COMMISSIONER OF INCOME TAX, KOCHIversusTRANS ASIAN SHIPPING SERVICES (P) LTD.

                        [2016] 3 S.C.R. 337



          COMMISSIONER OF INCOME TAX, KOCH!                              A
                                 v.
         TRANS ASIAN SHIPPING SERVICES (P) LTD.
                  (Civil Appeal No. 5869of2016)
                           JULYOS,2016                                   B
[T.S. THAKUR, CJI, A.K. SIKRI AND R. BANUMATID, JJ.)
      Income Tax Act, 1961:
       Chapter Xl/G: ss.115 VE, 115 VG - Tonnage Tax Scheme -
Assessee in business of operating qualifying ships - Held: ls eligible   c
for getting income computed under the special provisions contained
in Chapter XIIG
        s.115VB - Income ji-om slot charter - Whether the assessee
was eligible to. include the income derived from activities through
 'slot charter' arrangements as relevant shipping income to determine
                                                                         D
the deemed tonnage in terms of Rule II Q of the Income Tax Rules -
Held: Income earned by the assessee under slot charter
arrangement.1· comes under the definition of 'deemed tonnage tax'
as per explanation lo sub-section (./) of s.115VG of the Act and
therefore, this income is includible while assessing the same under
the said special provisions.                                             E
       s.115 VX - Tonnage of a ship - Determination of - Held:
Whenever the question of a tonnage of a ship crops up and the said
tonnage is to be determined, it has to be in accordance with the
valid certificate indicating its tonnage and it is a compulsory
obligation of the assessee to produce such a certificate - Howeve1;      F
this requirement of producing a certificate would not apply when
entire ship is not chartered and the arrangement pertains only to
purchase of slots, slot charter and m1 arrange men I of sharing of
break-bulk vessel.
      Dismissing the ·appeals, the Court
                                                                         G
      HELD: 1. Section 115VB specifically pl'ovides that for the
purpose of Chapter XlIG, a company would be regarded as
operating a ship 'if it operates any ship whether owned or
chartered by it and includes a case where even a part of the ship
has been chartered by it in an arrangement such as slot charter,
                                                                         H
                                337
33~            SUPREME COURT REPORTS                        [2016) 3 S.C.R.


A     space charter or joint charter'. All the conditions laid down in Section
      115VD of the Act are fulfilled by the assessee, except the conditions
      stipulated in clause (c) which impose an obligation on the assessee to
      produce a valid certificate in respect of such a ship where slot is
      chartered, indicating its net tonnage in force. The entire controversy
      revolves around the production of this certificate. As per the Revenue,
B     this is an essential requirement contained in Section 115VD of the
      Act which cannot be done away with because of the formula that is
      contained in Section 115VG of the Act for the computation of Tonnage
      Income. Section 115VG is in two parts insofar as computation of
      tonnage is concerned. When it comes to tonnage of a ship, a certificate
c     as mentioned in Section ll5VX is to be produced. Second part of this
      provision talks about 'deemed tonnage' in contradistinction to the
      'actual tonnage' mentioned in the certificate. Thus, it is not only the
      actual tonnage that is mentioned in the certificate referred to in
      Section 115VX of the Act which this provision deals with. In addition,
      deemed tonnage is also to be included if there is such a deemed
D     tonnage, and that deemed tonnage is to be added to the actual tonnage
      which is indicated in the certificate. Explanation to sub-section (4),
      inter alia, mentions that insofar as slot charter arrangements are
      concerned, purchase of such slot charter shall be treated as deemed
      tonnage. Tiie Legislature has, thus, clearly visualized that insofar as
      deemed tonnage is concerned, the!e would not be a11y possibility of
E     producing a certificate referred to in Section 115VX ofthe Act. When
      reading the provision in this manner, it becomes amply clear that
      Section 115VD of the Act which talks of a qualifying ship, contemplates
      the situation in which entire ship is either owned or chartered. Similar
       is the position which inheres in Section 115VX of the Act as it refers
      to 'the tonnage of a ship'. Therefore, whenever the question of a
 F
      tonnage of a ship crops up and the said tonnage is to be determined,
       it has to be in accordance with the valid certificate indicating its
       tonnage and it is a compulsory obligation of the assessee to produce
      such a certificate. However, this requirement of producing a certificate
      would not apply when entire ship is not chartered and the
G      arrangement pertains only to purchase of slots, slot charter and an
       arrangement of sharing ofbrcak-bulk vessel. The legal fiction created
       by sub-section (4) of Section 115VG is to be given its proper and
       sensible meaning. [Paras 18, 19, 21) [350-H; 351-A-C; 352-F-H;
      353-A-C)
             2. In terms of Section 115Vl(2), relevant :shipping income
H
COMMISSIONER OF INCOME TAX, KOCH! v. TRANS ASIAN                        339
           SHIPPING SERVICES (P) LTD.

