Relevant shipping income and exclusion from book profit.
228(1)
In this Part, the relevant shipping income of a tonnage tax company means—
- (a) its profits from core activities referred to in sub-section (3); and
- (b) its profits from incidental activities referred to in sub-section (7).
228(2)
Where the aggregate of all such incomes specified in sub-section (1)(b) exceeds 0.25% of the turnover from core activities referred to in sub-section (3), such excess shall not form part of the relevant shipping income for the purposes of this Part and shall be taxable under the other provisions of this Act.
228(3)
The core activities of a tonnage tax company shall be—
- (a) its activities from operating qualifying ships; and
- (b) other ship-related or inland vessel related activities, as the case may be, as follows:— (i) shipping contracts in respect of— (A) earning from pooling arrangements; (B) contracts of affreightment; (ii) specific shipping trades, being— (A) on-board or on-shore activities of passenger ships comprising of fares and food and beverages consumed on-board; (B) slot charters, space charters, joint charters, feeder services and container box leasing of container shipping.
228(4)
In sub-section (3)(b)(i),––
- (a) “pooling arrangement” means an agreement between two or more persons for providing services through a pool or operating one or more ships or inland vessels as the case may be, and sharing earnings or operating profits on the basis of mutually agreed terms; and
- (b) “contract of affreightment” means a service contract under which a tonnage tax company agrees to transport a specified quantity of specified products at a specified rate, between designated loading and discharging ports over a specified period.
228(5)
The Central Government, if it considers necessary or expedient so to do, may, by notification, exclude any activity referred to in sub-section 3(b) or prescribe the limit up to which such activities shall be included in the core activities for the purposes of this section.
228(6)
Every notification issued under this Part shall be laid, as soon as may be after it is issued, before each House of Parliament, while it is in session for a total period of thirty days which may be comprised in one session or in two or more successive sessions, and if, before the expiry of the session immediately following the session or the successive sessions aforesaid, both Houses agree in making any modification in the notification, or both Houses agree that the notification should not be issued, the notification shall thereafter have effect only in such modified form or be of no effect; so, however, that any such modification or annulment shall be without prejudice to the validity of anything previously done under that notification.
228(7)
The incidental activities shall be the activities which are incidental to the core activities and as prescribed for the purpose.
228(8)
Where a tonnage tax company operates any ship or inland vessels as the case may be, which is not a qualifying ship, the income attributable to operating such non-qualifying ship shall be computed under other provisions of this Act.
228(9)
Where any goods or services held for the purposes of—
- (a) tonnage tax business are transferred to any other business carried on by a tonnage tax company; or
- (b) any other business carried on by such tonnage tax company are transferred to the tonnage tax business, and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the tonnage tax business does not correspond to the market value of such goods or services as on the date of the transfer, then, the relevant shipping income under this section shall be computed as if the transfer, in either case, had been made at the market value of such goods or services as on that date.
228(10)
In sub-section (9), “market value”, in relation to any goods or services, means the price that such goods or services would ordinarily fetch on sale in the open market.
228(11)
Where, in the opinion of the Assessing Officer, the computation of the relevant shipping income in the manner specified in sub-section (9) presents exceptional difficulties, he may compute such income on such reasonable basis as he considers fit.
228(12)
Where it appears to the Assessing Officer that, owing to the close connection between the tonnage tax company and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the tonnage tax company more than the ordinary profits which might be expected to arise in the tonnage tax business, the Assessing Officer shall, in computing the relevant shipping income of the tonnage tax company for the purposes of this Part, take income as may reasonably be deemed to have been derived therefrom.
228(13)
In this Part, 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.
228(14)
Where a tonnage tax company also carries on any business or activity other than the tonnage tax business, common costs attributable to the tonnage tax business shall be determined on a reasonable basis.
228(15)
Where any asset, other than a qualifying ship, is not exclusively used for the tonnage tax business by the tonnage tax company, depreciation on such asset shall be allocated between its tonnage tax business and other business on a fair proportion to be determined by the Assessing Officer, having regard to the use of such asset for the purposes of the tonnage tax business and for the other business.
