29 Tonnage Tax Scheme TTS 14 Pgs by 22NYo60

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Prof. Nihit Jhaveri                                                                Direct Tax – FINAL C.A.
Mob.: 98202 25728                                                                     TONNAGE TAX SCHEME

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                CHAPTER XII – G:
           TONNAGE TAX SCHEME (T.T.S.)
         [SECTION 115V TO SECTION 115VZC]
         The provisions of this chapter were introduced w.e.f. 10/09/2004 and are
applicable only to those ‘Indian Companies’ which are engaged in the business of
operating ships. (In other words, these provisions are not to apply to Individuals, H.U.F.s,
A.O.P., B.O.I., etc…)
         This chapter is divided into 30 different sections starting from section 115V till
section 115VZC and it is an extension of ‘Presumptive Taxation Scheme’ i.e. it is similar
to the concept of section 44AD / 44AE / 44AF, but on a much larger scale with a detailed
applicability. One of the major difference between the concept of section 44AD / 44AE /
44AF and the concept of this chapter is that the provisions of section 44AD / 44AE /
44AF, were applicable to the assessee without his having to make any kind of application
to anybody, whereas, the provisions of this chapter shall apply only if an application in a
prescribed form was made by the assessee company to Joint Commissioner of Income
Tax (JCIT).

[1.] SECTION 115V: DEFINITIONS: This section seeks to define various
terminologies used in this chapter, which are as follows:-

    (a.) “Bareboat Charter” (BBC): means pure chartering (hiring) of a ship, whereby the
         charterer company gets not only the control and possession of the ship but also
         gets the right to appoint the Master and the Crew member of the ship.

         Note: “Chartering” means “hiring”
               “Chartering in” means taking on hire/rent
               “Chartering out” means giving it on hire/rent

    (b.) “Bareboat Charter-cum-demise” (BBCD): means a Bareboat Charter only but an
         arrangement whereby the ownership of the ship is intended to be transferred to
         the charterer after a stipulated period of time. (Normally, the rent for the ship
         under BBCD terms will be higher than the rent for the same ship under BBC
         terms, because under BBC terms, the ownership is not going to be transferred to
         the charterer, whereas under BBCD terms, the ownership is going to transferred)

         Note: Bareboat Charter can be understood as similar to “Operating Lease” and
         Bareboat Charter-cum-demise can be understood as similar to “Finance Lease”.

    (c.) “Seagoing Ship”: means a ship or a vessel, which has been certified as such (i.e.
         certified as a ‘Seagoing Ship/Vessel’) by a competent authority of any country.



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Prof. Nihit Jhaveri                                                                Direct Tax – FINAL C.A.
Mob.: 98202 25728                                                                     TONNAGE TAX SCHEME

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    (d.) “Factory Ship”: includes a ship providing processing services in respect of fishing
         produce.
         (This terminology has been defined in the act in an inclusive manner without
         explaining the meaning of the term. Factory Ship basically means a ship which is
         anchored in the middle of the water and provides all those services which may
         provided in a factory on land.)

    (e.) “Pleasure Craft”: means a ship, the main purpose for which it is used is Sports or
         Recreation. For e.g.: Motor-Boat, Speedboat, Jetski, etc…

    (f.) “Tonnage Income”: means an income of a Tonnage Tax Company from the
         business of operating Qualifying Ships, computed in accordance with the
         provisions of CH-XII-G.

    (g.) “Tonnage Tax Company” (T/T Co.): means a Qualifying Company, in respect of
         which the option of Tonnage Tax Scheme is in force.

    (h.) “Tonnage Tax Scheme” (TTS): means a scheme of computing the profits and
         gains of a Tonnage Tax Company from the business of operating Qualifying
         Ships, in accordance with the provisions of this chapter.

[2.] SECTION 115VA: Notwithstanding anything contained in section 30 to section
43B, the income of a Tonnage Tax Company from the business of operating qualifying
ships shall be computed in accordance with the provisions of this chapter only and will be
chargeable to tax under the head ‘Profits and Gains of Business and Profession’ only.

