2009-VIL-344-ITAT-DEL

Equivalent Citation: [2010] 35 SOT 285 (DELHI)

Income Tax Appellate Tribunal DELHI

IT APPEAL NO. 2979 (DELHI) OF 2007

Date: 01.10.2009

ADDITIONAL COMMISSIONER OF INCOME-TAX, RANGE-4, NEW DELHI

Vs

JAGSON INTERNATIONAL LTD.

BENCH

R.P. TOLANI AND SHAMIM YAHYA, JJ.

JUDGMENT

R.P. Tolani, Judicial Member. - This is revenue appeal. Sole ground raised is as under:

"That ld. CIT(A) has erred in law and on facts in directing the Assessing Officer to consider the rig as ‘qualifying ship’ under section 115VD of the Income-tax Act and allow the assessee for exercising option for Tonnage Tax Scheme under section 115VP/115VR of the Income-tax Act, 1961 without considering the fact that the assessee’s ship is actually and "offshore installation" and benefit under the aforesaid provision is specifically not meant for ‘offshore installation’ and also that the registration under Merchant Shipping Act, 1958 as a ship is not relevant in this case."

2. Brief facts are assessee filed application before Assessing Officer for exercising option for Tonnage Tax Scheme under section 115VP/115VR of the Income-tax Act, 1961. During the course of which assessee filed detailed submissions regarding its eligibility for the launch of Tonnage Tax Scheme. Assessing Officer, however, rejected the option of the assessee by following observations :

"I have gone through the submission of the assessee and the Assessing Officer’s report. After going through the submission of the assessee as well as the Assessing Officer’s report, I am satisfied that assessee’s claim is not found to be acceptable for the purpose of section 115VP/115VR of the Income-tax Act because as per Income-tax Act, the drilling rig is not covered under the definition of "Qualifying ship". The claim of the assessee was not registered as a ship under the Merchant Shipping Act, 1958. The assessee’s main object of business was not the carrying on of the business of the operation of ships."

3. Aggrieved assessee preferred appeal. At the time of above proceedings before Assessing Officer, the assessee had not received registration certificate under section 407 of Merchant Shipping Act, 1958. This fact has been noted by Assessing Officer in his order that assessee was not so registered. However, during the course of appellate proceedings, assessee had received the requisite licence under section 407 of the Merchant Shipping Act issued on 19-5-2006. CIT(A) considered various facts and directed the Assessing Officer to consider the same as "Qualifying ship" under section 115VD by following observations :

"Subsequently, the appellant had received the licence under section 407 of Merchant Shipping Act, 1958 which was issued on 19-5-2006 under Licence No. PF-182/06 specifically mentioned that licence shall remain valid from 31-3-2006 to 2-7-2007. Since the licence was received after the rejection of the application, the matter was remanded back to the Addl. Commissioner of Income-tax to verify its claim in view of the new evidences filed by the ld. AR of the appellant. The Assessing Officer, vide its remand report dated 5-2-2007, has stated that although the assessee-company has obtained the licence from Director General of Shipping under section 407 of Merchant Shipping Act but still the drilling rig is not covered under the definition of "Qualifying ship" as per the provisions of section 115VD of the Income-tax Act, 1961. As per the provisions of section 115VD, Qualifying ship does not include offshore installations. According to the Addl. Commissioner of Income-tax, Range-4, the drilling rig owned by the assessee-company is actually an offshore installation and, therefore, registration under Merchant Shipping Act, 1958 as a ship is not relevant. While coming to the conclusion that the drilling is offshore installation, Assessing Officer was of the view that offshore installations are normally deployed on ships or some carriages in the seas and towed to various offshore locations under the contracts. In fact, such installations are mounted/fitted/attached/installed on ships and does not make them as the ships.

