INCOME TAX
INSTRUCTION NO. 5156/1993
Dated: July 16, 1993
Section(s) Referred: 172
Statute: Income - Tax Act, 1961
With reference to the above, I wish to inform you that I have given anxious thoughts to the points raised in Paras 3 & 4 of your letter and re-examined the issue.
2. In my predecessor's report dt. 17-11-92, it was stated that income charged to tax u/s.172 of the I.T. Act is a deemed income and there is no scope for allowing any deduction for any expenditure or outgoings since the presumption is that while estimating the income at the prescribed rate of 7.5%, the expenditure and outgoings by the non-resident Shipping companies for the purpose of earning the freight income have been taken into consideration.
It was also suggested that vide para 6 of the said report that the Board could issue a clarificatory circular if an apportionment is to be made of the freight charges between the operator of the mothership and the operator of the daughter vessel.
3. As suggested in para 3 of your letter, it was examined as to whether the exporter makes separate payments to the operators of the mother and the daughter vessel. It is ascertained that no such separate payments are made by the exporters.
4. It has also been examined as to whether there are any agreements between the exporter and the mother vessel on the one hand and the mother vessel and the daughter vessel on the other. In this connection, I am enclosing a copy of the letter addressed by the Andhra Chamber of Commerce addressed to the ITO, Company Ward-I(4), Madras. The letter makes it clear that there are no agreements between the exporters and the mother vessel operators. It is vaguely suggested that it is the local shipping agent who books the cargo and collects the freight. From this, no inference can be drawn regarding the determination of the amount which is paid or payable to the non-resident shipping concerns. As already reported, the Bill of lading shows the freight for the entire transhipment from Madras to Tokyo. In the absence of any agreement to the contrary, the operator of the mothership is liable to tax on the entire freight u/s.172 of the I.T. Act at 7.5% of the freight charges. The freight charges paid to the operator of the daughter vessel can be considered as an expenditure for which deduction ought to be deemed to have been allowed while estimating the income at the prescribed rate of 7.5%. In the absence of any amendment of Board Circular, I feel it will be risky to take any view that apportionment ought to be made, as it is likely to lead to audit objections. Also, if carefully examined, it is found that the mother shipper is actually the recipient for the entire freight earnings as per the Bill of lading. Instead of directly incurring the expenditure by operating its own ship, the mother ship operator incurs expenditure through payment to the daughter vessel operator, the mother ship operator is spared of incurring the expenditure for taking the cargo from the Indian ports to Singapore/Colombo. Therefore, while estimating the income at 7.5% of the freight earnings, strictly speaking there is no hardship caused to the operator of the mother ship. The operator of the daughter ship is also liable to tax on its freight earnings u/s.172 of the I.T. Act.
5. If however, a policy decision is taken to give relief to the operators on the basis of the apportionment of the freight earnings, the Board may be pleased to issue a clarificatory circular to that effect. Though the Board may not issue the circulars in individual cases, since the issue covers a class of cases involving a particular problem, I believe it will be possible for the Board to issue a clarificatory circular as suggested in the report dt. 17.11.1992.
[CC's(Tech)-II, Madras DO No. CC.II/C(34)/93-94, dt. 16.7.'93 addressed to JS, CBDT]