ACKNOWLEDGMENT

We take this opportunity to express our humble gratitude and personal regards to Dr. Manoj
Kumar Singh for inspiring us and guiding us during the course of this project work and also for
his cooperation and guidance from time to time during the course of this project work on the
topic.

Place: Jodhpur Name of Students

Date of Submission: 19th August, 2017 Maryanka

Nishtha Acharya

Page 1
 TABLE OF CONTENTS

TOPIC NAME PAGE NO

 SYNOPSIS
1. INTRODUCTION 03
2. RESEARCH QUESTION 03
3. HYPOTHESIS 03
4. RESEARCH METHODOLOGY 04
5. CHAPERTISATION 04

 PROJECT

1. INTRODUCTION 05
SCOPE OF TOTAL INCOME 06
2. INCOME OF SHIPS AND SHIPPING COMPANIES 06
NEED FOR A SPECIAL TAX REGIME IN CASES OF SHIPS AND SHIPPING COMPANY 06
3. TONNAGE TAX SCHEME 07
TTS IN INDIA 07
4. BENEFITS OF TONNAGE TAX SCHEME 09
GROWTH OF DOMESTIC FLEET 09
5. CASE STUDY ON TRANS ASIAN SHIPPING PVT. LTD. V CIT 10
SCOPE OF APPLICABILITY OF TTS 10
6. ASCERTAINMENT OF TAX OF FOREIGN SHIPPING COMPANIES 14
A CRITICAL ANALYSIS OF SEC 172 OF IT ACT, 1961 AND ITS RELEVANCE WITH
RESPECT TO DTAA 15
7. WHAT LACKS IN THE TTS 17
8. CONCLUSION 18
9. LITERATURE REVIEW 19

Page 2
SYNOPSIS

ASSESSMENT OF INCOME OF SHIPS AND SHIPPING COMPANIES

INTRODUCTION

Approximately, 90 per cent of global trade (in terms of volume) is carried out through sea,
making the shipping industry a key participant in world trade. At the same point of time, the
Taxation Law in India provides for the tax on the total income of an assessee. For the purpose of
determining the total income of a person, Section 5 of the Income Tax Act, 1961 provides the
scope of total income. This provision provides that all the income received or accrued in India or
accrued outside India, of a resident, is taxable in India. On the other hand, for a non-resident, all
the income received or accrued in India is taxable in India. However, there exist complexities in
determining the income of ships and shipping companies of residents or non-residents. Shipping
vessels carry passengers and cargo through the territories of various countries, therefore, the
assessment of the income of a vessel for each voyage in all the countries having some nexus with
it becomes a complex job.

Most of the worldwide exchange is helped out through ocean, making the delivery business a key
member in world exchange. Therefore, a liberalized tax structure is required to attract more
investment in the shipping industry. However, the question is, whether the current system in
India for the assessment of income of ships and shipping companies is effective enough to keep
the inflow of investment alive.

RESEARCH QUESTION

 Whether the Tonnage Tax Scheme (TTS) makes the Indian Shipping Industry more
competitive in the international markets?

HYPOTHESIS

 The Tonnage Tax Scheme (TTS) makes the Indian Shipping Industry more competitive
in the international markets.

Page 3
RESEARCH METHODOLOGY

Doctrinal

We shall be taking reference from Newspaper articles, research papers, working papers, journals,
textbooks and other secondary data in our project report. The research methodology shall be
doctrinal and with the help of information received from the above mentioned sources, the
project report would be developed and aim to find an answer to the research questions.

CHAPTERISATION

Chapter I: Introduction

Scope of Total Income

Chapter II: Income of Ships and shipping companies

Need for a special tax regime in cases of ships and shipping companies

Chapter III: Tonnage TaxScheme

Tonnage Tax Scheme in India

Chapter IV: Benefits of Tonnage Tax Scheme

Growth of domestic fleet

Chapter V: Case study on Trans Asian Shipping Pvt. Ltd v CIT

Scope of applicability of TTS

Chapter VI: Ascertainment of tax of Foreign Shipping Companies

A critical anlysis of section 172 of IT Act, 1961 and its relevance with respect to DTAA

Chapter VII: What lacks in the TTS

Income from instruments invested in, out of the reserved accounts are not included in the
Tonnage Income

Chapter VIII: Conclusion

Page 4
CHAPTER I
INTRODUCTION

The TTS has been brought into picture as an aftermath of a long proposed tax regime in the
interim budget for part of 2004-05, as a result of hefty tax burden faced by the Indian shipping
companies with an objective of furthering profitability margins of the companies. One of the
prominent benefits rendered by the new instrument has to be promotion of FDI in the shipping
sector along with shoring up the country’s fleet strength.

