Our principal time-chartered a ship and loaded its own cargo at an Indian port. Is the hire paid to the shipowner taxable as an amount paid on account of carriage of goods?
No. The Supreme Court held that under a time charter the payment is for the use and hire of the ship, and is due whether or not the charterer carries anything at all, so it cannot be an amount paid on account of the carriage of goods within section 172(2). Nor did the charterers receive anything on that account, because they loaded their own cargo rather than sub-letting the ship or carrying a third party's goods. The character of the payment does not change with the use the charterer makes of the vessel or because it happened to load in India. The appeal was dismissed.
Decided by the Supreme Court (Supreme Court of India; Y.V. Chandrachud CJ, P.N. Bhagwati and D.A. Desai JJ. Judgment by Chandrachud CJ) on 1978-05-05, reported as (1978) 113 ITR 307; 1978 (3) SCC 23; AIR 1978 SC 1196; 1978 SCR (3) 943; 1978 SCC (Tax) 134. It bears on section 172(2), section 172 of the Income Tax Act 1961, in Assessment & Scrutiny, How Tax Law Is Read and Residence & Treaty Benefit matters.
This is the decision that separates hire from freight, and it is still the starting point when the Department seeks to bring a time charter within the shipping provisions. It refuses to let the place of loading dictate the character of the payment, and it insists that both limbs be tested: what the shipowner received, and what the charterer received. Where the charterer moves its own cargo, neither has received anything on account of carriage. The Court also states plainly how far substance over form goes. One should not over-rely on the label the parties attach and may tear the veil where a clever piece of drafting disguises the true character of a payment; but where the words used carry their accepted sense and the contract is on a standard approved form, there is no warrant for supposing that the description was chosen to avoid Indian tax.
Binding on every court and authority in India.
Read aloud by your device. Press again to stop.
The respondent, an Indian company doing clearing and forwarding and steamship agency work, acted in 1970 as shipping agent for Aluminium Company of Canada Limited, a non-resident. The Aluminium Company time-chartered the M.V. Sparto from Sparto Compania Naviera of Panama, another non-resident. Clause 4 of the charter party, on a standard form approved by the New York Produce Exchange, provided for payment for the use and hire of the vessel at US $4.50 per ton on her total dead weight carrying capacity per calendar month from delivery, the hire to continue until her redelivery. The ship called at Betul, Goa on 1 March 1970 and loaded 13,000 long tons of bauxite belonging to the time-charterers themselves, leaving on 20 March 1970 for Alfred port, Canada. She was allowed to sail against a guarantee bond given by the respondent to the President of India for the tax payable by the time-charterers under section 172. On 15 April 1970 the Income-tax Officer, Margao, demanded Rs 51,191 as tax under that section. The respondent obtained a mandamus from the Judicial Commissioner, Goa, to withdraw the notice, and the Union appealed by certificate.
The appeal was dismissed with costs and the Judicial Commissioner's judgment confirmed. The amount the time-charterers were required to pay the owners of the ship was not payable on account of the carriage of goods but on account of the use and hire of the ship, so section 172(2) was not attracted. The hire was payable irrespective of what use the charterers made of the ship, or whether they used it at all. The character of the payment cannot change according to the use to which the ship is put or because it was loaded with goods at an Indian port. The charterers themselves received nothing on account of the carriage of goods either, since they neither sub-let the ship nor loaded a third party's cargo but shipped their own bauxite.
The Court accepted that labels are not conclusive: one must look to the substance and, if necessary, tear the veil to see whether the true character of a payment differs from what clever drafting makes it appear. But it found no reason to suppose the parties meant anything other than what their words convey in their accepted sense. The charter was on a standard form approved by the New York Produce Exchange, and there was no warrant for supposing that a payment really made for carriage was described as hire in order to escape Indian tax. It then examined what a charter party is, drawing on Mitra's Law of Carriage by Sea, Carver and Scrutton. Not all charter parties are contracts of carriage: in a time charter the shipowner's remuneration is reckoned by the time for which the charterer is entitled to the ship's use, and where the ship and control over her working are transferred, the contract is really one of letting, governed by the law of hiring chattels rather than that of carriers and shippers. In a voyage charter, by contrast, freight is calculated by reference to the cargo carried. On clause 4, the hire accrued from delivery to redelivery by reference to dead weight capacity and time, and was due whether or not the ship carried anything, which shows that no part of it was paid on account of carriage. The Court closed with an illustration: if a hall is hired for a marriage the charges are for the use and hire of the place, not on account of the marriage.
if a hall is hired for a marriage, the charges payable to the owner of the place are for the use and hire of the place, not on account of marriage
Upload it and we will read it, work out your deadline and draft the reply. A CA reviews before anything is filed.