[3.] SECTION 115VB: “OPERATING SHIP”: As we discussed in the first paragraph
of this chapter, that the provisions of this chapter shall apply only to an Indian Company
which is in the business of operating ships. So, now we need to understand as to when
can a company be said to be operating a ship.
      As per Section 115VB, a company will be regarded as operating a ship, if it operates
a ship which is either owned by it or has been chartered in by it, including a case where a
ship has been chartered in under an arrangement such as Slot Charter, Space Charter or
Joint Charter.
      (A ship chartered in by the company, would not necessarily mean the entire ship
having been chartered in by the company. Sometimes, the company may have chartered
in only a part of the ship, which is popularly called as ‘Slot Charter’, i.e. only one slot of
the entire ship has been chartered in by the company. Sometimes, the company may not
even charter the entire ‘slot’ and may prefer to charter only a part of that entire slot,
which is popularly called as ‘Space Charter’, i.e. only a part of the entire slot has been
chartered in. Sometimes, the company may charter ‘Slot’ and ‘Space’ both on a ship,
such arrangement is popularly known as ‘Joint Charter’.)



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Prof. Nihit Jhaveri                                                                Direct Tax – FINAL C.A.
Mob.: 98202 25728                                                                     TONNAGE TAX SCHEME

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[4.] SECTION 115VC: “QUALIFYING COMPANY”(QC): In order to opt for the
Tonnage Tax Scheme, first of all the company has to qualify for the scheme. A Company
will be regarded as a Qualifying Company, if it satisfies all the following four conditions:

   (a.) The Company is an Indian Company.
   (b.) The place of its effective management is in India.
        (The place of effective management is deemed to be situated in that country, where
        the board of directors meet or take their crucial decisions or a place where the
        board of directors or the executive directors perform their routine functions)
   (c.) The Company owns at least one ‘Qualifying Ship’.
   (d.) The main object of the Company is to carry on the business of operating ships.

   Note: Company must fulfill all the above mentioned four conditions cumulatively, in
   order to be called as a ‘Qualifying Company’


[5.] SECTION 115VD: “QUALIFYING SHIP” (QS): The provisions of this chapter
aim at computing the income of a T/T Company from the business of operating
Qualifying Ships. Again, ownership of at least one Qualifying Ship is one of the
prerequisite conditions for applicability of the provisions of this chapter. So, now we
need to understand as to what do we mean by the term ‘Qualifying Ship’. Section 115VD
says that a ship will be regarded as a Qualifying Ship, if it satisfies all the following three
conditions cumulatively:-

 (a.) It is a seagoing ship or a vessel with a capacity of at least 15 Net Tonnage. (The
      way Air Conditioners have a capacity like 1 Ton, 1.5 Ton or Refrigerators have a
      capacity like 450 Liters or Motor Cars have a capacity like 1,300 CC, same way
      ships also have a capacity which is denominated in Tonnage/Tons) (1 Ton = 1,000
      K.g.)
 (b.) It is registered under Merchant Shipping Act, 1958. In case if the ship is
      registered outside India, then such ship must have a license issued to it in India by
      ‘Director General of Shipping’.
 (c.) A valid Certificate indicating its net tonnage is in force. (issued to the ship by
      Director General of Shipping.)


Exceptions: The following ships, however shall not be regarded as a Qualifying Ship:-

    (i.) A Ship, the main purpose for which it is used is the provision of goods and
          services of a kind, which are normally provided on land. e.g.: Cruise,
    (ii.) Fishing Vessel,
    (iii.) Factory Ship,
    (iv.) Pleasure Craft,


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Prof. Nihit Jhaveri                                                                Direct Tax – FINAL C.A.
Mob.: 98202 25728                                                                     TONNAGE TAX SCHEME

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    (v.) Offshore Installations for e.g.: Bombay High (ONGC),
    (vi.) Harbor or River Ferries for e.g.: Ferry between Gorai Beach and ‘Esselworld’ or
    Ferry at ‘Gateway of India’,
    (vii.) A ship which otherwise is a Qualifying Ship, but it is used as a fishing vessel for
    a period of more than 30 days in the given financial year.

    Note: There was one more exception to the definition of the term ‘Qualifying Ship’
    up to A.Y. 2005-2006 called as ‘Dredger’, but with effect from A.Y. 2006-2007,
    ‘Dredgers’ have been removed from the list of exceptions. In other words, w.e.f. A.Y.
    2006-2007, Dredgers can also be a Qualifying Ship. (‘Dredger’ means a vessel which
    is used for the purpose of clearing mud from the shore. Dredgers are used for various
    other purposes also for e.g. Dredger may be used for pulling and bringing a huge ship
    near the seashore.)


