# THE GREAT EASTERN SHIPPING CO. LTD v. STATE OF KARNATAKA & ORS

- **Citation:** [2019] 17 S.C.R. 856
- **Court:** Supreme Court of India
- **Decided:** 2019-12-04
- **Case number:** Civil Appeal No. 3383 of 2004
- **Bench:** Arun Mishra, M. R. Shah, B. R. Gavai
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/the-great-eastern-shipping-co-ltd-v-state-of-karnataka-ors-33681
- **Pages:** 61

## Headnote

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
 [2019] 17 S.C.R. 856
856
A
B
C
D
E
F
G
H
857
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 th

## Text

_Characters 0–39,983 of 139,864. This is a partial read: ask again with offset=39983 for what follows._

A
B
C
D
E
F
G
H
856
SUPREME COURT REPORTS
[2019] 17 S.C.R.
THE GREAT EASTERN SHIPPING CO. LTD.
v.
STATE OF KARNATAKA & ORS.
(Civil Appeal No. 3383 of 2004)
 DECEMBER 04, 2019
[ARUN MISHRA, M. R. SHAH AND B. R. GAVAI, JJ.]
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
 [2019] 17 S.C.R. 856
856
A
B
C
D
E
F
G
H
857
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,
THE GREAT EASTERN SHIPPING CO. LTD. v.
STATE OF KARNATAKA & ORS.
A
B
C
D
E
F
G
H
858
SUPREME COURT REPORTS
[2019] 17 S.C.R.
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]
A
B
C
D
E
F
G
H
859
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
THE GREAT EASTERN SHIPPING CO. LTD. v.
STATE OF KARNATAKA & ORS.
A
B
C
D
E
F
G
H
860
SUPREME COURT REPORTS
[2019] 17 S.C.R.
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.
A
B
C
D
E
F
G
H
861
Halsbury's Laws of England, 4th 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]
20th 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 7th Schedule and in
respect of fisheries Entry 21 of List II. However, as the High
THE GREAT EASTERN SHIPPING CO. LTD. v.
STATE OF KARNATAKA & ORS.
A
B
C
D
E
F
G
H
862
SUPREME COURT REPORTS
[2019] 17 S.C.R.
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.
Case Law Reference
[1988] 2 Suppl. SCR 942
referred to
Para 14
[2003] 4 Suppl. SCR 84
referred to
Para 14
[2006] 2 SCR 823
relied on
Para 35
[2010] 15 SCR 85
referred to
Para 38
(2002) 3 SCC 314
distinguished
Para 39
[1990] 1 SCR 884
relied on
Para 40
[1978] 3 SCR 943
referred to
Para 41
(2012) 47 VST 209 (Mad.)
referred to
Para 42
(1942) 2 KB 65
referred to
Para 44
(1983) 2 LLR 253
referred to
Para 45
(1958) 1 AER 787
referred to
Para 46
(1993) 2 LLR 335
referred to
Para 47
(1975) 1 LLR 422
referred to
Para 48
(1991) 1 LLR 100
referred to
Para 49
(1999) 9 SCC 182
referred to
Para 60
[2007] 6 SCR 1182
referred to
Para 61
[2000] 1 Suppl. SCR 120
followed
Para 57
A
B
C
D
E
F
G
H
863
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3383
of 2004.
From the Judgment and Order dated 23.01.2004 of the High
Court of Karnataka, Bangalore in Writ Appeal No. 5526 of 1999.
Tushar Mehta, SG, Balaji Srinivasan, AAG, Arvind P. Datar,
Mohan Parasaran, Arijit Prasad, Devadatt Kamat, Sr. Advs., Amar
Dave, Mahesh Agarwal, Rishi Agrawala, Anshuman Srivastava, Parul
Shukla, Ms. Devika Mohan, Rohan Talwar, E. C. Agrawala, Kanu
Agrawal, Mrs. Anil Katiyar, V. N. Raghupathy, Aditya Bhat, Javedur
Rahman, Rajesh Inamdar, Parikshit P. Angadi, Ashwin G. Raj, Manendra
Pal Gupta, Mrs. Shally Bhasin, Ms. Hemantika Wahi, Nishant
Ramakantrao Katneshwarkar, Anoop Kandari, G. Prakash, Jishnu
M. L., Ms. Priyanka Prakash, Ms. Beena Prakash, Ms. A. Jaswanthi,
Ms. P. Mitra, K. V. Vijayakumar, P. Venkat Reddy, Prashant Kumar
Tyagi, P. Srinivas Reddy, M/s. Venkat Palwai Law Associates,
Shibashish Misra, S. Debabrata Reddy, Chandan Kumar Mandal,
Suhaan Mukerji, Ms. Astha Sharma, Abhishek Manchanda, Ms. Kajal
Dalal, Prastut Dalvi, Ms. Dimple Nagpal, Naveen Kumar, M/s. PLR
Chambers and Co., Merusagar Samantaray, K. Luikang Michdel,
G. N. Reddy, Ms. Sujatha Bagadhi, T. Vijaya Bhaskar Reddy,
Ms. D. Priyanka, Anirudhha P. Mayee, Advs. for the appearing parties.
