Karnataka Sales Tax Act, 1957:
s.5C r/w. Art.366(29A)(d) of the Constitution of India – Charter Party Agreement – By the company (owner of the ship) with Manglore Port Trust for a period of six months – Notification by the Revenue asking the company to get itself registered as a dealer under the Act, as the agreement attracted tax u/s.5C of the Act – The company repudiated its exigibility to tax on the ground that it had not transferred the rights to the Port Trust – Writ petition inter alia on the ground that the Act does not extend to territorial waters of India and hence State not authorised to levy tax – Single Judge as well as Division Bench rejected the case of the company – Appeal to Supreme Court – Held: In the facts of the present case, the Charter Party Agreement tantamount to a deemed sale as there was a transfer of right to use the vessel as provided in Art.366(29A)(d) r/w. 5C or s.2(j) of the Act – For realization of tax imposed within the ken of power u/Art.366(29A)(d), it is not material where the goods are passed, but the situs of agreement is determinative for realization of tax – Thus, location of delivery of goods cannot be made the basis for levy of tax on the sale of goods – The question as to extent of power of coastal ”State with respect to territorial waters, is left open – Constitution of India – Art.366(29A)(d).
Dismissing the appeal, the Court
HELD: 1.1 A tax on the sale or purchase of goods includes a tax for transfer of right to use goods as that is deemed to be a sale. The tender documents pursuant to which agreement has been entered into contains the conditions and instructions to tenderers. The pre-qualification criteria provide that the tenderer has to submit the documents regarding ownership or possession of tug on bareboat/committed demise charter hire of tugs. In case he does not own the tug, he has to provide documents to prove that he has entered into a lease for charter hire of tug(s) for deploying them in the Port Trust during the period of the contract. The tenderer should have experience of manning and harbor practice for one year during the last 3 years. Tugs should be deployed at harbors at New Mangalore Port during the contract period. [Para 22] [873-B-D]
1.2 As per the Charter Party Agreement, Annexure I, the vessel has been taken by the Port Trust for various lawful services required by the chartered Port Trust, including towing, docking, and undocking at the Port round the clock for the contract period of 6 months. The contractor that is the company has to provide the cost or expenses related to the vessel, her master and crew, whereas the charterer to provide fuel, lubricants, water, electricity, port charges, and for anti-pollutants. The provisions for maintenance and operation are also contained in the agreement. As per clause 7, the vessel shall during the charter period be for all purposes at the disposal of the charterers and under their control in every respect, whereas the maintenance part is with the contractor company. The charterer shall have the use of all outfits, equipment, and appliances on board the vessel at the time of delivery. Insurance charges have to be borne by the contractor. The vessel shall be kept insured by the contractors at their expense against protection and indemnity risks. The whole reach and burthen of the vessel, including the lawful capacity to be kept at the charterer’s disposal. [Para 27] [882-D-F]
1.3 On perusal of the various terms and conditions of the Charter Party Agreement (Annexure I), clause 1 provides that the contractors “let” and the charterer “hire” the goods vessel for six months. The expression ‘let’ has been used, and the vessel most significantly during the charter period has been placed at the “disposal” of the charterers and under their control in every respect. The charterers have been given the right to use all outfits, equipment, and appliances on board the vessel at the time of the delivery, including the whole reach, burthen, and deck capacity. Thus, merely by providing the staff, insurance, indemnity, and other responsibilities of bearing officials costs, effective control for the entire period of six months has been given to the charterers. It is a case of transfer of right to use the vessel for which certain expenses and staff are to be provided by the contractor, which is not sufficient to make out that the control and possession of the vehicle are with the contractor. The possession and control are clearly with the charterer. There is not even an iota of doubt that under the charter agreement coupled with the instructions to tenderers, general conditions and special conditions for the contract as specified in the tender documents and charter-party clauses, there is a transfer of right to use the vessel for the purposes specified in the agreement. [Para 33] [884-C-F]