[6.] SECTION 115VE: ‘TONNAGE TAX BUSINESS’: The profits and gains of a T/T
Company from the business of operating Qualifying Ships shall be computed in the
manner laid down in section 115VG. Such business of operating Qualifying Ships shall
be called as ‘Tonnage Tax Business’, which shall be treated as separate and distinct from
all other businesses or activities that may be carried on by a T/T Company. All other
businesses other than the business of operating Qualifying Ships shall be called as ‘Non-
Tonnage Tax businesses’.

[7.] SECTION 115VF: ‘RELEVANT SHIPPING INCOME’ (ACTUAL INCOME):
The income of a T/T Company from the business of operating Qualifying Ships,
computed in accordance with the provisions of this chapter, is called T/T income, which
is a presumptive income and not an actual income and is chargeable to tax. On the other
hand, we will have the actual income also from such business. Such actual income from
the business of operating Qualifying Ships, is to be called as ‘Relevant Shipping Income
(RSI), which is the actual income, but is not chargeable to tax.
Note: Though, what is taxable is the ‘Tonnage Tax income’ and not the ‘Relevant
Shipping Income’, then also we are required to compute such ‘Relevant Shipping
Income’, because applicability of the beneficial provisions of this chapter, depend upon
the fulfillment of certain conditions, which are based on the amount of such ‘Relevant
Shipping Income’.

[8.] SECTION 115VG: COMPUTATION OF TONNAGE TAX INCOME: The step
by step computation of Tonnage income i.e. the presumptive income shall be as follows:-
         (a) Find out the Net Tonngae capacity of each Qualifying ship.
         (b) Ignore any tonnage in terms of kilograms.
         (c) Round off the balance tonnage to the nearest multiple of 100 tons.
         (d) On such rounded tonnage apply the following table to find out the daily
             tonnage income from such Qualifying ship:-



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Prof. Nihit Jhaveri                                                                Direct Tax – FINAL C.A.
Mob.: 98202 25728                                                                     TONNAGE TAX SCHEME

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  Net Tonnage of the Qualifying Ship                             Daily Tonnage Income
            Upto 1,000 Tons                                       Rs. 46/- per 100 Tons
  More than 1,000 Tons but upto 10,000                  Rs. 460/- + Rs. 35/- for each 100 Tons in
                  Tons                                            excess of 1,000 Tons
  More than 10,000 Tons but upto 25,000                 Rs. 3,610/- + Rs. 28/- for each 100 Tons
                  Tons                                          in excess of 10,000 Tons
         More than 25,000 Tons                          Rs. 7,810/- + Rs. 19/- for each 100 Tons
                                                                in excess of 25,000 Tons

          (e) Multiply the daily tonnage income calculated as above with the number of
              days for which the ship was operated by the company during the year.
          (f) Follow the procedure as above for all the qualifying ships and take the total
              of such income from all the qualifying ships.
          (g) The Tonnage income so computed as above will be the final taxable income.
              No further deduction of any actual expenditure will be allowed there from.

[9.] SECTION 115VH: JOINT INTEREST v/s JOINT OPERATION: If two or more
T/T companies are joint interest holders (similar to joint venture or a partnership) in a
particular QS and their shares are determinate, then the T/T income from such ship shall
be computed in a normal way and then it shall be apportioned amongst all such joint
interest holding companies in the ratio in which they share income amongst themselves.
      However, if two or more T/T companies are joint operators of a particular QS, then
in such cases, the computation of T/T income shall be made for each such company in
such a way, as if each of them had been the only operator of that ship. The daily income
from such QS shall be computed in a normal way and then such daily income shall be
multiplied by the number of days for which, such ship was operated, by each such joint
operating company individually.

[10.] SECTION 115VI: RELEVANT SHIPPING INCOME [R.S.I.]: Refer to hand
written notes.

[11.] SECTION 115VJ: TREATMENT OF COMMON COSTS: If any cost is
incurred by a T/T Company, which is common between its T/T business and its non-T/T
business, then such common costs shall be apportioned between T/T business and its non-
T/T business on a reasonable basis. (What is reasonable, has not been clarified anywhere
in the Act, but if the basis of apportionment is not found to be reasonable, then the
concerned A.O. shall have the necessary power to interfere in the matter.)
      That part of such common cost, which is attributable to its T/T business, shall go to
reduce the Relevant Shipping income of the company. On the other hand, that part of
such common cost, which is attributable to its non-T/T business, shall go to reduce its
other regular income.
     If an asset is commonly used between its T/T business and its non-T/T business, then
depreciation on such common asset shall also be treated as a common cost and shall be



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Prof. Nihit Jhaveri                                                                Direct Tax – FINAL C.A.
Mob.: 98202 25728                                                                     TONNAGE TAX SCHEME

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apportioned amongst T/T and Non-T/T businesses depending upon the use of such asset
in each such business.

