Taxability of non residents engaged in shipping business

Presumptive taxation scheme for shipping business

1) ‘Presumptive’ means to presume the income… it means even if the actual income earned is differ , in that case also the income shall be calculated on the presumptive basis provided the conditions specified therein are satisfied.

2) Section 44B read with Section 172 followed by the landmark judgement of supreme Court of A. S. Glittre are applicable only on the non residents who is engaged in the business of shipping.

It means if an Indian company actively engaged in the business of shipping , then section 44B shall not be applicable.

However to promote the Indian company engaged in shipping business , the chapter of “Tonnage taxation” Consisting of section 115V to 115VZC ” is introduced by finance bill , 2004.

3) important points on Section 44B & Section 172

a) It is applicable on all non residents whether it is an corporate or individual non residents.

b) The Very First line of Section 44B is ” Notwithstanding anything contained in section 28-43A”

It means it overrides the Chapter of PGBP , not other income.

it means if a non residents earn interest income from Indian companies apart from shipping income, then such income shall be charged to taxation normally as per the provisions of income tax act , 1961. However if the case falls under section 115A , then the concessional rate of taxation on interest income shall be applicable.

C) The Very First line overruled only the chapter of PGBP.

It means Depreciation as well as carried forward of unabsorbed Depreciation on the business of shipping shall not be allowed. Since they are governed by section 32 , which got overruled by section 44B.

D) Section 44B however does not override the chapter VI and VIA.

Chapter VI in income tax Consisting of Section 70 to 80 , which deals with the provisions of “set off or carry forward and set off of losses”. And chapter VIA consist of section 80C to 80U and 80 RRB along with profits linked deductions contains in the series of section 80 IA and onwards is applicable.

It means if the non residents individual Mr X engaged in the business of shipping in India, having other business of buying and selling of derivatives. From which he incurred losses and he also contribute to prime minister relief fund.. will he eligible to set of the losses and whether the deduction us 80G shall apply.

The answer is Yes.. since the losses of derivatives is now considered as normal business losses which can be set off against any other business incomes other than speculation.. and 80 G deduction will also be given to him.

E) Section 44B is basically the section which focuses on amount recipient mode.. for further clarification please read further.

F) It said that 7.50% of the aggregate of following “Sum” shall be Income under PGBP..first it focuses on The word “Sum”.. means “Amount” and other is that only income under “PGBP” is considered.

The other paragraph said that ” amount paid to any person whether he is assessee or his agent on his behalf for carriage of passengers etc..”Shipped at any port in India”.

To illustrate , 

Company X Inc engaged in the business of shipping.. the ship operates from Kolkata port to London port.

Company received Rs 100 lacs in India , an agent of company is appointed in London who also received Rs 20 lacs INR and also ab agent in Japan who received Rs 40 lacs in behalf of company.. what will be the total taxable income .

The income under the head pgbp will be 160 lacs.. however to compute the total taxable income , other incomes shall also considered.

After a close analysis of above para we can make a one liner conclusion , that if the non residents who is engaged in the business of shipping , and if the ships is shipped from any Indian port to outside India, the entire amount that is received is taxable.. it’s hardly matters who is the recipients of money.

Hence there is a requirement of recovery mechanism here.. since it might be possible that non residents will decide to receive it’s entire income outside India to avoid the taxation.. hence section 172 is introduced who casts the responsibility upon the master of ships to file necessary information and make effective arrangements of payment of taxes to the revenue.

G) the last para of section 44B deals with the amount received or deemed to be received in “india” for carriage of goods from any port outside India.

It means if the ships is port from new York port to Japan , and the amount is Received in india or deemed to be received in india, then it will be taxable in india.. say if the total transactions amount is 60 Lacs dollar and in india only 1 lacs dollar is Received , then 1 lacs shall be considered for section 44B purposes.

H) After a critical analysis, it can be understood , that in such a case where the shipped is port from outside India , it is almost impossible to Indian authorities to established an effective control over them .. that’s the reason , section 172 shall not be apply in such a case.

I) Hence for the purpose of application on mandatory provisions of section 172 assessee must be engaged in the shipping business from the port in india.. it means if he engaged only in the business of operations of ships from London to new york and only received payment in india , then section 172 shall not apply only 44B is apply.. 44B is treated as normal provisions for non residents.

J) The tax rate applicable is normal rate applicable to the classes of assessee as the case may be.

4) Analysis of Section 172.

A) it is an recovery mechanism applicable only when the ship is departure from any port in india to ensure the effective recovery of taxation along with other particulars of return of income by the income tax department.

B) The Section is mandatory and overrides the entire income tax act..very purpose of section is to recover the timely taxes.

C) No Depreciation whether current year or unabsorbed depreciation, No losses whether Current or brought forward losses, No deduction under 80 series whether 80C to 80 U and 80 RRB or profit linked deductions under section shall be allowed.

