Liquidated Damages Received By Shipping Company, Not Exempt Under 'Tonnage Tax Scheme': ITAT

The bench of Duvvuru RL Reddy (Judicial Member) and S Balakrishnan (Accountant Member) held that the liquidated damages are not directly received from the shipping activity and that they are compensatory in nature, which are collected from the contractors who fail to execute the contract.

Therefore, the ITAT ruled that though the liquidated damages may be an incidental business income for a shipping company, however, they do not constitute profit from the core or incidental activities carried out by the shipping companies, as defined under Chapter XIIG of the Income Tax Act.

The assessee- M/s. Dredging Corporation of India Ltd., is a public sector undertaking, who is engaged in executing offshore dredging activities under the Ministry of Shipping, Government of India. The Assessing Officer (AO) observed that the assessee had opted for the 'Tonnage Tax Scheme' under the provisions of Section 115VI under Chapter XIIG of the Income Tax Act, 1961. Under the said scheme, the income of shipping companies is computed at a specified rate, depending on the net tonnage of the ship.

The AO opined that certain amounts received by the assessee, including the amounts received towards liquidated damages, did not accrue from the core activity of dredging / shipping carried out by the assessee company. Thus, the AO ruled that the said amounts were not eligible for exemption under the 'Tonnage Tax Scheme'. Therefore, the AO made certain additions to the assessee's income.

Against this, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) (CIT (A)), who upheld the additions made by the AO with respect to liquidated damages.

The assessee M/s. Dredging Corporation filed an appeal before the ITAT, challenging the order passed by the CIT(A).

The ITAT observed that the source of income relating to liquidated damages, as received by the assessee, was the failure by the relevant parties to execute the contract work within the stipulated time. The Tribunal added that the source of such receipt was not the core or incidental shipping activity carried out by the assessee company.

The ITAT held that though the liquidated damages may be incidental business income for the assessee, however, they do not constitute profit from core or incidental activities, as defined under Chapter XIIG of the Income Tax Act, 1961.

While ruling that liquidated damages are not directly received from the shipping activity but are compensatory in nature, which are collected from the contractors for failure to execute contract, the ITAT held that the liquidated damages cannot be held to be from the core activity of shipping.

Thus, the Tribunal held that the liquidated damages received by the assessee cannot be included in computation of tonnage tax and therefore, they were not exempt under the 'Tonnage Tax Scheme'.

The ITAT thus upheld the order of the AO and dismissed the appeal of the assessee.

Case Title: M/s. Dredging Corporation of India Ltd. versus Asst. Commissioner of Income Tax

Dated: 09.09.2022 (ITAT Visakhapatnam)

Representative for the Appellant: Mr. G.V.N. Hari

Representative for the Respondent: Mr. M.N. Murthy Naik, CIT(DR)

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