The Taxation Law in India provides for the tax on the total income of an assessee. For the
purpose of determining the total income of a person, Section 5 of the Income Tax Act, 1961
provides the scope of total income. This provision provides that all the income received or
accrued in India or accrued outside India, of a resident, is taxable in India. On the other hand, for
a non-resident, all the income received or accrued in India is taxable in India. However, there
exist complexities in determining the income of ships and shipping companies of residents or
non-residents. Shipping vessels carry passengers and cargo through the territories of various
countries, therefore, the assessment of the income of a vessel for each voyage in all the countries
having some nexus with it becomes a complex job.

The key derivative force behind bringing about the scheme for computation of tax liability of
shipping companies was done by rationale of determination of tonnage of fleet and not according
to profits generated by its commercial undertakings. The Rakesh Mohan Committee Report
which is associated as a basis of the scheme recommended analyzing of tonnage tax by
multiplying Net Registered Tonnage of a vessel with a notional income rate so as to obtain a
daily taxable income. Similar facets of concept of notional income have been in implementation
in countries like UK, Germany and Netherland.

Approximately 90 per cent of global trade (in terms of volume) is carried out through sea,
making the shipping industry a key participant in world trade. Therefore, a liberalized tax
structure is required to attract more investment in the shipping industry. However, the question
is, whether the current system in India for the assessment of income of ships and shipping
companies is effective enough to keep the inflow of investment alive.

Page 5
Scope of Total Income

The Income Tax Act, 1961 discusses the scope of total income. Where all the income from
whatever source, received or deemed to be received, or accrued or deemed to accrue in India or
accrued outside India, of a resident, is taxable in India. On the other hand, for a non-resident, all
the income received or deemed to be received, or accrued or deemed to accrue in India is taxable
in India.1

CHAPTER II
INCOME OF SHIPS AND SHIPPING COMPANIES

However, the assessment of income of ships and shipping companies is not so straight forward.
The provision relating to scope of total income under section 5 of the Income Tax Act, 1961
discusses total income in any previous year. A previous year “means the financial year
immediately preceding the assessment year”2
A financial year begins on 1st April of a year and ends on the 31st March of the subsequent year.
Under section 2(9) “assessment year means the period of twelve months commencing on the 1st
day of April every year”.
The difficulty that arises in the computation of income of ships is that the ships are continuously
on voyage one after the other, travelling from port to port. They carry cargo and passengers from
different countries; therefore, their income accrues in a number of countries and is also received
in a number of countries.

Need for a special tax regime in cases of ships and shipping companies

It may be argued by some that a differential treatment to the shipping industry alone is
unreasonable and un-called for, the reason being that several other industries are functioning
majorly at the global level and are subjected to intense market competition; however, no
beneficial tax schemes have been brought about in those sectors. At this juncture, it is pertinent
to note that “almost ninety percent of the world’s fleet enjoys beneficial tax schemes and they are
subjected to nominal taxes.”3

1
Section 5 of Income Tax Act, 1961
2
Section 3 of Income Tax Act, 1961
3
Michael Pinto, “Why Tonnage Tax Makes Sense”, Business Standard, March 1, 2004.

Page 6
While framing domestic laws on such subjects it is a quintessential fact to give due regards to the
corresponding laws on the same subject in different jurisdictions. What is important is the equal
treatment to entities within the domestic tariff area (DTA). For as long as the DTA provides a
level playing field and the entities within are subjected equally to it, no special treatment for any
class of entity is required.
However, shipping industry is not subjected to such a plain and non-complex environment
whereby the domestic tariff system is sufficient to ensure the competitiveness of the industry in
the market. The competition faced by the shipping companies is not restricted to the domestic
sphere; rather, they face major competition at the international level. Now, if ninety percent of
their rival companies are subjected to nominal tax rates and the Indian Shipping Companies are
taxed at the existing rates of 35 percent4 that definitely does not set a competitive platform for
the Indian Shipping Companies. Thus, in order to remain competitive, the Indian companies need
to be brought at par with the rest of the companies around the world.