[12.] SECTION 115VK: DEPRECIATION: As per the provisions of the Income Tax
Act, the depreciation is to be charged on the ‘Block of Assets’ and not on any individual
asset. Prior to introduction of this chapter, there was only a ‘Block of Assets’. Now, due
to introduction of this chapter, block of any assets, shall now be required to be bifurcated
into the following two parts, namely,
    (a.) A Block of Qualifying Assets and
    (b.) A Block of Non-Qualifying Assets
         This bifurcation shall be made by way of dividing the opening Written Down
Value (W.D.V.) of every asset as on the very first day of the previous year from which
the TTS becomes applicable to the T/T company. Any revaluation after 10-09-2004 shall
be ignored for this purpose. Depreciation shall be computed on both such blocks
separately, applying the rate of depreciation, which is applicable to that block.
         Block of qualifying assets means a group of those assets, which are exclusively
used for T/T business of the company. The depreciation on the block of qualifying assets
shall go to reduce the relevant shipping income of the company, which is not chargeable
to tax.
         Block of non-qualifying assets means a group of those assets, which are
exclusively used for Non-T/T business of the company. The depreciation on the block of
non-qualifying assets shall go to reduce the normal income of the company, which is
chargeable to tax.
        If any asset is commonly used between T/T business and Non- T/T business, then
depreciation on such asset shall be treated as a common cost and the treatment of it shall
be in accordance with the provisions of section 115VJ, as discussed above.
        If an asset, which forms part of the block of qualifying assets, which is exclusively
meant for T/T business, begins to be used for Non-T/T business, then an appropriate
proportion of the opening WDV of such asset (i.e. the WDV as on the very first day of
that previous year, in which such asset began to be exclusively used for non-T/T
business, ignoring the WDV of such asset as on the date from which it so began to be
used for non-T/T business) shall be reduced from the block of qualifying assets and shall
be transferred to or included in the block of non-qualifying assets. The depreciation on
such asset for the year of transfer shall be calculated separately and shall be treated at par
with any other common cost and dealt with in accordance with the provisions of section
115VJ. From the next previous year onwards, such asset shall be deemed to be forming
part of the block of non-qualifying assets and the depreciation on such asset shall be
calculated under the category of the block of non-qualifying assets.
      Similar adjustment shall be carried out if an asset forming part of the block of non-
qualifying assets, which is exclusively meant for non-T/T business begins to be used for
T/T business.




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Prof. Nihit Jhaveri                                                                Direct Tax – FINAL C.A.
Mob.: 98202 25728                                                                     TONNAGE TAX SCHEME

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[13.] SECTION 115VL: GENERAL EXCLUSION OF DEDUCTION: The following
restrictions shall apply, while calculating the T/T income as well as the Relevant
Shipping income of a T/T company:-
    (a.) The T/T income so computed in accordance with the provisions of Section
         115VG, shall be the final taxable income. No further deduction will be allowed
         there from on account of any actual expenditure/loss/allowance/depreciation
         enumerated in section 30 to section 43B incurred to earn such T/T income.
    (b.) Though no deduction is allowable from T/T income on account of any
         depreciation, then also the W.D.V. of any asset shall be computed as if the
         depreciation had actually been allowed and claimed.
    (c.) No deduction will be allowed under Chapter VI-A from such T/T income.
    (d.) If Relevant Shipping Income (RSI) is negative, then such negative RSI shall be
         ignored. No set off or carry forward will be allowed in respect of such negative
         RSI.

[14.] SECTION 115VM: EXCLUSION OF LOSSES OF EARLIER YEARS: If there
are brought forward losses relating to the year during which the TTS was not in force for
the company i.e. losses of earlier years which are brought forward to the current year,
then such losses shall first of all be bifurcated into the following two parts:-
    (a.) That part of such earlier year’s brought forward loss, which pertains to the non-
         T/T business, and
    (b.) That part of such earlier year’s brought forward loss, which pertains to the T/T
         business.

    That part of such earlier year’s brought forward loss, which pertains to the non-T/T
business, shall be allowed to be brought forward, set off and even carried forward in a
normal way as usual. No further restrictions shall apply to the same.
    However, that part of such earlier year’s brought forward loss, which pertains to the
T/T business, can be brought forward to the current year, but will be allowed to be set off
only against the positive RSI of the current year. It cannot be set off against any other
income of the current year.
    After set off against the positive RSI of the current year, if it still remains unabsorbed,
then it can be carried forward to the next year, but even in the next year also it will be
allowed to be set off only against the positive RSI of that next year.

