Tonnage Tax Scheme – Chapter XIIG of Income-tax Act, 1961
CA. Kishan Rajubhai Mer
The author is member of the Institute of Chartered Accountants of India. He can be reached at kishan_mer@outlook.com.
Introduction to Tonnage Tax Scheme (TTS)
To promote the Indian shipping industry and make it more competitive with the global market, a Tonnage Tax Scheme (“TTS”) for taxation of shipping profits was introduced vide Finance Act (No. 2), 2004 w.e.f 01/04/2005.
Chapter XIIG was inserted in the Income-tax Act, 1961 (“the Act”) containing sections 115V to 115VZC which provides for special provisions relating to the taxation of the income of shipping companies. In this article, the author has made attempt to understand major provisions governing TTS under the Act.
Registration under TTS (Section 115VP to 115VR)
A qualifying company may opt for TTS by applying through Form 65 to the jurisdictional Joint Commissioner within period of 3 months from the date of incorporation or date on which it becomes a qualifying company.
The application shall be signed and verified on behalf of the company by the managing director of the company, or where for any unavoidable reason such as the managing director is not able to sign and verify this Form, or where there is no managing director, by any director of the company.
While applying, the company shall give, apart from other general details, the details of all ships owned or chartered by it, whether the ship is qualified or not.
Further, the company should enclose to the application for registration, in respect of each of the ships’ details of which are being given in application, a copy of the following certificates:
- Certificate of registration under the Merchant Shipping Act, 1958 and certificate under Merchant Shipping (Tonnage Measurement of Ship) Rules, 1987 made under the Merchant Shipping Act, 1958.
- Certificate of registration under the Merchant Shipping Act, 1958 and 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.
- In case of ships registered outside India, permission obtained from the Director-General of Shipping to charter in a ship.
Validity Period: An option for TTS, once approved by the Jurisdictional Joint Commissioner, shall remain valid for period of 10 assessment years from the assessment year relevant to previous year in which the option is exercised.
Renewal: The company may renew an option to opt for TTS by making an application as discussed above within one year from the end of the previous year in which the option ceases to have effect.
Which is a Qualifying Company (Section 115VC)?
Only a qualifying company may opt for TTS. A company is a qualifying company if:
- It is an Indian Company;
- Place of effective management of company is in India;
- It owns at least one qualifying ship; and
- Main objective of the company is to carry on the business of operating ships.
(A) The place where board of directors or executive directors make their decisions; or
(B) Where board routinely approves decisions made by executive directors/officers, the place where such executive directors or officers perform their functions.
What is Qualifying Ship (Section 115VD)?
To be a qualifying company, it must own at least one qualifying ship. A ship is a qualifying ship if:
- It is a sea-going ship with 15 Net tonnage or more;
- It is a ship registered under Merchant Shipping Act, 1958 or a ship registered outside India licensed by DG of Shipping; and
- Has a valid certificate in respect of such ship indicating its net tonnage is in force.
• Ship used for provision of goods/services normally provided on land
• Fishing vessels, factory ships, pleasure crafts
• Harbour and river ferries, offshore installations
• Qualifying ship used as a fishing vessel for > 30 days during previous year.
(Note: Dredgers were omitted from exclusions vide Finance Act 2005 w.e.f 01.04.2006, hence dredgers qualify subject to conditions).
Operating Ship (Section 115VB) & Charter-in Limits (Section 115VV)
A company shall be regarded as operating a ship if it operates any ship whether owned or chartered by it. Hence, where the company has taken ships on charter/lease, whether dry or wet, is covered by the term operating ship. It also includes arrangements such as slot charter, space charter or joint charter.
However, it excludes a ship which has been chartered out by the company on bareboat charter-cum-demise terms or on bareboat charter terms for a period exceeding 3 years.
“Bareboat charter”: Hiring of a ship for a stipulated period on terms which gives the charterer possession and control of the ship, including the right to appoint the master and crew.
“Bareboat charter-cum-demise”: A bareboat charter where the ownership of the ship is intended to be transferred after a specified period to the company to whom it has been chartered.
Limit for Charter-in of Tonnage (Section 115VV)
A company which has opted for TTS, shall not charter in more than 49% of the net tonnage of the qualifying ships operated by it during any previous year.
- It excludes a ship chartered in by the company on bareboat charter-cum-demise terms.
- Where limit for charter-in of tonnage exceeds 49% in any previous year, then income of such company for that previous year is computed as if TTS does not have effect for that previous year.
- Where limit exceeds 49% in two consecutive previous years, TTS ceases to have effect from the 3rd year onward.
- Where TTS ceases to have effect as above, the company is prohibited to opt for TTS for a period of 10 years (Section 115VS).
Computation of Profits & Relevant Shipping Income (Sections 115VA & 115VI)
Section 115VA overrides sections 28 to 43C. Income from business of operating qualifying ships is computed in accordance with TTS and deemed to be Income chargeable under Profits and gains of Business or profession (“PGBP”).
Relevant Shipping Income (Section 115VI) consists of:
- Profit from core activities: Activities from operating qualifying ship; shipping contracts (pooling arrangements or contract of affreightment); specific shipping trades like on-board passenger services (fares, food & beverages); slot/space/joint charters, feeder services, container box leasing.