228(16)
The book profit or loss derived from the activities of a tonnage tax company, referred to in sub-section (1), shall be excluded from the book profit of the company for the purposes of section 206.
Section Summary:
This section defines "relevant shipping income" for a tonnage tax company and outlines how it should be calculated and treated under the Income Tax Act. It specifies what constitutes core activities and incidental activities for such companies, and sets limits on the inclusion of incidental income in relevant shipping income. Additionally, it addresses how income from non-qualifying ships, transfers of goods/services, and common costs should be treated. The section also excludes book profit or loss from tonnage tax activities from the computation of book profit under Section 206.
Key Changes:
- Definition of Relevant Shipping Income: The section clearly defines relevant shipping income as profits from core activities (e.g., operating qualifying ships) and incidental activities (activities incidental to core activities).
- Limit on Incidental Income: If incidental income exceeds 0.25% of turnover from core activities, the excess is taxable under other provisions of the Income Tax Act.
- Exclusion of Non-Qualifying Ships: Income from operating non-qualifying ships is taxable under regular provisions, not under the tonnage tax scheme.
- Market Value for Transfers: Transfers of goods/services between tonnage tax business and other businesses must be recorded at market value for computing relevant shipping income.
- Exclusion of Book Profit: Book profit or loss from tonnage tax activities is excluded from the computation of book profit under Section 206.
Practical Implications:
For Tonnage Tax Companies:
- Companies must carefully segregate income from core activities, incidental activities, and non-qualifying ships.
- Incidental income exceeding the 0.25% threshold will be taxed separately, increasing compliance complexity.
- Transfers of goods/services between tonnage tax and other businesses must be recorded at market value, requiring accurate valuation.
- Depreciation on shared assets must be allocated fairly between tonnage tax and other businesses.
For Tax Authorities:
- Assessing Officers have the authority to adjust income computations if they suspect arrangements to inflate profits artificially.
- They can also determine a reasonable basis for computing income if exceptional difficulties arise.
Critical Concepts:
- Tonnage Tax Company: A company that opts for the tonnage tax scheme, where tax is computed based on the tonnage of ships rather than actual profits.
- Core Activities: Activities directly related to operating qualifying ships, including shipping contracts, pooling arrangements, and specific shipping trades.
- Incidental Activities: Activities that are incidental to core activities, as prescribed by the law.
- Qualifying Ship: A ship that meets the criteria specified under the tonnage tax scheme.
- Market Value: The price goods or services would fetch in an open market.
Compliance Steps:
- Segregate Income:
- Clearly separate income from core activities, incidental activities, and non-qualifying ships.
- Monitor Incidental Income:
- Ensure incidental income does not exceed 0.25% of turnover from core activities.
- Record Transfers at Market Value:
- For transfers between tonnage tax and other businesses, use market value for accounting purposes.
- Allocate Common Costs and Depreciation:
- Allocate common costs and depreciation on shared assets fairly between tonnage tax and other businesses.
- Exclude Book Profit:
- Exclude book profit or loss from tonnage tax activities when computing book profit under Section 206.
Examples:
Incidental Income Limit:
- A tonnage tax company has a turnover of ₹100 crore from core activities and ₹40 lakh from incidental activities. Since 0.25% of ₹100 crore is ₹25 lakh, the excess ₹15 lakh (₹40 lakh - ₹25 lakh) will be taxable under regular provisions, not under the tonnage tax scheme.
Market Value for Transfers:
- A tonnage tax company transfers goods worth ₹50 lakh from its tonnage tax business to another business. If the market value of these goods is ₹60 lakh, the relevant shipping income will be computed as if the transfer was made at ₹60 lakh.
Non-Qualifying Ships:
- A tonnage tax company operates both qualifying and non-qualifying ships. Income from the non-qualifying ships will be taxed under regular provisions, not under the tonnage tax scheme.