[15.] SECTION 115VN: CAPITAL GAIN ON TRANSFER OF A TONNAGE TAX
ASSET: The calculation of Capital Gain arising on transfer of a capital asset forming
part of block of Qualifying Assets, shall be in a normal way, in accordance with the
provisions of section 45 to section 51 of the Income Tax Act. No specific rules apply to
the same. Such Capital Gains will be chargeable to tax separately.
      The provisions of this chapter aim only at calculation of business income, arising
from the business of operating QS. This chapter, however, does not apply to capital gains
arising on transfer of T/T Assets held under T/T business. Therefore, computation of
capital gain shall be in a normal way.


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Prof. Nihit Jhaveri                                                                Direct Tax – FINAL C.A.
Mob.: 98202 25728                                                                     TONNAGE TAX SCHEME

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[16.] SECTION 115VO: EXCLUSION FROM “MAT” U/S 115JB: The Book Profit
or Loss arising from the business of operating QS of a T/T Company shall be excluded
while computing Book Profit U/S 115JB for “Minimum Alternate Tax (MAT)”
calculation.

[17.] SECTION 115VP: PROCEDURE AND TIME FOR OPTING FOR
TONNAGE TAX SCHEME: Unlike Section 44AD, 44AE, 44AF, the benefit of
presumptive taxation scheme of this chapter is not available automatically. In order to
avail the benefit of this scheme, the Qualifying Company has to make an application. It is
only a Qualifying Company, which can opt for the scheme by way of making an
application. A Non-Qualifying Company cannot apply for the scheme. The procedure for
applying is as follows:-

    (a.) A Qualifying Company (QC) can opt for the scheme by way of making an
         application in a prescribed form i.e. Form No. 65.
    (b.) Such Application has to be filed with the Joint Commissioner of Income Tax
         (JCIT) having jurisdiction over the company.
    (c.) However, for an existing company, such application can be filed at any time
         between 01/10/2004 and 31/12/2004 (3 months) and not beyond that. But for a
         company, which is newly incorporated, the time limit will be 3 months from the
         date of its incorporation. Same will be the case for a company, which is newly
         qualified for the scheme. A newly qualified company can make an application at
         any time within a period of 3 months from the date of its becoming a qualifying
         company.
    (d.) Upon receipt of application in Form No. 65, JCIT concerned will call for the
         production of further documents, details, etc.. in order to satisfy himself
         about the eligibility of the company to opt for the scheme.
    (e.) If JCIT is satisfied, then he shall pass an order in writing approving the option
         for the scheme.
    (f.) But if he is not so satisfied, then he shall pass an order refusing to approve
         the option. No such order of refusal shall be passed unless an opportunity of
         being heard was given to the applicant company. [Every such order of JCIT
         refusing to approve can be appealed against at CIT(A) level]
    (g.) Every such order, whether granting approval or refusing to approve shall be
         passed within a period of one month from the end of the month in which the
         application was received by JCIT.
    (h.) One copy of every such order shall be forwarded to the concerned applicant
         company.
    (i.) If an order is passed by JCIT approving the option, then the scheme shall
         become applicable not from the date of passing of such order, but shall become
         applicable from the beginning of the Financial Year in which the application was
         made by the company.



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Prof. Nihit Jhaveri                                                                Direct Tax – FINAL C.A.
Mob.: 98202 25728                                                                     TONNAGE TAX SCHEME

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[18.] SECTION 115VQ: PERIOD FOR WHICH THE TONNAGE TAX SCHEME
TO REMAIN IN FORCE: Once an order is passed by JCIT approving the option of
TTS, such TTS shall be applicable from the very first day of the financial year in which
the application was made by the company and it shall remain in force for a period of 10
consecutive years.
       However, in the following four circumstances the scheme shall stand withdrawn
before the expiry of 10 years:-
 (a.) The Qualifying Company (QC) ceases to be a Qualifying Company,
 (b.) The company fails to comply with the conditions enumerated in Section 115VT
      115VU and 115VV,
 (c.) The Company is specifically excluded from the scheme by way of an order of A.O.
      U/S 115VZC,
 (d.) The Company has given a declaration to the A.O. to the effect that the provisions of
      this scheme shall not apply to it (i.e. Company has opted out of the scheme).


