who authored the order for the Bench, upheld the order of the Commissioner(Appeals) holding that the ship operated by the assessee company is a qualified ship and, therefore, the assessee is entitled for the benefit of tonnage tax scheme under section 11 5VG of the Income-tax Act, 1961.

13. On the other hand, the learned Judicial Member held that the assessing Officer is justified in holding that the ship “M.V.Gem of Ennore” is 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 learned Judicial Member agreed with the view of the assessing Officer that coal can be transported between the concerned ports by land routes and, therefore, what for the assessee’s ship is used is for the provision of goods or services of a kind normally provided on land and therefore it is not qualified under section 115VD of the Act in the light of sub‑clause(i) of section 11 5VD. He opted to allow the appeal filed by the Revenue.

14. As there was difference of opinion, the Honourable Members formulated and referred the question in respect of the said difference of opinion to the Honourable President of the Tribunal as provided under section 255(4) of the Act. The following is the question referred by the Honourable Members:- “Whether, in view of facts and circumstances of the case, ship named ‘M.V.Gem of Ennore’ transporting thermal coal from one location to another location within the country, when such ports are connected by rail/road, can be excluded as ‘qualifying ship’ in terms of the exclusion clause(i) of section 1 15VD for the benefit of Tonnage Tax Scheme OR it can be treated as ‘qualifying ship’”?

15. The Honourable President nominated me as the Third Member and it is how the issue has been placed before me.

16. I heard Shri P.B.Sekaran, the learned Commissioner of Income-tax, appearing for the Revenue and Shri Arvind Sonde, the  learned counsel along with Shri Niraj Sheth, appearing for the respondent-assessee.

17. The learned commissioner of Income-tax contended that the benefit of tonnage tax scheme is available only to the qualifying ships as provided in section 11 5VD and the conditions to be satisfied to become a qualifying ship have to be construed strictly and there is no room to enlarge the scope of the provisions contained therein. He stated that the exclusion clause(i) of section 11 5VD specifically provides that a sea going ship or vessel cannot be treated as a qualifying ship if the main purpose for which it is used is providing of goods or services of a kind normally provided on land. He explained that in the present case thermal coal is transported for Tamil Nadu Electricity Board from ports like Haldia, Paradip and Vizag so as to unload it at Ennore or Tuticorin ports in Tamil Nadu. All these ports are dotted in the coromandel line of India and well connected by roads and rail. Transportation of thermal coal from the loading ports is very much possible either by means of road transport or rail transport to reach at the destination ports and the sea route is only an alternate route. He argued that the option given to the assessee is only to choose the method of computing the income, either the normal method or the tonnage tax scheme and there is no option to choose the alternatives available for operating the ships. If land routes are available, the assessee cannot claim the benefit of tonnage scheme. The ship is voyaging through Indian coastal waters. The service rendered by operating the ship could equally be provided on land and therefore the restrictive clause(i) provided in section 11 5VD makes out a clear case that the assessee is not entitled for the benefit of tonnage tax scheme.

18. The learned commissioner of Income-tax further argued that the Commissioner of Income Tax (Appeals) has heavily relied on similar legislation in Netherlands and United Kingdom. He explained that such comparative study is appreciated in academics, but as far as interpretation of law is concerned, the law must be interpreted strictly according to the statutory expression provided therein and cannot draw analogies from legislations of other countries. He further argued that in English law examples have been provided to highlight the real intent of the restriction relating to goods or services that could be provided on land such as retailers, restaurants, hotels, etc. But in clause(i) of section 11 5VD the Indian law has not provided any such examples. It clearly shows that the Indian law was not exactly following the English law on the subject.

19. The learned counsel appearing for the assessee company, on the other hand, argued that there is nothing in the law to presume that a ship operating in the coastal waters of India is not entitled for the benefit of tonnage tax scheme. A ship can be operated both in coastal waters and in international waters. The core activity of a ship is to carry passengers and goods from destination to destination. As far as a ship is concerned, it is immaterial whether it is operating between two domestic ports or between two international ports. The crucial aspect to be looked into is whether the ship is being operated to carry on the cardinal function inferred from the operation of a ship voyaging through sea waters. The learned counsel explained that it is for the assessee to decide which mode of transportation should be selected for carrying on its business. The assessee is engaged in the contract of transporting thermal coal from North-Eastern ports to South-eastern ports. It is possible to transport the thermal coal by land routes using road and rail carriages and also by sea routes using ships. The assessee got the contract of transportation because the assessee is owning ship and is in a position to transport thermal coal by sea route, probably at a better economy of cost. The operating character of the ship is not at all changed only for the reason that the ship is navigating only through Indian coastal waters.

