Slot charter should benefit under tonnage tax scheme

The tonnage tax scheme was introduced in 2004 through chapter XII-G of the Income Tax Act, 1961, to provide incentives for the shipping industry. The scheme allows Indian shipping companies to compute corporate income tax on a notional income, as a factor of the net tonnage of a ship. Under the scheme, a “qualifying company” is eligible for the preferential tax system if it owns at least one “qualifying ship”. A qualifying ship is one having a “valid certificate”, i.e. a licence or certificate issued under the Merchant Shipping Act, 1958 (MSA).

In the chapter, by specific inclusion, the operation of slots (spaces for containers on a ship) which are chartered in is covered within the scheme, and slot charters are not required to be operated on qualifying ships. Yet, the Cochin bench of the Income Tax Appellate Tribunal (ITAT) in July held that slot charters are required to be operated on qualifying ships having valid certificates to be eligible under the scheme.

The ITAT reasoned that: chapter XII-G is applicable only to the “income from the business of operating qualifying ships” – a term used in section 115VA, which sets out the coverage of the scheme; the benefit of the scheme is available only to qualifying ships (having a valid certificate), and this applies to ships on which slots are chartered; section 115VI(6) provides that the income attributable to operating a non-qualifying ship must be computed in accordance with other provisions of the act, i.e. those not in chapter XII-G.

Economic Laws Practice is a full-service law firm with headquarters in Mumbai and offices in New Delhi, Pune and Ahmedabad. Ranjeet Mahtani is a senior associate at the firm and Stella Joseph is an associate.