Page 1

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 5869 OF 2016 (ARISING OUT OF SLP (CIVIL) NO. 25251/2015)

COMMISSIONER OF INCOME TAX, KOCHI .....APPELLANT(S)

VERSUS

TRANS ASIAN SHIPPING SERVICES (P) LTD. .....RESPONDENT(S)

W I T H

CIVIL APPEAL NO. 5870 OF 2016 (ARISING OUT OF SLP (CIVIL) NO. 25252/2015)

J U D G M E N T

A.K. SIKRI, J.

Leave granted.  Matter finally heard as the case was fixed

for final hearing.

2. Chapter XIIG of the Income Tax Act, 1961 (hereinafter referred to

as the 'Act') contains special provisions for assessments relating

to income of shipping companies.  Under this Chapter, shipping

companies  are  given  a  choice  to  either  get  income  from the

Civil Appeal No. 5869 of 2016 & Anr. (arising out of SLP (C) No. 25251 of 2015 & Anr.) Page 1 of 31

Page 2

shipping business computed in accordance with the provisions

contained in the Act meant for computation of income in respect

of business or profession or opt for methodology of computing

income as per the special formula provided in that Chapter which

accords a different treatment and different manner of computation

of income for the shipping business.  

3. Chapter IV of the Act deals with 'Computation of Total Income'

and as per the scheme of the Act, such a computation of total

income is governed by five heads which are provided in Section

14 of  the Act.  These are:  (i)  Salaries;  (ii)  Income from House

Property;  (iii)  Profits  and Gains of  Business or  Profession;  (iv)

Capital  Gains and (v)  Income from Other  Sources.  Thereafter,

manner of computation of the income under the aforesaid heads

is stipulated in various sections falling under Chapter IV.  As far

as Income from Profits and Gains of Business or Profession is

concerned, Sections 28 to 44DB of the Act contain the procedure

for  computation  of  income  under  this  head.  Therefore,  any

person,  natural  or  juristic,  who earns income from business in

India  is  supposed  to  get  the  income  from  the  said  business

computed in the manner provided in those sections.  However,

Civil Appeal No. 5869 of 2016 & Anr. (arising out of SLP (C) No. 25251 of 2015 & Anr.) Page 2 of 31

Page 3

Chapter XIIG makes an exception thereto by carving out special

provisions relating to income of  shipping companies.   It  would

mean that those companies which are shipping companies are

permissible to get their income computed under the said Chapter.

Section 115VA of the Act gives this option and reads as under:  

“115VA.  Computation  of  profits  and  gains from  the  business  of  operating  qualifying ships. - Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of a company,  the  income  from  the  business  of operating qualifying ships, may, at its option, be computed in  accordance with the provisions of this Chapter and such income shall be deemed to  be  the  profits  and  gains  of  such  business chargeable  to  tax  under  the  head  "Profits  and gains of business or profession".

4. As is clear from the bare reading of this Section, option is given to

the shipping company, which is operating “qualifying ships”, to get

its  income  computed  in  accordance  with  the  provisions  of

Chapter  XIIG,  irrespective  of  those  stipulations  otherwise

contained  in  Sections  28  to  43C  for  computation  of  business

income.   Once  such  an  option  is  exercised  and  income  is

computed in accordance with the provisions of the said Chapter,

a fiction is created by deeming the said income to be the profits

and gains of  such business chargeable to tax under the head

'Profits and Gains of Business or Profession'.  To put it otherwise,

Civil Appeal No. 5869 of 2016 & Anr. (arising out of SLP (C) No. 25251 of 2015 & Anr.) Page 3 of 31

Page 4

though the income of such shipping company would be computed

in the manner provided under Chapter XIIG, the same would be

treated as income from business which is chargeable to tax as

provided  under  the  head  'Profits  and  Gains  of  Business  or

Profession' and would be treated as chargeable to tax under that

head.

5. For a shipping company to be eligible to exercise such an option,

there are certain conditions to be fulfilled, which are as under:

(i) In the first place, the assessee has to be a 'company'.  The word

'company' is defined in Section 2(17) of the Act.  Such a company

may have various businesses and one such business may be the

business of operating qualifying ships.  However, it is only that

income  which  is  generated  from  'The  Business  of  Operating

Qualifying  Ships'  that  will  be  computed  as  per  the  special

provisions in Chapter XIIG.  Income from other businesses will be

computed in the same manner as provided in Sections 28 to 43C.

In  case  the  business  of  the  company  is  to  operate  qualifying

ships only, then the income from that sole business will be under

this Chapter.

(ii) Income from the business of operating qualifying ships shall

Civil Appeal No. 5869 of 2016 & Anr. (arising out of SLP (C) No. 25251 of 2015 & Anr.) Page 4 of 31

Page 5

be  computed  under  Chapter  XIIG  only  if  such  an  option  is

specifically  exercised  by  the  assessee  company.  This

requirement is particularly mentioned in Section 115VP of the Act.

Such an option, when given, is to remain in force for a period of

ten years from the date on which the said option is exercised,

and  this  period  is  prescribed  in  Section  115VQ  of  the  Act.