CHAPTER III
TONNAGE TAX SCHEME
“Tonnage tax is calculated not on the profit or loss of a company in a given year, but by applying
a notional annual income on its net registered tonnage.”5 The implication of this is that the
company knows its tax burden in advance and the pre-determined tax has to be paid, irrespective
of the profits or losses that the company makes in any financial year. This method of taxation
provides the shipping companies with a safe sphere of opportunity to plan their financial
activities. Since the tax liability is pre-known and cannot go beyond a certain amount, the
company can accordingly plan its investments and other business activities.

Tonnage Tax Scheme in India

“The Finance Act (No.2), 2004 introduced Tonnage Tax System (TTS) for taxation of income
derived from shipping activities by an Indian Company. A new Chapter XII-G (containing
sections from 115V to 115VZC) was inserted in the Income Tax Act 1961 to provide for special

4
Paragraph E of Part III of the First Schedule of the Finance Bill, 2016
5
Supra Note 1

Page 7
provisions relating to taxation of shipping companies with effect from the assessment year 2005-
06.”6
This scheme of taxation is optional for qualifying Indian shipping companies.
A company under the Income Tax Act, 1961 is a qualifying company if-
“(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.”7
We can, thus, see that only Indian companies could be qualifying companies. Therefore, only
Indian companies have the option to opt for the Tonnage Tax Scheme which is a beneficial tax
scheme for shipping companies.
Section 115 VG discusses the computation of the tonnage income of qualifying shipping
companies. According to section 115VG (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).”
Sub section (2) provides that the tonnage income of any qualifying ship is the daily tonnage
income of the ship multiplied by the number of days in the previous year. A table therefore has
been provided for the calculation of the daily tonnage income.
Qualifying ship having net tonnage Amount of daily tonnage income
(1) (2)
up to 1,000 Rs. 46 for each 100 tons
exceeding 1,000 but not more than 10,000 Rs. 460 plus Rs. 35 for each 100 tons exceeding
1,000 tons
exceeding 10,000 but not more than 25,000 Rs. 3,610 plus Rs. 28 for each 100 tons
exceeding 10,000 tons
exceeding 25,000 Rs. 7,810 plus Rs. 19 for each 100 tons
exceeding 25,000 tons

6
Press Information Bureau, Government of India, Ministry of Finance available at
http://pib.nic.in/newsite/PrintRelease.aspx?relid=117521
7
Section 115 VC of the Income Tax Act, 1961

Page 8
Under the Tonnage Tax System, Indian shipping firms have to pay just 1-2% of their income as
tax, as compared with the corporate tax rate of 33.9%.8

CHAPTER IV
BENEFITS OF TONNAGE TAX SCHEME
With the introduction of this scheme, there would be a simple and fixed rate tax regime being
applied uniformly for the assessee opting for availing the scheme along with a proficient level of
certainty in tax on shipping activities. “In case of pure shipping companies, it will reduce the
amount of effort required to compute annual tax returns and result in cost savings. q Listed
companies will derive more advantages from this regime in that the deferred tax liability in
respect of shipping will be phased out. This will result in higher earnings per share and at the
same time strengthen the balance sheet.”9

Also, under Sec. 33 of the IT Act, the scheme would have a lot of benefits as the shipping
companies would be able to dispose and acquire ships whenever they want and that there would
not be constraints running through the same provision relating to such transactions. The section
also lays down that when the acquired ship is sold within timeframe of eight years of purchase,
the revenue so generated out of the same has to be added as profits for the year, thereby only
taxing capital gains from the transaction.

