Cruise Does Not Cease To Be 'Carriage Of Passengers' Under Income Tax Act Because Of Onboard Hospitality: Supreme Court

The Supreme Court has recently ruled that hospitality and entertainment offered on board a cruise do not alter the essential nature of the activity as the carriage of passengers under the Income Tax Act.

Ruling on the applicability of the presumptive taxation regime for non-resident shipping companies under Section 44B, the court observed that ancillary services provided during a voyage do not take the operation outside the scope of the provision.

A bench of Justices S.V.N. Bhatti and N.V. Anjaria was hearing the revenue's challenge to the Bombay High Court's ruling extending the benefit of Section 44B to the foreign cruise operator Superstar Libra Ltd. (SLL).

The Revenue had argued that SLL's business was primarily hospitality and entertainment rather than the carriage of passengers.

Rejecting that contention, the court observed, "On a voyage, the providing of ancillary services does not take away from the meaning of 'carriage' as per Section 44B of the Act. The meaning adopted by the Assessing Officer is restrictive in the facts and circumstances of this case. The illegality was factually corrected by the impugned orders."

The court dismissed the Revenue's appeals and upheld the Bombay High Court's ruling that Star Cruises (India) Pvt. Ltd., the Indian agent of SLL, was entitled to the benefit of Section 44B.

The dispute arose after the Indian agent sought a certificate under Section 195 of the Income Tax Act. It contended that SLL's income was taxable under Section 44B, a presumptive taxation provision under which the taxable income of a non-resident engaged in the business of operating ships is computed at 7.5% of its specified receipts.

The Assessing Officer rejected the claim. It held that since the cruises originated and terminated at Mumbai while offering passengers hospitality and entertainment, the activity did not amount to the carriage of passengers within the meaning of Section 44B.

On that basis, the Assessing Officer estimated the foreign cruise operator's taxable income at 25% of the cruise fare instead of 7.5%.

The Commissioner of Income Tax (Appeals) reversed the assessment after holding that the foreign cruise operator fulfilled the requirements of Section 44B.

The Income Tax Appellate Tribunal affirmed that decision. It observed that a round-trip voyage still involved the carriage of passengers, passengers could disembark at intermediate ports, and the entertainment provided on board was merely incidental to the operation of ships. The Bombay High Court later upheld those concurrent findings.

Before the Supreme Court, the revenue argued that SLL's dominant activity was conducting tourist packages and excursions rather than transporting passengers. It contended that the company could not claim the benefit of Section 44B merely because it operated ships and that its income should therefore be assessed at 25% instead of the presumptive rate of 7.5%.

The cruise operator, on the other hand, argued that it satisfied the twin requirements under Section 44B as a non-resident engaged in the business of operating ships.

It submitted that the Assessing Officer had adopted an unduly narrow interpretation of the expression "carriage" by insisting that it necessarily involved transportation from one port to another. According to the company, the hospitality and entertainment provided during a voyage were only ancillary to its principal business of operating cruise services.

Agreeing with the concurrent findings of the appellate authorities and the Bombay High Court, the court clarified that it was not attempting to define the expression "carriage" in the abstract. Instead, it was examining how the term applied to the facts of the case.

The court observed that the assessing officer's interpretation was too restrictive. It also noted that passengers could disembark at intermediate ports, a fact ignored by the department.

Finding no reason to interfere with the concurrent factual findings, the court upheld the application of Section 44B to the foreign cruise operator for the assessment years in question and dismissed the Revenue's appeals.

For Appellant: ASG Raghavendra P. Shankar, Senior Advocate Arijit Prasad, Advocate Pallavi Mishra, Advocate Anmol Chandan, Advocate A.A. Pandey, Advocate Anita Sahni, Advocate Nikhil Aradhe and AOR Sudarshan Lamba.

For Respondents: AOR Meera Mathur, AOR Anand Varma, Advocate Apoorva Pandey and Advocate Ayush Gupta.