Introduction: In the vast expanse of the maritime industry, a complex tapestry of operators, from Main Line Operators (MLOs) orchestrating end-to-end cargo journeys to Feeder Vessel Operators (FVOs) facilitating relay cargo between ports, and Non Vessel Owner Common Carriers (NVOCCs) consolidating diverse shipments, each plays a unique role in the global trade ecosystem. The dynamics extend to charter arrangements, including Bareboat, Time, and Voyage Charters, adding layers of complexity to maritime logistics. Tax considerations, governed by Sections 44B and 172, alongside insights into Double Taxation Avoidance Agreements (DTAA), further complicate the landscape. This exploration unveils the intricacies of shipping operations, offering a navigational guide through the seas of operators, charter agreements, and the ever-shifting tax terrain in the maritime domain. Join us on this voyage as we unravel the threads that bind these elements, shaping the pulse of international trade on the high seas.
Page Contents
- Types of Operators in Shipping Business
- Types of Charters in Shipping Business
- Taxability of Shipping Business Operators
- Taxability of Foreign Shipping & Airline Companies under DTAA
- Tax Benefits to Shipping and Airline companies set up in IFSC
- Important CBDT Circulars related to Shipping Industry
- Port Clearance Procedure
Types of Operators in Shipping Business
i. Main Line Operators (MLO)
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- Own/Charter vessels which carry cargo from the port of origin to the destination-port
- Issue B/L to shippers/NVOCC for the entire voyage
- Earn freight income from shippers
ii. Feeder Vessel Operators (FVO)
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- Serve MLOs whose vessels do not call ports of origin/destination
- Own/charter vessels which carry cargo between origin/destination ports and hub ports i.e. “Relay” Cargo
- Issue Service B/L to MLO for voyage between the origin/destination ports and hub ports
- Earn freight from MLO
iii. Non Vessel Owner Common Carrier (NVOCC)
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- Do not own, charter or operate any carrying ship
- Undertake transport of goods using container slots booked on the vessels of other operators
- Consolidate small packets/cargo of various shippers into container loads i.e. act as consolidators
- May own or hire containers
- Issue house B/L to shippers
- Earn freight from shippers
iv. Tramp Ship
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- A ship which operates without a schedule
- Used mainly for carrying bulk commodities or homogeneous cargoes in shiploads
- Each voyage is separately negotiated between the ship owner and the shipper, usually through a broker
Types of Charters in Shipping Business
i. Bareboat Charter: The Bareboat Charter represents a leasing arrangement where a ship is provided to the lessee without crew or equipment. In this agreement, the lessee gains operational control and is responsible for the vessel’s navigation, maintenance, and overall management during the lease period. Essentially, the lessor transfers possession while retaining ownership, creating a lessee-centric operational model.
ii. Bareboat Charter cum Demise: Taking the concept further, the Bareboat Charter cum Demise involves the transfer of ownership to the charterer after a specified period. This arrangement essentially combines a leasing agreement with an eventual sale transaction. During the charter period, the charterer operates the vessel as if they were the owner, and upon completion of the stipulated timeframe, ownership is formally conveyed, mirroring aspects of a sale.
iii. Time Charter: The Time Charter arrangement offers a fully equipped ship for hire over a defined period. Unlike the Bareboat Charter, ownership remains with the shipowner, but the charterer gains control over the vessel’s operations and enjoys considerable flexibility. This type of charter is often favored when a ship is required for a specific duration, providing the charterer with operational control without the burdens of ownership.
iv. Voyage Charter: In a Voyage Charter, a ship is hired for a specific voyage or journey. Unlike time-based charters, this arrangement is voyage-centric, making it ideal for one-time or short-term shipping needs. The charterer pays for the transportation of goods from one port to another on a per-voyage basis. This type of charter is well-suited for specific cargo shipments, offering flexibility and efficiency for both charterer and shipowner.
Taxability of Shipping Business Operators
Section 44B
- Deals with assessment of ‘Regular’ shipping business
- Starts with a non-obstante clause
- Overrides sections 28 to 43A
- Income deemed at 7.5% of
- Export freight (wherever received) and import freight (if, received in India)
- Freight to include demurrage, handling charges or other similar charges
- NOC from Port AO for PCC mandatory unless Annual DIT (E) obtained from the jurisdictional AO containing name of the (Cir. 30/2016)
- Filing Voyage Return is mandatory
- Time limit for completion of the assessment procedure is governed by S.153A
Section 172
- Deals with levy and recovery of tax of ship belonging to or chartered by a non-resident
- Starts with a non-obstante clause
- Overrides all other provisions of IT Act
- Income deemed at 7.5% of
- Export freight (wherever received). Includes demurrage, handling charges or any other similar charges – S 172(4)
- Procedure for levy and collection of tax, Voyage return, NOC for obtaining PCC, etc. Benefit of Cir. 30/2016 is available
- Filing Voyage wise return is mandatory
- AO to complete assessment within 9 months from the end of the relevant financial year – S. 172(4A)
Taxability of Foreign Shipping & Airline Companies under DTAA
Overview
Article -8 OECD 2017 Model Convention (deleted portions were part of 2010 MC)
i. Profits of an enterprise of a Contracting State from the operation of ships or aircraft in international traffic shall be taxable only in Contracting State that State in which the place of effective management of the enterprise is situated.
ii. Profits from the operation of boats engaged in inland waterways transport shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated.
iii. If the place of effective management of a shipping enterprise or of an inland waterways transport enterprise is aboard a ship or boat, then it shall be deemed to be situated in the Contracting State in which the home harbour of the ship or boat is situated, or, if there is no.
iv. The provisions of paragraph 1 shall also apply to profits from the participation in a pool, a joint business or an international operating agency.