The Judgment of the Court was delivered by
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,
namely "Kumari Tarini"). The company entered into a Charter Party
THE GREAT EASTERN SHIPPING CO. LTD. v.
STATE OF KARNATAKA & ORS.
A
B
C
D
E
F
G
H
864
SUPREME COURT REPORTS
[2019] 17 S.C.R.
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 to use goods within the
meaning of section 5C of the KST Act. It was only a contract of
service. The contract is for the hire of a tug on payment of Rs.1.5 lakh
per day. The expression used in the agreement is 'service.' Time
Charters world over are considered a contract of service. There is a
A
B
C
D
E
F
G
H
865
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 licence, there is a mere right to use the
property. The Time Charter is recognised as an agreement in the nature
of pure service. They are entirely distinct from Bareboat Charter
Agreement or charter by demise. The charters are of three kinds viz.
(a) Time Charter, (b) Bareboat Charter or Charter by Demise, and (c)
Voyage Charter. Time charter and voyage charter are contracts of
service, whereas bareboat charter amounts to transfer of right to use
the ship itself. In a time charter, master and crew are in the employment
of the owner, and complete control, ownership, and possession of the
vessel remain only with the owner through the master and crew. The
delivery to the Port Trust is only a symbolic one, and the legal and
physical possession of Tug continues to be with the company. Thus,
the arrangement is a service, not a lease. Learned senior counsel has
made reference to Scrutton on charter parties, Halsbury's Laws of
England, and have also relied upon various decisions.
6. Mr. Datar has further submitted that the Port Trust cannot
use the Tug for any purpose except, as mentioned in clause 3 of the
Agreement. The Port Trust cannot take away the Tug outside the
harbour limits of the Port Trust. Legal possession and fiscal control had
not been transferred to the Port Trust, and only a conditional use of
the vessel has been given. 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.
7. It is further urged that if the vessel is at the disposal of the
Port Trust, does not mean that there is a transfer of right to use it. The
expression must be understood in a proper context of the agreement
itself. It would be absurd to suggest that the vessel can be partly in
possession of the Port Trust and partly with the company. Any
interpretation otherwise of the contract may create mayhem in the
scheme of indirect taxation in India.
THE GREAT EASTERN SHIPPING CO. LTD. v.
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]
A
B
C
D
E
F
G
H
866
SUPREME COURT REPORTS
[2019] 17 S.C.R.
8. Mr. Datar has also referred to international laws relating to
time charter and Bareboat Charter Agreements that have been in
existence for more than 100 years. According to him, the time charter
has always been treated as a contract of service. He has relied on the
Ministry of Finance, Department of Revenue, a clarification dated
18.6.2008 issued on the basis of detailed examination and analysis of
the Charter Party Agreements entered by shipping companies with their
charterers and have clarified that vessels fall under the category of
tangible goods. A charterer acquired the right to use the vessel without
having the right to possession or effective control of the vessel.
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.
9. Mr. Datar, learned senior counsel has also 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.
10. It was submitted that 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). None of the maritime States have been given
the territorial waters as part of their territory. He has also referred to
Dr. Ambedkar's speech in the Constituent Assembly to submit 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
A
B
C
D
E
F
G
H
867
and Fishing (Regulation) Act, 1986 (Act of 1986) was passed by the
State legislature, within 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; otherwise, each maritime State can pass laws with any
of the items mentioned in List -I regarding the activities in the territorial
waters, which are the prerogative of the Parliament.
11. Mr. Datar has 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. By
implication, any taxes on the carriage of goods or passengers in the
territorial waters is outside the legislative competence of the State
legislature. Entries 25 to 27 of List I indicate that the entire shipping
industry is exclusively within the domain of Parliament. Entry 27 of ListI cover the ports, and the agreement is with the Port Trust. He has
further attracted our attention to section 5 of the Territorial Waters Act,
1976. Section 5 defines the contiguous zone to be at a distance of 24
nautical miles from the nearest point of the base-line. The Central
Government has the exclusive power to make laws concerning customs
and other fiscal matters on activities that take place in the contiguous
zone. The Territorial Waters Act prevails over the State legislature
dealing with sales tax, i.e., the KST Act. Thus, the decision in 20th
Century Finance Corporation Ltd. v. State of Maharashtra, 2000
(6) SCC 12 is not attracted in which this Court was concerned with
the controversy as to which State could levy sales tax, where signing
of the contract, delivery of the goods or use of the rights were in
different States. The majority held that the State where a contract is
signed would have the power to levy a sales tax. Thus, the place where
the goods were delivered or used could not be a ground for levy of
sales tax. Merely signing of the contract in Mangalore conferred no
jurisdiction to levy sales-tax on the State of Karnataka. The decision
has no application to the transaction, the effect of which takes place in
territorial waters or the high seas, even if the agreement is signed within
a particular State.
