IS TONNAGE TAX SCHEME RESTRICTED ONLY FOR COMPANIES HANDLING CARGO?
It has been presumed by many that the benefit of Tonnage Tax Scheme (TTS) should only be restricted to companies with ships carrying on cargo handling activities. Since there are various other companies which are not handling cargo but are involved in moving men and materials to offshore locations, companies providing platform supply vessels, anchor handling tugs, etc., it becomes important to know whether the benefit of TTS can be expanded to such companies or not.
In this article we go through the history of TTS, analyze the sections and clauses and at the end try to come to a logical conclusion.
Why is TTS required?
In view of the stiff competition faced by the Indian Shipping Companies vis a vis foreign shipping lines, and in order to ensure and easily accessible fixed rate, low tax regime for shipping companies, the Rakesh Mohan Committee in its report (of January 2002) recommended the introduction of TTS.
As per the memorandum to the Finance Budget of 2004-05, the scheme is introduced to make the Indian shipping industry more competitive.
Provisions governing Tonnage taxation
Chapter XII-G has been inserted in Income Tax Act from AY 2005-06 containing Section 115V to Section 115VZC which provide for special provisions relating to taxation of the income of shipping companies.
Here, we analyze only those sections which are important from the perspective of our question above.
Section 115V(l) of the Act defines “tonnage tax company” to mean ‘a qualifying company in relation to which tonnage tax option is in force’.
Section 115V(g) of the Act defines “qualifying company” to mean ‘a company referred in Section 115VC’.
Section 115VC of the Act defines a company as a qualifying company if:
Section 115V(h) of the Act defines “qualifying ship” to mean ‘a ship referred in Section 115VD’.
Section 115VD of the Act defines a ship as a qualifying ship if
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;
(ii) fishing vessels;
(iii) factory ships;
(iv) pleasure crafts;
(v) harbour and river ferries;
(vi) offshore installations;
(vii) Dredgers (Omitted w.e.f. from 1st April 2006)
(viii) a qualifying ship which is used as a fishing vessel for a period of more than thirty days during a previous year.
Section 115V(m) of the Act defines “tonnage tax scheme” to mean ‘a scheme for computation of profits and gains of business of operating qualifying ships under the provisions of this chapter’.
Section 115V(j) of the Act defines “tonnage income” to mean ‘income of a tonnage tax company computed in accordance with the provisions of this chapter’.
Section 115VF of the Act mentions that the tonnage income shall be computed in accordance with section 115VG and the income so computed shall be deemed to be the profits chargeable under the head “Profits and gains of business or profession” and the relevant shipping income referred to in sub-section (1) of section 115VI shall not be chargeable to tax.
As per Section 115VI(1) of the Act, the relevant shipping income of a tonnage company means:
(i) its profits from core activities referred to in sub-section (2);
(ii) its profits from incidental activities referred to in sub-section (5):
Provided that where the aggregate of all such incomes specified in clause (ii) exceeds one-fourth per cent of the turnover from core activities referred to in sub-section (2), such excess shall not form part of the relevant shipping income for the purposes of this Chapter and shall be taxable under the other provisions of this Act.
(2) The core activities of a tonnage tax company shall be—
(i) its activities from operating qualifying ships; and
(ii) other ship-related activities mentioned as under :—
(A) shipping contracts in respect of—
(i) earning from pooling arrangements;
(ii) contracts of affreightment.
Explanation.—For the purposes of this sub-clause,—
(a) “pooling arrangement” means an agreement between two or more persons for providing services through a pool or operating one or more ships and sharing earnings or operating profits on the basis of mutually agreed terms;
(b) “contract of affreightment” means a service contract under which a tonnage tax company agrees to transport a specified quantity of specified products at a specified rate, between designated loading and discharging ports over a specified period;
(B) specific shipping trades, being—
(i) on-board or on-shore activities of passenger ships comprising of fares and food and beverages consumed on board;
(ii) slot charters, space charters, joint charters, feeder services, container box leasing of container shipping.
(5) The incidental activities shall be the activities which are incidental to the core activities and which may be prescribed for the purpose.
Incidental activities are provided in Rule 11R of Income Tax Rules, 1962 and include the following:
1. maritime consultancy charges
2. income from loading or unloading of cargo
3. ship management fees or remuneration from managed vessels
4. maritime education or recruitment fees
On evaluation of the above definitions and clauses it is crystal clear that to avail tonnage tax scheme, a company has to be a qualifying company operating qualifying ships.
The definition of a qualifying company does not require it to be any specific kind of a company which deals in cargo. The definition of the qualifying ship also nowhere specifies the requirement of a ship carrying cargo. As a matter of fact, dredgers which were specifically put in the exclusion list was removed w.e.f. 1st April 2006. A dredger is a marine vessel fitted with a device(s) to scrap or suck the sediment deposition over sea bed. Hence as per the definition, dredgers were never meant to carry cargo but still the benefit of tonnage tax is available to companies operating dredgers.
The core activities as per Section 115V(2) of the Act also do not specify any requirement with respect to carrying cargo. It includes the activities from operating qualifying ships and from shipping contracts in respect of earning from pooling arrangements and contracts of affreightment.
The memorandum to Finance Act proposing the insertion of Tonnage Tax Scheme also did not speak about restricting the benefit only to companies carrying cargo. Also, the term shipping companies is nowhere restricted to only mean companies operating ships for movement of cargo. Wherever required the law has clearly excluded the type of companies and ships which are not allowed to take the benefit of TTS.
Circular no. 5 dated 5th July, 2005 which deals with the Chapter XII-G in detail also does not restrict the benefit to only cargo companies.
Conclusion: Based upon the provisions of law and above discussion, the benefit of TTS should be available to Companies satisfying the conditions laid in Chapter XII-G of the Act irrespective of they handling cargo or not.