Handle my notice → Ask a CA on WhatsAppNo. The Supreme Court held that under a time charter the payment is for the use and hire of the ship, and is due whether or not the charterer carries anything at all, so it cannot be an amount paid on account of the carriage of goods within section 172(2). Nor did the charterers receive anything on that account, because they loaded their own cargo rather than sub-letting the ship or carrying a third party's goods. The character of the payment does not change with the use the charterer makes of the vessel or because it happened to load in India. The appeal was dismissed. This was decided by the Supreme Court (Supreme Court of India; Y.V. Chandrachud CJ, P.N. Bhagwati and D.A. Desai JJ. Judgment by Chandrachud CJ) and bears on section 172(2), section 172 of the Income Tax Act 1961. It is reported as (1978) 113 ITR 307; 1978 (3) SCC 23; AIR 1978 SC 1196; 1978 SCR (3) 943; 1978 SCC (Tax) 134. This is the decision that separates hire from freight, and it is still the starting point when the Department seeks to bring a time charter within the shipping provisions. It refuses to let the place of loading dictate the character of the payment, and it insists that both limbs be tested: what the shipowner received, and what the charterer received. Where the charterer moves its own cargo, neither has received anything on account of carriage. The Court also states plainly how far substance over form goes. One should not over-rely on the label the parties attach and may tear the veil where a clever piece of drafting disguises the true character of a payment; but where the words used carry their accepted sense and the contract is on a standard approved form, there is no warrant for supposing that the description was chosen to avoid Indian tax. If it applies to you, the first step is this: Classify the charter first. In a time charter the hire accrues by time and is payable whether or not the ship is used, which is what takes it outside a charge on carriage receipts.
The respondent, an Indian company doing clearing and forwarding and steamship agency work, acted in 1970 as shipping agent for Aluminium Company of Canada Limited, a non-resident. The Aluminium Company time-chartered the M.V. Sparto from Sparto Compania Naviera of Panama, another non-resident. Clause 4 of the charter party, on a standard form approved by the New York Produce Exchange, provided for payment for the use and hire of the vessel at US $4.50 per ton on her total dead weight carrying capacity per calendar month from delivery, the hire to continue until her redelivery. The ship called at Betul, Goa on 1 March 1970 and loaded 13,000 long tons of bauxite belonging to the time-charterers themselves, leaving on 20 March 1970 for Alfred port, Canada. She was allowed to sail against a guarantee bond given by the respondent to the President of India for the tax payable by the time-charterers under section 172. On 15 April 1970 the Income-tax Officer, Margao, demanded Rs 51,191 as tax under that section. The respondent obtained a mandamus from the Judicial Commissioner, Goa, to withdraw the notice, and the Union appealed by certificate. The matter was decided on 1978-05-05 by the Supreme Court (Supreme Court of India; Y.V. Chandrachud CJ, P.N. Bhagwati and D.A. Desai JJ. Judgment by Chandrachud CJ). On those facts the Supreme Court held as follows. The appeal was dismissed with costs and the Judicial Commissioner's judgment confirmed. The amount the time-charterers were required to pay the owners of the ship was not payable on account of the carriage of goods but on account of the use and hire of the ship, so section 172(2) was not attracted. The hire was payable irrespective of what use the charterers made of the ship, or whether they used it at all. The character of the payment cannot change according to the use to which the ship is put or because it was loaded with goods at an Indian port. The charterers themselves received nothing on account of the carriage of goods either, since they neither sub-let the ship nor loaded a third party's cargo but shipped their own bauxite.
