Unclear tax rules for vital clearing zones

Girish Mistry | Updated on March 12, 2018 Published on May 20, 2012

Inland container depots and container freight stations were set up to help decongest ports. Kamal Narang


Maritime trade has, since ancient times, made remarkable contribution to the development of Indian economy. The country's ports handle more than 90 per cent of its foreign trade. Moreover, the growing volume of international trade calls for expeditious clearance at the ports.

A lengthy clearing process has led to the development of Inland Container Depots and Container Freight Stations to help decongest ports.

These are the places where containers are packed/ unpacked and aggregation/ segregation of export/import cargo takes place. As notified customs area, they are on par with the Customs Port as a designated place unloading/ loading of goods.

Though ICDs and CFSs may not be functionally different, an ICD is generally located in the interiors — away from the servicing port (outside the port town), while the CFS is an off-dock facility located near the servicing port.

Eligibility for tax incentive

To foster investment in infrastructure, the Income Tax Act, 1961, provides tax incentives either in the form of profit-linked or investment-based deduction.

Prior to Finance Act 2001, the definition of an infrastructure facility under Section 80-IA of the IT Act included “any other public facility of similar nature as may be notified by the Board in this behalf in the official gazette”.

However, an ambiguity has arisen following an amendment to the IT Act in 2001, coupled with a Central Board of Direct Taxes clarification and a proposed amendment in Finance Bill 2012.

The Finance Act 2001 excluded the phrase “any other public facility of similar nature as may be notified by the Board in this behalf in the official gazette”.

The industry did not think the amendment would impact its claim for considering ICDs/ CFSs as part of a port, more so in the nature of inland port, for claiming benefits.

It relied on CBDT circular no. 793 dated June 23, 2000, as amended by circular no. 10/2005 dated December 16, 2005, which clarified that the term ‘port' for Section 80-IA includes structures at ports for storage, loading and unloading and so on if the port authority concerned certifies that the structures are part of the port.

Not part of port?

However, the Delhi Tribunal in the case of Container Corporation of India Ltd denied the tax benefits to ports, holding that ICDs/ CFSs are separate infrastructure facilities and cannot be treated as part of a port/ inland port. It observed that had the ‘inland port' included these structures, CBDT would not have notified them as a separate infrastructure facility. The Tribunal, however, had not considered the Customs law, which specifies that a customs port would include notified ICDs/ CFSs.

The IT department has been denying Section 80-IA benefits to ICDs/ CFSs set up outside the port area. The CBDT, vide a circular dated January 6, 2011, has said that ICDs/ CFCs not located in the port area or any inland water, river or canal cannot be considered for the Section 80-IA benefit.

There are several cases pending before the Tribunal and the matter is also pending before the Special Bench of the Mumbai Tribunal. However, recently, the Delhi High Court held that ICDs/ CFSs are eligible for Section 80-IA benefits.

Now, a proposed amendment in Finance Bill 2012 provides investment-linked incentives for ICDs and CFSs, as notified under the Customs Act as a specified business.

It is clear that ICDs and CFSs constitute an important segment of the infrastructure facility. Given that the proposed amendment in Finance Bill 2012 seeks to treat them as an infrastructure facility (which was the position prior to 2002-03), one needs to understand why and how the position changes during the interim period. This is creating unnecessary ambiguity, leading to an increase in litigation.

Ministries clarify

The Ministry of Shipping, Ministry of Commerce and Industry, and the Central Board of Excise and Customs have clarified that ICDs and CFSs (that is, custom area of port) are classified as inland port and recommended that CBDT should consider granting 80-IA benefits to them (even after the amendment in 2001-02).

It is important that the ambiguity surrounding this tax benefit for the period 2001-2012 is cleared at the earliest, in order to end litigation and avoid a Vodafone-type situation.

Girish Mistry is Partner, KPMG

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Published on May 20, 2012
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