12. Mr. Mohan Parasaran, learned senior counsel has taken us
in detail to various clauses of the agreement. The agreement is in the
THE GREAT EASTERN SHIPPING CO. LTD. v.
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]
A
B
C
D
E
F
G
H
868
SUPREME COURT REPORTS
[2019] 17 S.C.R.
nature of a time charter as approved by the New York Produce
Exchange (NYPE), which is the standard form for time charters. It is
neither a bareboat cum demise charter nor a voyage charter and is,
therefore, only a time charter because of terms and conditions. He has
relied upon BSNL v. Union of India, (2006) 3 SCC 1 wherein this 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 very
language of the agreement makes it clear to be a contract of service.
The expressions like delivery and re-delivery are not to be understood
in a literal sense. There are certain obligations upon the company, which
makes out that effective control over the vessel is with the company.
He had also referred to Harbour Craft Rules. The tug is always
operated, controlled, run, maintained, and insured by the company.
Possession of the Tug remains with it. In the event the tug is disabled
from use, the charterer is not required to pay charter-party charges to
the company. The company has to indemnify the charterer.
13. Mr. Mohan Parasaran, learned senior counsel has also
submitted that the concept of time charter-party is a charter for a
specified period rather than for a specific task. There are other types
of Charter Party Agreements like demise charter and voyage charter.
Under a demise charter, the owner leases his ship to the charterer for
an agreed period in exchange for periodic payments. In voyage charter,
the owners agree that their ship officered, crewed and bunkered by
them, shall carry specified cargo on an agreed voyage in exchange for
freight, characteristically a "single payment." Under Mercantile
jurisprudence, it is well-settled that insofar as time charter is concerned,
it is only a service contract. He has also referred to Scrutton on
Charterparties and Bill of Lading, and British Shipping Laws,
Carriage by Sea book by Colinvaux, Raoul P. He has also referred to
a decision in British India Steam Navigation Co. Ltd. v.
Shanmughavilas Cashew Industries & Ors., (1990) 3 SCC 481 and
other decisions and the definition of time charter-party in Black's Law
Dictionary. For the period during which the transferee has such legal
right, it has to be to the exclusion of the transferor company, which is
explicitly necessary to constitute a transfer of the right to use, which is
A
B
C
D
E
F
G
H
869
not merely a licence to use the goods. Service tax is already leviable
treating it as service agreement as such sales-tax cannot be exacted
by the State Government. The territorial waters are within the exclusive
jurisdiction of the Union of India. In view of Article 297 of the
Constitution, the State of Karnataka has no jurisdiction to impose a sales
tax. The territorial waters are deemed Union territory. The sovereignty
of India extends and has always extended to the territorial waters and
the seabed and subsoil underlying and air space over, such waters and
it is the Central Government which has the power to alter the limits of
the territorial waters.
14. Mr. Devadatt Kamat, learned senior counsel submitted on
behalf of the State of Karnataka 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. He has referred to various clauses of the
agreement to take home the aforesaid submission and has relied upon
20th Century Finance Corporation Ltd. v. State of Maharashtra
(supra), a decision of the Constitution Bench of this Court which has
been approved in BSNL (supra). He has further urged that a coastal
State has jurisdiction to levy sales-tax in the territorial waters abutting
the coast. He has also referred to Article 297. He has relied upon Dr.
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. Though the Article has been amended on more than one
occasion, the Parliament has not altered the basic premise of Article
297. He has relied upon Baliram Waman Hiray v. Justice B. Lentin,
(1988) 4 SCC 419; P.T. Rajan v. T.P.M. Sahir (2003) 8 SCC 498.
Several States, including the State of Karnataka, have enacted the laws
with respect to fisheries. He has referred to section 2(j) of the
Karnataka Marine Fishing (Regulation) Act, 1986. There was a transfer
of right to use the vessel as apparent from the various clauses of the
agreement. He has also relied upon Article 366 and the debates relating
to it. Parliament has chosen not to place any restriction on the power
of the State Government under Article 366(29A)(d).
15. Mr. Tushar Mehta, learned Solicitor General of India has
expressed the concern of the Union of India with respect to territorial
waters and has submitted that the territorial waters vested in the Union
THE GREAT EASTERN SHIPPING CO. LTD. v.
