Taxation of Shipping Profits Derived by Non Residents [Section 44B]

Section 44B provides that profits or gains of a non-resident from the business of operation of ships are to be taken @ 7.5% of the aggregate of the following amounts:

(a) paid or payable, whether in or out of India, to the assessee or to any person on his behalf on account of carriage of passengers, livestock, mail or goods shipped at any port in India.

(b) received or deemed to be received in India by or on behalf of the assessee on account of the carriage of passengers, livestock mail or goods shipped at any port outside India.

Explanation to Section 44B provides that the amounts referred to above will also include the amount paid or payable or received or deemed to be received by way of demurrage charges or handling charges or any other amount of similar nature.

Important Judicial Precedents & Board Circulars:

1. The amounts paid or payable or the amounts received or deemed to be received will also include the amount paid or payable or received or deemed to be received by way of demurrage charges or handling charges or any other amount of similar nature [CIT v. Japan Lines Ltd. [2003] 260 ITR 656 (Madras HC)].

Thus 7.5% of the gross amounts mentioned above would be liable to tax and no deduction would be allowed for any expenditure, (i.e. the provisions of section 28 to 43A are not to be taken into account) however carried forward losses would be allowed to be set off from such income.

2. Service tax a statutory liability would not involve any element of profit and a service provider collects same from its customers, therefore the same cannot be included in total receipt for determining presumptive income under section 44B [Islamic Republic of Iran Shipping Lines v DCIT (Intl Taxation) [2011] 46 SOT 101 (Mumbai Tribunal)]

3. Once it is accepted that assessee is into a shipping business, then either the provisions of DTAA shall apply or section 44B of the Act. [A.P.Moller Maersk v. DDIT [2014] 149 ITD 434 (Mumbai Tribunal)].

4. In Anchor Line Ltd. v. ITO, [1990] 32 ITD 403, the Mumbai Tribunal has observed that, “set off of carry forward of losses” has been discussed in sections 70 to 80 and these provisions have to be applied in the case of a non resident when profits and gains of shipping business are computed under the special provision viz. section 44B. Therefore, business loss would be allowed to be carried forward and set off irrespective of provisions of section 44B, subject to limitation that it could not be allowed to be carried forward and set off beyond period of eight years.

Comparison with Section 172

At this juncture, it is appropriate to compare section 172 on this topic which is placed under chapter XV, “Liability in special cases”. The heading of the section is “Shipping business of non-residents”. It creates a tax liability in respect of occasional shipping by making a special provision for the levy and recovery of tax in the case of a ship belonging to or chartered by a non resident which carries passengers, livestock, mail or goods shipped at any port in India.

The object of the section is to ensure the levy and recovery of tax in the case of ships belonging to or chartered by non-residents. The section brings to tax the profits made by them from occasional shipping by means of summary assessment in which 7.5% of the gross amount received by them is deemed to be assessable profit.

It is significant to note that there is a difference between section 44B and section 172. In section 44B, no procedure for assessment and collection of tax is provided.

The incidence of tax under section 44B is on a non-resident engaged in the business of operation of ships or chartered by him or it, and if such income constituted the amount paid to payable on account of the carriage of passengers, livestock, mail or goods shipped to any port in India.

While section 172 refers to levy and recovery of tax in the case of any ship belonging to or chartered by a non-resident which carries passengers, livestock, mail or goods shipped from any port in India.

The difference between section 44B and section 172 has been explained by the Karnataka High Court in V. M. Salgaocer & Bros Ltd. v. Deputy Controller [1991] 187 ITR 381. Those who do regular shipping business are covered by section 44B and they will be assessed in accordance with the provision of the Act applicable to the rates specified in section 44B, while causal visit of Indian port is covered by section 172.

Section 172(3) imposes an obligation on the master of the ship to prepare and furnish to the Assessing Officer a return of the full amount paid or payable to the owner or charterer or any person on this behalf, on account of the carriage of all passenger, livestock, mail or goods shipped at any port in India since the last arrival of the ship thereat. Such return is, ordinarily, to be furnished by the master of the ship before the departure, from that port in India, of the ship.

The proviso to section 172(3) however, provides that a return may be filed by the person authorized by the master of the ship within 30 days of the departure of the ship from the port, if:

(a) the Assessing Officer is satisfied that it is not possible for the master of the ship to furnish the return required by section 172(3) before the departure of the ship from the port and

(b) the master of the ship has made satisfactory arrangement for the filing of the return and payment of tax by any other person on this behalf.

Section 172(4) provides for a summary procedure of assessment. On receipt of the return filed by the master of the ship or by any person on this behalf, the Assessing Officer has to determine the taxable income by virtue of provision of section 172(2), the taxable income is a sum equal to 7.5% of the amount paid or payable on account of carriage of passengers etc. to the owner or charterer or to any person on his behalf, whether that amount is paid or payable in or out of India. The tax payable on such taxable income is to be calculated at the rate or rates in force applicable to the total income. The master of the ship is liable for payment of such tax.

Under section 172(4A), it is incumbent on the AO to pass the order of assessment within 9 months from the end of the financial year in which the return of income under section 172(3) is filed.

Section 172(5) empowers the Assessing Officer, for the purpose of determining the tax payable, to call for such accounts and documents as he may require.

Section 172(6) prohibits grant of a port clearance to the ship until the Collector of customs or other authorized officer, is satisfied that the tax assessable under section 172 has been duly paid or that satisfactory arrangements have been made for the payment thereof.

Under section 172(7), the owner or charter has option to claim before the expiry of the assessment year relevant to the previous year in which the date of departure of the ship from the Indian port falls, that an assessment in respect of his total income for the previous year may be made in the normal course under section 143. In such a case, any payment made under section 172 is to be treated as a payment in advance of the tax leviable for that assessment year and the difference between the sum so paid and the amount of tax found payable by him on such assessment is to be paid by him or refunded to him as the case may be.

Under section 172(8) the sum chargeable to tax includes amounts payable by way of demurrage charge or handling charge or any other amount of similar nature.