- Profit from incidental activities: Maritime consultancy charges, income from loading/unloading of cargo, ship management fees for managed vessels, and maritime education or recruitment fees. (Turnover of incidental activities should not exceed 25% of turnover of core activities, else excess is taxed under normal provisions).
Note: In case the relevant shipping income of a tonnage tax company is a loss, then such loss shall be ignored for the purposes of computing tonnage income.
Tonnage Income (Section 115VF) & Computation Slabs (Section 115VG)
The tonnage income of the company is the aggregate of tonnage income of each qualifying ship. Tonnage income of each qualifying ship = Daily tonnage income × Number of days in operation during previous year.
| Qualifying ship having net tonnage (1) | Amount of daily tonnage income (2) |
|---|---|
| Up to 1,000 tons | ₹ 70 for each 100 tons |
| Exceeding 1,000 but not more than 10,000 tons | ₹ 700 plus ₹ 53 for each 100 tons exceeding 1,000 tons |
| Exceeding 10,000 but not more than 25,000 tons | ₹ 5,470 plus ₹ 42 for each 100 tons exceeding 10,000 tons |
| Exceeding 25,000 tons | ₹ 11,770 plus ₹ 29 for each 100 tons exceeding 25,000 tons |
Example of Computation of Tonnage Income:
Company A, a tonnage tax company, owned qualifying ships details of which are as follows:
| Name of Ship (A) | Net tonnage per cert. (B) | Rounded off to ‘100 (C) | Daily: up to 1000T (D) | Daily: >1000 to <10000T (E) | Daily Total (F)=(D)+(E) | Days in Op. (G) | Tonnage Income (Rs) (H)=(F)×(G) |
|---|---|---|---|---|---|---|---|
| Ship – B | 751 | 800 | 560 | 0 | 560 | 365 | 204,400 |
| Ship – C | 1749 | 1700 | 700 | 371 | 1071 | 180 | 192,780 |
| Ship – D | 3579 | 3600 | 700 | 1378 | 2078 | 280 | 581,840 |
| Total Tonnage Income for previous year: | ₹ 979,020 | ||||||
General Exclusion of Deductions (Section 115VL)
- Deductions under sections 30 to 43B deemed to have been given full effect.
- No loss shall be allowed to be carried forward or set-off.
- No deduction allowed under Chapter VIA.
- Depreciation deemed to have been computed and allowed.
Exclusion from MAT (Section 115VO)
Book profit or loss derived from activities of a tonnage tax company referred in section 115VI shall be excluded from the book profit of the company for the purposes of section 115JB. For incomes other than TTS income, MAT remains applicable unless opted for section 115BAA.
Transfer of Profits to Tonnage Tax Reserve (TTR) Account (Section 115VT)
Tonnage tax company shall require to credit to reserve account (“TTR”) an amount not less than 20% of book profits derived from relevant shipping activities for each previous year. TTR created shall be utilized within 8 years for:
- Acquisition of new ship for the business of the company (cannot be sold/transferred for 3 years, except in demerger).
- Until acquisition, for the purpose of operating qualifying ships.
- Prohibited Utilizations: Distribution of dividend/profit; remittance outside India as profit; creation of any assets outside India.
Consequences of Non-compliance: If unutilized within 8 years or mis-utilized, proportional relevant shipping income becomes taxable under normal provisions. If credit is < 20%, proportional shortfall is taxable under normal provisions. If TTR is not created for 2 consecutive years, TTS ceases from 3rd year and prohibited for 10 years (Section 115VS).
Compliance, Training & Transfer Pricing Jurisprudence
Maintenance & Audit of Accounts (Section 115VW)
Must maintain separate books of accounts in respect of operating qualifying ships and furnish Audit Report in Form 66 from a Chartered Accountant before the specified date under Section 44AB.
Minimum Training Requirement (Section 115VU)
Must comply with DG Shipping training guidelines and furnish DG Shipping compliance certificate with return u/s 139. If not complied for 5 consecutive previous years, TTS ceases from 6th year onward and barred for 10 years (Section 115VS).
Applicability of Transfer Pricing to Tonnage Tax Companies: Mumbai ITAT Ruling
Van Oord India Private Limited v. ACIT – 5(3) Mumbai, [ITA: 7228/Mum/2012] [AY 2007-08]
The Mumbai ITAT had the occasion to deal with the question whether transfer pricing provisions contained in Chapter–X of the Act can also apply to tonnage income determined in accordance with TTS under Chapter–XIIG of the Act.
Ruling: The ITAT held that tonnage income is computed based on tonnage capacity and number of days in operation and not at arm’s length price. Section 92C prescribes methods for computation of ALP and no method is prescribed which can have application to tonnage income. Thus, the machinery provided under Chapter–X to compute arm’s length price fails, and in such circumstances, applicability of Chapter–X has to fail. Although Chapter–X was invoked to alter rental charges paid to an associated enterprise, it has no effect on income computed under Chapter–XIIG. Hence, Chapter–X has no application in computing income chargeable under Chapter–XIIG.