Growth of Domestic Fleet

1. Direct Relationship between Growth of Fleet and Freight

With a beneficial fiscal scheme, the domestic fleet is bound to grow. What is important to
understand is why such a growth of domestic fleet is imperative. United Nations Conference on
Trade and Development conducted a study whereby it was found that the developed maritime
nations paid 4 percent of the value of their trade by way of freight. This percentage increased in
the cases on developing maritime nations to 8 percent and in case of India, this value goes as
high as 10 percent10. This is because of the simple fact that the more developed the fleet of a

8
P. Manoj, “Tonnage Tax Rules Need Refinement” Last Modified: Fri, Jun 05 2015.
9
KETAN KARANI, TONNAGE TAX: IMPLICATIONS FOR THE SHIPPING INDUSTRY 1 (July, 2004),
http://www.kotaksecurities.com/pdf/specialreport/Tonnage_tax_July_2004.pdf
10
Supra Note 1

Page 9
 country, the less it is dependent on the ship-renting nations and thereby it has to pay a lesser
amount as freight.

2. More Employment

Every ship with an Indian flag has a crew consisting Indians. Thus, every fleet will add
considerably to the employment in India, thereby affecting the Indian economy in a very positive
way. The example of UK can be cited in this behalf. “In each of the first three years following
the introduction of tonnage tax, the British fleet strength went up by more than 1 million tonnes,
rocketing the country from a lowly 21st position to the 9th largest in the world.”11

3. Strengthening of the Shares of Indian Vessels in the Indian Foreign Trade

Above all, this measure should arrest the declining share of Indian vessels in India’s foreign
trade and if the British experience is anything to go by should result in considerable savings in
payments to foreign ship owners.

CHAPTER V
CASE STUDY ON TRANS ASIAN SHIPPING PVT. LTD. V. COMMISSIONER OF
INCOME TAX

Scope of Applicability of the Tonnage Tax Scheme

It is a recent judgment of Supreme Court12 whereby the Court resolved a case of a ship owned by
the taxpayer, after fulfilling the due conditions for it to be a ‘qualifying ship’ as per the essentials
of the TTS (Tonnage Tax Scheme). Along with carrying out its operations as a qualifying ship,
the tax payer indulged in operations of “Slot Charter Arrangements” with the other ships. What
is significant in the ruling was that the Court pronounced that benefits of Tonnage Tax Scheme
would be subsequently available to income from the specified Slot charter arrangements.

 Facts of the case

 The taxpayer was the owner of a qualifying ship and all other conditions therein were
fulfilled in order for it to be termed as a “qualifying company”, under Sec.115VC of the

11
Supra Note 10
12
(2016) 8 SCC 604

Page 10
 Income Tax Act, 1961. Also, the special provisions of chapter XII-G (TTS) was applied
in order to compute income generated from the ship.
 It is to be noted that along with carrying its operations as a qualifying ship for the year
2005-06 and 2008-09, the ship was also taken up for slot charter arrangements with other
ships.
 The issue circumscribing the case was regarding computation of income generated
through the slot charter arrangement and whether or not the same income qualified under
the head for availing the benefit of Tonnage Tax Scheme. The AO, in the present case
viewed that such income was not having similar attributes and characteristics as those
under TTS and hence does not qualify for the same. Also the aforementioned income was
neither generated by the taxpayer from his own ship nor from entire ship chartered by
him.
Also, in order for him to avail benefits under the scheme, there was a requirement for the
taxpayer to show that ship was a qualifying ship and hence issuance of a valid certificate
mentioning its net tonnage to that effect was a prerequisite as per sec. 115VX (i)(b) of the
act.
 Here, in the current case, although the taxpayer had submitted valid certificate but the
same was only fulfilled with respect to its own ship and not complied with, with respect
to the ships charted by him under the Slot Charter Arrangement.
 On the other hand, the Taxpayer contended that the clause insisting on producing of a
valid certificate is to be respected with respect to the taxpayer’s own ships and for the
ones fully hired by him.
Additionally, the provisions of Sec. 115VG read along with rule 11Q of IT Rules, 1961
states, regarding computation of income of full ship, the same has to be done on the basis
of “Net Tonnage” as per its records under a valid certificate while that of part of ship on
the basis of “deemed tonnage”.
 The AO, in this case rejected the contention of taxpayer and similarly following the same
rationale, the CIT (Appeal) and Income- Tax Appellate Tribunal upheld the same.