In the rejoinder reply, the ld. AR of the appellant dated 21-2-2007 has submitted that the Addl. Commissioner of Income-tax has interpreted "offshore installations" in her own way without referring to any citation of any judicial authority or explanation given by the Legislature or any definition given under the English dictionary. It is a fact that the word ‘offshore installation’ has not been explained or defined in the Income-tax Act. In absence of such definition or judicial pronouncements, one has to consult the English dictionaries. As per the English dictionaries, it is found that the word ‘offshore’ has not been defined anywhere but the words ‘offshore’ and ‘installation’ have been separately defined in the dictionary. As per the New Lexicon Webster’s Dictionary, ‘offshore’ means ‘moving away from the shore and towards sea’. The word ‘installation’ has been defined an installing or being installed/an apparatus set in a position for use such as lighting installation/a military establishment including the base and all its equipment. Therefore, any installation which has been fixed or set in a position at a distance place from shore or away from the shore is called ‘offshore installation’. The installation is built by installing various equipments, fixing them for the work and after the work is over, they are dismantled and shifted to its another site. Contrary to that the drilling ship is built or constructed by various equipments and material for the purpose for which it is required to be used but they are not dismantled and shifted to its another site. Contrary to that the drilling ship is built or constructed by various equipments and material for the purpose for which it is required to be used but they are not dismantled instead ship itself moves from one place to another for working on the other site. The ships meant for drilling purpose, which are popularly called as ‘rigs’ are required to be registered under Merchant Shipping Act but not installations. Regarding the observations of the Addl. CIT that installation are mounted/fitted/attached/installed on ship does not make the offshore installations as the ships, it was submitted that there is no equipment, i.e., ‘rig’ which is mounted/fitted/attached/installed on ships but this is a part and parcel of the ship which is used for drilling purpose. It is not the case where ship is built and thereafter, equipment for drilling are mounted/fitted/attached/installed. All the drilling equipments were planned and placed at the time of the manufacturing of the ship itself. This ship is not ship which is used after segregating equipments. The nomenclature of the drilling ship as a ‘rig’ has been made because of the functional aspect of the same. Thus, it is not an installation but a ship only. In that context, it was also submitted that although the work of ‘drilling’ can be done by ‘offshore installation’ also but when it is required to be done by ‘ship’, the contract is made with those persons who operate ships and when they do not require ships and the purpose are different, they hire parties who built ‘installations’. It was also submitted that the provisions of section 115VD had originally excluded ‘dredgers’ from the definition of ‘Qualifying ship’ but later on by Finance Act, 2005 with effect from 1-4-2006 ‘Dredgers’ were deleted under the list of ‘exclusions’ provided in this section. The activity of dredging is limited to taking out sand while ships used for drilling are not only doing activity of taking out stand but afterwards drill further and give report of mud testing for which sophisticated equipments were installed and these ships used for drilling were never included in the list of exclusion as may be seen from the history of provisions. In view of these facts, the Assessing Officer is totally unjustified in considering the ‘rig’ as ‘offshore installations’ instead of ‘Qualifying ship’ and should be directed to allow its application under Tonnage Tax Scheme under section 115VP.

