Section 115VE — Manner of Computation of Income under Tonnage Tax Scheme

CHAPTER XII-G — SPECIAL PROVISIONS RELATING TO INCOME OF SHIPPING COMPANIES (TONNAGE TAX)

Section 115VE — Manner of computation of income under tonnage tax scheme

Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · bharattax.co Treatise

Chapter / Part: Chapter XII-G (Special Provisions Relating to Income of Shipping Companies — the Tonnage Tax Scheme), inserted by the Finance (No. 2) Act, 2004 w.e.f. 1-4-2005 (AY 2005-06).

Finance Act, 2026: No amendment. The Finance Act, 2026 does not touch any section of Chapter XII-G (verified against the Finance Act, 2026 text).

Finance Act, 2025: Extended the Scheme to inland vessels (Inland Vessels Act, 2021) — inland-vessel words inserted across the Chapter w.e.f. 1-4-2026; s.115VP timeline/IFSC provisos also added. Text below is the in-force position for AY 2026-27.

A. SECTION COMMENTARY

1. The 'separate business' fiction

Section 115VE is the structural keystone of the Chapter. It directs that a tonnage tax company compute the profits of its qualifying-ship business under the Scheme [sub-s.(1)], and — crucially — it deems that business to be a SEPARATE BUSINESS ('the tonnage tax business'), distinct from all the company's other activities [sub-s.(2)], the profits of which are computed SEPARATELY [sub-s.(3)]. The Scheme applies only if a valid s.115VP option is in force [sub-s.(4)]; absent an option, the shipping profits are computed under the ordinary provisions [sub-s.(5)].

2. Why the ring-fence matters

The separate-business fiction is what makes the rest of Chapter XII-G coherent: it underpins the segregation of common costs (s.115VJ), the splitting of depreciation blocks (s.115VK), the general exclusion of deductions/set-off (s.115VL), the ring-fencing of pre-option losses (s.115VM), the bespoke capital-gains rule for qualifying assets (s.115VN) and the MAT carve-out (s.115V-O). It also explains why income that does not belong to the tonnage tax business (e.g. non-qualifying-ship income under s.115V-I(6), or liquidated damages) is computed normally.

3. Consequence for transfer pricing

Because the tonnage tax business is a self-contained, separately-computed, presumptive stream, the Mumbai Tribunal in Van Oord India held that ordinary Chapter X transfer-pricing adjustments do not attach to qualifying-ship income — the Chapter's own anti-diversion machinery in s.115V-I(7)-(8) governs instead.

B. STATUTORY POSITION (verbatim operative text)

Section 115VE, Income-tax Act, 1961 (Chapter XII-G):

115VE. (1) A tonnage tax company engaged in the business of operating qualifying ships shall compute the profits from such business under the tonnage tax scheme.

(2) The business of operating qualifying ships giving rise to income referred to in sub-section (1) of section 115V-I shall be considered as a separate business (hereafter in this Chapter referred to as the tonnage tax business) distinct from all other activities or business carried on by the company.

(3) The profits referred to in sub-section (1) shall be computed separately from the profits and gains from any other business.

(4) The tonnage tax scheme shall apply only if an option to that effect is made in accordance with the provisions of section 115VP.

(5) Where a company engaged in the business of operating qualifying ships is not covered under the tonnage tax scheme or, has not made an option to that effect, as the case may be, the profits and gains of such company from such business shall be computed in accordance with the other provisions of this Act.

Unamended by the Finance Act, 2025 and the Finance Act, 2026.

C. AUTHORITIES

Candour note: No decision construes s.115VE in isolation. The authorities below apply its 'separate business' character — to oust transfer pricing (Van Oord) and the s.14A overlay (Four M Maritime) — and frame the elective Scheme (Trans Asian).

C-1 Separate-business code ousts transfer pricing

Van Oord India (P) Ltd v. DCIT — [2023] 155 taxmann.com 462 (Mumbai - ITAT) [also TS-605-ITAT-2019(Mum)-TP], AY 2009-10

Forum: Income-tax Appellate Tribunal, Mumbai Bench (tribunal-stage order).

Provisions: Chapter X (transfer pricing, ss.92 to 92F) read with Chapter XII-G; ss.115V-I(7) and 115V-I(8); s.115VE (separate business).

Facts / Issue: The assessee, an Indian subsidiary of a Netherlands dredging group, carried on dredging through qualifying ships under TTS as well as other operations. The TPO sought to apply arm's-length transfer-pricing adjustments to its international transactions.