Page 11
 Supreme Court’s Findings on The Case
 The court through its pronouncement made it quite clear that the income from ship
generated through slot charter arrangement would be specifically included as an
instrument of a ship chartered by company. According to Sec. 115 VB of the act, it is
clearly mentioned that for TTS, a company would be regarded as operating ship; if any
ship is operated by the taxpayer, irrespective of ownership or some charter arrangement
and the same also goes onto including such instance even where a part of ship has been
charted through Slot Charter Arrangement, Space Charter or Joint Charter.
 Sec. 115VG (4) of the Act is in two parts insofar as computation of tonnage is concerned.
When it is about tonnage of a ship, a certificate to that effect is required as mentioned in
Sec. 115VX while the second part is about ‘deemed tonnage’, as compared to the ‘actual
tonnage’ mentioned in the certificate.13
 Further explaining Sec. 115VG (4) of the Act, talking about the Slot Charter
Arrangement, the court explained that purchase of Slot Charter would be treated as
deemed tonnage. The same could be inferred by words of legislature through Sec.
115VX whereby it has been clearly visualized that in cases of ‘deemed tonnage’, there is
no need of production of a certificate to effectuate it.
 On a bare reading of Sec. 115VD of the act, it becomes amply clear that a qualifying ship
refers to a situation where the entire ship is either owned or chartered. Further, equating
the same with Sec. 115VD, Sec. 115VX of the act, talks about the tonnage of a ship. In
order to decide the question of a ship’s tonnage, the same is to be done in accordance
with the valid certificate laying out its tonnage and that a compulsory obligation is
inferred on the taxpayer for production of such certificate.
 On the other hand, when the entire ship is not chartered, but merely in slots then the
requirement of furnishing a certificate does not apply.
 Referring to a case of Karimtharuvi Tea Estates Ltd. 14, the court outlined the reason that
while interpreting conflicting tax statutes, the rules and definitions under the act should
apply to all other provisions generally. Also, when conflicting provisions are observed,
the same ought to be interpreted harmoniously.
13
KPMG, Benefits of Tonnage Tax Scheme is available to Slot Charter Arrangements-Supreme Court (July, 2016),
available at http://www.in.kpmg.com/taxflashnews/KPMG-Flash-News-Trans-Asian-Shipping-Services-P-Ltd-2.pdf
14
Karimtharuvi Tea Estates Ltd. V. State of Kerala and Ors [1968] 48 ITR 28 (SC)

Page 12
  Therefore, the rules for definition of Tonnage Tax very specifically demarcates the
requirement of certificate with respect to owned and slot charter ships.
The TTS was recommended as a result of realization of a lot of factors, also outlined in
the Rakesh Mohan Committee report detailing stiff competition faced by Indian shipping
companies’ vis-à-vis foreign companies and in order to ensure low tax regime with
effective growth in the shipping industry. The main aim of introduction of this Scheme
was to make the industry more competitive in the global context by mitigating its tax cost
effectively.
The question before the court as highlighted in the case was with respect to applicability
of TTS to income derived from Slot Charter Arrangements. Rationalizing the argument,
the tax department included slot charter arrangement under the same purview as that of a
qualifying ship and the same was a subject matter of valid certification showing the
accurate tonnage under the scheme as per the act while on the other hand the taxpayer
insisted that requirement of production of a certificate to be maintained with respect to
his own ships or that fully hired but not for Slot Charter Arrangements. “However,
although the Supreme Court agreed to the contention of determination of tonnage
according to a valid certificate which implied as a compulsory obligation but the court
also said that the said reasoning would not apply when the entire ship is not chartered,
and the arrangement pertains to purchase of slots, slot charter and sharing of the break
bulk vessel. Therefore, the court allowed the taxpayer to avail benefits of the TTS. This
judgment would further help shipping companies to avail benefits of the scheme for slot
charter arrangements”.15 This judgment would play a vital role in proving reliefs to key
players in the shipping front who provide vessels for international operations and hence
procure much portion of the income from such slot charter arrangements not classified as
‘Qualifying Ships’, and facilitate transactions where it is difficult for the assesse to obtain
certificates for such ships.