Rival contentions have carefully been considered. After considering the rival submissions I find a substantial support in the contention of the ld. AR of the appellant. It is a fact that many ships are given the nomenclature as per the function carried out by them, e.g., ships used for dredging are called ‘dredgers’, ships towing other ships are called ‘tugs’, ships used for exploring the mineral water are called ‘Rigs’, ships carrying arms or missiles called ‘torpedoes war ship’ and so on. Therefore, the nomenclature given to a ship as per its functions cannot be considered at its face value. A ship engaged in the business of mineral exploration may be called as ‘right’ but same cannot be categorized ‘offshore installations’. ‘Offshore installations’ are the structure, which is created by moving the various equipments used for the purpose of exploration or otherwise away from the shore. After the assigned task is over, these installations can be dismantled and shifted to other place of the need. Contrary to that ‘rig’ is a ship where equipments for exploration of mineral salt are installed as a part and parcel of the ship only. These equipments cannot be separate from the ship and installed independent. In fact, these ships are manufactured specifically for the purpose of exploration of mineral oil and can be moved to any place of the assignment. Therefore, the findings of the Assessing Officer that the ‘rigs’ are ‘offshore installations’ is without any basis and citing any judicial pronouncement or Legislature or even the dictionary meaning. My view finds further support from the registration and the licence given by the Director General of Shipping under section 407 of the Merchant Shipping Act recognizing the ‘rig’ as a ship only. Since this certificate has been given by the Competent authority of Government of India, same cannot be ignored for the purpose of income-tax. Had the legislator had any intention of excluding the same from the definition of the ‘Qualifying Ship’ under section 115VD, same would have been mentioned specifically as was done in the case of dredgers by Finance Act, 2004 but same was also excluded from the list of the ‘exclusion’ by the Finance Act, 2005 with effect from 1-4-2006. Moreover, the ships are required to be registered under Merchant Shipping Act, a condition, which has been fulfilled by the assessee-company but not installation. Furthermore, ships are moving vessels but not installations. Furthermore, the ‘rigs’ are not mounted/fitted/attached/installed on the moving vessels but they are part and parcel of them only and such moving vessels are the ships only but called ‘rigs’ because of their specialized function of exploring the mineral oils. Considering the totality of all the facts and circumstances, I do not find any justification in the findings of the Assessing Officer in categorizing the ships as ‘offshore installations’ and denying them the status of ‘qualifying ship’ under section 115VD of the Income-tax Act. The Assessing Officer is directed to consider the ‘rigs’ as ‘qualifying ship’ under section 115VD of the Income-tax Act and allow its application for exercising option to Tonnage Tax Scheme under section 115VP/115VR of the Income-tax Act, 1961."

4. Aggrieved revenue is in appeal. Learned DR contends that the so-called ship of the assessee in fact is not ship but a drilling rig, which is not covered under the definition of ‘qualifying ship’ and at the time of disposal of assessee’s application in Form No. 65, the assessee’s ship was not registered under the Merchant Shipping Act. Order of Assessing Officer was relied on.

5. Ld. counsel for the assessee drew our attention that at the time of Assessing Officer’s proceedings assessee’s ship was not registered under the Merchant Shipping Act, although the application was pending. On this basis, Assessing Officer held that assessee is not eligible for Tonnage Tax Scheme. Thereafter, the assessee received the above registration/licence. The same was filed before CIT(A) as additional evidence, which was admitted and was sent to the Assessing Officer for remand report. In the remand report, Assessing Officer raised an objection that in the definition provided in section 115VD for qualifying ship, offshore installation has been specifically excluded.

6. Offshore installation has been defined. However, words ‘offshore’ and ‘installation’ have been separately defined in various dictionaries. In New Lexicon Webster’s Dictionary, the word ‘offshore’ has been defined as an adjective as under :

"Moving away from the shore and towards sea; Located at little distance from the shore, such as offshore fisheries."

As the adverb it has been explained as under :

"From the shore; at distance from the shore."

In the Chambers Dictionary Deluxe Edition, this word "offshore" has been explained - from the shore; at distance from shore; without (placed or operating) abroad cited or operating the restriction of British law and tax.

The word "installation" has been defined in New Lexicon Webster’s Dictionary as under:—

"An installing or being installed // an apparatus set in a position for use, such as lighting installation // a military establishment, incl. the base and all its equipments."

In the Chambers Dictionary, this word has been explained as under:—

"Act of installing; Act fitting something in a position for use; apparatus place in a position for use; the complete apparatus for electric lighting, or like; the military base, etc."

It may be appreciated that the word "offshore" therefore means away from the shore or located at a little distance from the shore while the "installations" has been explained as an apparatus or establishment which have been fixed at a place or set in a position for use. It does not mean anything, i.e., apparatus or establishment which is being used without being fixed or set in a position for its use. Anything which is moving from one place to another for using the same cannot be termed as installed. Any movable thing cannot be treated as installation. Thus, any installation which has been fixed or set in a position at distance place from shore or away from the shore is called "offshore installation". The ‘installation’ is built by installing various equipments, fixing them for the work and then dismantled and shifted to another site. The ship is built or constructed also by various equipments and material for the purpose for which it is required to be used but they are not dismantled instead ship itself shifts from one place to another for working on the other site. The ships are required to be registered under Merchant Shipping Act but not installations secondly, they are not those which are not movable and required to be shifted after dismantling. In the modern world, there could be a case of installing any equipment on the ship for the specific cause or requirement but this would not be called offshore installation instead it would be called installation on the ship. There may be a case of installation which is taken from one place to another but that cannot be called as ship because while shifting from one place to another it is required to be partially or totally dismantled according to distance of place and availability of facilities. Further for a ship it is not only necessary to be registered under the Merchant Shipping Act but it has to fulfil all the requirements and formalities to be fulfilled.