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]
A
B
C
D
E
F
G
H
870
SUPREME COURT REPORTS
[2019] 17 S.C.R.
of India as per Entries 25 to 27 and 30 of List I and the Territorial
Waters Act. The decision of the Karnataka High Court to the extent
of territorial waters, cannot be said to be correct. He has relied upon
the debates in the Constituent Assembly as to Article 297. In accordance
with 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.
16. Following questions arise for consideration in the matter:
(i) Whether the State of Karnataka has jurisdiction to levy
sales-tax 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?
17. This Court issued notice to various coastal States, and they
have filed response also with respect to territorial waters, such as the
States of Goa, Maharashtra, Kerala, Tamil Nadu, Andhra Pradesh, and
West Bengal, etc.
In Re: Section 5C of KST Act:
18. The State of Karnataka has sought to levy tax under section
5C of the KST Act on charter-party on the ground that it is a transfer
of right to use vessel.
19. Section 5C of the KST Act reads:
"Section 5C - Levy of tax on the transfer of the right to use any
goodsNotwithstanding anything contained in sub-section (1) or subsection (3) of section 5, but subject to sub-sections (4), (5) and
(6) of the said section, every dealer shall pay for each year a
tax under this Act on his taxable turnover in respect of the transfer
of the right to use any goods mentioned in column (2) of the
Seventh Schedule for any purpose (whether or not for a specified
period) at the rates specified in the corresponding entries in
column (3) of the said Schedule."
A
B
C
D
E
F
G
H
871
20. Section 2(t) of the KST Act defines "sale" and reads as under:
"Section 2(t) "sale" with all its grammatical variations and cognate
expressions means every transfer of the property in goods (other
than by way of a mortgage, hypothecation, charge or pledge)]
by one person to another in the course of trade or business for
cash or for deferred payment or other valuable consideration,
and includes,-
(i) a transfer otherwise than in pursuance of a contract of
property in any goods for cash, deferred payment or
other valuable consideration;
(ii) a transfer of property in goods (whether as goods or in
some other form) involved in the execution of a works
contract;
(iii) a delivery of goods on hire purchase or any system of
payment by installments.
(iv) a transfer of the right to use any goods for any purpose
(whether or not for a specified period) for cash, deferred
payment or other valuable consideration;--
Explanation 1.-x x x
Explanation 2.- x x x
Explanation 3.- (a) The sale or purchase of goods (other than
in the course of inter-State trade or commerce or in the course
of import or export) shall be deemed, for the purposes of this
Act, to have taken place in the State wherever the contract of
sale or purchase might have been made, if the goods are within
the State.
(i) n the case of specific or ascertained goods, at the time
the contract of sale or purchase is made; and
(ii) in the case of unascertained or future goods, at the time
of their appropriation to the contract of sale or purchase
by the seller or by the purchaser, whether the assent of
the other party is prior or subsequent to such
appropriation.
3(b) x x x
THE GREAT EASTERN SHIPPING CO. LTD. v.
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]
A
B
C
D
E
F
G
H
872
SUPREME COURT REPORTS
[2019] 17 S.C.R.
3(c) x x x
3(d) x x x"
21. A reading of the definition of sale makes it crystal clear that
every transfer of property in goods by one person to another in the
course of trade or business, includes the transfer of right to use any
goods for any purpose. Section 5C of the Act also provides levy of tax
on the transfer of the right to use any goods. Article 366(29A)(d)
inserted by the Constitution (46th Amendment) Act, 1982 on 2.2.1983
reads:
"366. (29) "tax on income" includes a tax in the nature of an
excess profits tax;
(29A) "tax on the sale or purchase of goods" includes-
(a) a tax on the transfer, otherwise than in pursuance of a
contract, of property in any goods for cash, deferred
payment or other valuable consideration;
(b) a tax on the transfer of property in goods (whether as
goods or in some other form) involved in the execution
of a works contract;
(c) a tax on the delivery of goods on hire purchase or any
system of payment by instalments;
(d) a tax on the transfer of the right to use any goods for
any purpose (whether or not for a specified period) for
cash, deferred payment or other valuable consideration;
(e) a tax on the supply of goods by any unincorporated
association or body of persons to a member thereof for
cash, deferred payment or other valuable consideration;
(f) a tax on the supply, by way of or as part of any service
or in any other manner whatsoever, of goods, being food
or any other article for human consumption or any drink
(whether or not intoxicating), where such supply or
service, is for cash, deferred payment or other valuable
consideration,
and such transfer, delivery or supply of any goods shall be deemed
to be a sale of those goods by the person making the transfer,
A
B
C
D
E
F
G
H
873
delivery or supply and a purchase of those goods by the person
to whom such transfer, delivery or supply is made;"
(emphasis supplied)
22. 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 prequalification 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.
23.