Tts N (1).docx

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

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TABLE OF CONTENTS TOPIC NAME

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 SYNOPSIS 1. INTRODUCTION

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2. RESEARCH QUESTION

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3. HYPOTHESIS

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4. RESEARCH METHODOLOGY

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5. CHAPERTISATION

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 PROJECT

1. INTRODUCTION

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SCOPE OF TOTAL INCOME

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2. INCOME OF SHIPS AND SHIPPING COMPANIES NEED FOR A SPECIAL TAX REGIME IN CASES OF SHIPS AND SHIPPING COMPANY 3. TONNAGE TAX SCHEME

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TTS IN INDIA

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4. BENEFITS OF TONNAGE TAX SCHEME GROWTH OF DOMESTIC FLEET

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5. CASE STUDY ON TRANS ASIAN SHIPPING PVT. LTD. V CIT SCOPE OF APPLICABILITY OF TTS

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6. ASCERTAINMENT OF TAX OF FOREIGN SHIPPING COMPANIES

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A CRITICAL ANALYSIS OF SEC 172 OF IT ACT, 1961 AND ITS RELEVANCE WITH RESPECT TO DTAA

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7. WHAT LACKS IN THE TTS

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8. CONCLUSION

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9. LITERATURE REVIEW

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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.

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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

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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.

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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

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

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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 5

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

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provisions relating to taxation of shipping companies with effect from the assessment year 200506.”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 (1) up to 1,000 exceeding 1,000 but not more than 10,000 exceeding 10,000 but not more than 25,000 exceeding 25,000

Amount of daily tonnage income (2) Rs. 46 for each 100 tons Rs. 460 plus Rs. 35 for each 100 tons exceeding 1,000 tons Rs. 3,610 plus Rs. 28 for each 100 tons exceeding 10,000 tons Rs. 7,810 plus Rs. 19 for each 100 tons exceeding 25,000 tons

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

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India,

Ministry

of

Finance

available

at

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

P. Manoj, “Tonnage Tax Rules Need Refinement” Last Modified: Fri, Jun 05 2015. 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 8 9

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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

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Supra Note 10 (2016) 8 SCC 604

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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”.

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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.

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 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.

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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)

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

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.

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Supra Note 12

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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

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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;

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

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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

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-clearancecertificate-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/ 20

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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

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

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 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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