7. The relevant Chapter of Merchant Shipping Act is named as "Control of Indian ships and ships engaged in coasting trade". This clearly shows that it applies to only ships and not to the offshore installation. Section 405 specifically explained about application of part - it clearly states as under:—

"Application of part.—This Part applies only to sea-going ships fitted with mechanical means of propulsion of not less than one hundred and fifty tons gross, but the Central Government may, by notification in the Official Gazette, fix any lower tonnage for the purposes of this part."

Thus ‘ship’ required to be licensed is sea-going ship fitted with mechanical means of propulsion which is not provided in any of the "offshore installation".

The observations of Additional Commissioner of Income-tax that installation which are mounted/fitted/attached/installed on ships does not make the offshore installation as the ships. It is submitted that there is no equipment, i.e., ‘rig’ which is mounted/fitted/attached/installed on ships instead this ship is built in which ‘rig’ and other equipments were planned on the ship from the very beginning of building a ship. It is not a case where ship is built and thereafter equipments were mounted/fitted/attached/installed but in the present case, the Deep sea Matdrill ship was built by Nippon Kokan K.K. of Japan who have built this ship in 1981 at Tsu City in Japan. While building this ship on 19-1-1981 it is planned for the special purpose of drilling in offshore and all the equipments which were fitted or mounted or installed or attached as may be required on the day of planning itself. Thus, this ship was not such ship which is used after segregating equipments and vessel because while building the ship itself all the equipments which are necessary were planned and placed at various places and while moving from one place to another whole ship is moved consisting of all the equipments, boats, life-saving devices, its quarters having accommodation of 74 persons, canteen, recreation facilities, helipad, laboratory where tests are done, etc., the ‘rig’ is one of the main equipment is also not segregated but it is also moved along with the ship. Thus, it is not an installation but a ship. It is necessary to explain that in the exploration of mineral oil, there are various steps and for different purposes ships, equipments, installation are used. The assessee owns a ship which is used for specific purpose such as drilling, testing casing, producing data and preparing all the reports, etc., as assigned under the contract. The work of ‘drilling’ can be done also by "offshore installation" but when it is required to be done by ‘ship’ the contract is made with those persons who operate ships and when they do not require ships and the purpose are different they hire parties who built ‘instillations’. It is necessary to draw your kind attention the provisions of section 115VD introduced with effect from 1-4-2005 by Finance Act, 2004 in which originally "dredgers" were also mentioned at S. No. (vii) which were excluded to be treated under the definition of "Qualifying Ship". These "Dredgers" are used for taking out sand/mud from the base of sea and bring sand/mud to the shore. Later on by Finance Act, 2005 with effect from 1-4-2006, clause (vii) was omitted and ‘dredgers’ were deleted under the list of "exclusions" provided in this section. The activity of dredging is limited to taking out sand while ships used for drilling are not only doing activity of taking out sand but afterwards drill further and give report of mud testing for which sophisticated equipments were installed and these ships used for drilling were never included in this list of exclusions as may be seen from the history of provisions.

This clearly shows that ships used for drilling, dredging, etc., are not offshore installations otherwise deletion of dredgers was not required. The offshore installations are those which are fixed for the specific purpose of fishing, production of mineral oil and after finishing the purpose are dismantled and shifted to other site. In case of short distance, they are fixed to other site through cranes or through ships. While ships used for drilling, dredging, etc., are moved from one place to another without being dismantled or without the help of crane. It is, therefore, submitted that assessee’s ship which is duly been registered and has obtained the licence under Merchant Shipping Act, 1958 by an authority of Director General Shipping be treated as "Qualifying ship" and not as an "offshore installations" as understood by ld. Addl. CIT. Apart from certificate from DG Shipping various other certificates have already been filed which were also necessary for issuing certificate by the Office of DG, Shipping.