1.4 To constitute a transaction for the transfer of right to use of goods, essential is, goods must be available for delivery. In the instant case, the vessel was available for delivery and in fact, had been delivered. There is no dispute as to the vessel and the charterer has a legal right to use the goods, and the permission/licence has been made available to the charterer to the exclusion of the contractor. Thus, there is complete transfer of the right to use. It cannot be said that the agreement and the conditions subject to which it has been made, is not a transfer of right to use the goods, during the period of six months, the contractor has no right to give the vessel for use to anyone else. Thus in view of the provisions inserted in Article 366(29A)(d) of the Constitution of India, Section 5C, and definition of ‘sale’ in section 2 of the Karnataka Sales Tax Act, there is no room for doubt that there is a transfer of right to use the vessel. [Para 34] [884-G-H; 885-A]
1.5 Applying the substance of the contract and the nominal nature test, the vessel was available when the agreement for the right to use the goods has taken place. The vessel was available at the time of transfer, deliverable, and delivered and was at the exclusive disposal for six months round the clock with the charterer port trust. The use of license and permission was at the disposal of the charterer and to the exclusion of the contractor/transferor. It was not open to the contractor to permit the use of the vessel by any other person for any other purpose. [Para 37] [888-F-G]
1.6 The Court is not turning the decision upon the terms used like ‘let’, ‘hire’, ‘delivery’ and ‘re-delivery’ but on the other essential terms of the Charter Party Agreement entered in the instant case which clearly makes out that there is a transfer of exclusive right to use the vessel which is a deemed sale and is liable to tax under the KST Act. In the instant case, full control of the vessel had been given to the charterer to use exclusively for six months, and delivery had also been made. The use by charterer exclusively for six months makes it out that it is definitely a contract of transfer of right to use the vessel with which the Court is concerned in the instant matter, and that is a deemed sale as specified in Article 366(29A)(d). It depends upon the terms and conditions of the charter-party when it is to be treated as only for service and when it is the transfer of right to use. [Para 43] [897-H; 898-A-C]
1.7 In a charter-party by demise, it may be charter without master or crew or bareboat charter, and another may be a charter with master and crew under which ship passes to the charterer for the purposes of mercantile adventure. As held in the present case, full control has been given, and use is exclusively for the charterer. He has the right to use the space and burden. [Para 52] [904-C-D]
1.8 It is not correct to say that charter agreements are only for service purpose. It depends upon the charter-party, and there is no super-check formula to find out the nature of the contract. It depends upon the terms and conditions of each contract. Merely use of specific words is not determinative, but the real crux is to be seen as per relevant conditions as agreed to between the parties. [Para 53] [904-E-F]
1.9 It is not correct to say that as per the scheme of the Harbour Craft Rules the owner retains the control of the vessel. Merely by ss. 4, 6 and 8 of the Harbour Craft Rules which pertain to license, its production/change of ownership etc., it cannot be said that the owner has not transferred the right to use the vessel. The ownership in such a deemed sale is retained by owner. He does not cease to be an owner by transferring right to use the property. Merely by the fact that a license to be obtained with certain stipulations and to be produced by Tindal on being demanded and change incapacity to be reported to the Deputy Conservator, the provisions are not of any help for interpreting the Charter Party Agreement, and to decide the question whether there is a transfer of right to use the vessel. [Para 55] [905-C-E]
1.10 Therefore, the Charter Party Agreement tantamount to a deemed sale as there was a transfer of right to use the vessel as provided in Article 366(29A)(d) read with section 5C or section 2(j) of the Karnataka Sales Tax Act. Thus, the transaction is liable to be taxed by the concerned authorities in the State of Karnataka. [Paras 68] [916-C]
Bharat Sanchar Nigam Ltd. & Anr. v. Union of India & Ors., (2006) 3 SCC 1 : [2006] 2 SCR 823 ; British India Steam Navigation Co. Ltd. v. Shanmughavilas Cashew Industries & Ors., (1990) 3 SCC 481 : [1990]
1 SCR 884 – relied on.
State of A.P. & Anr. v. Rashtriya Ispat Nigam Ltd., (2002) 3 SCC 314 – distinguished.