of a Tonnage Tax Company means its profits from core activities         A
and its profits from incidental activities. Core activities of a
Tonnage Tax Company have been specified in sub-section (2) of
the said section. These include its activities from operating
qualifying ships and other ship related activities including slot
charter. When the scheme of the said special provision for
                                                                         B
computation of income under TTS is exempted, the balance tilted
in favour of the assessee as that was the precise purpose in
introducing TTS in India. In view of the stiff competition faced by
the Indian shipping companies vis-a-vis foreign shipping lines,
the Rakesh Mohan Committee in its report (of Jan., 2002)
recommended the introduction of the TTS in India. The whole              c
purpose of introduction of the Scheme was to make the Indian
shipping industry more competitive in the global space by
rationalising its tax cost. For the reason that it is impossible to
cater to all shipping routes on owned ships, it is an accepted and
widely prevalent practice globally and in India that shipping
                                                                         D
companies engage in slot charter operations. If such slot charter
arrangements are not entered into, then Indian shipping
companies will not be able to take up contract of affreightmcnts
and these contracts would have fallen to only foreign shipping
lines thereby making Indian shipping industry uncompetitive.
Such slot charter arrangements being with a shipping company             E
but not in relation to or for a particular ship, it is impossible for
the Indian shipping company to identify the cargo ship, which
carried the goods. Accordingly, there is no requirement of the
certificate under the Scheme in relation to the vessel on which
slot chai·ter operations are carried out. [Paras 25, 26) (354-G-H;
355-A-D; 356-A]
                                                                         F
      Karimtharuvi Tea Estates Ltd. v. State of Kera/a and
      Ors. (1968) 48 ITR (SC) 28 - followed.
      Azadi Bachao Ando/an v. Union of India 263 ITR 706;
      Navnit Lal Jhaveri v. K.K. Sen IAC 56 ITR 198 SC;
                                                                         G
      UCO Bank v. CIT 237 ITR 889 SC - referred to.
                       Case Law Reference
      (1968) 48 ITR (SC) 28             followed       Para 22
      263 ITR 706                       referred to    Para 27
      IAC 56 ITR 198 SC                 referred to    Para 27           H
340            SUPREME COURT REPORTS                         [2016) 3 S.C.R.


A           237 ITR 889 SC                  referred to         Para 27
            CIVIL APPELLATE JURISDICTION : Civil Appeal No. 5869
      of2016.
            From the Judgment and Order dated 23.01.2015 of the High Court
      of Kera la at Ernakulam in Income Tax Appeal No: l 29 of 2012.
8
            Mukul Rohatgi, AG, Ms. Diksha Rai, Arijit Pt·asad, Mrs. Anil
      Katiyar, Advs. for the Appellant.
            Porus Kaka, Sr. Adv., Alok Y11dav, Somnath Shukla, Udit Jain,
      Nishant Shah, Harish Pandey. Advs. for the Respondent.
C
                                .
            The Judgment of the Court was delivered by
                                                 .
            A. K. SIKRI, J. I. Leave grant€d. Ma!ter finally heard as the
      case was fixed for final hearing.
             2. Chapter XIIG of the Income Tax Act, 1961 (hereinafter referred
      to as the 'Act') contains special provisions for ·assessments relating to
D
      income of shipping companies. Under this Chapter, shipping companies
      are given a choice to either get income from the. shipping business
      computed in accordance with the provisions contained in the Act meant
      for computation of income in respect of business or profession or opt for
      methodology of computing income as per the special formula provided
E     in thatChapterwhich accords a different treatment and different manner
      of computation of income for the shipping business.
             3. Chapter IV of the Act deals with 'Computation of Total Income'
      and as per the scheme ofthe Act, such a computation of total income is
      governed by five heads which are provided in Section 14 of the Act.
 F    These are: (i) Salaries; (ii) Income from House Prope11y; (iii) Profits
      and Gains of Business or Profession; (iv) Capital Gains and (v) Income
      from Other Sources. Thereafter, manner of computation of the income
      under the aforesaid heads is stipulated in various sections falling under
      Chapter IV. As far as Income from Profits and Gains of Business or
      Profession is concerned, Sections 28 to 4408 of the Act contain the
G     procedure for computation of income under this head. Therefore, any
      person, natural or juristic, who earns income from business in India is
      supposed to get the income from the said business computed in the manner
      provided in those sections. However, Chapter XIIG makes an exception
      thereto by carving out special provisions relating to income of shipping
H     companies. It would mean that those companies which are shipping
COMMISSIONER OF INCOME TAX, KOCH! v. TRANS ASIAN                             341
    . SHIPPING SERVICES (P) LTD. [A. K. SIKRI, J.]

companies are permissible to get their income computed under the said         A
Chapter. Section I l SVA of the Act gives this option and reads as.under:
      "115VA. Computation of profits and gains from the
      business of operating qualifying ships.
      Notwithstanding anything to the contrary contained in
      sections 28 to 43C, in the case of a company, the income                B
      from the business of operating qualifying ships, may, at its
      option, be computed in accordance with the provisions of
      this Chapter and such income shall be deemed to be the
      profits and gains of such business chargeable to tax under
      the head "Profits and gains of business or profession".
                                                                              c
        4. As is clear from the bare reading of this Section, option is
given to the shipping company, which is operating "qualifying ships", to
get its income computed in accordance with the provisions of Chapter
XIIG, irrespective of those stipulations otherwise contained in Sections
28 to 43C for computation of business income. Once such an option is          D
exercised and income is computed in accordance with the provisions of
the said Chapter, a fiction is created by deeming the said income to be
the profits and gains of such business chargeable to tax under the head
'Profits and Gains of Business or Profession'. To put it otherwise, though
the income of such shipping company would be computed in the manner
provided under Chapter XIIG, the same would be treated as income              E
from business which is chargeable to tax as provided under the head
'Profits and Gains of Business or Profession' and would be treated as
chargeable to tax under that head.
      5. For a shipping company to be eligible to exercise such an
option, there are certain conditions to be fulfilled, which arc as under:     F
       (i) In the first place, the assessee has to be a 'company'. The
word 'company' is defined in Section 2( 17) of the Act. Such a company
may have various businesses and one such business may be the business
of operating quali1ying ships. However, il is only that income which is
generated from 'The Business of Operating Quali1ying Ships' that will         G
be computed as per the special provisions in Chapter XIIG. Income
from other businesses will be computed in the same manner as provided
in Sections 28 to 43C. In case the business of the company is to operate
qualifying ships only, then the income from that sole business will be
under this Chapter.
                                                                              H
342            SUPREME COURT REPORTS                           [2016] 3 S.C.R.