15
Supra Note 12

Page 13
CHAPTER VI
ASCERTAINMENT OF TAX OF FOREIGN SHIPPING COMPANIES
India-Denmark DTAA is a tax treaty signed between Denmark and India so as to avoid double
taxation in the countries. Whereby, Article 9 of the treaty specifically deals with the avoidance
of double taxation in transacting the business of shipping companies in different jurisdictions.
“Article 9 of India Denmark DTAA provides as follows:
1. Profits derived from the operation of ships in international traffic shall be taxable only in the
Contracting State in which the place of effective management of the enterprise is situated.
2. Notwithstanding the provisions of paragraph 1, such profits may be taxed in the other
Contracting State from which they are derived provided that the tax so charged shall not
exceed:
a. during the first five fiscal years after the entry into force of this Convention, 50 per cent, and
b. during the subsequent five fiscal years, 25 per cent,
of the tax otherwise imposed by the internal law of that State. Subsequently, only the provisions
of paragraph 1 shall be applicable.
3. The provisions of paragraph 1 shall also apply to profits from the participation in a pool, a
joint business or an international operating agency engaged in the operation of ships.
4. For the purposes of this Article:
a. interest on funds connected with the operation of ships in international traffic shall be
regarded as income from the operation of such ships and the provisions of Article 12 shall not
apply in relation to such interest ; and
b. profits from the operation of ships includes profits derived from the use, maintenance or
rental of containers (including trailers and related equipment for the transport of containers) in
connection with the transport of goods or merchandise in international traffic.”16
Article 9(1) and Art 9(2) of DTAA India-Denmark talks about the profits generated through
ships in international front, is stipulated to be taxed on the “contracting state” where the place of
effective management of the entity is situated Also, an analysis of Article 8 of OECD MC
highlights the scheme of taxation of shipping profits directly on the states where its situs of
effective management is observed. In furtherance of same issue under UN MC the matter is
16
Article 9 of DTAA and prevention of fiscal evasion with Denmark, notification No. GSR 853(E), dated 25-9-198

Page 14
classified under two optional grounds. At the first instance, the model similar to OECD model is
followed while at the second option, reliance on a shared right to tax is placed where the source
country taxes foreign shipping income on a conditional basis.

The Rajkot Bench of ITAT, in Pearl Logistic & EM- IM Corporation17 held that as per Article 9
of the India- Denmark levy treaty, the income derived by the ships of overseas country in
international traffic is not taxable in India because the company has its place of effective
management outside India.

The Court further observed that certificate of registration, shareholders’ residence and owner’s
passport proves the point that the shipping company was Denmark resident. Furthermore,
director of company was resident of Denmark, thereby taking all the important decisions and
meeting from there only.

Drawing an analogy to Azaadi Bachao Aandolan Case18, the duty benefit of treaty to the foreign
shipping is available as Head and Brain of the company is in Denmark. Also the tax payer, in
the current case has shown proof of its effective management to be outside India by endowing
various above mentioned documents which go on proving his nationality. Therefore, this income
shall not be taxed in India as per Article 9 of the Tax Treaty.19

A critical analysis of Section 172 of IT Act, 1961 and its relevance with respect to DTAA:

Section 172 of the Act provides for a self contained code for assessment of shipping business of
non residents. According to the plan of tax assessment contained in the said section, income of a
foreign shipping company carrying passengers, livestock, mail or goods and leaving from an
Indian port shall be deemed to pay seven and a half percent of the sum paid or payable by virtue
of such carriage to the proprietor or the charterer or to any individual for his benefit.

The port clearance will be provided by the custom authorities if:

The first condition is either the tax due on the income has been paid or; secondly, when
satisfactory arrangements have been made for the payment of such taxes;

17
2017- TII- 57- ITAT- RAJKOT- INTL
18
UOI v Azaadi Bachao Aandolan (203) 132 Taxman 373 (SC)
19
Radha Rani Holdings Pvt. Ltd. v IDIT(2007) 110 TTJ 920 (Del)

Page 15
There are occurrences where the foreign shipping company is covered by India’s DTAA with
other country in which the taxing rights of the shipping company is completely with the foreign
country. In such cases, the foreign shipping companies are not required to be taxed with respect
to, either under section 172(3) for the voyage returns or for the annual return under section 139
r/w section 172(7) of the Act, 1961. As per the Circular issued by the Board, the AO is
competent to issue annual NOC for a year after carefully verifying applicability of DTAA. It
was expected that such voyage return filing and Port Clearance Certificate (PCC) to foreign
shipping companies shall take place in a scheduled and expeditious manner.

