In this Webinar, we shall under the Tonnage taxation scheme under Income-tax Act, 1961. It is a presumptive taxation scheme under which certain types of shipping companies (qualifying companies) operating certain types of ships (qualifying ships) are given an option to compute income in accordance with the provisions Sec 115 VA to 115 VZC. Incomes under these provisions are computed based on the Net Tonnage of the qualifying ship on a presumptive basis. The Qualifying company may opt to be charged to tax under provisions of the Tonnage Tax Scheme or under regular provisions of the Act

1. Tonnage Taxation Scheme
CA Jugal Gala

2. Credits and Acknowledgments
Harish Kumar R
Thirumal V

3. Legends used in the Presentation
AO Assessing Officer
CG Central Government
PGBP Profits and Gains of Business or Profession
POEM Place of Effective Management
PY Previous Year
TTS Tonnage Tax Scheme
WDV Written Down Value

4. Presentation Schema
Introduction and
Rationale
Computation of
Tonnage Income from
Business of Operating
Qualifying ships
Procedure for Option of
Tonnage Tax Scheme
Conditions for
Applicability of Tonnage
Tax Scheme
Amalgamation and
Demerger of Shipping
companies
Miscellaneous

5. Introduction
Tonnage Tax scheme is a presumptive taxation scheme under which certain types of shipping
companies (qualifying companies) operating certain types of ships (qualifying ships) are given an
option
Sec 115VA – Income from PGBP of a company in the business of Operating Ships, may be
calculated as per Chapter XII-G at the option of the assessee
Finance Act (No. 2), 2004 introduced the Tonnage Tax Scheme

6. Rationale
Long standing demand of the shipping
industry
Shipping companies generally do not
compete with players in domestic
circuit but in international arena
Would enable Indian shipping lines to
compete successfully against their rivals
anywhere in the world
Nearly 90% the world’s fleet enjoys the
benefit of a tax-friendly regime in which
only nominal tax is levied

7. Computation of Tonnage Income from Business of Operating
Qualifying ships

8. Operating Ships – Sec 115VB
in an arrangement such as slot charter, space charter or joint charter
includes a case where even a part of the ship has been chartered in by it
if it operates any ship whether owned or chartered by it and
A company shall be regarded as operating a ship
Provided that a company shall not be regarded as the operator of a ship
• which has been chartered out by it
o on bareboat charter-cum-demise terms or
o on bareboat charter terms
• for a period exceeding 3 years
Bareboat charter means hiring of a ship for a stipulated period on terms which give the charterer possession and control of the ship,
including the right to appoint the master and crew
Bareboat charter-cum-
demise
means a bareboat charter where the ownership of the ship is intended to be transferred after a specified period to the
company to whom it has been chartered
Charter Chartering is an activity within the shipping industry whereby a shipowner hires out the use of their vessel to a charterer
Slot charter means a charter whereby the shipper leases one or more “slots,” aboard a container ship
Space Charter means a charter whereby the shipper leases a portion of the cargo space
Joint charter Where two charterers jointly take a ship on charter from a shipowner

9. Qualifying Company – Sec 115VC
If a company satisfies the following conditions, it can be termed as Qualifying Company:
It is an Indian
company
The Place of Effective Management
(POEM) of the company is in India
It owns at least one
qualifying ship
The main object of the company is to
carry on the business of operating ships
POEM means
• The place where the board of directors of the company or its executive directors, make their decisions
• In a case where the board of directors routinely approve the commercial and strategic decisions made by the
- executive directors or
- officers of the company,
• the place where such executive directors or officers of the company perform their functions
Qualifying Ship – Sec 115VD
A ship is a qualifying
ship if it satisfies the
following:
It is a sea going ship or vessel of 15 net tonnage or more
It is a ship registered under the Merchant Shipping Act, 1958, or
a ship registered outside India in respect of which a licence has been issued by the Director-General of Shipping
A valid certificate in respect of such ship indicating its net tonnage is in force
But does not include
Fishing vessels Factory ships Pleasure crafts
Harbour and
river ferries
Offshore
installations
A sea going ship or vessel if the main purpose for which it is used is the
provision of goods or services of a kind normally provided on land
A qualifying ship which is used as a fishing vessel for
a period of more than 30 days during PY