D) Flat 7.50% of income from any ships departs from any port in India is taxable as PGBP.. Again it is to be noticed that only business income from ships is considered..other income will be taxed normally.

E) A flat rate of taxes applicable to a foreign companies shall be applicable in all cases.. here is the catch..it means even if the non residents is an individual , engaged in shipping business from port of India, then also he is liable for a tax rates of 40 percent.

F) The chapter of TDS special consideration for section 195 is not applicable.

it means that if a person’s who is going to make the payment to the shipping company engaged from business operated from port in india, fails to deduct the TDS or after deducting the TDS fails to make the payment, then also he is not liable for facing any penalty contained in section 201(1A) & other provisions like 40a(ia).

The logic behind is that section 172 is itself a recovery procedure of taxes in this cases. (held as per Commissioner of income tax vs dempo & co. P. Ltd)

G) However the section 172 is mandatory in nature , although it’s not debarred the assesse to opts for section 44b ie normal provisions of the Act..it means first assesse have to fullfil all the requirements if section 172 and then he can opts for normal provisions ie. Section 44B and etc.

H) Now the question is why one should opts for section 44B after being subjected to 172.

First if he is an individual, since in section 172 the tX rates is 40 Percent , which is very high for individual prospective. Secondly if he have losses from other business , then he can set off such losses..

Thirdly , if have investments in business eligible for deductions under section 80IA and others…then he should go for normal provisions ie 44B and normal rates )

I) if the Assessee makes the payment under section 172 say Rs. 50 crores and then apply for Section 44B and let’s say final liability comes to say 45 crores, then assessee is eligible for a refund of 5 crores.. held by the supreme court in the case of A S Glittre, assessee will also be entitled to get a interest on refund us 244A and also he is liable to pay interest us 234B and 234C wherever applicable.

5) Example to simplify the above things ..

A Foreign individual Mr John of Nitherlands engaged in the business of operations of shipping for the purpose of carrying of ships, carriage etc..

He currently have three ships… Ships A , B and C..

ships A is effectively engaged in the operations from Mumbai port to London port.. he received the following sums and other details of expenditures is as follows…

Received in Nitherlands Rs 100 lacs

Received in Bombay (india) Rs 30 lacs

Received in Japan Rs 60 lacs..

above sum doesn’t include demurrage charges of 16 lacs received in Bombay.

He also make an expenditure under business head say Rs 20 lacs..

Apart from that he also make investments in Indian stock markets in option and incurred a losses of Rs 80 lacs….

Ship B engaged in the operations of ships from Nitherlands to Japan and his agent Mr Ramesh in Bombay received Rs 30 lacs..total expenditure is 8 lacs..

Ship C engaged in the business of operations of ships from Nitherlands to Japan and he received Rs 80 lacs in Tokyo…total Expenditures is Rs 15 lacs

Calculate the total taxable income to the best of assessee as per the income tax act, 1961..

1) Applicable provisions.
Section 172 is applicable in case of only ship A and not in case of ship B and C..

2) Section 44B which is normal provisions for non residents engaged in shipping business, applicable on Ship A and Ship B not in the case of Ship C…since neither Ship is operated from Indian port and neither amount is Received or deemed to be received in india..

3) First apply the provisions of Section 172 since it is mandatory (only ship A)..

Total deemed income under PGBP head-

7.5% of (100+30+60+16*) = 15.45 lacs

* Demurrage charges or other charges of similar nature will as also be included for calculating taxable income as per CBDT circular.. hence 16 lacs is also added.

Less : Expenditures – not allowed as per overriding nature of section 172.

Hence taxable income under Section 172 is 40% of 15.45 lacs = 6.18 lacs.. firstly Assessee have to pay this to the credit of central government..

Now if assessee opts for section 44B..

Total income =

Ship A=  (100+30+60+16)= 206 lacs

Ship B =.                              = 30   lacs

Total comes to 236 lacs. …taxable portions shall be 7.50% of 236 lacs = comes to 17.70 lacs …(no expenditures shall be allowed here also)

Assessee will also to set off the losses on derivatives since section 44B doesn’t overrides section 70 to 80..

Hence after set off the losses total taxable income shall be nil and balance loss of 62.30 lacs shall be allowed to carried forward..

(if taxable income will be positive then tax rate shall be normal and 40 percent is not applicable)

The tax which is paid by the Assessee us 172 ie 6.18 lacs shall be refunded to the assesse .. he is also entitled to get the interest on  refund us 244A as per supreme Court held in the case of AS Glittre.

Note: 

(1) The assessee who is covered us 172 and 44B is not required to maintain the books of accounts and get his accounts audited us 44AB in no cases. since section 44AA and 44AB doesn’t covered 44B transactions. Hence even if they report the normal income lower than what is calculated us 172 , then also they is not required to maintained the books of accounts us 44AA and get his accounts audited us 44AB.

(2) If assessee opts for section 44B and make a cash payment in exceeds of 10,000, then no disallowance shall be made since it overrides section 40A(3).