A            (ii) Income from the business ofoperating qualifying ships shall
      be computed under Chapter XllG only if such an option is specifically
      exercised by the assessee company. This requirement is particularly
      mentioned in Section 11 SVP of the Act. Such an option, when given, is
      to remain in force for a period of ten years from the date on which the
      said option is exercised, and this period is prescribed in Section 11 SVQ
B
      of the Act. However, it can be renewed within one year from the end of
      the previous year in which the option ceases to have effect (Section
      11 SVR). In certain circumstances stipulated in Section 11 SVS of the
      Act, there is a prohibition to opt forthe scheme.
            The scheme that is to be opted for computation of income under
c     this Chapter is known as 'Tonnage Tax Scheme' (for short 'TTS') as
      defined in sub-section (m) of Section 11 SV of the Act.
            (iii) Though. these special provisions relate to income of shipping
      companies, it is only that income which is received from business of
      "operating qualifying ships" that is eligible for computation under this
D     Chapter.
            "llSVD. Qualifying ship.- For the purposes of this
            Chapter, a ship is a qualifying ship if-
            ( a) it is a sea going ship or vessel of fifteen net tonnage or
E           more;
            (b) it is a ship registered under the Merchant Shipping Act,
            1958 (44of1958), or a ship registered outside India in respect
            of which a licence has been issued by the Director-General
            of Shipping under section 406 or section 407 of the
            Merchant Shipping Act, 1958 (44of1958); and
F
            (c) a valid certificate in respect of such ship indicating its
            net tonnage is in force,
            but does not include-
            (i) a sea going ship or vessel ifthe main purpose for which
G           it is used is the provision of goods or services of a kind
            normally provided on land;
            (ii) fishing vessels;
            (iii) factory ships;
H           (iv) pleasure cralls;
COMMISSIONER OF INCOME TAX, KOCH! v. TRANS ASIAN                               343
    SHIPPING SERVICES (P) LTD. [A. K. SIKRI, J.]

      (v) harbour and river ferries;                                            A
      (vi) offshore installations;
      (vii) (Clause (vii) omitted by the Finance Act, 2005 (18 of
      2005), sec. 36 (w.e.f. 1-4-2006). Clause (vii), before
      omission, stood as under: "(vii) dredgers".
                                                                                8
      (viii) a qualifying ship which is used as a fishing vessel for
      a period of more than thirty days during a previous year."
       Which ship should be treated as 'operating ship', is to be understood
from the prescription thereofas mentioned in Section l 15VB which reads
as under:                                                                       c
      "llSVB. Operating ships.- For the purposes of this
      Chapter, a company shall be regarded as operating a ship if
      it operates any ship whether owned or chartered by it and
      includes a case where even a pait of the ship has been
      chartered in by it in. an arrangement such as slot charter,
                                                                                D
      space charter or joint charter :
           Provided that a company shall not be regarded as the
       operator of a ship which has been chartered out by it on
       bareboat charter-cum-demise terms or on bareboat charter
       terms for a period exceeding three years."
                                                                                E
     As per this, a ship would be treated as 'operating ship' if a.
company:
       (a) operates any ship, whether owned or chartered by it;
       (b) where even a part of the ship has been chattered by that
company in an arrangement such as slot charter, space cha1ter or joint
                                                                                F
charter. The only exception is that if a ship has been chattered out by
the company on bareboat charter-cum-demise terms or on bareboat
charter terms for a period exceeding three years, then that company
shall not be regarded as the operator of that particular ship.
       (iv) The company operating such ships has to be a "qualifying            G
company" as defined in clause (g) of Section 11 SV of tlie Act which
says qualifying company means a company referred to in Section 11 SVC
of the Act. Section 1l5VC lays down certain 9onditions to be fulfilled
for a company to be qualifying company. It reads as under:
"llSVC. Qualifying company. - For the purposes of this Chapter, a
344            SUPREME COURT REPORTS                            [2016] 3 S.C.R.


A     company is a qualifying company if-
            (a) it is an Indian company;
            (b) the place of effective management of the company is in
            India;
8           (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.
            Explanation.-For the purposes of this section, "place of
            effective management of the company" means-
c           (A) the place where the board of directors of the company
            or its executive directors, as the case may be, make their
            decisions; or
            (8) in a case where the board of directors routinely approve
            the commercial and strategic decisions made by the executive
D
            directors or officers of the company, the place where such
            executive directors or officers of the company perform their
            functions."
             As may be seen from the reading of the aforesaid provision, apart
      from the conditions that a company has to be an Indian company with
E
      effective management of the company in India and main objective of
      the company is to carry on business of operating ships, the other significant
      condition is that the company itself should own 'at least one qualifying
      ship'. Thedescriptionofqualifyingship is contained in Section l ISVD,
      as already noted above, and owning at least one qualifying ship is one of
 F    the eligibility conditions for getting the income computed under these
      special provisions.
             6. Once aforesaid conditions are fulfilled, the income from the
      business of operating qualifying ships is to be computed under Chapter
      XllG. The manner of computation of such income, as provided under
 G    this Act, is under 'TTS'. Clause (m) of Section I ISY defines TTS as
      under:
             "(m) ''tonnage tax scheme" means a scheme for
             computation of profits and gains of business of operating
             qualifying ships under the provisions of this Chapter."
 H           7. The provisions for TTS are contained in Section I l SYE
COMMISSIONER OF INCOME TAX, KOCHI v. TRANS ASIAN                                345
    SHIPPING SERVICES (P) LTD. [A. K. SIKRI, J.]