[19.] SECTION 115VR: RENEWAL OF TONNAGE TAX SCHEME: The T/T
scheme can be renewed at any time within a period of one year from the end of the
Financial Year in which the scheme ceases to have the effect. The renewal of the scheme
shall be subject to the same procedure as was applicable in relation to approval of the
option. (in other words, the company will have to make an application in Form No. 65 to
JCIT for renewal of the scheme).

[20.] SECTION 115VS: PROHIBITION ON RENEWAL FOR 10 YEARS IN
CERTAIN CASES: In following three circumstances, the company will not be allowed
to apply for renewal for ten years. In other words, there will be a LOCK-OUT period of
ten years in the following three circumstances:-

(a.) The company fails to comply with the conditions enumerated in Section 115VT
     115VU and 115VV,
(b.) The Company is specifically excluded from the scheme by way of an order of A.O.
     U/S 115VZC,
(c.) The Company has given a declaration to the A.O. to the effect that the provisions of
     this scheme shall not apply to it (i.e. Company has opted out of the scheme).

      In all the above three circumstances, company will not be allowed to renew the
      scheme for a period of ten years from the date of default U/S 115VT, 115VU,
      115VV or from the date of order U/S 115VZC or from the date of opting out, as the
      case may be.

     In other words, company will be allowed to renew the scheme, only under the
following two circumstances:-



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Prof. Nihit Jhaveri                                                                Direct Tax – FINAL C.A.
Mob.: 98202 25728                                                                     TONNAGE TAX SCHEME

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    (a.) The Company had ceased to be a Qualifying company before the expiry of ten
         years period and has now, once again become a Qualifying company,
    (b.) The Company has successfully completed its ten years period under the scheme.

[21.] SECTION 115VT: TRANSFER TO TONNAGE TAX RESERVE ACCOUNT:
(a.) In order to comply with the conditions, every T/T Company shall be required to
create a Tonnage Tax Reserve Account and transfer to that Reserve Account, an amount
not less than 20 % of the Book Profits of that T/T Company derived from Core activities
and Incidental activities for that previous year.
(b.) The funds so transferred to Reserve Account shall be utilized within a period of 8
years from the end of the previous year in which the funds were credited, for the purpose
of acquiring a new ship.
(c.) Until acquisition of new ship, the funds can be used for the purpose of the business of
operating qualifying ships.
(d.) However, the funds shall not be utilized for the purpose of distribution of dividends
or profits or for the purpose of remittance outside India as profits or for the purpose of
creation of any asset outside India.
(e.) The term ‘Book Profit’ shall have the same meaning, as is assigned to it in section
115JB (Minimum Alternate Tax – MAT)
(f.) A T/T Company may decide to transfer more than 20 % of its Book Profits. In such a
case, the excess amount so transferred shall also be utilized in the same manner as
indicated above.
(g.) However, for any reason, if the T/T Company is not able to transfer minimum 20 %
of Book Profits in any given previous year, then the shortfall shall be made good in the
immediately succeeding previous year. No such relaxation shall be available beyond the
succeeding previous year.
(h.) The following two types of defaults may take place under this section:-


TYPE – I: The amount transferred to Reserve Account, is less than 20 % of the Book
Profits for that previous year (i.e. there is a shortfall in transfer to Reserve Account):- In
such situation, the following two legal consequences shall follow:-

[1.] In the year of shortfall, some extra amount as calculated below, will become
chargeable to tax in addition to T/T income:-

                                                    Relevant Shipping Income of such year
            % of shortfall
                                                                      (less)
               20 %                       X
                                                      Tonnage Tax Income for such year

                                                      (subject to Non-Negativity)




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 Prof. Nihit Jhaveri                                                                Direct Tax – FINAL C.A.
 Mob.: 98202 25728                                                                     TONNAGE TAX SCHEME

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 [2.] If the shortfall continues for any two consecutive previous years, then the provisions
 of TTS shall cease to apply to the company from the beginning of the third previous year.
 Not only that but in addition, there will be a LOCK OUT of 10 years starting from such
 third year.


 TYPE – II: The amount credited to Reserve Account:-
    Has been utilized for non-specified purposes, i.e. the amount has been misutilized,
    Has not been utilized for specified purposes within 8 years’ period, or
    Has been utilized for the purpose of acquiring a new ship, but such new ship has
       been sold or transferred (otherwise than in a scheme of Demerger) before the
       expiry of 3 years from the end of the previous year in which it was acquired.