However, it can be renewed within one year from the end of the

previous year in which the option ceases to have effect (Section

115VR).  In certain circumstances stipulated in Section 115VS of

the Act, there is a prohibition to opt for the scheme.

The scheme that is to be opted for computation of income

under this Chapter is known as 'Tonnage Tax Scheme' (for short

'TTS') as defined in sub-section (m) of Section 115V of the Act.

(iii) Though,  these  special  provisions  relate  to  income  of

shipping companies, it is only that income which is received from

business  of  “operating  qualifying  ships”  that  is  eligible  for

computation under this Chapter.

“115VD. Qualifying ship.- For the purposes of this Chapter, a ship is a qualifying ship if— (a) it is a sea going ship or vessel of fifteen net tonnage or more;

Civil Appeal No. 5869 of 2016 & Anr. (arising out of SLP (C) No. 25251 of 2015 & Anr.) Page 5 of 31

Page 6

(b)  it  is  a  ship  registered  under  the  Merchant Shipping  Act,  1958  (44  of  1958),  or  a  ship registered  outside  India  in  respect  of  which  a licence has been issued by the Director-General of Shipping under section 406 or section 407 of the Merchant Shipping Act, 1958 (44 of 1958); and

(c)  a  valid  certificate  in  respect  of  such  ship indicating its net tonnage is in force, 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)  (Clause  (vii)  omitted  by  the  Finance  Act, 2005  (18  of  2005),  sec.  36  (w.e.f.  1-4-2006). Clause  (vii),  before  omission,  stood  as  under: “(vii) dredgers”. (viii) a qualifying ship which is used as a fishing vessel  for  a  period  of  more  than  thirty  days during a previous year.”

Which  ship  should  be  treated  as  'operating  ship',  is  to  be

understood from the prescription thereof as mentioned in Section

115VB which reads as under:

“115VB. Operating ships.- For the purposes of this  Chapter,  a  company  shall  be  regarded  as operating a ship if it  operates any ship whether owned  or  chartered  by  it  and  includes  a  case where even a part of the ship has been chartered in by it in an arrangement such as slot charter, space charter or joint charter :

Civil Appeal No. 5869 of 2016 & Anr. (arising out of SLP (C) No. 25251 of 2015 & Anr.) Page 6 of 31

Page 7

Provided  that  a  company  shall  not  be regarded  as  the  operator  of  a  ship  which  has been  chartered  out  by  it  on  bareboat charter-cum-demise terms or on bareboat charter terms for a period exceeding three years.”

As per this, a ship would be treated as 'operating ship' if a

company:

(a) operates any ship, whether owned or chartered by it;

(b) where even a part of the ship has been chartered by that

company in an arrangement such as slot charter, space charter

or joint charter.  The only exception is that if  a ship has been

chartered out by the company on bareboat charter-cum-demise

terms or on bareboat charter terms for a period exceeding three

years, then that company shall not be regarded as the operator of

that particular ship.

(iv) The  company  operating  such  ships  has  to  be  a  “qualifying

company” as defined in clause (g)  of  Section 115V of  the Act

which says qualifying company means a company referred to in

Section  115VC of  the  Act.   Section  115VC lays  down certain

conditions to be fulfilled for a company to be qualifying company.

It reads as under:

“115VC.  Qualifying  company.  - For  the purposes  of  this  Chapter,  a  company  is  a qualifying company if—

Civil Appeal No. 5869 of 2016 & Anr. (arising out of SLP (C) No. 25251 of 2015 & Anr.) Page 7 of 31

Page 8

(a) it is an Indian company;

(b)  the  place  of  effective  management  of  the company is in India;

(c) it owns at least one qualifying ship; and

(d) the main object of the company is to carry on the business of operating ships. Explanation.—For the purposes of this section, "place of effective management of the company" means—

(A) the place where the board of directors of the company or its executive directors, as the case may be, make their decisions; or

(B)  in  a  case  where  the  board  of  directors routinely approve the commercial and strategic decisions  made  by  the  executive  directors  or officers of the company, the place where such executive directors  or  officers  of  the company perform their functions.”

As may be seen from the reading of the aforesaid provision, apart

from the conditions that a company has to be an Indian company

with  effective  management  of  the company in  India  and  main

objective of  the company is  to  carry  on business of  operating

ships,  the other  significant  condition is  that  the company itself

should  own  'at  least  one  qualifying  ship'.   The  description  of

qualifying ship is contained in Section 115VD, as already noted

above,  and  owning at  least  one qualifying ship is  one of  the

Civil Appeal No. 5869 of 2016 & Anr. (arising out of SLP (C) No. 25251 of 2015 & Anr.) Page 8 of 31

Page 9

eligibility conditions for getting the income computed under these

special provisions.

6. Once  aforesaid  conditions  are  fulfilled,  the  income  from  the

business of operating qualifying ships is to be computed under

Chapter XIIG.  The manner of computation of such income, as

provided under this Act, is under 'TTS'.  Clause (m) of Section

115V defines TTS as under:

“(m) "tonnage tax scheme" means a scheme for computation of profits and gains of business of operating qualifying ships under the provisions of this Chapter.”