10. Manner of Computation – Sec 115VE
A tonnage tax company (a company for which opts for Tonnage Tax option) engaged in the business of operating qualifying ships
shall compute the profits from such business under the tonnage tax scheme (TTS)
Income from the business of operating qualifying ships shall be considered separate from other businesses of the assessee
TTS shall apply only if an option to that effect is made in accordance with the provisions of Sec 115VP (method and time of opting)
If TTS is not opted, Income shall be computed as per regular provision
Tonnage Income – Sec 115VF
Tonnage income means the Income of a tonnage tax company computed in accordance
with the provisions of Sec 115VG (computation of tonnage tax income)
The income so computed is deemed to be the profits chargeable under the head PGBP
Where income is so computed, the ‘relevant shipping income’* referred to in Sec
115VI(1) will not be chargeable to tax
* Relevant shipping income is the actual income of the qualifying company and Tonnage income is the deemed income – relevant
shipping income is used for the purpose of calculating taxable income in case of non-utilisation or mis-utilisation of reserve

11. Computation of Tonnage Income – Sec 115VG
Tonnage income of a Tonnage tax company - for a PY is the aggregate of the tonnage income
of each qualifying ship
Tonnage income of a qualifying ship - is to be calculated on the basis of the daily tonnage
income of such ship multiplied by the number of days in the PY
If operated for only part of the PY, the tonnage income shall be computed proportionately
Qualifying ship having net tonnage Amount of daily tonnage income
Up to 1000 Rs. 70 for each 100 tons
Next 9000 tons Rs 53 for each 100 tons
Next 15,000 tons Rs 42 for each 100 tons
Balance tonnage Rs 29 for each 100 tons
Tonnage means the tonnage of a ship indicated in the valid certificate
Sec 115VH - Calculation in
case of joint operation
Where a qualifying ship is operated by two or more companies by way of joint interest
• If respective shares are definite and ascertainable - proportionate to the share of interest
• In other cases - tonnage income of each company shall be computed as if each had been the only operator

12. Relevant shipping income – Sec 115VI
Relevant shipping income of a tonnage tax company means its profits from core activities and its profits from incidental activities
Where the aggregate of income from incidental activities exceeds 0.25% of the turnover from
core activities, such excess will shall be taxable under the regular provisions of the Act
The core activities of a tonnage tax company are
Its activities from operating qualifying ships
A) shipping contracts in respect of—
(i) earning from pooling arrangements;
(ii) contracts of affreightment.
(a) "pooling arrangement" means an agreement between two or more persons for providing services through a
pool or operating one or more ships and sharing earnings or operating profits on the basis of mutually agreed terms;
(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;
B) specific shipping trades, being—
(i) on-board or on-shore activities of passenger ships comprising of fares and food and beverages consumed on board;
(ii) slot charters, space charters, joint charters, feeder services, container box leasing of container shipping
other ship-related activities mentioned as under:

13. Contd.
In the following cases, the relevant shipping income is to be computed as if the transfer had
been at market value of the goods and services as on the date of transfer:
Where any goods or services held for the purposes of
-Tonnage tax business are transferred to any other business carried on by a tonnage tax company
-Any other business carried on by such tonnage tax company are transferred to the tonnage tax business
The consideration 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
Market value - price that such goods or services would ordinarily fetch on sale in the open market
Where the computation of the relevant shipping income in the manner specified above presents
exceptional difficulties, the AO may compute such income on such reasonable basis as he may deem fit
The incidental activities of the tonnage tax company are the activities which are incidental to the core activities
Rule 11R - maritime consultancy charges, income from loading or unloading of cargo, ship management fees or
remuneration received for managed vessels; and maritime education or recruitment fees
Where a tonnage tax company operates a non-qualifying ship, then the income attributable to
operation of the non-qualifying ship should be computed as per regular provisions
Treatment of Common
Costs – Sec 115VJ
• In case assessee carries on any other business, common costs shall be apportioned on a reasonable basis
• In case of use of assets other than qualifying ship not exclusively for shipping, depreciation shall be
apportioned on a fair proportion determined by AO having regard to usage