 In such situation, an extra amount as calculated below, shall become chargeable to tax in
 addition to Tonnage Tax Income, in the year of violation of the condition:-



                                                                Relevant Shipping Income of that
          Amount of default                                      earlier previous year to which
Amount transferred to Reserve Account                                    reserves pertain
  in the previous year to which such                 X                        (less)
            reserve pertains                                      Tonnage Tax Income of such
                                                                      earlier previous year

                                                                   (subject to Non-Negativity)


 Note: ‘New Ship’ shall also include a ship, which prior to its acquisition by T/T
 Company, was used by any other person other than the T/T Company (i.e. a second-hand
 ship), provided it was not owned by any person resident in India. (i.e. no depreciation
 was claimed on such ship by any person resident inIndia)


 [22.] SECTION 115VU: MINIMUM TRAINING REQUIREMENT: Once the option
 for T/T Scheme has been approved to the company, the company shall be required to
 comply with the minimum training requirement, by way of providing training to its
 ‘Trainee Officers’ in accordance with the guidelines framed by Director General of
 Shipping and notified by Central Government in this regard. Upon successful completion
 of this training, the Director General of Shipping shall issue a Certificate to the company
 to that effect. A copy of such certificate shall be required to be attached along with the
 Return of Income (ROI) by the company.
      If this requirement is not complied with by the company for five consecutive
 previous years, then the T/T scheme shall cease to have effect from the beginning of the
 sixth year. In addition to that there shall be a LOCK-OUT for the next ten years i.e. the


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Prof. Nihit Jhaveri                                                                Direct Tax – FINAL C.A.
Mob.: 98202 25728                                                                     TONNAGE TAX SCHEME

============================================================================================================



company will not be allowed to renew its option for the scheme for a period of ten years,
starting from such sixth year.

[23.] SECTION 115VV: LIMIT FOR ‘CHARTER-IN’ OF TONNAGE: According to
section 115VB, a company will be regarded as operating a ship, if it operates a ship,
which is either owned by it or which has been chartered in by it. However, section
115VV, stipulates a condition that not more than 49 % of the total net tonnage of all the
qualifying ships, which are operated by the company during the year, should have been
chartered in. In simple words, the net tonnage of ‘qualifying chartered in ships’ should
not be more than 49 % of the total net tonnage of all the ships. The calculation is to be
made in the following way:-

         Net tonnage of each qualifying ship,                           Number of
         which has been chartered in by the                             days in a year,
         company, excluding those ships, which                          for which each
[A.]     have been chartered in by the company                 X        such ship was            = [A]
         under a ‘Bare-Boat Charter-cum-                                operated by the
         Demise’ terms                                                  company
                                                   (+)

         Net tonnage of each qualifying ship,                           Number of
         which is owned by the company,                                 days in a year,
         including those ships, which have been                         for which each
[B.]     chartered in by the company under a                    X       such ship was            = [B]
         ‘Bare-Boat Charter-cum-Demise’ terms                           operated by the
                                                                        company


                                                   (=)

[C.] TOTAL OF [A.] (+) [B.]……………………………………………………..[C]



       As per section 115VV, [A] should not be more than 49 % of [C].

      In case, if the net tonnage of all the qualifying ships chartered in by the company,
exceed the above mentioned limit of 49 % in any particular previous year, then the
provisions of this scheme will not apply to the company for that particular previous year
and the income of T/T company for that previous year shall be computed in accordance
with the normal provisions. Not only that but if such limit of 49 % was exceeded in an
two consecutive previous years, then the option of TTS, shall cease to have effect from


                                                                                                         12
===============================================================
Prof. Nihit Jhaveri                                                                Direct Tax – FINAL C.A.
Mob.: 98202 25728                                                                     TONNAGE TAX SCHEME

============================================================================================================



the beginning of the third previous year and in such situation, the company will not be
allowed to renew its TTS option for the next ten years starting from the beginning of the
third year of default under this section i.e. there will be a LOCK-OUT for ten consecutive
previous years starting from such third year of default.