7. The provisions for TTS are contained in Section 115VE onwards.

For our purposes, it is not necessary to take stock of all these

provisions.  As we are primarily concerned with Section 115VE

and Section 115VG of the Act, we shall discuss the schemes with

reference to these provisions.  The TTS talks of 'Tonnage Income'

which is to be computed under Section 115VG of a Tonnage Tax

Company.  This Tonnage Income, as per Section 115VG of the

Act,  is  the  income  of  each  qualifying  ship.   The  formula  of

calculating  this  Tonnage  Income  of  each  qualifying  ship  is

stipulated  in  sub-sections  (2)  and  (3)  of  Section  115VG.

Civil Appeal No. 5869 of 2016 & Anr. (arising out of SLP (C) No. 25251 of 2015 & Anr.) Page 9 of 31

Page 10

Sub-section  (4)  of  Section  115VG  defines  'Tonnage'  to  mean

tonnage of a ship indicated in the certificate referred to in Section

115VX  and  'includes  the  deemed  tonnage  computed  in  the

prescribed manner'.   Explanation to sub-section (4)  of  Section

115VG clarifies  that  deemed tonnage shall  be  the  tonnage in

respect of an arrangement of purchase of slots, slot charter and

an arrangement of sharing of break-bulk vessel.   

8. Section 115VE deals with the manner of computation of income

under  TTS.   In  nutshell,  such  company  which  has  exercised

option under this Chapter is known as a 'Tonnage Tax Company'

and its income from the business of  operating qualifying ships

shall be considered as a separate business distinct from all other

activities of the business carried on by the company.  The income

from this particular business only is to be computed separately

from the profits and gains from any other business.  The income

for this activity under TTS is known as 'tonnage income' (Section

115VF).  The computation of tonnage income is to be done in the

manner prescribed in Section 115VG.  As this is  an important

provision for the purposes of deciding the instant appeal, same is

reproduced below:

Civil Appeal No. 5869 of 2016 & Anr. (arising out of SLP (C) No. 25251 of 2015 & Anr.) Page 10 of 31

Page 11

“115VG. Computation of tonnage income.- (1) The tonnage income of a tonnage tax company for a previous year shall be the aggregate of the tonnage  income  of  each  qualifying  ship computed in  accordance with  the  provisions  of sub-sections (2) and (3).

(2) For  the  purposes  of  sub-section  (1),  the tonnage income of each qualifying ship shall be the  daily  tonnage  income  of  each  such  ship multiplied by—

(a) the number of days in the previous year; or

(b)  the number of  days in  part  of  the previous year in case the ship is operated by the company as a qualifying ship for only part of the previous year, as the case may be.

(3) For  the  purposes  of  sub-section  (2),  the daily tonnage income of a qualifying ship having tonnage referred  to  in  column (1)  of  the  Table below  shall  be  the  amount  specified  in  the corresponding entry in column (2) of the Table:

Table Qualifying ship having

net tonnage Amount of daily tonnage

income (1) (2)

up to 1,000 Rs. 70 for each 100 tons

exceeding 1,000 but  not more than 10,000

Rs 700 plus Rs. 53 for  each 100 tons  exceeding 1,000 tons

exceeding 10,000 but  not more than 25,000

Rs. 5,470 plus Rs. 42 for each 100 tons  exceeding 10,000 tons

exceeding 25,000 Rs. 11,770 plus Rs. 29  for each 100 tons  exceeding 25,000 tons.]

Civil Appeal No. 5869 of 2016 & Anr. (arising out of SLP (C) No. 25251 of 2015 & Anr.) Page 11 of 31

Page 12

(4) For the purposes of this Chapter, the tonnage shall mean the tonnage of a ship indicated in the certificate  referred  to  in  section  115VX  and includes the  deemed tonnage computed in  the prescribed manner. Explanation.—For  the  purposes  of  this sub-section,  "deemed  tonnage"  shall  be  the tonnage  in  respect  of  an  arrangement  of purchase  of  slots,  slot  charter  and  an arrangement of sharing of break-bulk vessel.

(5) The tonnage shall  be rounded off  to  the nearest  multiple  of  hundred  tons  and  for  this purpose  any  tonnage  consisting  of  kilograms shall be ignored and thereafter if such tonnage is not a multiple of hundred, then, if the last figure in that  amount  is  fifty  tons  or  more,  the  tonnage shall  be  increased  to  the  next  higher  tonnage which  is  a  multiple  of  hundred  and  if  the  last figure is less than fifty tons, the tonnage shall be reduced  to  the  next  lower  tonnage  which  is  a multiple of hundred; and the tonnage so rounded off  shall  be  the  tonnage  of  the  ship  for  the purposes of this section.

(6)  Notwithstanding  anything  contained  in  any other provision of this Act, no deduction or set off shall  be  allowed  in  computing  the  tonnage income under this Chapter.”

9. We would also like to point out at this stage that Section 115V-I

deals with 'relevant shipping income' and as per Section 115VF,

such relevant shipping income shall not be chargeable to tax.

