International Taxation: Taxation of Non-residents Shipping Business-Section 44B of the Act

Let us start with a small practical scenario

A non-resident foreign shipping Company reports income under section 44B of the Act. It would like to claim unabsorbed depreciation and brought forward business loss against such income. Whether such claims are permissible?

What Is Foreign Shipping Business? 

Foreign shipping business refers to the operation of ships that are owned by non-residents and engaged in carrying passengers, livestock, mail, or goods to or from ports in India. 

Income generated from such carriage, including amounts received for freight or handling charges is considered income from the shipping business. 

Section 44B of the Income Tax Act

Section 44B of the Income Tax Act deals with special provisions for computing profits and gains of shipping business in the case of non-residents. It reads as under:

• Notwithstanding anything to the contrary contained in section 28 to 43A in the case of an assessee, who is a non-resident and is engaged in the business of operation of ships, a sum equal to 7.5% of following shall be deemed to be the profits of such business -

(i) the amounts paid or payable whether in or out of India to the assesses or to any person on his behalf, on account of carriage of passengers, livestock, mail or goods shipped at any port in India, and

(ii) any amount received or deemed to be received in India by or on behalf of the assesses, on account of carriage of passengers, livestock, mail or goods shipped at any port outside India,

• For the purpose of this section, the amount shall also include amount paid or payable or received or deemed to be received by way of demurrage charge or handling charge or any other amount of similar nature.

Example of Section 44B

A foreign resident, Mr. Smith, engaged in the shipping business, makes the following transportation:

Shipping Rs. 50 lakh worth of goods from Mumbai port to a port in Singapore and earns Rs. 1.5 lakh as handling charges.

Shipping Rs. 80 lakh worth of electronics to Dubai and earns Rs. 0.25 lakh as handling charges.

Transporting passengers for receipts of Rs. 1.5 crore in India.

carry forward losses from any other business - Rs. 1,00,000.

The total taxable income for a foreign resident, Mr. Smith shall be  Rs.10,36,250.

In this example:

The income earned from shipping goods from Mumbai to Singapore will be considered for taxation under Section 44B.

The income earned from transporting passengers in India will also be considered.

Carry forward losses are applicable in this scenario.

Technical issue involved

The section 44B of the Act provides for presumptive taxation mechanism for determination of “Business Income” when non-resident is engaged in shipping business. The presumptive income determined under section 44B of the Act is 7.5% of prescribed amounts in clause (i) and (ii) of sub-section (2).

The provisions of this section starts with non-obstante clause and it overrides almost all the provisions of head “Income from Business or profession”, meaning thereby all the permissible deductions under the head “Income from business or profession” are deemed to be allowed. And therefore, the issue becomes significant about allowability of unabsorbed depreciation and brought forward business loss against such presumptive income of non-resident engaged in shipping business.

Analysis and Conclusion

As discussed above, one of the salient features of section 44B is that it overrides provisions starting from section 28 to 43A of the Act. So far as claim of unabsorbed depreciation is concerned, it is governed by section 32(2) of the Act, falling between sections 28 to 43A, therefore, deemed to have been allowed, hence same cannot be adjusted while computing presumptive income under section 44B of the Act.

On the other hand, set-off of brought forward business loss is governed by section 72, which isbeyond the provisions of section 28 to 43A, therefore, same shall be adjusted against presumptive income computed under section 44B of the Act.

The above view is also supported by the CBDT circular No. 169, dated 23-6-1975 and Hon’ble Calcutta High Court in case of Universal Cargo Carriers Inc. vs. CIT (1987) 165 ITR 209.

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