8. Learned counsel for the assessee further contends that Hon’ble Delhi High Court in assessee’s own case for assessment years 1996-97, 1997-98, 1998-99 and 1999-2000—CIT v. Jagson International Ltd. [2008] 214 CTR (Delhi) 227 for the purpose of section 33AC has been held to be ship by following observations :

"The issue whether the ‘Deep Sea Matdrill’ is a ship for the purposes of section 33AC was decided in favour of the assessee in respect of the assessment year 1994-95. There is merit in the contention urged by learned counsel for the assessee that this issue cannot be agitated by the revenue again and again. The drilling rig was placed on a vessel described as a barge, which could be moved out from place to place for offshore drilling. The Tribunal considered this aspect of the matter and came to the conclusion that the ‘Deep Sea Matdrill’ is nothing but a ship. It is a barge, which can be moved from place to place like any other ship. When the drilling rig is in use, then apparently to save some expenses the ship’s propeller is removed; but whenever it is required to be shifted, the propeller is refixed and the ship is made mobile. On merits, therefore, we are of the view that the claim made by the assessee in respect of section 33AC of the Act is quite justified. Only one view is possible, namely, that the ‘Deep Sea Matdrill’ is a ship. Even if learned counsel for the revenue is right in contending that the ‘Deep Sea Matdrill’ is not a ship, we do not think that exercise of power under section 263 of the Act by the Commissioner would be justified only because the Assessing Officer has taken a view in favour of the assessee. The law requires the view to be erroneous also; and that has not been substantiated by learned counsel for the revenue.

Insofar as the second issue relating to section 80-IA(3) of the Act is concerned, which is to the effect whether the ‘Deep Sea Matdrill’ was used in the Indian territorial waters before its acquisition by the assessee, we find that this is essentially a question of fact. That apart, we find that under section 148 of the Act, the Assessing Officer had specifically mentioned in the reasons recorded that he was prima facie of the view that the vessel had been used in the Indian territorial waters prior to its acquisition by the assessee. A response was given by the assessee to the notice in which it was categorically mentioned that the ship was never used in India so deduction under section 80-IA(3) could not be denied to the assessee.

The last issue addressed by learned counsel for the revenue relates, to section 80-IA(4) of the Act a bare reading of section 80-IA(4) of the Act shows that what is required to be determined is essentially factual and there is no legal issue which is involved, much less a substantial question of law. This issue was raised by the Assessing Officer during the course of reassessment proceedings and it was replied to by the assessee. The Assessing Officer was satisfied with the explanation and did not raise any further questions. The Tribunal has not erred in taking the view that it took, namely, that the CIT had overlooked the agreements dated 28-2-1995 and 30-9-1999 which were on the record of the Assessing Officer. In all the three issues that have been urged by the counsel for the revenue, no substantial question of law arises.

Deduction under section 33AC is allowable in respect of a barge with the drilling rig over it which can be moved from place to place and, therefore, CIT was not justified in exercising power under section 263 on the ground that the barge is not a ship and assessee’s claim for deduction under section 33AC has been wrongly allowed; question whether the conditions laid down in section 80-IA(3) and 80-IA(4) are fulfilled by the assessee are essentially question of fact and the Assessing Officer having allowed the claim for deduction under section 80-IA, revision under section 263 was not justified."