14. Depreciation – Sec 115VK
The depreciation for the first PY of the tonnage tax scheme has to be computed on the WDV of the qualifying ships
The WDV of the block of assets, being ships, as on the first day of the PY, has to be divided in the ratio of
the book WDV of the qualifying ships and the book WDV of the non-qualifying ships
The block of qualifying assets would constitute a separate block of assets
The manner of computing the book WDV of the block of qualifying assets and the block of other assets is as follows :
The book WDV of each qualifying asset and each other asset as on the first day of the PY is to be determined by
taking the book WDV of each asset appearing in the books of account as on the last day of the preceding PY
The book WDV of all the qualifying assets and other assets are to be aggregated
The ratio of the aggregate book WDV of the qualifying assets to the aggregate book WDV of the other assets has to be determined

15. Assumptions and Consequences regarding Deductions and
Losses – Sec 115 VL & 115 VM:
Deductions under Sec 30-43B are deemed to have been allowed
No set off and carry forward of losses shall be permitted on income computed under tonnage tax scheme
No chapter VI A deduction shall be allowed on such income
Written down value of the assets shall be computed as if depreciation had been allowed on such assets
Proportionate Business loss under Sec 72 that are accrued to qualifying company prior to tonnage tax scheme shall be excluded
Chargeable Gains from Transfer of Tonnage Tax Assets – 115VN
• Any profits or gains arising from the transfer of a capital asset being an asset forming part of the block of qualifying assets
• shall be chargeable to income-tax in accordance with Sec 45 (Capital Gains Charging Sec) read with Sec 50 (Depreciable Assets)
In Sec 50 for “WDV of the block of assets”, the words “WDV of the block of qualifying assets” shall be substituted
Exclusion from Minimum Alternate Tax – 115VO
• Book profit or loss derived from the activities of a tonnage tax company, referred in Sec 115V-I (Relevant shipping income),
shall be excluded from the book profit of the company for the purposes of Sec 115JB (MAT)

16. Procedure for Option of Tonnage Tax Scheme

17. Method and Time of Opting for TTS – Sec 115VP
A qualifying company may opt for the tonnage tax scheme by making an application to the Joint Commissioner having
jurisdiction over the company in Form 65
The application may be made:
• By any existing qualifying company during the ‘Initial Period’ which is between 30th day of September, 2004 but
before the 1st day of January, 2005
• In case of a company incorporated after the initial period – within 3 months from the date of incorporation
• Existing company becomes qualified after the initial period - within 3 months from the date on which it became a
qualifying company
On receipt of an application for option for tonnage tax scheme, the Joint Commissioner shall pass an order in writing:
• Approving the option for tonnage tax scheme; or
• Refusing to approve the option for tonnage tax scheme, after giving the applicant an opportunity of being heard
Every order shall be passed before the expiry of 1 month from the end of the month in which the application was received
Where an order granting approval is passed by the Joint Commissioner, TTS shall apply from the AY relevant to the PY in
which the option for tonnage tax scheme is exercised

18. Period for which Tonnage Tax Option to Remain in Force –
Sec 115 VQ
An option for tonnage tax scheme shall cease to have effect from the PY in which:
Qualifying company ceases to be a qualifying company;
Default is made in complying with the provisions contained in
• Sec 115VT relating to transfer of profit to tonnage tax reserve account or
• Sec 115VU relating to training requirement for tonnage tax company or
• Sec 115VV relating to limit for charter in tonnage;
Tonnage tax company is excluded from the tonnage tax scheme u/s 115VZC by AO due to abuse of tonnage tax scheme
Qualifying company voluntarily opts out of the scheme
An option for tonnage tax scheme, shall remain in force for a period of 10 years from the date on which such
option has been exercised and shall be taken into account from the PY in which such option is exercised
Renewal of Tonnage Tax Scheme – Sec 115VR
• An option for TTS, approved under Sec 115VP, may be renewed within one year
from the end of the PY in which the option ceases to have effect
• Provisions for Manner and time of opting shall apply similarly as for original option