onwards. For our purposes, it is not necessary to take stock of al I these      A
provisions. As we are primarily concerned with Section l l 5VE and
Section l l 5VG of the Act, we shall discuss the schemes with reference
to these provisions. The TTS talks of'Tonnage Income' which is to be
computed under Section l l 5VG of a Tonnage Tax Company. This
Tonnage Income, as per Section ll 5VG of the Act, is the income of
                                                                                 B
each qualifying ship. The formula of calculating this Tonnage Income of
each qualifying ship is stipulated in sub-sections (2) and (3) of Section
 l 15VG. Sub-section (4) of Section l 15VG defines 'Tonnage' to mean
tonnage of a ship indicated in the certificate referred to in Section l l 5VX
and' includes the deemed tonnage computed in the prescribed manner'.
Explanation to sub-section (4) of Section l 15VG clarifies that deemed           c
tonnage shall be the tonnage in respect of an arrangement of purchase
of slots, slot charter and an arrangement of sharing of break-bulk vessel.
        8. ·Section 11 SVE deals with the manner of computation of income
under TIS. In nutshell, such company which has exercised option under
this Chapter is known as a 'Tonnage Tax Company' and its income from             D
the business ofoperating qualifying ships shall be considered as a separate
business distinct from all other activities of the business carried on by
the company. The income from this particular business only is to be
computed separately from the profits and gains from any other business.
The income for this activity under TTS is known as 'tonnage income'
                                                                                 E
(Section l l 5VF). The computation of tonnage income is to be done in
the manner prescribed in Section l l 5VG. As this is an important provision
for the purposes of deciding the instant appeal, same is reproduced below:

       "llSVG. Computation of tonnage income.- (I) The
       tonnage income of a tonnage tax company for a previous
                                                                                 F
       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).

       (2) For the purposes of sub-section (I), the tonnage income
       of each qualifying ship shall be the daily tonnage income of
                                                                                 G
       each such ship multiplied by-

       ( a) the number of days in the previous year; or
       (b) the number of days in part of the previous year in case
       the ship is operated by the company as a qualifying ship for
       only part of the previous year, as the case may be.                       H
346         SUPREME COURT REPORTS                             [2016] 3 S.C.R.


A        (3) For the purposes of sub-section (2), the daily tonnage
         income of a qualifying ship having tonnage referred to in
         column ( 1) of the Table below shall be the amount specified
         in the corresponding entry in column (2) of the Table:
                                      Table

B       Qualifying ship having net            Amount of daily tonnage
                 tonnage                             income
                    (I)                                (2)

      up to 1,000                         Rs. 70 for each I 00 tons

c     exceeding 1,000 but not more
      than 10,000
                                          Rs 700 plus Rs. 53 for each 100
                                          tons exceeding 1.000 tons
      exceeding I 0,000 but not more      Rs. 5,470 plus Rs. 42 for each
      than 25,000                         I 00 tons exceeding I 0,000 tons
      exceeding 25,000                    Rs. 11.770 plus Rs. 29 for each
                                          I 00 tons exceeding 25,000
                                          tons.]
D
          (4) For the purposes of this Chapter, the tonnage shall mean
          the tonnage ofa ship indicated in the ce11ificate referred to
          in section l l 5VX and includes the deemed tonnage
          computed in the prescribed manner.

 E        Explanation.-For the purposes of this sub-section,
          "deemed tonnage" shall be the tonnage in respect of an
          arrangement of purchase of slots, slot charter and an
          arrangement of sharing of break-bulk vessel.
          (5) The tonnage shall be rounded off to the nearest multiple
          of hundred tons and for this purpose any tonnage consisting
 F
          of kilograms shall be ignored and thereafter if such tonnage
          is not a multiple of hundred, then, ifthe last figure in that
          amount is fifty tons or more, the tonnage shal I be increased
          to the next higher tonnage which is a multiple of hundred
          and ifthe last figure is less than fifty tons, the tonnage shall
G         be reduced to the next lower tonnage which is a multiple of
          hundred; and the tonnage so rounded off shall be the tonnage
          of the ship for the purposes of this section.
          (6) Notwithstanding anything contained in any other provision
          of this Act, no deduction or set off shall be allowed in
H         computing the tonnage income under this Chapter."
COMMISSIONER OF INCOME TAX, KOCH! v. TRANS ASIAN                                 347
    SHIPPING SERVICES (P) LTD. [A. K. SIKRI, J.]