10. After  narrating  the scheme of  Chapter  XIIG containing  special

provisions for computation of profits and gains from the business

Civil Appeal No. 5869 of 2016 & Anr. (arising out of SLP (C) No. 25251 of 2015 & Anr.) Page 12 of 31

Page 13

of  operating  qualifying  ships  by  a  company, we advert  to  the

precise nature of dispute that has arisen in the instant appeal.  As

mentioned  above,  it  is  only  income  from  the  business  of

operating qualifying ship that has to be computed in accordance

with the provisions of Chapter XIIG.  As per Section 115VB of the

Act, a company is regarded as operating a ship if it operates any

ship which is owned by it or a ship which is chartered by it and it

also includes a case where even a part  of  the ship has been

chartered by it  in  an arrangement  such as slot  charter, space

charter  or  joint  charter  etc.   The  question  that  has  arisen  for

consideration pertains to 'slot charter' i.e. should the 'slot charter'

operations of  a  'Tonnage Tax Company'  be carried on only  in

'qualifying ships' to include the income from such operations to

determine  the  'tonnage  income'  under  'TTS'  in  terms  of  the

provisions of  Chapter XIIG of  the Act?  In other words,  is  the

income derived from 'slot charter' operations of a 'Tonnage Tax

Company' liable to be excluded while determining the 'Tonnage

Income' under the 'TTS' if such operations are carried on in ships

which are not 'qualifying ships' in terms of the provisions of that

Chapter of the Act and the relevant provisions of the Income Tax

Rules, 1962?

Civil Appeal No. 5869 of 2016 & Anr. (arising out of SLP (C) No. 25251 of 2015 & Anr.) Page 13 of 31

Page 14

11. As a matter of fact, the respondent-assessee owns a qualifying

ship and fulfills all other conditions as well to make it a qualifying

company under Section 115VC.  The income that is generated

from the said qualifying ship is exigible to tax as per the special

provisions contained in Chapter XIIG, as assessee has exercised

the  requisite  option  in  this  behalf.   However,  in  addition  to

operating its qualifying ship, in the relevant Assessment Years i.e.

2005-2006 and 2008-2009 it had also 'slot charter' arrangements

in other ships.  In the relevant income tax returns filed by the

assessee,  the assessee had also included the income earned

from  such  slot  charter  arrangements  for  the  purpose  of

computation thereof under Chapter XIIG.  It is in this context the

question has arisen as to whether the assessee was eligible to

include the income derived from activities through 'slot charter'

arrangements  as  relevant  shipping  income  to  determine  the

deemed tonnage in terms of Rule 11Q of the Income Tax Rules.   

12. The Assessing Officer was of the view that the income earned

under slot charter arrangement did not qualify for coverage to be

given special treatment in Chapter XIIG as this income was not

generated by the assessee from its own ship, i.e., it  is neither

Civil Appeal No. 5869 of 2016 & Anr. (arising out of SLP (C) No. 25251 of 2015 & Anr.) Page 14 of 31

Page 15

from the ship owned by the assessee nor from the entire ship

chartered by the assessee.  He took the view that in order to avail

the benefit of Chapter XIIG, the assessee was supposed to show

that  the  ship  operated  by  it  was  qualifying  ship  and  for  this

purpose it was incumbent upon the assessee to produce a 'valid

certificate  indicating  its  net  tonnage'  as  provided  in  Section

115VX(1)(b) of the Act.  However, the assessee had submitted

such valid certificate only in respect of its own ship and did not

submit the same in respect of ship chartered by the assessee

under  the  slot  charter  arrangement.   The  contention  of  the

assessee was that the requirement of producing 'valid certificate'

is to be insisted only for assessee's own ships and for the ships

hired fully.  This contention was not accepted by the Assessing

Officer.  The assessee had also argued that as per the method of

computation provided under Section 115VG of the Act read with

Rule 11Q of the Rules income for full ship is to be computed on

the basis of 'net tonnage' shown in the valid certificate, whereas

income of  part  of  the  ship  is  computed as  'deemed tonnage'.

This argument was also rejected by the Assessing Officer on the

ground that there was a requirement of producing valid certificate

even for part of the ship and in the absence thereof income from

Civil Appeal No. 5869 of 2016 & Anr. (arising out of SLP (C) No. 25251 of 2015 & Anr.) Page 15 of 31

Page 16

slot charter arrangement could not be included for the purpose of

computation of tonnage income under the TTS.   

13. The  order  of  the  Assessing  Officer  was  upheld  by  the

Commissioner of Income Tax (Appeals) resulting into dismissal of

appeal filed by the assessee.  Even the ITAT accepted the view

taken by the Assessing Officer and dismissed the appeal filed

before  it  by  the  assessee  thereby  upholding  the  order  of  the

Assessing Officer.  However, in further appeal that was preferred

by the assessee to the High Court under Section 260A of the Act,

the assessee has succeeded in getting its way through as the

High Court  has found merit  in  its  contention.   Thus,  the High

Court, vide impugned judgment and order dated 23.01.2015, has

allowed  the  appeal  of  the  assessee  holding  that  the  income

earned by the assessee under slot charter arrangement comes

under the definition of 'deemed tonnage tax' as per explanation to

sub-section  (4)  of  Section  115  VG  of  the  Act  and,  therefore,

exclusion of this income while assessing the same under the said

special provisions was not appropriate.  In other words, the High

Court has held that the assessee is eligible for tonnage on slot

charter related income also.  This view taken by the High Court is

Civil Appeal No. 5869 of 2016 & Anr. (arising out of SLP (C) No. 25251 of 2015 & Anr.) Page 16 of 31

Page 17

under examination in the present proceedings.  