20. The learned counsel for the assessee argued that land routes are available to our neighbouring countries like Bangla Desh, Myanmar, Pakisthan and even Thailand and theoretically to all Asian countries and even beyond that. If the interpretation made by the assessing authority is to be accepted, the tonnage tax benefit will not be available to any shipping company transporting goods from India to such countries for the simple erratic reason that land routes are available between India and those countries. The learned counsel argued that this line of argument is perverse and the interpretation is quite ridiculous. If the interpretation given by the assessing authority is accepted, no shipping company in India will be able to avail the benefit of tonnage tax scheme except where the ships are sailing through coastal waters. That could never be the intention of the legislature in enacting the law provided in Chapter XII-G of the Income-tax Act, 1961.

21. It is in this context, the learned counsel argued that a comparative study on similar lines available in other countries becomes relevant. The intention of the legislature to introduce the tonnage tax scheme was to give incentives to shipping companies by way of low tax incidence. The scheme is available not only in India but also in other countries. The United Kingdom has legislated on this subject following the legislation made in Netherlands. India has drafted the same phraseology in its legislation. Therefore there is nothing wrong in comparing the analogous legislations to examine the real intent and purpose of the restrictive clauses provided under section 11 5VD, wherein the qualifications of a ship are explained. The learned counsel explained that the intention of the legislature to put such a restriction is to prevent misuse of this beneficial section so that the benefit is enjoyed only by those shipping companies who are operating the ships to perform the functions expected from the shipping industry like bulk carriage of goods and transporting of passengers. That is why the British legislation has given certain examples to show as to what are those items which do not come under the purview of the benefit. By anchoring a ship in coastal waters an assessee can run a retail business, restaurant, hotel, radio station, casino, etc. It may try to get the benefit of tonnage tax scheme. Such facilities are easily provided on land. Those services may be shifted aboard a ship anchored in coastal waters only for the purpose of getting tax benefit. It is to exclude such misuse of the provision of law that the restrictive clause(i) has been provided under section 11 5VD. It is not meant for denying the benefit to an assessee who is operating a ship to perform the core function of a ship like mass transportation of goods and passengers. The assessee is operating the ship to transport tons and tons of thermal coal from ports like Haldia, Paradip and Vizag to ports like Ennore and Tuticorin.

22. Therefore, the learned counsel contended that the Commissioner of Income Tax (Appeals) has rightly understood the intent and purpose of the legislation on the subject matter and has rightly held that the assessee is entitled for the benefit of tonnage tax scheme.

23. I heard both sides in detail and perused the relevant materials available on record.

24. 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.

25. 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 Chipping 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.

26. 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.

27. 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 11 5VD 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 operateing 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.

28. 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.

29. 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 Commissioner of Income-tax(Appeals) 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 subsection(i) applies only to those provision 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.

30. On the facts and circumstances of the case I agree with the view of the learned Accountant Member 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 under section 11 5VD of the Income-tax Act, 1961 and the assessee is entitled for the benefit of tonnage tax scheme provided under Chapter XII-C of the Income-tax Act, 1961. I agree with the view of the learned Accountant Member that the appeal of the Revenue is liable to be dismissed.

31. Now the matter will be placed before the regular Bench for passing orders, to finally dispose of the appeal on majority view.

Sd/-

(Dr. O.K.Narayanan)

Vice-President

THIRD MEMBER

Chennai,

Dated the 1 7^th June, 2011. V.A.P.

____________________________________

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH “B” CHENNAI

(Before Shri U.B.S. Bedi, Judicial Member and Shri Abraham P. George, Accountant Member)

I.T.A. No. 1195/Mds/2010
Assessment Year : 2006-07

The Assistant Commissioner of Income Tax, Company Circle II(3), Chennai – 600034.

(Appellant)

M/s West Asia Maritime Ltd., Buhari Towers, 6^th floor, v. 4, Moores Road,Chennai – 600 034

PAN : AAACW1023E

(Respondent)

Appellant by :     Shri Clemond

Respondent by :     Shri R. Vijayaraghavan

ORDER GIVING EFFECT

PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER :

In the above appeal, there was a difference of opinion between the Members comprising the Bench. Honourable President, ITAT, referred the following question before Honourable Vice President, ITAT, Chennai, as Third Member:-

“Whether, in view of facts and circumstances of the case, ship named ‘M.V. Gem of EnnoreRs.  transporting thermal coal from one location to another location within the country, when such ports are connected by rail/ road, can be excluded as qualifying ship” in terms of the exclusion clause (i) of section ll5Vb for the benefit of Tonnage Tax Scheme OR it can be treated as qualifying ship”.”