The procedural difficulties in issuance of Port Clearance Certificate (PCC) as required under
section 172 of the Income-tax Act, 1961 are being faced by foreign shipping companies. Board,
for the same reason has issued Circular No 732 dated 20-12-1995 to do away with system of
obtaining NOC for every voyage in cases which fall under full DTAA (Double Taxation
Avoidance Agreement) relief. However, it has been represented that

(a) Foreign Shipping Companies who can enjoy treaty benefits are required to come up to
Port Assessing Officer to generate No Objection Certificate (NOC) for each vessel at
the port in order to submit for onward compliance to Customs department at the port.
(b) No homogeneous practice is followed for issuance of NOC by the Port Assessing
officers to each voyage and also in assessment of voyage return.20
As the section 172 comes under the Chapter XV “Liability in special cases” under Part H which
is “Profits of Non residents from occasional shipping business” of the Income Tax Act, 1961, it
may not cover the freight paid to a non resident engaged in regular shipping business and filing
income tax return u/s 44B of the Income Tax Act, 1961. Hence, there is a liability to deduct TDS
on freight portion paid to regular shipping company after considering the relief available in
DTAA of the respective countries.21

20
CBDT, Streamlines Process of Issuing ‘Port Clearance Certificate’ to foreign shipping companies, Taxmann Tax
and Corporate laws of India, 31st Aug, 2016 Available at:
https://www.taxmann.com/topstories/104010000000049013/cbdt-streamlines-process-of-issuing-port-clearance-
certificate-to-foreign-shipping-companies.aspx
21
CA Hiresh Desai, TDS on Sea Freight to shipping companies, 22 nd Feb, 2013, Available at:
https://hireshdesai.wordpress.com/2013/02/22/no-tds-on-sea-freight-to-shipping-companies/

Page 16
CHAPTER VII

WHAT LACKS IN THE TTS

 Income from Instruments Invested in, out of the Reserved Accounts are not included
under Tonnage Income

Any company that has opted for TTS is required under the provisions of the statute to reserve 20
percent of the profits in the books of account arising out of the shipping business to a reserve
account and this amount shall be utilized for the acquisition of more vessels. Since there is a
limitation of deploying this money only for the acquisition of a vessel, pending such investment,
a company may want to make some short-term investments in respect of this amount. The Act
does not provide the inclusion of income earned from such instruments under the TTS scheme,
even though such income is attributable to the shipping activity.

 Not Every Company may want an Expansion of its Fleet

Furthermore, a company may not intend the kind of expansion which is envisaged by the Act by
making such provision for the reserve account for acquisition of vessels.

 Income out of Sale of Old Vessels is not covered under Tonnage Income

Another type of income that is not included within the scope of TTS is the income out of the sale
of old and outdated vessels. It is an essential and common activity undertaken by the shipping
companies to sell the old vessels and buy the new and most advanced vessels for a smoother and
more profitable business. However, the income derived from such sale is not covered under the
scope of the TTS. Rather, such income is taxed normally under the head of Capital Gains. If such
incomes are in fact included under the scope of tonnage income, this amount could also be
deployed for the acquisition of more ships as provided under the Act. “Whereas, most of the
jurisdictions wherein such tax incentives/schemes are prevalent, profits or gains arising from
transfer of such assets are included in the tonnage income and exempted from tax.”22

22
Himanshu Doshi & Sameer Kanabar, “Shipping Calculation: A Calculate Determination”, Shipping, Marine and
Ports World, 2016 Mumbai

Page 17
  Stringent Provisions Adversely Affecting the Companies that Suffer Losses

Under the provisions of TTS a failure to transfer book profits to tonnage tax reserves for two
successive financial years shall omit a company from the tonnage tax scheme for the next 10
years. It became a topic of discussion when the Shipping Corporation of India Ltd. faced losses
for three consecutive years and thereby failed to make such transfer in the tonnage tax reserves.