14. Mr.  Rohatgi,  learned  Attorney  General  who  appeared  for  the

Income Tax Department/Revenue, at  the outset  referred to the

reasoning which was adopted by the ITAT and submitted that the

ITAT had  rightly  interpreted  the  provisions  even  in  respect  to

deemed tonnage and came to the correct conclusion that even

slot charter arrangement has to be in respect of a qualifying ship.

He read out the relevant portions of the discussion contained in

the order of ITAT in this behalf and submitted that in order to get

a  particular  income covered  under  these  special  provisions,  it

was necessary to fulfill all the conditions which are stipulated in

various provisions of this Chapter.  His argument was that it is

only  the  business  of  operation  of  qualifying  ships  that  was

covered  by  the  Chapter.   Therefore,  even  the  slot  charter

arrangement had to necessarily be in respect of 'qualifying ship'.

It was submitted that unless this threshold is crossed and the test

of eligibility as per the conditions stipulated under Section 115VA

to Section 115VE of the Act are fulfilled, the question of crossing

over to the second stage of computation of income as per the

method of  determination of  tonnage would not  arise.   On that

Civil Appeal No. 5869 of 2016 & Anr. (arising out of SLP (C) No. 25251 of 2015 & Anr.) Page 17 of 31

Page 18

basis, he argued that the entire approach of the High Court by

solely  relying  upon  explanation  to  sub-section  (4)  of  Section

115VG was erroneous.   

15. Per contra, Shri Porus Kaka, senior advocate appearing for the

assessee, made an endeavour to justify the view taken by the

High  Court  by  adopting  the  reasons  which  are  given  in  the

impugned judgment.  In the process, the learned senior counsel

went into the background as to how TTS was introduced in the

scheme on the basis of the recommendations contained in the

Report given in January, 2002 by the Rakesh Mohan Committee,

which was appointed by the Government.  He emphasised that

the  main  purpose  of  introducing  TTS  was  to  ameliorate  the

hardships  suffered  by  the  Indian  shipping  companies  vis-a-vis

foreign shipping lines because of the stiff competition faced by

the Indian companies and also to ensure an easily acceptable

fixed rate low tax regime for shipping companies.  His submission

was  that  Chapter  XIIG  incorporating  this  TTS  which  was

introduced  by  the  Finance  Act,  2004,  had  to  be  interpreted

keeping in view the aforesaid objective. He also argued that the

legal fiction created by sub-section (4) of Section 115VG along

Civil Appeal No. 5869 of 2016 & Anr. (arising out of SLP (C) No. 25251 of 2015 & Anr.) Page 18 of 31

Page 19

with  Rule  11Q  of  the  Rules  had  to  be  given  its  proper  and

sensible meaning and read in this manner and the insistence of

the  Income  Tax  Authorities  requiring  production  of  valid

certificates  even  in  respect  of  slot  charter  was  a  totally

inappropriate  demand  and  that  would  render  redundant  and

otiose many provisions of this Chapter.

16. Dilating the aforesaid submissions, he argued that explanation to

Section 115VG(4) which clarifies 'deemed tonnage' to include slot

charter had to be read along with Circular No. 05/2005 which was

a  contemporaneous expositio  circular issued after inserting the

said  Chapter  and  clarifies  that  “the  tonnage  income  shall  be

further  increased  by  the  deemed  tonnage”  which  is  to  be

computed  in  the  manner  prescribed  in  Rule  11Q.   Deemed

tonnage  means  the  tonnage  in  respect  of  an  arrangement  of

purchase of slots, slot charter, and an arrangement of sharing of

break-bulk vessels. He, thus, argued that arrangements of slot

charter even on non-qualifying ship are statutorily included within

the  ambit  of  the  term 'income from the  business  of  operating

qualifying ship'.

17. We  have  given  our  earnest  consideration  to  the  respective

Civil Appeal No. 5869 of 2016 & Anr. (arising out of SLP (C) No. 25251 of 2015 & Anr.) Page 19 of 31

Page 20

submissions.

18. To recapitulate  briefly,  the  assessee  is  a  company as  defined

under  Section 2(17)  of  the Act  and is  also in  the business of

operating qualifying ship(s).  It is also not in dispute that it owns a

qualifying  ship  and  fulfillment  of  this  condition  permits  the

assessee to exercise its option for computation of income from

the business of operating qualifying ships under Chapter XIIG of

the Act.  The assessee exercised the option in this behalf, as per

Section  115VP of  the  Act  in  respect  of  Assessment  Years  in

question.   Therefore,  the  assessee  is  a  'qualifying  company'

under  Section  115VC of  the  Act.   In  fact,  the  income that  is

generated from the qualifying ship owned by the assessee is also

assessed under the special provisions contained in Chapter XIIG

of the Act.  The dispute, however, pertains to the income from the

slot charter arrangements which the assessee has made in other

ships during the concerned Assessment Years.  The ships where

slot  charter  are  arranged  are  obviously  not  owned  by  the

assessee. Further, as only some slots are chartered, full  ships

are not chartered.  

