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Charter Party Agreement tantamount to a deemed sale as there was a transfer of right to use the vess


The bench comprising of Justice Arun Mishra, Justice M. R Shah and Justice B. R Gavai delivered the judgment of a writ petition questioning the competence of the State Government to impose a sales tax in respect of the goods which are used within the territorial waters of India.

The Hon’ble Supreme Court considered the following issues in the present case;

(i) Whether the State of Karnataka has jurisdiction to levy sales­tax under section 5C of the KST Act in respect of the Charter Party Agreement dated 8.1.1998?

(ii) Whether the agreement dated 8.1.1998 constitutes “transfer of the right to use”?

(iii) Whether the State of Karnataka has the competence to levy sales tax on the agreement, which is effective within the territorial waters? 

The learned Senior Counsel on behalf of the appellant submitted that the Time Charter Agreement does not amount to transfer of right to use goods within the meaning of section 5C of the KST Act. It was only a contract of service. The expression used in the agreement is ‘service’. There is a difference between the ‘right to use goods’ and ‘the transfer of the right to use goods’. In case of a lease, there is a transfer of an interest in the property, whereas, in a license, there is a mere right to use the property. The Time Charter is recognized as an agreement in the nature of pure service. The use of the words ‘at the disposal of Port’ in clause 7 is a standard term used in all charter agreements, and these do not indicate the transfer of legal possession or transfer of fiscal control. The contract indicates various liabilities and responsibilities of the owner; the insurance has to be provided by the appellants. For the performance of service, the Bank Guarantee also has to be given. The owner is responsible for damage to his Tug, Jetty, port premises, or any other vessel in the port. The company is responsible for providing indemnity to the charterer. Thus, the owner has not lost his control over the vessel.

The appellant also pleaded that vessels fall under the category of tangible goods. Therefore, the consideration paid for chartering of vessels is liable to service tax under the category of   ‘supply of tangible goods for use by way of service without possession and control. The fact that time charters are subject to service tax and bareboat charters are subject to sales tax, which indicates that time charters are contracts of service. If they involved a transfer of right to use Parliament would never have subjected them to service tax.

The learned counsel for the appellant submitted that usually, only the Parliament can make laws relating to territorial waters. Under Article 246(4), read with Article 286, Parliament can make fiscal laws relating to imposition of tax on either supply of goods or services or both, where such supply takes place outside the State. Thus, even if the situs of agreement fell in the territory of State, it would be of no relevance as the vessel has to ply in territorial waters. An agreement cannot be signed in the high seas. The High Court has erred in treating the territorial water as part of the territory of Karnataka, in contravention to Article 297 as well as the provisions of the Territorial Waters, Continental Shelf, Exclusive Economic Zone, and other Maritime Zones Act, 1976 (Act of 1976).

The Counsel for the appellant also argued that the entire territorial waters would exclusively belong to the Union, and it is only by way of an exception through Entry 21 in List II that “fisheries” has been kept under the control of a State Government. The State Government is, thus, competent to regulate fishing up to the territorial waters. The same would again be restricted by Entry 57 of List I, which provides that fisheries beyond the territorial waters would be under the control of the Union as per Entry 21, List II.  The Karnataka Marine and Fishing (Regulation) Act, 1986 (Act of 1986) was passed by the State legislature, within the purview of powers as per Entry 21 of List II. Section 2(j) of the Act of 1986 has defined Karnataka State to include the territorial waters, but that has to be read in the context of Entry 21 in List II. The definition in section 2(j) is confined to the regulation of fisheries, and cannot be interpreted to mean that the territorial waters belong to Karnataka. The State cannot claim 12 nautical miles as part of its territory;

And further submitted that under Entries 56 and 57 of List II, the State legislature has the competence to levy tax on the carriage of goods and passengers only on inland waters base. Entries 25 to 27 of List I indicate that the entire shipping industry is exclusively within the domain of Parliament. The agreement is in the nature of a time charter as approved by the New York Produce Exchange (NYPE), which is the standard form for time charters.

The appellant has relied upon BSNL v. Union of India, (2006) 3 SCC 1 wherein the Court has laid down essential attributes of a transaction to constitute a transfer of the right to use the goods. At no point of time, the vessel should go out of the possession or control of the company, therefore the essential ingredient to constitute it a transfer of the right to use is missing. He has also referred to DLF Universal Ltd. v. Director, Town, and Country Planning Department, Haryana, (2010) 14 SCC 1.

The counsel for the respondent contended that the transfer of right to use occurs when the agreement has been entered into and not when the delivery of the goods takes place. The counsel referred to Ambedkar’s speech in the Constituent Assembly that “State laws will prevail over that area, whatever law you make will have its operation over the area of three miles from the physical territory” and has also referred to H.M. Seervai’s seminal work on the “Constitutional Law of India” with respect to interpretation of Article 297 of the Constitution of India. Parliament has chosen not to place any restriction on the power of the State Government under Article 366(29A) (d). Article   297(3),   the Parliament has enacted the Territorial Waters Act, 1976; he has referred to sections 3, 5, and 7 of the said Act. He has also relied on Articles 246 and 286 of the Constitution of India.

The Hon’ble Court observed that;

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. As in essence, it has to be seen from a conjoint reading of various conditions whether there is a transfer of right to use the vessel.

The court stated that;

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 charter­party clauses, there is a transfer of right to use the vessel for the purposes specified in the agreement.

There is no dispute as to the vessel and the charterer has a legal right to use the goods, and the permission/license has been made available to the charterer to the exclusion of the contractor. Thus, there is a complete transfer of the right to use.

The Hon’ble Court considered the charter­party in question in the context of applicable law, particularly in view of the constitutional provisions of Article 366(29A)(d).

The Court held

that there is transfer of right to use tangible goods, which is determinative of deemed sale as per the Constitution of India and provisions of section 5C reflecting the said intendment. There is transfer of right to use exclusively given to charterer for six months, and the vessel has been kept under the exclusive control. The charterer qualifies the test laid down by this Court in Bharat Sanchar Nigam Ltd & Anr v Union of India & Ors. (2006) 3 SCC 1.

The next question for consideration is whether the State of Karnataka has power under Section 5C of the Act to exact  sales­tax though charter­party has been signed in Mangalore in view of the fact that the vessel was to be used in territorial waters.

The court observed in 20th Century Finance Corpn. Ltd. v. State of Maharashtra, (2000) 6 SCC 12 that 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 the territory of the Union of India. It makes no difference as the situs of the deemed sale is in Mangalore. Thus, the liability to pay tax under the Act cannot be countenanced.

The Hon’ble Supreme Court held that

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.

Therefore, the court finds no merit in the appeal and is dismissed.

Srutha R Elayidom



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