DLF Universal Ltd. & Anr. v. Director, Town, and Country Planning Department, Haryana & Ors., (2010) 14 SCC 1 : [2010] 15 SCR 85 ; Union of India v. Gosalia Shipping (Pvt.) Ltd., (1978) 3 SCC 23 : [1978] 3 SCR 943 ; State of Tamil Nadu & Ors. v. Tvl. Essar Shipping Ltd. & Ors., (2012) 47 VST 209 (Mad.) – referred to.
In re: An Arbitration between sea and land securities Ltd. and William Dickinson & Co. Ltd. The Alresford, (1942) 2 KB 65 ; Scandinavian Trading Tanker Co. A.B. v. Flota Petrolera Ecuatoriana, (1983) 2 LLR
253 ; Port Line, Ltd. v. Ben Line Steamers, Ltd. (1958)
1 AER 787 ; Torvald Klaveness A/S v. Arni Maritime Corporation (1993) 2 LLR 335 ; Skibsaktieselskapet Snefonn, Skibsaksjeselskapet Bergehus, and Sig. Bergesen D.Y. & Co. v. Kawasaki Kisen Kaisha Ltd. (1975) 1 LLR 422 ; Hyundai Merchant Marine Co. Ltd. v. Gesuri Chartering Co. Ltd. (1991) 1 LLR 100 – referred to.
Halsbury’s Laws of England, 4 th Edn., Vol. 43 – referred to.
2. For the realization of tax imposed within the ken of power under Article 366(29A)(d), it is not material where the goods are passed, but the situs of the agreement is determinative for the realization of tax. The location of the delivery of goods cannot be made the basis for the levy of tax on the sale of goods. Where a party has entered into a formal contract, and the goods are available for delivery irrespective of the place where they are located, the situs of sale where the property or goods passes, would be at the place where the contract has been entered into. In the present case, the agreement has been admittedly signed in Mangalore, and the vessel is used in the territorial waters, which is as per the submission of the company, fully in territory of the Union of India. It makes no difference as the situs of the deemed sale is in Mangalore. [Paras 57, 58] [905-G-H; 908-G-H; 909-B-C]
20 th Century Finance Corporation Ltd. v. State of Maharashtra, (2000) 6 SCC 12 : [2000] 1 Suppl. SCR
120 – followed.
Aggarwal Brothers v. State of Haryana & Anr., (1999)
9 SCC 182 : State of Orissa & Anr. v. Asiatic Gases Ltd., (2007) 5 SCC 766 : [2007] 6 SCR 1182 – referred to.
3. With respect to territorial waters, to what extent the coastal State can exercise power has been considered by the High Court, and specific findings have been recorded. The High Court has gone into the question of whether the territorial waters abutting the landmass form part of the State of Karnataka. It was not disputed that the extent of territorial waters is up to
12 nautical miles from the landmass that is the baseline. Article
297 has been considered by the High Court and the Lists in the 7th Schedule of the Constitution. Entries 25 to 27 and 30 of List I, Entry 32 of List III, i.e., Concurrent List have been referred. The High Court has also relied upon the definition of State as provided in Section 2(j) of the Marine & Fishing Act, 1986, Entries 13 and 21 of State List II of the 7 th Schedule and in respect of fisheries Entry 21 of List II. However, as the High Court has given a finding, and on being impleaded, coastal States have filed their response as notices were issued to them. The Court need not go into the question in respect of the right of the States and the Central Government as to territorial waters at all, because of the finding concerning exaction of tax under the KST Act owing to situs where the transfer right to use the vessel, which is a deemed sale, had taken place. As such, the question is left open and the finding recorded by the High Court in this regard is diluted. [Paras 63- 65] [914-H; 915-A-E] Baliram Waman Hiray v. Justice B. Lentin, (1988) 4 SCC 419 : [1988] 2 Suppl. SCR 942 ; P.T. Rajan v. T.P.M. Sahir (2003) 8 SCC 498 : [2003] 4 Suppl. SCR
84 – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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