Section 115VV — Limit for Charter In of Tonnage

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

Section 115VV — Limit for charter in of tonnage

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 49 per cent charter-in cap

Section 115VV keeps the Scheme anchored to ship-OWNING companies. Not more than 49 per cent of the net tonnage of the qualifying ships operated by a company in a previous year may be 'chartered in' [sub-s.(1)], computed on an average-net-tonnage basis [sub-ss.(2)-(3), Rule 11S]. Breach in a single year strips the option for THAT year (income computed normally) [sub-s.(4)]; breach in TWO consecutive years causes the option to cease from the year following the second [sub-s.(5)]. The Explanation excludes from 'chartered in' a ship taken on bareboat-charter-cum-demise terms (treated as quasi-ownership).

2. Interplay with slot charters and the Supreme Court

The charter-in limit must be read alongside the slot/space/joint-charter regime that the Supreme Court construed in Trans Asian Shipping. Slot and space charters generate 'deemed tonnage' and constitute 'operating' under s.115VB, yet the company may not OWN the carrying ship; s.115VV's 49 per cent cap (computed under Rule 11S) is the quantitative discipline that prevents a tonnage tax company from becoming, in substance, a pure charterer. The bareboat-cum-demise exclusion in the Explanation reflects the same ownership-oriented logic that underlies s.115VC(c).

B. STATUTORY POSITION (verbatim operative text)

Section 115VV, Income-tax Act, 1961 (Chapter XII-G), as in force on and after 1 April 2026:

115VV. (1) In the case of every company which has opted for tonnage tax scheme, not more than forty-nine per cent of the net tonnage of the qualifying ships operated by it during any previous year shall be chartered in.

(2) The proportion of net tonnage referred to in sub-section (1) in respect of a previous year shall be calculated based on the average of net tonnage during that previous year.

(3) For the purposes of sub-section (2), the average of net tonnage shall be computed in such manner as may be prescribed in consultation with the Director-General of Shipping.

(4) Where the net tonnage of ships or inland vessels, as the case may be, chartered in exceeds the limit under sub-section (1) during any previous year, the total income of such company in relation to that previous year shall be computed as if the option for tonnage tax scheme does not have effect for that previous year.

(5) Where the limit under sub-section (1) had exceeded in any two consecutive previous years, the option for tonnage tax scheme shall cease to have effect from the beginning of the previous year following the second consecutive previous year in which the limit had exceeded.

Explanation.—For the purposes of this section, the term “chartered in” shall exclude a ship or inland vessel, as the case may be, chartered in by the company on bareboat charter-cum-demise terms.

Inland-vessel words in sub-s.(4) and the Explanation inserted by the Finance Act, 2025 w.e.f. 1-4-2026. Unamended by the Finance Act, 2026.

C. AUTHORITIES

Candour note: No reported decision construes the s.115VV cap directly. The slot/space-charter authority of the Supreme Court is the nearest in point, as it construes the 'operating'/'chartered-in' arrangements the cap regulates.

C-1 Charter-in / slot-charter arrangements (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.