       9. We would also like to point out at this stage that Section 11 SV-      A
I deals with 'relevant shipping income' and as per Section 11 SVF, such
relevant shipping income shall not be chargeable to tax.       '      ·

       l 0. After narratingthe scheme of Chapter XIIG containing special
provisions for computation of profits and gains from the business of
operating qualifying ships by a company, we advert to the precise nature          B
of dispute that has arisen in the instant appeal. As mentioned above, it is
only income from the business of operating qualifying ship that has to be
computed in accordance with the provisions of Chapter X!IG. As per
Section l 15VJ3 of the Act, a company is regarded as operating a ship if
it operates any ship which is owned by it or a ship which is chartered by         c
it and it also includes a case where even a pait of the ship has been
chartered by it in an arrangement such as slot charter, space charter or
joint charter etc. The question that has arisen for consideration pertains
to 'slot charter' i.e. should the 'slot charter' operations of a 'Tonnage
Tax Company' be carried on only in 'qualifying ships' to include the
income from such operations to determine the 't011_nage income' under             D
'TTS' in terms of the provisions of Chapter XllG of the Act? In other
words, is the income derived from 'slot chatter' operations ofa 'Tonnage
Tax Company' liable to be excluded while determining the 'Tonnage
Income' under the 'TTS' if such operations are carried on in ships which
are not 'qualifying ships' iii terms of the provisions of that Chapter of the
                                                                                  E
Act and the relevant provisions of the Income Tax Rules, 1962?

        11. As a matter of fact, the respondent-assessee 9wns a.qualifying
ship and fulfills all other conditions as well to make it a qualifying company
under Section 11 SVC. The income that is generated from the said
qualifying shi.p is exigible to tax as per the special provisions contained in    F
Chapter XlIG, as assessee has exercised the.[equisite option in this behalf.
However, in addition to operating its qualifying ship, in the relevant
Assessment Years i.e. 2005-2006 and 2008-2009 it had also 'slot charter'
arrangements in other ships. In the relevant income tax returns filed by
the assessee, the assessee had also included the income earned from
such slot charter arrangements for the purpose of computation thereof             G
under Chapter XIIG. It is in this context the question has arisen as to
whether the assessee was eligible to include the income derived from
activities through 'slot charter' arrangements as relevant shipping income
to determine the deemed tonnage in terms of Rule I lQ of the Income
Tax Rules.                                                                        H
348            SUPREME COURT REPORTS                          [2016] 3 S.C.R.


A.            12. The Assessing Officer was of the view that the income earned
      under slot charter arrangement did not qualify for coverage to be given
      special treatment in Chapter XllG as this income was not generated by
      the assessee from its own ship, i.e., it is neither from the ship owned by
      the assessee nor from the entire ship chartered by the assessee. He
      took the view that in order to avail the benefit of Chapter XIIG, the
B
      assessee was supposed to show that the ship operated by it was qualifying
      ship and for this purpose it wasjncumbent upon the assessee to produce
      a 'valid certificate indicating its net tonnage' as provided in Section
       l l 5VX( 1)(b) of the Act. However, the assessce had submitted such
      valid certificate only in respect of its own ship and did not submit the
c     same in respect of ship chartered by the assessee under the slot charter
      arrangement: The contention of the assessee was that the requirement
      of producing 'valid certificate' is to be insisted only for assessee's own
      ships and for the ships hired fully. This contention was not accepted by
      the Assessing Officer. The assessee had also argued that as per the
      method of computation provided under Section l l 5VG of the Act read
D
      with Rule 11 Qof the Rules income for full ship is to be computed on the
      basis of 'net tonnage' shown in the valid certificate, whereas income of
      part of the ship is computed as 'deemed tonnage'. This argument was
      also rejected by the Assessing Officer on the ground that there was a
      requirement of producing valid certificate even for part of the ship and
E      in the absence thereof income from slot charter arrangement could not
       be included forthe purpose of computation of tonnage income under the
      TTS.
             13. The order of the Assessing Officer was upheld by the
      Commissioner oflncome Tax (Appeals) resulting into dismissal of appeal
F     filed by the assessee. Even the !TAT accepted the view taken by the
      Assessing Officer 11nd dismissed the appeal filed before it by the assessee
      thereby upholding the order of the Assessing Officer. However, in further
      appeal that was preferred by the assessee to the High Co Ult under Section
      260A of the Act, the assessee has succeeded in getting its way through
      as the High Court has found merit in its contention. Thus, the High
G     Court, vi de impugned judgment and order dated 23.01.2015, has allowed
      the appeal of the assessee holding that the income.earned by the assessee
      under slot charter arrangement comes under the definition of 'deemed
      tonnage tax' as per explanation to sub-section (4) of Section 115 VG of
      the Act and, therefore, exclusion of this income while assessing the same
 H    under the said special provisions was not appropriate. In other words,
COMMISSIONER OF INCOME TAX, KOCH! v. TRANS ASIAN                                  349
    SHIPPING SERVICES (P) LTD. [A. K. SIKRI, J.]

