Section 115VZC — Exclusion from Tonnage Tax Scheme

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

Section 115VZC — Exclusion from 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 exclusion order and its safeguards

Section 115VZC is the enforcement mechanism for s.115VZB. Where a tonnage tax company is party to an abusive transaction/arrangement under s.115VZB(1), the Assessing Officer 'shall, by an order in writing, exclude such company from the tonnage tax scheme' [sub-s.(1)]. Two safeguards attach: a show-cause notice giving the company an opportunity to be heard (first proviso), and the prior approval of the Principal Chief Commissioner / Chief Commissioner before any exclusion order (second proviso). Sub-section (2) is a complete defence: the section does not apply if the company satisfies the AO that the transaction was a BONA FIDE commercial transaction not entered into to obtain a tax advantage under the Chapter.

2. Consequences and appeal

On exclusion, the option ceases from the FIRST DAY of the previous year in which the abusive transaction was entered into [sub-s.(3)] — a retrospective unwinding to the year of abuse. The exclusion also feeds the ten-year re-entry bar in s.115VS and the cessation list in s.115VQ(2)(c). Importantly, an order under s.115VZC(1) is independently APPEALABLE: the Income-tax Act lists, among orders appealable to the Commissioner (Appeals), 'an order passed by an Assessing Officer under sub-section (1) of section 115VZC' [s.246A(1)(ba)] — so the company has a statutory remedy against exclusion.

3. The bona fide carve-out

The sub-s.(2) bona fide defence is the practical heart of the provision: ordinary commercial dealings, even with associated parties, do not attract exclusion unless designed for a tonnage-tax advantage. Read with s.115VZB's 'abuse' threshold and the senior-officer approval requirement, s.115VZC is a calibrated, last-resort sanction rather than a routine adjustment power.

B. STATUTORY POSITION (verbatim operative text)

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

115VZC. (1) Where a tonnage tax company is a party to any transaction or arrangement referred to in sub-section (1) of section 115VZB, the Assessing Officer shall, by an order in writing, exclude such company from the tonnage tax scheme: Provided that an opportunity shall be given by the Assessing Officer by serving a notice calling upon such company to show cause, on a date and time to be specified in the notice, why it should not be excluded from the tonnage tax scheme: Provided further that no order under this sub-section shall be passed without the previous approval of the Principal Chief Commissioner or Chief Commissioner.

(2) The provisions of this section shall not apply where the company shows to the satisfaction of the Assessing Officer that the transaction or arrangement was a bona fide commercial transaction and had not been entered into for the purpose of obtaining tax advantage under this Chapter.

(3) Where an order has been passed under sub-section (1) by the Assessing Officer excluding the tonnage tax company from the tonnage tax scheme, the option for tonnage tax scheme shall cease to be in force from the first day of the previous year in which the transaction or arrangement was entered into.

Unamended by the Finance Act, 2025 and the Finance Act, 2026. An order under s.115VZC(1) is appealable to the Commissioner (Appeals) under s.246A(1)(ba).

C. AUTHORITIES

Direct-in-point authority — the Mumbai Tribunal recognised ss.115VZB-115VZC (with s.115V-I(7)-(8)) as the Chapter's self-contained anti-abuse machinery; the appeal route under s.246A(1)(ba) is the statutory remedy against an exclusion order.

C-1 Self-contained anti-abuse machinery (displaces general 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.