Section 115VZB — Avoidance of Tax

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

Section 115VZB — Avoidance of tax

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. A Scheme-specific anti-avoidance rule

Section 115VZB is the Chapter's bespoke anti-avoidance rule. The Scheme does NOT apply where a tonnage tax company is party to a transaction or arrangement that amounts to an ABUSE of the Scheme [sub-s.(1)]. Sub-section (2) defines abuse: a transaction/arrangement is abusive if it results (or but for the section would result) in a 'tax advantage' for (i) a person other than the tonnage tax company, or (ii) the tonnage tax company in respect of its NON-tonnage activities. The Explanation gives 'tax advantage' an inclusive meaning — manipulation of expense/interest/cost allocation that reduces non-tonnage income or increases non-tonnage loss, or a transaction producing more than ordinary profits from tonnage activities.

2. Relationship with s.115V-I and Chapter X

Section 115VZB is the qualitative anti-abuse partner of the quantitative anti-diversion rules in s.115V-I(7)-(8). The Mumbai Tribunal in Van Oord India treated this self-contained machinery (s.115V-I(7)-(8) with ss.115VZB-115VZC) as the reason the general Chapter X transfer-pricing provisions do not separately attach to qualifying-ship income. The rule targets the classic risk in a presumptive island regime — shifting costs INTO, and profits OUT of, the low-taxed tonnage stream. A finding of abuse under s.115VZB is the predicate for exclusion under s.115VZC.

B. STATUTORY POSITION (verbatim operative text)

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

115VZB. (1) Subject to the provisions of this Chapter, the tonnage tax scheme shall not apply where a tonnage tax company is a party to any transaction or arrangement which amounts to an abuse of the tonnage tax scheme.

(2) For the purposes of sub-section (1), a transaction or arrangement shall be considered an abuse if the entering into or the application of such transaction or arrangement results, or would but for this section have resulted, in a tax advantage being obtained for— (i) a person other than a tonnage tax company; or (ii) a tonnage tax company in respect of its non-tonnage tax activities.

Explanation.—For the purposes of this section, “tax advantage” include,— (i) the determination of the allowance for any expense or interest, or the determination of any cost or expense allocated or apportioned, or, as the case may be, which has the effect of reducing the income or increasing the loss, as the case may be, from activities other than tonnage tax activities chargeable to tax, computed on the basis of entries made in the books of account in respect of the previous year in which the transaction was entered into; or (ii) a transaction or arrangement which produces to the tonnage tax company more than ordinary profits which might be expected to arise from tonnage tax activities.

Unamended by the Finance Act, 2025 and the Finance Act, 2026. (This Chapter-specific anti-abuse rule is distinct from the general GAAR in Chapter X-A, ss.95-102.)

C. AUTHORITIES

Direct-in-point authority — the Mumbai Tribunal treated ss.115V-I(7)-(8)/115VZB-115VZC as the Chapter's self-contained anti-abuse code that displaces general transfer pricing.

C-1 Self-contained anti-abuse code ousts Chapter X TP

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 Purposive framing of the 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.