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2019 Supreme(Online)(SC) 651
SUPREME COURT OF INDIA
ARUN MISHRA, J
THE GREAT EASTERN SHIPPING CO. LTD. – Appellant
Versus
STATE OF KARNATAKA – Respondent
CIVIL APPEAL NO.3383 OF 2004
For the Appellants/Petitioners: Shri Arvind Datar, Mr. Mohan Parasaran, Mr. Devadatt Kamat
For the Respondents: Mr. Tushar Mehta
The Court held that a Time Charter Agreement constitutes a transfer of the right to use goods, qualifying it as a deemed sale under Article 366(29A)(d) of the Constitution, subject to sales tax.
Headnote:(A) Karnataka Sales Tax Act, 1957 - Section 5C - Article 366(29A)(d) of the Constitution of India - Sales Tax levied on the hiring of a vessel under Time Charter Agreement - Court holds that the agreement constitutes a transfer of the right to use goods, which is a deemed sale for taxation purposes - Jurisdiction of the State to levy tax within territorial waters upheld. (Paras 1-68)
(B) Contractual Relationship - The essential distinction between a time charter and a contract of service clarified, emphasizing that control and possession of the tug remain with the owner, despite the presence of terms such as hire and delivery. (Paras 5-6, 60-68)
(C) Legislative Competence - Issue of whether the State has authority to levy sales tax on goods used in territorial waters addressed; affirmed that the situs of the contract is determinative for tax liability despite the location of actual use. (Paras 56-68)
Facts of the case:
The Great Eastern Shipping Co. contended against the State of Karnataka's claim to levy Sales Tax on hire charges for services provided under a Time Charter Agreement concerning the use of a tug within territorial waters. Legal proceedings ensued after tax registration notifications were issued based on the Assistant Commissioner’s interpretations.
Findings of Court:
The court ruled in favor of the State, determining the contract reflects a transfer of the right to use the tug for a specified period, qualifying as a deemed sale under the applicable laws.
Issues: The primary issues were the jurisdiction of the State to levy sales tax on a transaction involving goods operated in territorial waters and whether a mere service agreement can be subject to sales tax.
Ratio Decidendi: The agreement constituted a transfer of the right to use goods; thus, the State’s imposition of sales tax is justified under the Karnataka Sales Tax Act and relevant constitutional provisions.
Result: Appeal dismissed; the transaction deemed taxable under the Karnataka Sales Tax Act.
| Table of Content |
|---|
| 1. background of sales tax dispute. (Para 1 , 2 , 3 , 4) |
| 2. arguments on transfer of right to use. (Para 5 , 6 , 7 , 8 , 9 , 10 , 11) |
| 3. legal definitions and provisions of the kst act. (Para 12 , 18 , 19 , 20) |
| 4. court's reasoning on jurisdiction and applicability. (Para 13 , 14 , 15 , 17) |
| 5. details and implications of the charter party agreement. (Para 25 , 26 , 27 , 28 , 29) |
| 6. analysis of the transfer of right to use. (Para 32 , 33 , 34) |
| 7. rulings on deemed sale under the kst act. (Para 35 , 36 , 37 , 38) |
| 8. differences between service contracts and sales. (Para 40 , 41 , 42) |
| 9. jurisdictional authority over territorial waters. (Para 43 , 44 , 45) |
| 10. clarification of effective control and use. (Para 46 , 47) |
| 11. court's clarification on charter and lease distinctions. (Para 49 , 50 , 51) |
| 12. final conclusions and dismissal of the appeal. (Para 60 , 62 , 63 , 67) |
JUDGMENT
ARUN MISHRA, J.
1. 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 8.1.1998 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 (for short, “the KST Act”) read with Article 366 (29A) (d) of the Constitution of India.
2. 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, Signature Not Verified namely "Kumari Tarini"). The company entered into a Charter Party Digitaly signed by JAYANT KUMAR ARORA Date: 2019.12.04 16:32:29 IST Reason:
Agreement with New Mangalore Port Trust on 8.1.1998. 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.
3. The Assistant Commissioner of Income Tax vide notification dated 8.6.1998 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 dated 26.6.1998 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 Assistant Commissioner sent another communication dated 28.12.1998 informing that last chance was given to the company to get itself registered under the KST Act within 15 days failing which he would be compelled to file charge-sheet against the company for the offence under section 29(2)(aaaa) of the KST Act. The Joint Commissioner of Income Tax (Commercial Taxes) on a query being made by the company wrote that he was not the competent authority to issue a clarification regarding liability or otherwise to pay tax under section 5C of the KST Act.
4. 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 over the territorial waters State of Karnataka has no power. The learned Single Judge was not justified in refusing to consider the question, whether there was a transfer of right to use the tug. It held that there was a transfer of right to use the tug by the company to the Port Trust.
5. Shri Arvind Datar, learned senior counsel appearing on behalf of the company submitted that the Time Charter Agreement dated 8.1.1998 does not amount to transfer of right t