the High Court has held that the assessee is eligible for tonnage on slot         A
charter related income also. This view taken by the High Court is under
examination in the present proceedings.
        14. Mr. Rohatgi, learned Attorney General who appeared for the
Income Tax Depai1ment/Revenue, at the outset referred to the reasoning
which was adopted by the ITATand submitted that the !TAT had rightly               8
interpreted the provisions even in respect to deemed tonnage and came
to the correct conclusion that even slot charter arrangement has to be in
respect of a qualifying ship. He read out the relevant portions of the
discussion contained in the order ofITAT in this behalf and submitted
that in order to get a particular income covered under these special
provisions, it was necessary to fulfill all the conditions which are stipulated   c
in various provisions of this Chapter. His argument was that it is only
the business of operation of qualifying ships that was covered by the
Chapter. Therefore, even the slot charter arrangement had to necessarily
be in respect of' qualifying ship'. It was submitted that unless this threshold
is crossed and the test of eligibility as per the conditions stipulated under     D
Section 11 SVA to Section 11 SVE of the Act are fulfilled, the question of
crossing overto the second stage of computation -0f income as per the
method of determination of tonnage would not arise. On that basis, he
argued that the entire approach of the High Com1 by solely relying upon
explanation to sub-section (4) of Section 11 SVG was erroneous.
                                                                                   E
        15. Per contra, Shri Porus Kaka, senior advocate appearing for
the assessee, made an endeavour to justify the view taken by the High
Court by adopting the reasons which are given in the impugned judgment.
ln the process, the learned senior counsel went into the background as
to how TTS was introduced in the scheme on the basis of the
recommendations contained in the Report given in January, 2002 by the              F
Rakesh Mohan Committee, which was appointed by the Government.
He emphasised that the main purpose of introducing TTS was to
ameliorate the hardships suffered by the Indian shipping companies vis-
a-vis foreign shipping lines because of the stiff competition faced by the
Indian companies and also to ensure an easily acceptable fixed rate low
                                                                                  G
tax regime for shipping companies. His submission was that Chapter
XllG incorporating this TTS which was introduced by the Finance Act,
2004, had to be interpreted keeping in view the aforesaid objective. He
also argued that the legal fiction created by sub-section (4) of Section
 l l 5VG along with Rule 11 Q of the Rules had to be given its proper and
sensible meaning and read in this manner and the insistence of the Income         H
350            SUPREME COURT REPORTS                            [2016] 3 S.C.R.



A     Tax Authorities requiring production of valid certificates even in respect
      of slot charter was a totally inappropriate demand and that would render
      redundant and otiose many provisions of this Chapter.
             16. Dilating the aforesaid submissions, he argued that explanation
      to Section 115VG(4) which clarifies 'deemed tonnage' to include slot
B     charter had to be read along with Circular No. 05/2005 which was a
      contemporaneous expositio circular issued after inserting the said Chapter
      and clarifies that "the tonnage income shall be further increased by the
      deemed tonnage" which is to be computed in the manner prescribed in
      Rule 11 Q. Deemed tonnage means the tonnage in respect of an
      arrangement of purchase of slots, slot charter, and an arrangement of
c     sharing of break-bulk vessels. He, thus, argued that arrangements of
      slot charter even on non-qualifying ship are statutorily included within
      the ambit of the term 'income from the business of operating qualifying
      ship'.
            17. We have given our earnest consideration to the respective
D     submissions.
              18. To recapitulate briefly, the assessee is a company as defined
      under Section 2(17) of the Act and is also in the business of operating
      qualifying ship(s). It is also not in dispute that it owns a qualifying ship
      and fulfillment of this condition permits the assessee to exercise its option
E     for computation of income from the business of operating qualifying
      ships under Chapter XIIG of the Act. The assessee exercised the option
      in this behalf, as per Section I 15VP of the Act in respect of Assessment
      Years in question. Therefore, the assessee is a 'qualifying company'
      under Section 1I5VC of the Act. In fact, the income that is generated
 F    from the qualifying ship owned by the assessee is also assessed under
      the special provisions contained in Chapter XIIG of the Act. The dispute,
      however, pertains to the income from the slot cha1ier arrangements which
      the assessee has made in other ships during the concerned Assessment
      Years. The ships where slot charter are arranged are obviously not
      owned by the assessee. Further, as only some slots are chartered, full
 G    ships are not chartered.
             In this context, the first question would be as to whether such a
      slot charter can be treated as 'operating ships' within the meaning of
      Section 11 SVB of the Act? This provision specifically provides that for
      the purpose of Chapter XIIG, a company would be regarded as operating
 H    a ship 'if it operates any ship whether owned or chartered by it and
COMMISSIONER OF INCOME TAX, KOC HI v. TRANS ASIAN                               3S I
    SHIPPING SERVICES (P) LTD. [A. K. SIKRI, J.]

includes a case where even a part of the ship has been chartered by it in        A
an arrangement such as slot charter, space charter or joint charter'. It
is clear from the above that slot charter is specifically included as an
instance of a ship chartered by the company.
         I 9. Next comes the issue as to whether it would be treated as a
'qualifying ship' as defined under Section I I SYD of the Act. A perusal         B
of the provisions of Section I I SYD of the Act would indicate that all the
conditions laid down therein are fulfilled by the assessee, except the
conditions stipulated in clause (c) which impose an obligation on the
assessee to produce a valid certificate in respect of such a ship where
slot is chai1ered, indicating its nettonnage in force. The entire controversy
revolves around the production of this certificate. As per the Revenue,
                                                                                 c
this is an essential requirement contained in Section 1 I SYD of the Act
which cannot be done away with because of the formula that is contained
in Section 11 SVG of the Act for the computation of Tonnage Income. It
is argued that computation of Tonnage Income under TTS has to be as
for the provisions of Section 11 SVG and sub-section ( 4) thereof defines        D
'Tonnage' to mean tonnage ofa ship indicated in the certificate referred
to in Section 11 SVX. This Section makes the following reading:
       '' 11 SVX. ( 1) For the purposes of this Chapter,-
       (a) the tonnage of a ship shall be determined in accordance
       with the valid ce11ificate indicating its tonnage;                        E
       (b) "val id certificate" means,-
       (i) in case of ships registered in India-
       ( a) having a length of less than twenty-four metres, a
       ce11ificate issued under the Merchant Shipping (Tonnage                   F
       Measurement of Ship) Rules, 1987 made under the
       Merchant Shipping Act, 1958 (44 of I 958);
       (b) having a length of twenty-four metres or more, an
       international tonnage ce11ificate issued under the provisions
       of the Convention on Tonnage Measurement of Ships, 1969,                  G
       as specified in the Merchant Shipping (Tonnage
       Measurement of Ship) Rules, 1987 made under the
       Merchant Shipping Act, 19S8 (44of19S8);
       (ii) in case of ships registered outside India, a licence issued
       by the Director-General of Shipping under section 406 or                  H
352             SUPREME COURT REPORTS                             [2016] 3 S.C.R.