Even though Article -8 under Model Convention is amended, bilateral treaties could continue to be based on earlier Model until bilaterally revised.
Article -8 – Special provision for allocation of taxing rights on profits of a non-resident from ‘Operation of Ships or Aircrafts’ in ‘International traffic’.
- Special provision – Prevails over Article 5
- Existence of PE irrelevant – Mitigates burden of profit attribution – MC Para 20 – Art.8
OECD Model 2017 allocates taxing rights to the country of incorporation
Subject to bilateral variations – each treaty needs to be separately examined
Applies to Profits of an enterprise engaged in operation of Ships/Aircraft in international traffic – Article 8(1)
- Profits from Operations of Ships or Aircrafts
- Ship/Aircraft could be owned or leased in ‘International Traffic’
- Activities ‘directly connected with operations’ or ‘incidental or ancillary to operations’
Profits from participation in a pool; a joint business or an international operating agency covered – Article 8(2)
Tax Benefits to Shipping and Airline companies set up in IFSC
Shipping in IFSC
- Income by way of royalty or interest on account of lease of ship paid to foreign entities is fully exempt from tax in India
- No Capital Gains tax on transfer of ship by a IFSC Unit enjoying 100% tax exemption
- The above two exemptions are subject to IFSC Unit commencing its operations by 31st March, 2024
CBDT Circulars under S. 172
Circular No. 723 (dated September 19, 1995)
Withholding tax on freight charges paid to FSC/Indian shipping agents
- Section 172 overrides all other provisions of IT Act
- Overrides sections 195 and 194C
In the matter of Freight Systems (India) the Delhi Tribunal observed that payment of ocean freight and IHC are not subjected to TDS by virtue of provisions of Section 172. The issue is clarified by the CBDT vide Circular no. 723 dated 19/09/1995.
ITO v. Freight Systems (India) (P.) Ltd. (2006) 103 TTJ (Del) 103/(2006) 6 SOT 473 (Del)
Circular No. 730 (dated July 14, 1995)
- CIT v. Norasia Lines (Malta) Ltd. [[2007] 107 ITD 301/109 TTJ 152 (Cochin Trib.) (SB)] – Chargeability of interest is to be determined by statutory provisions and not by CBDT Circulars
- Circular 730 struck down and withdrawn vide Circular No. 9/2001
Circular No. 732 (dated December 20, 1995)
- ‘No objection certificate’ on annual basis
- No requirement to obtain Voyage- wise NOC
- AO competent to issue Annual NOC valid for one year in respect of taxation of shipping profits after being satisfied about applicability of the DTAA benefits
Circular No. 9 (dated July 9, 2001)
- Payment u/s. 172(4) cannot be considered as payment of advance tax
- Assessee who exercises option u/s. 172(7) is not liable to pay interest u/s 234B/234C or entitled to receive interest u/s 244A
Circular No. 30 (dated August 26, 2016)
- Customs authorities to accept Annual NOC for issuance of PCC for FSCs enjoying full DIT Relief. Voyage NOC from port AO is not required
- In other cases, voyage NOC from the AO having jurisdiction over port is necessary
Port Clearance Procedure
STEP 1: Obtain DIT Exemption Certificate, wherever FSC is entitled to DTAA benefits, along with Annual NOC containing names of the vessel for which relief is granted from the jurisdictional AO
STEP 2: Where annual NOC is not available, or does not contain the name of the vessel, file undertaking with the AO at the concerned port (guaranteeing to file voyage return and pay/arrange for payment of taxes, if any) before arrival of the ship at the port and obtain Voyage-wise NOC
STEP 3: Obtain PCC from Customs Authorities on the basis of Annual NOC/Voyage-wise NOC
STEP 4: Ship is allowed to leave India on the basis of PCC from Customs Authorities
STEP 5: File Voyage Return u/s 172(3) within 30 days of the departure of the ship along with challans for the taxes paid, or file DIT Relief Certificate, if no tax is payable
STEP 6: Time-limit for passing voyage assessment order u/s 172(4A) – 9 (nine) months from the end of the financial year in which Voyage Return is filed – Inserted vide Finance Act 2007 w.e.f. April 1, 2007 – No form for the return is prescribed.
STEP 7: Option u/s 172(7) – to be taxed under other provisions of the Act- option to be exercised before end of the assessment year.
Conclusion: The maritime industry’s complexity necessitates a comprehensive understanding of shipping operators, charter types, and tax implications. Navigating through Main Line Operators, Feeder Vessel Operators, and Non Vessel Owner Common Carriers, stakeholders must also grasp the intricacies of charter agreements like Bareboat, Time, and Voyage Charters.
Tax considerations, especially under Sections 44B and 172, add another layer of complexity, emphasizing the need for adherence to CBDT Circulars. Foreign shipping companies can leverage benefits under DTAA, and those in International Financial Services Centres enjoy specific tax exemptions, making strategic decisions crucial.
This comprehensive guide aims to equip industry participants with insights into the multifaceted world of shipping, offering a roadmap for navigating legal, operational, and tax aspects in the maritime domain.
Author Bio
Thank you for your article which help us to understand certain terminologies in this unique business line. I have one query. A shipping line agent provides a 50% DIT Relief certificate requesting non deduction of TDS as the income is not taxable under DTAA provisions. Can we consider this as sufficient document for non-deduction of TDS or shall we keep on deducting TDS until he provides Lower deduction certificate?