It was further contended that in assessee’s own case in assessment year 2004-05 in ITA No. 2978/Delhi/2007 at the instance of revenue, a specific ground was raised that assessee was operating a rig and not a ship. ITAT vide order dated 17-10-2008 relying on the order of Hon’ble Delhi High Court (supra) held the assessee’s ‘Deep Sea Matdrill’ to be a ship and not a rig by following observations :

"This is an appeal filed by the assessee. It is directed against the order of the CIT(A) dated 16-3-2007 for assessment year 2004-05. Grounds of appeal read as under :

"1. The CIT(A) has erred in law and on facts in deleting the disallowance of Rs. 12,50,00,000 made by the Assessing Officer under section 33AC of the Income-tax Act ignoring the fact that the assessee-company is operating a right and not a ship.

2. The appellant craves leave to add, to alter, or amend or delete any grounds of appeal at the time of hearing."

2. Benefit of section 33AC was denied by the Assessing Officer on the ground that the drilling rig, namely, ‘Deep Sea Matdril’ was not a ship and, therefore, the assessee is not entitled to claim benefit under section 33AC to the tune of Rs. 12,50,000. The CIT(A) has allowed this claim of the assessee on the basis of his order for assessment year 2001-02 and no speaking order has been passed for the year under consideration.

3. At the outset, it was brought to our notice that Hon’ble jurisdictional High Court in assessee’s own case vide their order dated 14-11-2007 which is reported as CIT v. Jagson International Ltd. 214 CTR (Delhi) 227 have held that ‘Deep Sea Matdrill’ is in the category of ship and, therefore, the claim of assessee under section 33AC is in order. He has produced before us a copy of the said order. The relevant observations of Their Lordships of Hon’ble jurisdictional High Court are reproduced below :

‘13. Insofar as the first issue, whether the ‘Deep Sea Matdrill’ is a ship for the purposes of section 33AC of the Act is concerned, we find that this issue was decided in favour of the assessee in respect of the assessment year 1994-95. We find merit in the contention urged by learned counsel for the assessee that this issue cannot be agitated by the revenue again and again.

14. Learned counsel for the assessee contended that a drilling rig can be of two kinds, namely, one on a stationary platform and the other placed on a ship, which can be moved out. Insofar as the present case is concerned, it does appear quite clearly that the drilling rig was placed on a vessel described as a barge, which could be moved out from place to place for offshore drilling. The Tribunal considered this aspect of the matter and came to the conclusion (with which we do not find any fault) that the ‘Deep Sea Matdrill’ is nothing but a ship. It is a barge, which can be moved from place to place like any other ship. When the drilling rig is in use, then apparently to save some expenses the ship’s propeller is removed; but whenever it is required to be shifted, the propeller is refixed and the ship is made mobile. On merits, therefore, we are of the view that the claim made by the assessee in respect of section 33AC of the Act is quite justified.’

In view of the above discussion, it was argued by ld. AR that the issue now stands covered by the above-mentioned decision of the Hon’ble High Court.

The ld. DR did not controvert such pleading of ld. AR.

In this view of the position, we hold that the CIT(A) has rightly held that the assessee is entitled to claim benefit of section 33AC and the appeal filed by the revenue is dismissed."

9. Learned counsel further contends that CIT(A) on the basis of facts alone vide order dated 16-3-2007 has held that assessee is entitled to option for tonnage tax scheme under section 115VP/115VR. Thereafter, Hon’ble Delhi High Court delivered the above judgment of 14-11-2007 and ITAT, as mentioned above, on 17-10-2008. Both these orders in favour of the assessee were not available before CIT(A). Therefore, the order of CIT(A) needs to be upheld in view of judgments by Hon’ble Delhi High Court in assessee’s own case in ITA No. 75 of 2006 and ITAT Delhi (supra).

10. We have heard the rival contentions and perused the material on record. We have perused the registration of the assessee’s vessel under section 407 of the Merchant Shipping Act, which are in respect of the ship, which has been referred to by the CIT(A). Hon’ble Delhi High Court vide order dated 14-11-2007 and ITAT vide its order dated 17-10-2008 has held the assessee’s vessel to be a ship and not a rig. In view thereof, the assessee’s application under section 115VD/115VR is to be allowed for the purpose of option of tonnage tax scheme. Order of CIT(A) is upheld and appeal is dismissed

11. In the result, revenue appeal is dismissed.

 

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