1. Introduction of shipping business
India has a coastline spanning 7517 km with 13 major ports and about 200 small ports. According to the Ministry of Shipping, around 95 per cent of India’s trading by volume and 70 per cent by value is done through maritime transport. About 90% of India sea cargo is handled by foreign carriers 1, hence it is no surprise that foreign shipping income gaining significant importance under the income tax law and treaties signed with various countries.
Section 172 of income tax act is a special provision which deals with levy and recovery tax from foreign shipping companies. It specifies that every foreign shipping company has to declare a certain percentage of profit on its freight income and pay tax on it. In case of all foreign shipping company assessment is made under this section as this section overrides all other provisions of the act. However this section does not override the section 90 of the act as central government has signed agreements with other countries for giving relief to residents of contracting party and that agreement shall prevail over the provision of the income tax act.
This section applies to any ship, belonging to or chartered by a non-resident, which carries passengers, livestock, mail or goods shipped at a port in India. Finance act 1997 has also included demurrage charge or handling charge or any other amount of similar nature in freight income.
2. Disallowance of expense on account of Non-deduction of TDS:
Section 172 is a self-contained code for the levy and recovery of the tax, ship-wise, and journey wise. The CBDT vide Circular No. 723, dated 19-9-1995 has accepted that section 195 would not be applicable where section 172 applies. When section 195 is not applicable, disallowance of expenses cannot be made on account of non-deduction of tax deduction at source.
3. Deemed Income of shipping business:
7.5% of the amount paid or payable on account of such carriage to the owner or the charterer or to any person on his behalf, whether that amount is paid or payable in or out of India, shall be deemed to be income accruing in India to the owner or charterer on account of such carriage.
4. Summary Assessment:
Section 172 is a section for levy and recovery of tax, hence instead of regular assessment a summary assessment is made and no clearance certificate is granted by clearance officer unless all taxes are paid under this section. The central board of direct has issued a detailed Circular No. 30 dated 26th august 2016 laying down the procedure for tax clearance certificate and shipping business assessment. Circular provides that annual NOC should be issued in cases where no tax is leviable on foreign shipping business due to the DTAA. NOC should clearly mention the name of ships owned, name of shipping company and name of members of the pool.
In case of foreign shipping company files an intimation under section 172(7) expressing its willingness to be assessed on the annual basis instead of on a voyage basis, the assessment before port assessing officer cease and the port assessing officer shall intimate to the concerned assessing officer issuing annual NOC.
This section is not good at length still we have substantial decisions of court on the subject matter. Before making decision one has to look and read this section with treaty signed with other contracting state, because in few treaties right to tax shipping profit attributes to the state in which place of effective management is situated.
Note 1- https://www.thehindubusinessline.com/economy/logistics/Indian-cargo-making-foreign-lines-rich/article20666092.ece