A           section 407 of the Merchant Shipping Act, 1958 (44of1958)
            specifying the net tonnage on the basis of Tonnage
            Certificate issued by the Flag State Administration where
            the ship is registered or any other evidence acceptable to
            the Director-General of Shipping produced by the ship owner
            while seeking permission for chartering in the ship."
8
             20. This argument seems to be convincing in the first blush as
      requirement of producing a valid certificate is specified in Section 11 SVD
      as well as in sub-section (4) of Section 11 SVG. However, a I ittle closer
      scrutiny of the aforesaid provisions would take away the sheen of this
      submission and negate the contention of the Revenue, thereby persuading
c     us to accept the reasoning given by the High Cow1 as well as the manner
      in which aforesaid statutory provisions are interpreted by it. In this behalf,
      we reproduce sub-section (4) of Section I 15VG of the Act which is a
      provision regarding computation of tonnage income:
             (4) For the purposes of this Chapter, the tonnage shall mean
D            the tonnage of a ship indicated in the certificate referred to
             in section 11 SVX and includes the deemed tonnage
             computed in the prescribed manner.
             Explanation.-f'or the purposes of this sub-section,
             "deemed tonnage" shall be the tonnage in respect of an
E            arrangement of purchase of slots, slot charter and an
             arrangement of sharing of break-bulk vessel.
              21. Aforesaid provision is in two parts insofar as computation of
      tonnage is concerned. When it comes to tonnage ofa ship, a certificate
      as mentioned in Section 11 SVX is to be produced. Second part of this
 F    provision talks about 'deemed tonnage' in contradistinction to the 'actual
      tonnage' mentioned in the certificate. Thus, it is not only the actual
      tonnage that is mentioned in the certificate referred tci in Section 11 SVX
      of the Act which this provision deals with. In addition, deemed tonnage
      is also to be included ifthere is such a deemed tonnage, and that deemed
G
      tonnage is to be added to the actual tonnage which is indicated in the
      certificate. Explanation to sub-section (4 ), inter al ia, mentions that insofar
      as slot charter arrangements are concerned, purchase of such slot charter
      shall be treated as deemed tonnage. The Legislature has, thus, clearly
      visualised that insofar as deemed tonnage is concerned, there would not
      be any possibility of producing a certificate referred to in Section 11 SVX
 H    of the Act. When we read the provision in this manner, it becomes
COMMISSIONER OF INCOME TAX, KOC HI v. TRANS ASIAN                              353
    SHIPPING SERVICES (P) LTD. [A. K. SIKRI, J.]

amply clear that Section 11 SVD of the Act which talks of a qualifying          A
ship, contemplates the situation in which entire ship is either owned or
chartered. Similar is the position which inheres in Section 11 SVX of the
Act as it refers to 'the tonnage of a ship'. Therefore, whenever the
question of a tonnage of a ship crops up and the said tonnage is to be
determined, it has to be.in accordance with the valid certificate indicating
                                                                                8
its tonnage and it is a compulsory obligation of the assessee to produce
such a certificate. However, this requirement of producing a certificate
would not apply when entire ship is not chartered-and the arrangement
pe1iains only to purchase of slots, slot charter and an arrangement of
sharing of break-bulk vessel. The contention of the senior counsel for
the assessee is right that the legal fiction created by sub-section (4) of      c
Section 11 SVG is to be given its proper and sensible meaning. This
position becomes abundantly clear by reading Rule 11 Q or the Rules
which specifies the basis/formula of computing deemed tonnage in respect
of arrangement of slot charter and reads as under:
          "11 Q. (I) For the purpose of the Explanation to sub-section          D
          (4) of section 11 SVG, deemed tonnage in respect of an
          arrangement of purchase of slots and slot charter shall be
          computed (illustrative formula given in Note 3 appearing
          after the corresponding Fonn No. 66) on the following basis:
          2.5        TEU = I Net Tonnage ( 1 NT)                                E
          where TEU is Twenty foot Equivalent Unit (Container of
          this size)
          (2) Computation of deemed tonnage (illustrative formula
          given in Note 4 appearing after the corresponding Form
          No. 66) in respect of an arrangement of sharing of break-             F
          bulk vessel shall be made on the following basis :
          (i) in case where cargo is restricted by volume:
          19 cubic meter (cbm) =I net tonnage (1 NT): and

          (ii) in case where cargo is restricted by weight                      G
          14 metric tons = 1 net tonnage (I NT)"
       22. In Karimtlwruvi Tea Est11tes Ltd. v. State of Kent/a mu/
Ors.', a Constitution Bench of this Court, while interpreting conflicting
I (   1968) 48 lTR (SC) 28
                                                                                H
354             SUPREME COURT REPORTS                             [2016] 3 S.C.R.



