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Applicability of Indian tonnage tax benefits to ships operating solely in Indian coastal waters In brief
In a recent decision, in the case of West Asia Maritime Ltd.1 (the “assessee”), the Chennai Income-tax Appellate Tribunal (the “Tribunal”), Third Member Bench, has held that the benefit under chapter XII-G of the Income-tax Act, 1961 (the
“Act”), i.e. the tonnage tax scheme (“TTS”), 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.
1 ACIT v. West Asia Maritime Ltd. [2011-TIOL-479-ITAT-MAD-TM]
Facts
The assessee is an Indian company engaged in the business of shipping and port services. It filed its tax return for assessment year (“AY”) 2006-2007 claiming benefits of TTS in respect of ships operated by it. Out of 10 ships operated by the assessee, ship “M.V. Gem of Ennore” transported thermal coal from Haldia, Paradip, Vizag port to Ennore and Tuticorin port (i.e. solely in Indian waters).
The assessing officer (“AO”) denied the benefit of TTS to the assessee for the abovementioned ship on the ground that the definition of “qualifying ship” under section 115VD of the Act specifically excludes a sea going ship or vessel used mainly for provision of goods or services of a kind normally provided on land.
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1 August, 2011
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2 Aggrieved by the order of the AO, the assessee appealed before the Commissioner
of Income-tax (Appeals) (“CIT(A)”) and contended as under:
• Carrying of cargo from one Indian port to another would not disentitle the assessee benefit of TTS, especially since there was no disabling provision in TTS.
• The Indian TTS has been largely adopted from British law. The language used in clause (i) of section 115VD of the Act is exactly the same as provided in the British law. The British law specifically provides examples for exclusion from this clause such as retail outlets, restaurants, hotels, prisons, radio stations, casinos, financial services and offices.
• Thus, only such activities should be excluded which can normally be provided on land and which could be easily be shifted to a ship, for taking advantage of preferential tax treatment under TTS.
The CIT(A) held that assessee was entitled to benefits of TTS with respect to its vessel “M.V.Gem of Ennore”. Aggrieved by the order of CIT(A), the tax authorities appealed before the Tribunal.
Issue before the Tribunal
Whether a ship which is operated solely in Indian waters can avail the benefits of TTS?
Assessee’s contentions
• The TTS nowhere provides that a ship operating in Indian coastal waters is not entitled to the benefit of TTS. 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 one destination to another and it is immaterial whether it is operating between two domestic ports or international ports.
• If AO’s contention that movement which is possible via land transport should not be transported by ocean is to be accepted, then the tonnage tax benefit will not be available to any shipping company transporting goods from India to such countries where the land routes are available between India and those countries. The mode of transport to be used is a commercial decision to be taken by a businessman based on the cost factors involved
• Reliance can be placed on legislations of foreign countries that provide for similar schemes.
Revenue’s contentions
• The definition of “qualifying ship” given in section 115VD of the Act specifically excluded a sea going ship or vessel used mainly for provision of goods or services of a kind normally provided on land. The movement of coal between ports in India could normally be routed through land which was connected by rail as well as road. Therefore, the ships transporting goods the movement of which is possible via land transport automatically stood excluded from the benefit of TTS.
• Comparative study of foreign legislation 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.
• In British 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. Similar restrictions are not provided in section 115VD of the Act and therefore, TTS should be differently interpreted.
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Tribunal Ruling
The appeal was heard by the divisional bench. However, there was a difference of opinion between the Tribunal Members. While the Accountant Member held that the benefit of TTS should be available to assessee, the Judicial Member held otherwise. Therefore, the matter was referred to a Third Member (Vice President), who observed as under:
• 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 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 is entitled to opt for TTS 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 operating character of the ship is not at all changed only for the reason that the ship is navigating only through Indian coastal waters
• Merely because reliance is placed on examples taken from British 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 provisions of goods or services unrelated to the core activities of operating ship.
• Accordingly, the Tribunal (Third Member) held that the ship operating in Indian coastal waters is a “qualifying ship” under section 115VD of the Act and entitled to benefits of TTS.
Conclusion
• This decision lays down an important proposition that ships operating solely in Indian coastal waters are entitled to the benefit of TTS. This decision should help Indian shipping companies avoid frivolous litigation on this issue.
• The observation of the Tribunal that inferences can be drawn from foreign country legislations where Indian legislations are drafted in similar phraseology should help in matters involving interpretation of law / terms where no or minimum judicial precedence is available under Indian law.
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