[24.] SECTION 115VW: MAINTENANCE OF SEPARATE SET OF BOOKS OF
ACCOUNTS AND AUDIT: The T/T Scheme shall have effect only if the T/T Company
maintains a separate set of Books of Account for its T/T business and furnishes a report
of a Chartered Accountant along with its ROI. In other words, the provisions of this
scheme shall not apply to a T/T Company for that Previous Year in which a separate set
of Books of Account is not maintained for its T/T business or a report of C.A. has not
been furnished along with the ROI. (No other Penal provisions have been prescribed in
the Act for this default)

[25.] SECTION 115VX: DETERMINATION OF TONNAGE OF THE SHIP: The
presumptive income of any T/T Company shall be based on tonnage of its Qualifying
ships. Such ‘tonnage’ shall not be as indicated by the manufacturer of the ship, but shall
be determined in accordance with a valid certificate issued by Director General of
Shipping for each such ship in this regard.

[26.] SECTION 115VY: AMALGAMATION OF TONNAGE COMPANIES:
Whenever, there’s an amalgamation of two or more T/T companies, the provisions of the
scheme shall automatically apply to the amalgamated company, provided the
amalgamated company is a qualifying company. However, the scheme shall apply to the
amalgamated company not for a fresh period of 10 years, but only for that much period,
which is equal to the longest unexpired period of the scheme available to any of its
amalgamating company.
       After amalgamation, if the amalgamated company is a qualifying company, but is
not a T/T company, then such amalgamated company will have to make a fresh
application to JCIT in Form No. 65 within 3 months from the date of approval of the
scheme of amalgamation.
      If there is an amalgamation of two or more companies, whereby at least one of the
amalgamating company was a qualifying company as on 01/10/2004, but did not exercise
its option for Tonnage Tax Scheme within the time allowed, then, the provisions of this
chapter shall not apply to such amalgamated company at all. Income of such
amalgamated company will then be computed in accordance with the normal provisions
of the Income Tax Act. This is basically to avoid amalgamation of a tonnage Tax
Company with a Non-Tonnage Tax Company.

[27.] SECTION 115VZ: DEMERGER OF TONNAGE COMPANY: Before the
expiry of the period of TTS, if a Demerger takes place in a T/T company, then the
provisions of TTS shall automatically apply to the Demerged Company as well as to the
Resulting Company both, but only for the unexpired period of the scheme, provided both
of them are Qualifying companies after the demerger. If any of them is not a Qualifying


                                                                                                         13
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Prof. Nihit Jhaveri                                                                Direct Tax – FINAL C.A.
Mob.: 98202 25728                                                                     TONNAGE TAX SCHEME

============================================================================================================



company after the demerger, but subsequently qualifies for the scheme, then that
company will have to make a separate application to JCIT in Form No. 65, within 3
months from the date of qualifying.

[28.]SECTION 115VZA: EFFECT OF TEMPORARILY CEASING TO OPERATE
A QUALIFYING SHIP: If a T/T company temporarily ceases to operate a particular
qualifying ship (i.e. to say, a particular qualifying ship is operated only for 9 months
during the year and for balance 3 months it is not operated at all by the company), then
also the company will be deemed to be operating that ship. In other words, the company
will not cease to be considered as operator of that ship.
         However, if the qualifying ship temporarily ceases to be a ‘Qualifying Ship’
(may be for a single day during the entire financial year), then that ship will not be
considered as a qualifying ship for that whole year for the purposes of this chapter.

[29.] SECTION 115VZB: AVOIDANCE OF TAX: The provisions of this chapter shall
not apply to that T/T company, which is found to be a party to any transaction or an
arrangement, which amounts to an abuse of the scheme.
       A transaction or an arrangement, will be considered as amounting to an abuse of
the scheme, if application of such transaction or arrangement results ina tax advantage
being obtained by:-
    (a.) A Tonnage Tax Company for its Non-T/T business, or
    (b.) A person other than a Tonnage Tax Company.

[30.] SECTION 115VZC: EXCLUSION FROM TONNAGE TAX SCHEME: If a
T/T company is found to be a party to any transaction or an arrangement, which amounts
to abuse of TTS, as explained in section 115VZB, then the concerned A.O. shall by way
of passing an order in writing, exclude such company from the scheme, after giving a
reasonable opportunity of being heard by way of issuing a show cause notice to such
company. However, the A.O. shall require a prior approval of CCIT for passing such
order.
       Whenever, any such order has been passed by A.O., the TTS shall cease to have
effect not from the date of the order, but from the very first day of the previous year, in
which the company was found to have entered into such transaction or arrangement
amounting to abuse of the scheme.
        Every such order passed by A.O. excluding the company from the scheme, shall
be appealable to Income Tax Appellate Tribunal (ITAT) u/s 253 of the Act.



                                      Prof. Nihit Jhaveri
                                      Mob.: 98202 25728


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