Held: To the extent income is earned from operating qualifying ships and taxed under TTS, the general transfer-pricing provisions of Chapter X do not apply — Chapter XII-G is a complete, self-contained presumptive code and s.115V-I itself supplies bespoke anti-diversion machinery (sub-ss.(7) and (8): substitution of market value for intra-company transfers, and recomputation where a close connection produces more than ordinary profits). An ordinary ALP adjustment cannot be layered on tonnage income.

Ratio / why it matters: Authority that Chapter XII-G ousts the normal Chapter X transfer-pricing machinery for qualifying-ship income, and that ss.115V-I(7)-(8) (with the anti-abuse provisions in ss.115VZB-115VZC) are the Chapter's own self-contained safeguards against income shifting.

C-2 Self-contained computation — no s.14A overlay

ACIT v. Four M Maritime (P) Ltd — [2015] 152 ITD 557 / 56 taxmann.com 348 (Chennai - Trib.)

Forum: Income-tax Appellate Tribunal, Chennai Bench.

Provisions: Section 115VD (qualifying ship); Chapter XII-G read with s.14A and Rule 8D; s.115VL / s.115VG(6).

Held: (i) A ship transporting coal from one Indian port to another is a 'qualifying ship' for TTS (following the coastal-shipping line of West Asia Maritime). (ii) Once shipping income is computed under the self-contained presumptive code of Chapter XII-G, a disallowance under s.14A read with Rule 8D cannot be superimposed on that income — tonnage income is a deemed figure from which no further deduction or set-off is allowed, and correspondingly no s.14A disallowance is made against it.

Ratio / why it matters: Twin authority — reaffirms coastal-shipping eligibility under s.115VD, and establishes that the Chapter XII-G code displaces the normal computational machinery (including s.14A) in respect of tonnage income, supporting the 'general exclusion of deduction and set-off' philosophy of ss.115VL and 115VG(6).

C-3 Elective, self-contained Scheme (Supreme Court)

CIT v. Trans Asian Shipping Services (P) Ltd — (2016) 385 ITR 637 (SC) / [2016] 71 taxmann.com 35 / (2016) 241 Taxman 30 (SC)

Forum / Bench: Supreme Court of India; T.S. Thakur CJI, A.K. Sikri J and R. Banumathi J. Judgment dated 5 July 2016, affirming the Kerala High Court and the Cochin Bench of the Tribunal.

Provisions: Sections 115VA, 115VB, 115VF, 115VG (including the s.115VG(4) Explanation on 'deemed tonnage') and 115VX, read with Rule 11Q; Chapter XII-G generally.

Issue: Whether income from 'slot charter' operations of a tonnage tax company can be included in 'tonnage income' under the Tonnage Tax Scheme (TTS) even where those operations are carried on in ships that are NOT the company's own 'qualifying ships' — and whether production of the tonnage certificate referred to in s.115VX is a pre-condition for computing such slot-charter income.

Held: Allowing the assessee, the Court held that although only income from operating a 'qualifying ship' is computed under Chapter XII-G, s.115VB expressly treats a company as 'operating a ship' even where only a PART of a ship has been chartered in under an arrangement such as slot charter, space charter or joint charter. A slot-charter arrangement is made with a shipping line and not in relation to an identified ship, so the carrying vessel (and its certificate) cannot be identified. The 'deemed tonnage' mechanism in the Explanation to s.115VG(4) — covering purchase of slots, slot charter and sharing of break-bulk vessel — was introduced precisely to capture such arrangements; to insist on a s.115VX certificate for slot charters would render deemed tonnage otiose. The s.115VX certificate requirement therefore does NOT apply to slot/space-charter operations and the slot-charter income is includible in tonnage income.

Ratio / why it matters: The leading — and only — Supreme Court authority on Chapter XII-G. It settles the architecture of the Scheme: (i) the charging provision is s.115VA read with s.115VF and s.115VG; (ii) the TTS is a 'preferential regime of taxation' to be construed to advance its object of making Indian shipping globally competitive (Rakesh Mohan Committee, January 2002); and (iii) 'deemed tonnage' is a distinct head of tonnage not dependent on a ship-specific certificate. The Court relied on CBDT Circular No. 5/2005 dated 15-7-2005 and reaffirmed that CBDT circulars explaining a scheme bind the Department.

Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text reproduced verbatim from the Income-tax Act, 1961 (text as in force on and after 1 April 2026, incorporating the inland-vessel insertions made by the Finance Act, 2025 with effect from 1 April 2026). Citations are stated as reported; tribunal and stay-stage orders are flagged as such. Where a section has not been judicially construed, that is stated candidly and the nearest governing authority is given. This material is for professional reference and is not legal advice.