CHAPTER VIII
CONCLUSION
Irrespective of the various loopholes or lacunae as identified and discussed in the current system
of TTS in India, the benefits it confers on the Indian Shipping Industry cannot be watered down.
The major issue concerning the current scheme of TTS is the non-inclusion of a number of
sources of income in the tonnage income under the scheme which are in fact incidental to or
connected with the shipping business. This non-inclusion does put some burden on the shipping
companies, and is a hurdle to the competitiveness of these companies given the fact that the
foreign legal systems have TTS schemes whereby such income is also included under tonnage
income and is subjected to the lower rates of income tax. However, it cannot be argued that the
Tonnage Tax Scheme has seen no success in bringing the Indian shipping companies at par with
the shipping companies in the rest of the world. The reduction of tax burden on the tonnage
income has resulted in a 2-3 % tax rate as compared to the tax rate under the regular provisions
regarding income from commercial transactions, which is around 35 %.
Therefore, any of the criticism of the TTS cannot lead to the conclusion that the TTS has been a
failure. With a considerable reduction in the tax burden, this scheme has brought the Indian
Shipping Companies at an enhanced level of competitiveness.

LITERATURE REVIEW

“Shipping Industry Almanac, 2014”, Ernst & Young

This article lists down the tax system of different countries for the shipping industry. From this
article, the tax regime of India would help build the foundation for our project report. The
relevant portions regarding tax facilities of Indian shipping companies, the alternate tonnage tax
regime and tax system for non-resident companies shall be included in the project. Furthermore,

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the Double Taxation Avoidance Agreement and other international treaties shall be included in
the project. This article also discusses the anticipated amendments in the tax laws and other laws
in the near future, which shall help build the analysis of the effectiveness of the current tax
regime in India for shipping companies.

“Income from Time Charter of Ships from Operations between Indian Ports is Taxable as
Royalty”, KPMG in India, 11th November, 2013.

This article discusses the cases of Poompuhar Shipping Corporation Ltd. v. ITO and West Asia
Maritime Ltd. v. ITO, where the Madras High Court held that the income from time chartering
or ‘use of ship’ between the ports in India, constitutes royalty u/s 9(1)(vi) of the Income Tax Act,
1961 and the relevant tax treaties. Discussing these two cases and referring to the analysis in this
article, we shall discuss the status of foreign shipping companies operating along Indian ports for
the purposes of assessment of income.

“Shipping Taxation: A Calculate Determination”, Himanshu Doshi

This article discusses in detail the status of foreign shipping companies operating in India as well
as outside, and also the status of seafarers working on Indian and foreign ships. The article lists
down the various issues faced by the shipping industries, such as, the determination of the tax
residential status of seafarers, no service tax exemption on services received by shipping
companies etc. This information shall be used to determine the differential status of Indian and
foreign shipping companies for tax purposes in India.

“Taxation of Shipping Income under Tax Treaties- Development of Case Law in India”, Amar
Mehta, 24th June, 2015

Following the article, we would be highlighting numerous case studies dealing with issues
relating to the income from shipping entities under various tax jurisdictions and treaties. The
international instruments have been studied in relation to the same subject and the concluding
remarks show the different methods of taxation used by different international agreements in
order to determine tax liability of shipping company.

“Rakesh Mohan Panel Report- Shipping Companies may be allowed to choose Tax Regime”,
P.Manoj, Business Line, 16th Jan, 2002

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This article discusses the findings and recommendations provided by Rakesh Mohan Panel
Report on the introduction of TTS and the effect of shifting to the new Tax Regime. The report
critically analyzes the new scheme put forth as well as the benefits arising from it especially with
the focus on the “optional character” of the scheme. Also, calculation of Tonnage Tax on the
basis of principle of NRT along with a distinctive analysis of schemes of other countries
following the same model to be studied simultaneously.

“Tonnage Tax: Implications for the Shipping Industry”, Ketan Karani, July, 2004

The article talks about how the shift to the new Tax Scheme would reduce taxes of Indian
Shipping Companies and draw a comparison with International Counterparts performing similar
operations. We have outlined various benefits of the scheme as laid down in the aforementioned
article and critically studies the result of the new scheme which would also allow the shipping
companies to sell ships and taxed as capital gains out of the sale.

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