In this context, the first question would be as to whether such a

Civil Appeal No. 5869 of 2016 & Anr. (arising out of SLP (C) No. 25251 of 2015 & Anr.) Page 20 of 31

Page 21

slot charter can be treated as 'operating ships' within the meaning

of Section 115VB of the Act?  This provision specifically provides

that  for  the  purpose  of  Chapter  XIIG,  a  company  would  be

regarded  as  operating  a  ship  'if  it  operates  any  ship  whether

owned or chartered by it and includes a case where even a part

of the ship has been chartered by it in an arrangement such as

slot charter, space charter or joint charter'.  It is clear from the

above that slot charter is specifically included as an instance of a

ship chartered by the company.

19. Next  comes the issue as to whether  it  would  be treated as a

'qualifying ship' as defined under Section 115VD of the Act.  A

perusal  of  the  provisions  of  Section  115VD  of  the  Act  would

indicate that all  the conditions laid down therein are fulfilled by

the assessee, except the conditions stipulated in clause (c) which

impose  an  obligation  on  the  assessee  to  produce  a  valid

certificate  in  respect  of  such  a  ship  where  slot  is  chartered,

indicating  its  net  tonnage  in  force.   The  entire  controversy

revolves  around the  production  of  this  certificate.   As  per  the

Revenue, this is an essential  requirement contained in Section

115VD of the Act which cannot be done away with because of the

Civil Appeal No. 5869 of 2016 & Anr. (arising out of SLP (C) No. 25251 of 2015 & Anr.) Page 21 of 31

Page 22

formula  that  is  contained  in  Section 115VG of  the  Act  for  the

computation of Tonnage Income.  It is argued that computation of

Tonnage Income under TTS has to be as for the provisions of

Section 115VG and sub-section (4) thereof defines 'Tonnage' to

mean tonnage of a ship indicated in the certificate referred to in

Section 115VX.  This Section makes the following reading:

“115VX. (1) For the purposes of this Chapter,—

(a) the tonnage of a ship shall be determined in accordance with the valid certificate indicating its tonnage;

(b) "valid certificate" means,—

(i) in case of ships registered in India—

(a)  having  a  length  of  less  than  twenty-four metres, a certificate issued under the Merchant Shipping (Tonnage Measurement of Ship) Rules, 1987  made  under  the  Merchant  Shipping  Act, 1958 (44 of 1958);

(b)  having  a  length  of  twenty-four  metres  or more, an international tonnage certificate issued under  the  provisions  of  the  Convention  on Tonnage  Measurement  of  Ships,  1969,  as specified  in  the  Merchant  Shipping  (Tonnage Measurement of Ship) Rules, 1987 made under the Merchant Shipping Act, 1958 (44 of 1958);

(ii)  in case of  ships registered outside India,  a licence  issued  by  the  Director-General  of Shipping under section 406 or section 407 of the

Civil Appeal No. 5869 of 2016 & Anr. (arising out of SLP (C) No. 25251 of 2015 & Anr.) Page 22 of 31

Page 23

Merchant  Shipping  Act,  1958  (44  of  1958) specifying  the  net  tonnage  on  the  basis  of Tonnage  Certificate  issued  by  the  Flag  State Administration  where  the  ship  is  registered  or any  other  evidence  acceptable  to  the Director-General  of  Shipping  produced  by  the ship  owner  while  seeking  permission  for chartering in the ship.”

20. This  argument  seems  to  be  convincing  in  the  first  blush  as

requirement of producing a valid certificate is specified in Section

115VD as well as in sub-section (4) of Section 115VG.  However,

a little closer scrutiny of the aforesaid provisions would take away

the sheen of this submission and negate the contention of the

Revenue, thereby persuading us to accept the reasoning given

by  the  High  Court  as  well  as  the  manner  in  which  aforesaid

statutory  provisions  are  interpreted  by  it.  In  this  behalf,  we

reproduce sub-section (4) of Section 115VG of the Act which is a

provision regarding computation of tonnage income:

(4) For the purposes of this Chapter, the tonnage shall mean the tonnage of a ship indicated in the certificate  referred  to  in  section  115VX  and includes the deemed tonnage computed in the prescribed manner. Explanation.—For  the  purposes  of  this sub-section,  "deemed  tonnage"  shall  be  the tonnage  in  respect  of  an  arrangement  of purchase  of  slots,  slot  charter  and  an arrangement of sharing of break-bulk vessel.

