The Great Eastern Shipping Co. Ltd. Vs. State of Karnataka and Ors. - (Supreme Court) (04 Dec 2019)

A tax on sale or purchase of goods includes a tax for transfer of right to use goods

MANU/SC/1674/2019

Sales Tax/VAT

The question involved in the appeal is whether it is open to the State of Karnataka to levy Sales Tax in view of the Time Charter Agreement dated 8th January, 1998 and whether it amounts to transfer of the right to use goods within the meaning of Section 5C of the Karnataka Sales Tax Act, 1957 ("the KST Act") read with Article 366(29A) (d) of the Constitution of India, 1950.

The Appellant-The Great Eastern Shipping Co. Ltd. filed 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 Appellant owns a tug (towing vessel, namely "Kumari Tarini"). The company entered into a Charter Party Agreement with New Mangalore Port Trust on 8th January, 1998. It agreed to make available the services of tug, for the purposes provided in the agreement along with the master and other personnel of the company to the Port Trust for six months.

The Assistant Commissioner of Income Tax vide notification directed the company to register itself as a dealer under the provisions of the KST Act on the ground that, the agreement attracted tax under Section 5C thereof. The company in the reply repudiated the claim on the ground that, there was no transfer of right to use the goods given by the company to the Port Trust as the possession and custody of the tug continued with it.

The company filed a writ petition on the ground that, the KST Act does not extend to territorial waters of India situated adjacent to the landmass of the State of Karnataka. Thus, the State is not authorised to exact any tax on the hire charges received from the Port Trust. The learned Single Judge dismissed the writ petition, aggrieved thereby the company preferred a writ appeal. The same has also been dismissed; hence, the appeal has been filed. A Division Bench of the High Court of Karnataka has rejected the submission raised by the Appellant that State of Karnataka has no power over the territorial waters.

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 question that arises for consideration is whether there is a transfer of the right to use the vessel. It has to be considered in view of the charter agreement entered into between the company and the Port Trust. 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.

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. Thus in view of the provisions inserted in Article 366(29A) (d), Section 5C, and definition of 'sale' in Section 2 of the KST Act, there is no room for doubt that there is a transfer of right to use the vessel.

The Charter Party Agreement qualifies the test laid down by this Court. 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.

Present Court in the 20th Century Finance Corporation Ltd. & Anr. v. State of Maharashtra , has considered for Article 366(29A)(d) of Constitution, the taxable event is the transfer of the right to use the goods regardless of when or whether the goods are delivered for use. The deemed sale takes place at the site where the right to use the goods is transferred. It is of no relevance where the goods are delivered under the right to transfer to use them. The situs of the agreement is relevant, which is admittedly within the territory of Karnataka. The situs of the deemed sale is in Mangalore, and the decision of a Constitution Bench of this Court in the 20th Century Finance Corporation Ltd. & Anr. v. State of Maharashtra is binding and effectively repels the submission to the contrary.

Charter party has been entered into admittedly in Mangalore, and the ship is used at the New Mangalore Port by the New Mangalore Port Trust. Though vessel was used in the territorial waters, makes no difference with respect to exigibility of sales-tax under the provisions of the KST Act in view of the decision of this Court in 20th Century.

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. Appeal dismissed.

Relevant : 20th Century Finance Corporation Ltd. & Anr. v. State of Maharashtra MANU/SC/0412/2000

Tags : AGREEMENT TRANSACTION TAX LEVY