The Court accepted that labels are not conclusive: one must look to the substance and, if necessary, tear the veil to see whether the true character of a payment differs from what clever drafting makes it appear. But it found no reason to suppose the parties meant anything other than what their words convey in their accepted sense. The charter was on a standard form approved by the New York Produce Exchange, and there was no warrant for supposing that a payment really made for carriage was described as hire in order to escape Indian tax. It then examined what a charter party is, drawing on Mitra's Law of Carriage by Sea, Carver and Scrutton. Not all charter parties are contracts of carriage: in a time charter the shipowner's remuneration is reckoned by the time for which the charterer is entitled to the ship's use, and where the ship and control over her working are transferred, the contract is really one of letting, governed by the law of hiring chattels rather than that of carriers and shippers. In a voyage charter, by contrast, freight is calculated by reference to the cargo carried. On clause 4, the hire accrued from delivery to redelivery by reference to dead weight capacity and time, and was due whether or not the ship carried anything, which shows that no part of it was paid on account of carriage. The Court closed with an illustration: if a hall is hired for a marriage the charges are for the use and hire of the place, not on account of the marriage. In the words reproduced by the source cited on this page: "if a hall is hired for a marriage, the charges payable to the owner of the place are for the use and hire of the place, not on account of marriage"
It was decided by the Supreme Court on 1978-05-05 and is reported as (1978) 113 ITR 307; 1978 (3) SCC 23; AIR 1978 SC 1196; 1978 SCR (3) 943; 1978 SCC (Tax) 134. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 172(2), section 172, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal was dismissed with costs and the Judicial Commissioner's judgment confirmed. The amount the time-charterers were required to pay the owners of the ship was not payable on account of the carriage of goods but on account of the use and hire of the ship, so section 172(2) was not attracted. The hire was payable irrespective of what use the charterers made of the ship, or whether they used it at all. The character of the payment cannot change according to the use to which the ship is put or because it was loaded with goods at an Indian port. The charterers themselves received nothing on account of the carriage of goods either, since they neither sub-let the ship nor loaded a third party's cargo but shipped their own bauxite. It arises in Assessment & Scrutiny, How Tax Law Is Read and Residence & Treaty Benefit matters, on section 172(2), section 172 of the Income Tax Act 1961, and was decided by Supreme Court of India; Y.V. Chandrachud CJ, P.N. Bhagwati and D.A. Desai JJ. Judgment by Chandrachud CJ. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Show who owned the cargo. If the charterer carried its own goods, it earned no freight, and the Revenue's case fails on that limb as well. Do not rely on the label alone; be able to show that the contract works as it reads, ideally on a standard industry form, so that the substance argument has nothing to bite on. Check the provisions in force for your year, including the presumptive shipping provisions and any treaty article, before applying this decision to a modern charter.
Still good law. The distinction between hire under a time charter and an amount paid on account of carriage is settled, and the source page records the decision as followed in later shipping cases. It construes section 172(2) as it stood for a 1970 voyage; that section has been amended and a presumptive provision for the shipping business of non-residents has since been enacted, so the provisions in force for the year must be read alongside it. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The decision turns on the terms of a time charter where the charterer carried its own cargo. It says nothing about a voyage charter, about a charterer who sub-lets or carries third party goods, or about the treatment of such hire under section 9 or under a double taxation treaty, none of which were in issue. Section 44B, listed in the batch line, did not exist at the time and is not considered. The harvested page carries a reporter's headnote above the judgment, which has been disregarded, and the text contains evident misprints including 'Carriage by Sell' for 'Carriage by Sea'. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed with costs and the Judicial Commissioner's judgment confirmed. The amount the time-charterers were required to pay the owners of the ship was not payable on account of the carriage of goods but on account of the use and hire of the ship, so section 172(2) was not attracted. The hire was payable irrespective of what use the charterers made of the ship, or whether they used it at all. The character of the payment cannot change according to the use to which the ship is put or because it was loaded with goods at an Indian port. The charterers themselves received nothing on account of the carriage of goods either, since they neither sub-let the ship nor loaded a third party's cargo but shipped their own bauxite.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
The Tribunal disallowed my education cess. Does s.40(a)(ii) actually cover cess?
Our principal's freight was exempt under Article 8, but the officer says Article 24 applies because the freight went to a London account. Who wins?