Civil Appeal No. 5869 of 2016 & Anr. (arising out of SLP (C) No. 25251 of 2015 & Anr.) Page 23 of 31

Page 24

21. Aforesaid  provision  is  in  two  parts  insofar  as  computation  of

tonnage is concerned.  When it comes to tonnage of a ship, a

certificate  as  mentioned  in  Section  115VX is  to  be  produced.

Second part  of  this  provision talks  about  'deemed tonnage'  in

contradistinction  to  the  'actual  tonnage'  mentioned  in  the

certificate.   Thus,  it  is  not  only  the  actual  tonnage  that  is

mentioned in the certificate referred to in Section 115VX of the

Act which this provision deals with.  In addition, deemed tonnage

is also to be included if there is such a deemed tonnage, and that

deemed tonnage is to be added to the actual tonnage which is

indicated in the certificate. Explanation to sub-section (4),  inter

alia,  mentions  that  insofar  as  slot  charter  arrangements  are

concerned,  purchase  of  such  slot  charter  shall  be  treated  as

deemed tonnage.  The Legislature has, thus, clearly visualised

that insofar as deemed tonnage is concerned, there would not be

any possibility  of  producing a  certificate  referred to  in  Section

115VX of the Act.  When we read the provision in this manner, it

becomes amply clear that Section 115VD of the Act which talks of

a qualifying ship, contemplates the situation in which entire ship

is  either  owned  or  chartered.   Similar  is  the  position  which

inheres in Section 115VX of the Act as it refers to 'the tonnage of

Civil Appeal No. 5869 of 2016 & Anr. (arising out of SLP (C) No. 25251 of 2015 & Anr.) Page 24 of 31

Page 25

a ship'.  Therefore, whenever the question of a tonnage of a ship

crops up and the said tonnage is to be determined, it has to be in

accordance with the valid certificate indicating its tonnage and it

is  a compulsory obligation of  the assessee to produce such a

certificate.  However, this requirement of producing a certificate

would  not  apply  when  entire  ship  is  not  chartered  and  the

arrangement pertains only to purchase of slots, slot charter and

an arrangement of sharing of break-bulk vessel.  The contention

of the senior counsel for the assessee is right that the legal fiction

created by sub-section (4) of Section 115VG is to be given its

proper and sensible meaning.  This position becomes abundantly

clear  by  reading  Rule  11Q  of  the  Rules  which  specifies  the

basis/formula  of  computing  deemed  tonnage  in  respect  of

arrangement of slot charter and reads as under:

“11Q. (1) For the purpose of the  Explanation  to sub-section  (4)  of  section  115VG,  deemed tonnage  in  respect  of  an  arrangement  of purchase  of  slots  and  slot  charter  shall  be computed  (illustrative  formula  given  in  Note  3 appearing after the corresponding Form No. 66) on the following basis :

2.5 TEU = 1 Net Tonnage (1 NT)

where  TEU  is  Twenty  foot  Equivalent  Unit (Container of this size)

Civil Appeal No. 5869 of 2016 & Anr. (arising out of SLP (C) No. 25251 of 2015 & Anr.) Page 25 of 31

Page 26

(2) Computation  of  deemed  tonnage (illustrative  formula  given  in  Note  4  appearing after the corresponding Form No. 66) in respect of  an  arrangement  of  sharing  of  break-bulk vessel shall be made on the following basis :

(i)  in case where cargo is restricted by volume: 19 cubic meter (cbm) = 1 net tonnage (1 NT); and

(ii)  in case where cargo is restricted by weight 14 metric tons = 1 net tonnage (1 NT)”

22. In Karimtharuvi Tea Estates Ltd. v. State of Kerala and Ors.1,

a Constitution Bench of this Court, while interpreting conflicting

tax provisions held that the Rules made under the Act, must be

taken to be prescribed by the Act and the definitions contained

therein must apply to other provisions.  In the same judgment, it

was  held  that  if  two  provisions  are  in  conflict,  they  must  be

interpreted in a harmonious manner.  The calculation of income

arising from carriage of goods on slot basis has, in the wisdom of

the Legislature, been disconnected from the capacity of a ship,

on account of impossibility of getting such information in relation

to ships on which slot charter is undertaken.  This aspect has due

recognition in Note 3 of the said Form 66.  Thus, the Act and the

Rules  for  computation  on  tonnage  tax  specifically  and

1 (1968) 48 ITR (SC) 28

Civil Appeal No. 5869 of 2016 & Anr. (arising out of SLP (C) No. 25251 of 2015 & Anr.) Page 26 of 31

Page 27

categorically differentiate the requirement of the Certificate with

regards to owned ship and slot charter.  In law, the said Rule also

recognizes that identification of the vessel for slot charter cannot

be done.

23. It would also be pertinent to mention that Note 3 below Form No.

66, in terms of Rule 11D, recognizes the reason for prescribing a

separate formula for slot charter  by mentioning:  “3.  Formula for

conversion of TEUs into NT (Slot Charter)

(i) In addition to loading containers on their own container vessels, shipping companies also hire slots  on  container  ships  (not  owned  by  them) plying on various routes.  These slots could be hired for a sector voyage or on long term basis, all  round  the  year,  in  various  vessels  and  in varying numbers and thus cannot be converted to net tonnage identifying the particular vessel on which the slot is hired. Thus, a formula has been worked  out  to  convert  the  slots  hired  into  net tonnage.”