19. Prohibition to opt for TTS in certain cases – Sec 115VS
from the date of opting out or default or order, as the case may be
shall not be eligible to opt for tonnage tax scheme for a period of 10 years
Whose option has been excluded from tonnage tax scheme in pursuance
of an order made under section 115VZC (exclusion from TTS by AO),
Makes a default in complying with the provisions of section 115VT or
section 115VU or section 115VV or
opts out of the TTS on its own or
A qualifying company,

20. Conditions for Applicability of Tonnage Tax Scheme

21. Transfer of Profits to Tonnage Tax Reserve Account – Sec 115 VT
and such shortfall shall be deemed to be part of the reserve requirement of that following PY.
the company shall create the reserves to the extent possible in that PY and the shortfall, if
any, shall be added to the amount of the reserves required to be created for the following PY
and consequently, the company is not in a position to create the full or any part of the reserves,
Where the company has book profit from the business of operating qualifying ships and book loss from any other sources,
A tonnage tax company shall, be required to credit to a special reserve account, Tonnage Tax Reserve Account, an
amount not less than 20% of the book profit derived from its core and non core activities in each PY.
Book profit shall have the same meaning as prescribed u/s 115JB (for MAT) so far as it relates to the income
derived from its core and non core activities in each PY.
However the company shall cease to have the benefit under TTS if the
reserve is not created for two consecutive PYs

22. Utilisation, Misutilisation and Non utilisation
Where any amount credited to the Tonnage Tax Reserve Account:
Has been utilised for any purpose other than that referred above or
Has not been utilised for the purpose specified of acquiring a new ship or
Has been utilised for the purpose of acquiring a new ship but such ship is sold or otherwise
transferred, other than in any scheme of demerger by the company to any person at any
time before the expiry of 3 years from the end of the PY in which it was acquired
Utilisation of the Reserves
The amount credited to the Tonnage Tax Reserve account shall be utilised by the company before the expiry of a period of 8 years
immediately following the PY in which the amount was credited for:
i. Acquiring a new ship for the business of the company and
ii. Until the acquisition of a new ship, for the purposes of the business of operating qualifying ships other than for distribution by way
of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India.
Misutilization or Non utilization of Reserve Amount

23. Consequences of Mis utilisation, Non utilisation or Inadequate
Transfer
Where the amount credited to the Tonnage Tax Reserve Account is less than 20% of book profits
Consequences of Misutilization or Non- utilization of Reserve Amount
Where the qualifying company has not utilized or misutilized the reserve
amount, the following amount shall be deemed to be income of the relevant PY
Taxable Amount = Relevant shipping income X Extent of reserves unutilized or mis utilised
----------------------------------------------------------
Total reserve created during the year
Taxable in the year of misutilization or year after the expiry of 8 years or the year on which wrongful transfer took place
Consequences if the amount transferred to Reserve is less than 20%
Taxable Amount = Relevant shipping income X Shortfall in the credit to Reserve
-------------------------------------------
Minimum reserve to be credited

24. Minimum Training Requirement for Tonnage Tax Company –
Sec 115VU
A tonnage tax company shall comply with the minimum training requirement in respect of trainee officers in accordance with
the guidelines framed by the Director-General of Shipping and notified in the Official Gazette by the Central Government.
The tonnage tax company shall be required to furnish a copy of the certificate issued by the Director-General of Shipping
along with the return of income under section 139 to the effect that such company has complied with the minimum training
requirement in accordance with the guidelines.
Where the minimum training requirement is not complied with for any 5 consecutive PYs, the option of the company for
tonnage tax scheme shall cease to have effect from the beginning of the PY following the fifth consecutive PY in which the
failure to comply with the minimum training requirement had occurred