A     tax provisions held that the Rules made under the Act, must be taken to
      be prescribed by the Act and the definitions contained therein must apply
      to other provisions. In the same judgment, it was held that if two provisions
      are in conflict, they must be interpreted in a harmonious manner. The
      calculation of income arising from carriage of goods on slot basis has, in
      the wisdom of the Legislature, been disconnected from the capacity of a
 B
      ship, on account of impossibility of getting such information in relation to
      ships on which slot charter is undertaken. This aspect has due recognition
      in Note 3 of the said Form 66. Thus, the Act and the Rules for
      computation on tonnage tax specifically and categorically differentiate
      the requirement of the Certificate with regards to owned ship and slot
·c    charter. In law, the said Rule also recognizes that identification of the
      vessel for slot charter cannot be done.
             23. It would also be pertinent to mention that Note 3 below Form
      No. 66, in terms of Rule 11 D, recognizes the reason for prescribing a
      separate formula for slot charter by mentioning: "3. Formula for conversion
 D    ofTEUs into NT (Slot Chatier)
             (i) In addition to loading containers on their own container
             vessels, shipping companies also hire slots on container ships
             (not owned by them) plying on various routes. These slots
             cou Id be hired for a sector voyage or on long term basis, al I
             round the year, in various vessels and in varying numbers
 E
             and thus cannot be converted to net tonnage identifying the
             particular vessel on which the slot is hired. Thus, a formula
             has been worked out to convert the slots hired into net
             tonnage."
            24. The position is taken beyond any pale of doubt with the
 F    following Note in Form No. 66:
             "There is no need to mention the name of the ship, income
             from which is computed on deemed tonnage basis."
             25. We may also point out that in terms of Section 115 Vl(2),
 G    relevant shipping income of a Tonnage Tax Company means its profits
      from core activities and its profits from incidental activities. Core activities
      of a Tonnage Tax Company have been specified in sub-section (2) of
      the said section. These include its activities from operating qualifying
      ships and other ship related activities including slot charter.
             26. When the scheme of the aforesaid special provision for
 H
COMMISSIONER OF INCOME TAX, KOCH! v. TRANS ASIAN . 355
    SHIPPING SERVICES (P) LTD. [A. K. SIKRI, J.]

computation of income under TTS is exempted, we find the balance                A
tilted in favour of the asses see as that was the precise purpose in
introducing TTS in India. It may be stated in brief that in view of the
stiff competition faced by the Indian shipping companies vis-a-vis foreign
shipping lines, and in order to ensure an easily accessible. fixed rate, low
tax regime for shipping companies, the Rakesh Mohan Committee in its
                                                                                B
report (of January, 2002) recommended the introduction of the TTS in
India, which was similar to, and adopted some of the best global practices
prevalent. The whole purpose of introduction of the Scheme was to
make the Indian shipping industry more competitive in the global space
by rationalising its tax cost. For the reason that it is impossible to cater
to all shipping routes on owned ships, it is an accepted and widely             c
prevalent practice globally and iii India that shipping companies engage
 in slot charter operations. If such slot charter arrangements are not
entered into, then Indian shipping companies will not be able to take up
contract of affreightments and these contracts wou Id have fallen to only
foreign shipping lines thereby making Indian shipping industry
                                                                                D
 uncompetitive. Such slot charter arrangements being with a shipping
company but not in relation to or for a particular ship, it is impossible for
the Indian shipping company to identify the cargo ship, which carried the
goods. This peculiarity has been duly recognized at Note 3 of Form 66
and reproduced as under:
       "In addition to loading containers on their own container                E
       vessels, shippingcompanics also hire slots on container ships
       (not owned by them) plying on various routes. These slots
       could be hired for a sector voyage or on long term basis, all
       round the year, in various vessels and in varying numbers
       and thus cannot be converted to net tonnage identifying the              F
       particular vessel on which the slot is hired. Thus. a formula
       has been worked out to convert the slots hired into net
       tonnage".
      Similarly, for space charter also, this business aspect has been
recognized at Note 4(b) to Form 66 as under:                                    G
       "Since the entire vessel is not chartered and only a small
       space is booked in the vessel, conversion of chartered space
       into net tonnage is not available. Hence, a conversion
       fonnula of cargo carried on a ship to its net tonnage has
       been worked out".
                                                                                H
356             SUPREME COURT REPORTS                            [2016] 3 S.C.R.


A·           Accordingly, there is no requirement of the certificate under the
      Scheme in relation to the vessel on which slot charter operations are
      carried out.
             27. We would also like to refer to Circular No. 05/2005 dated
      15.07.2005 explaining the need and essence of the introduction of these
B     provisions which was issued contemporaneously by the Central Board
      of Direct Taxes (CBDT). The Circular clarifies that the Scheme is a
      "preferential regime of taxation". It also clarifies that '"charging provision
      is under Section I 15VA read with Section 115VF and Section I I 5VG."
      Circulars ofCBDT explaining the Scheme of the Act have been held to
      be binding on the Department repeatedly by this Court in a series of
c     judgments including Azadi BaclwoAmloltm v. Union ofImlia 2, Nav11it
      Lal Jlwveri v. K.K. Seti"', mu/ UCO Bank v. CIT'.
             28. We, thus, agree with the decision of the High Court and find
      no merit in the instant appeals. The same are hereby dismissed. There
      shall, however, be no order as to cost.
D

      Devika Gujral                                               Appeals dismissed.




      ' 263 ITR 70(,
      'IAC 56 ITR 198 SC
      '237 ITR 889 SC