24. The position is taken beyond any pale of doubt with the following

Note in Form No. 66:

“There is no need to mention the name of  the ship, income from which is computed on deemed tonnage basis.”

25. We may also point out that in terms of Section 115VI(2), relevant

Civil Appeal No. 5869 of 2016 & Anr. (arising out of SLP (C) No. 25251 of 2015 & Anr.) Page 27 of 31

Page 28

shipping income of  a Tonnage Tax Company means its profits

from core activities and its profits from incidental activities.  Core

activities  of  a  Tonnage  Tax  Company  have  been  specified  in

sub-section (2)  of  the said section.  These include its  activities

from operating qualifying ships and other ship related activities

including slot charter.   

26. When  the  scheme  of  the  aforesaid  special  provision  for

computation  of  income  under  TTS  is  exempted,  we  find  the

balance tilted in favour of the assessee as that was the precise

purpose in introducing TTS in India.  It may be stated in brief that

in  view  of  the  stiff  competition  faced  by  the  Indian  shipping

companies vis-a-vis foreign shipping lines, and in order to ensure

an  easily  accessible,  fixed  rate,  low  tax  regime  for  shipping

companies,  the  Rakesh  Mohan  Committee  in  its  report  (of

January,  2002)  recommended  the  introduction  of  the  TTS  in

India, which was similar to, and adopted some of the best global

practices prevalent.   The whole  purpose of  introduction of  the

Scheme  was  to  make  the  Indian  shipping  industry  more

competitive in the global space by rationalising its tax cost.  For

the reason that it is impossible to cater to all shipping routes on

Civil Appeal No. 5869 of 2016 & Anr. (arising out of SLP (C) No. 25251 of 2015 & Anr.) Page 28 of 31

Page 29

owned  ships,  it  is  an  accepted  and  widely  prevalent  practice

globally  and  in  India  that  shipping  companies  engage  in  slot

charter  operations.   If  such slot  charter  arrangements  are  not

entered into, then Indian shipping companies will not be able to

take  up  contract  of  affreightments  and  these  contracts  would

have fallen to only foreign shipping lines thereby making Indian

shipping industry uncompetitive.  Such slot charter arrangements

being with  a  shipping  company but  not  in  relation  to  or  for  a

particular ship, it is impossible for the Indian shipping company to

identify the cargo ship, which carried the goods.  This peculiarity

has been duly recognized at Note 3 of Form 66 and reproduced

as under:

“In  addition to  loading containers  on their  own container vessels, shipping companies also hire slots  on  container  ships  (not  owned  by  them) plying on various routes.  These slots could be hired for a sector voyage or on long term basis, all  round  the  year,  in  various  vessels  and  in varying numbers and thus cannot be converted to net tonnage identifying the particular vessel on which the slot is hired.  Thus, a formula has been worked  out  to  convert  the  slots  hired  into  net tonnage”.

Similarly, for space charter also, this business aspect has been

recognized at Note 4(b) to Form 66 as under:

Civil Appeal No. 5869 of 2016 & Anr. (arising out of SLP (C) No. 25251 of 2015 & Anr.) Page 29 of 31

Page 30

“Since the entire vessel is not chartered and only a  small  space  is  booked  in  the  vessel, conversion of chartered space into net tonnage is not available.  Hence, a conversion formula of cargo carried on a ship to its net tonnage has been worked out”.

Accordingly, there is no requirement of the certificate under the

Scheme in relation to the vessel on which slot charter operations

are carried out.   

27. We  would  also  like  to  refer  to  Circular  No.  05/2005  dated

15.07.2005 explaining the need and essence of the introduction

of these provisions which was issued contemporaneously by the

Central Board of Direct Taxes (CBDT).  The Circular clarifies that

the Scheme is a “preferential regime of taxation”.  It also clarifies

that “charging provision is under Section 115VA read with Section

115VF and Section 115VG.”  Circulars of CBDT explaining the

Scheme  of  the  Act  have  been  held  to  be  binding  on  the

Department  repeatedly  by this  Court  in  a  series  of  judgments

including Azadi Bachao Andolan v. Union of India2, Navnit Lal

Jhaveri v. K.K. Sen3, and UCO Bank v. CIT4.

2 263 ITR 706 3 IAC 56 ITR 198 SC 4 237 ITR 889 SC

Civil Appeal No. 5869 of 2016 & Anr. (arising out of SLP (C) No. 25251 of 2015 & Anr.) Page 30 of 31

Page 31

28. We, thus, agree with the decision of the High Court and find no

merit  in the instant appeals.  The same are hereby dismissed.

There shall, however, be no order as to cost.   

.......................................C.J.I. (T.S. THAKUR)

.............................................J. (A.K. SIKRI)

.............................................J. (R. BANUMATHI)

NEW DELHI; JULY 05, 2016

Civil Appeal No. 5869 of 2016 & Anr. (arising out of SLP (C) No. 25251 of 2015 & Anr.) Page 31 of 31