25. Limit for ‘Charter in’ of Tonnage – Sec 115VV
Not more than 49% of the net tonnage of the qualifying ships operated by a tonnage tax company shall be chartered in,
during any PY (i.e. minimum 51% of the qualifying ships should be owned ships)
The proportion of net tonnage referred to above shall be calculated based on the average of net tonnage during that PY.
Where the net tonnage of ships chartered in exceeds the limit during any PY, the total income of such company in relation to
that PY shall be computed as if the option for tonnage tax scheme does not have effect for that PY.
Where the chartering limits prescribed had exceeded in any two consecutive PYs, the option for tonnage tax scheme shall
cease to have effect from the beginning of the PY following the second consecutive PY in which the limit had exceeded.
The term “chartered in” shall exclude a ship chartered in by the company on bareboat charter-cum-demise terms

26. Maintenance and audit of accounts – Sec 115VW
An option for tonnage tax scheme by a tonnage tax company will not have effect in relation to a PY unless such company -
Maintains separate books of account in respect of the business of operating qualifying ships
Furnishes, along with the return of income for that PY, the report of an accountant, in Form No. 66 duly signed by an accountant
Determination of Tonnage – Sec 115VX
The tonnage of the ship shall be determined in accordance with the valid certificate indicating its net tonnage
Valid Certificate means
-Having a length of less than 24 metres, a certificate issued under the Merchant Shipping Act, 1958
-Having a length of 24 metres or more, an international tonnage certificate issued under the Merchant Shipping Act, 1958
In case of ships registered in India
In case of ships registered outside India
A licence issued by the Director-General of Shipping of the Merchant Shipping Act, 1958 specifying the net tonnage
on the basis of Tonnage Certificate issued by the Flag State Administration where the ship is registered
Any other evidence acceptable to the Director-General of Shipping produced by the ship owner while seeking permission for chartering

27. Amalgamation and Demerger of Shipping companies and
Miscellaneous

28. Amalgamation – Sec 115VY
Situation Implications
Where the amalgamating companies are tonnage tax
companies
The provisions of TTS shall apply to the amalgamated company for the
unexpired period of amalgamated or amalgamating company whichever is
longer
Where the amalgamated company is not a tonnage tax
company at the time of amalgamation, but
amalgamated company is a qualifying company
It shall make an application within 3 months from the date of approval of
the scheme of Amalgamation
Where one of the amalgamating companies is a
qualifying company as on the 1st day of October, 2004
and which has not exercised the option for TTS within
the initial period
The provisions of this Chapter shall not apply to the amalgamated company
and the income of the amalgamated company from the business of
operating qualifying ships shall be computed in accordance with the other
provisions of this Act
Demerger – Sec 115VZ
Where in a scheme of demerger, the demerged company transfers its business to the resulting company before the expiry of
the option for TTS, the TTS shall apply to the resulting company for the unexpired period if it is a qualifying company

29. Effect of Temporarily Ceasing to Operate Qualifying Ships – Sec
115VZA
A temporary cessation shall not be considered as a cessation of operating of such qualifying ship
Where a qualifying company continues to operate a ship, which temporarily ceases to be a qualifying ship,
then such ship will not be considered as a qualifying ship
Avoidance of Tax – Sec 115VZB
The TTS will not apply where a transaction or arrangement which amounts to an abuse of the TTS
A transaction or arrangement will be considered as an abuse if the entering into or the application of such
transaction or arrangement results, or would, but for this section have resulted, in a tax advantage being
obtained by
- A person other than a tonnage tax company
- A tonnage tax company in respect of its non-tonnage tax activities
Tax
Advantage
includes
-The determination of the allowance for any expense or interest or
-The determination of any cost or expense allocated or apportioned
which has the effect of reducing the income or increasing the loss, from activities other than tonnage tax activities
A transaction or arrangement which produces to the tonnage tax company more than ordinary profits
which might be expected to arise from tonnage tax activities

30. Exclusion from Tonnage Tax Scheme – Sec 115VZC
Where a tonnage tax company is a party to any transaction or arrangement which amounts to an abuse of the TTS, the AO has
the power to exclude such company from the TTS, by an order in writing, after giving an opportunity of being heard to such
company
No order shall be passed without the previous approval of the Chief Commissioner or Principal Chief Commissioner
If the company proves to AO that the transaction or arrangement was a bona fide commercial transaction
and has not been entered into for the purpose of obtaining tax advantage
Non-
Applicability

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