IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 29.08.2011 CORAM: THE HONOURABLE MRS.JUSTICE CHITRA VENKATARAMAN and THE HONOURABLE MR.JUSTICE M.JAICHANDREN Tax Case (Revision) Nos.184, 1563, 1589 and 1590 of 2006 and W.A.No.1140 of 2010 The State of Tamil Nadu represented by the Deputy Commissioner (CT) Chennai (North) Division Greams Road Chennai-600 006. .. Petitioner in all these TCRs. versus Tvl.Essar Shipping Limited No.7, Chennai House Esplanade Chennai-600 108. .. Respondent in all these TCRs. Essar Shipping Ports & Logistics Limited (Formerly known as Essar Shipping Ltd.) New No.77/56, C.P.Ramaswamy Road Abhiramapuram, Chennai-600 018. (Formerly at Chennai-House, Chennai-108) (Amended by order dated 22.12.2009 made in W.P.M.P.No.715 of 2009) .. Appellant in W.A.No.1140 of 2010/Petitioner versus The Commercial Tax Officer (FAC) Rattan Bazaar Assessment Circle First Floor, Kuralagam Annexe Chennai-600 108. .. Respondent in W.A.No.1140 of 2010/Respondent ----- https://hcservices.ecourts.gov.in/hcservices/ PRAYER: Tax Case (Revision) No.184 of 2006 is filed under Section 38 of the Tamil Nadu General Sales Tax Act, 1959 to revise the order of the Sales Tax Appellate Tribunal (Additional Bench), Chennai, passed in S.T.A.No.1704/2001 dated 05.04.2002 against the Appellate Assistant Commissioner (CT)I, Kuralagam Annexe Chennai-108 in AP.73/2001 dated 18.07.2001, and AP.115/2001, dated 27.07.2001, in RC.1545/98 (A4)-1995-96 and RC 1545/98(A4)-1996-97 respectively dated 12.02.2001 & 22.02.2001 respectively against the Commercial Tax Officer, Rattan Bazaar Assessment Circle, 1st Floor, Kuralagam Annexe, Chennai-108 in RC.1545/98(A4) 1995-96 dated 12.02.2001. Tax Case (Revision) No.1563 of 2006 is filed under Section 38 of the Tamil Nadu General Sales Tax Act, 1959 to revise the order of the Sales Tax Appellate Tribunal (Additional Bench), Chennai, passed in S.T.A.No.774/2001 dated 25.06.2001 against the Appellate Assistant Commissioner (CT)-I, Kuralagam Annexe Buildings, Chennai-108 in Appeal No and year 1) AP.110/98; 2) AP 160/99; 3) AP 462/99 dated 29.01.98; 26.03.1999, 30.06.99. Assessment Year:92-93;93-94;94-95; against the commercial Tax Officer, Rattan Bazaar Assessment Circle, Chennai-108 dated 30.06.1999 for the Assessment No & Year RC 1545/98/A4, 1994-95(TNGST); Tax Case (Revision) No.1589 of 2006 is filed under Section 38 of the Tamil Nadu General Sales Tax Act, 1959 to revise the order of the Sales Tax Appellate Tribunal (Additional Bench), Chennai, passed in S.T.A.No.772/2001 dated 25.06.2001 against the Appellate Assistant Commissioner (CT)I, Sixth Floor, Kuralagam Annexe Buildings, Chennai- 108 dated 27.01.2000 in AP No and year 1. AP 110/98; 2. AP 160/99; 3, AP 462/99; dated 29.01.88, 26.03.99; 30.06.99; 92-93, 93-94, 94-95 respectively against the Commercial Tax Officer, Rattan Bazaar Assessment Circle dated 29.01.98 in Assessment No & Year RC.1949/97/92-93. Tax Case (Revision) No.1590 of 2006 is filed under Section 38 of the Tamil Nadu General Sales Tax Act, 1959 to revise the order of the Sales Tax Appellate Tribunal (Additional Bench), Chennai, passed in S.T.A.No.773/2001 dated 25.06.2001 against the Appellate Assistant Commissioner (CT)I, Sixth Floor, Kuralagam Annexe Buildings, Chennai- 108 dated 27.11.2000, Appeal No and year 1.AP 110/98; AP.160/99; AP 462/99, 29.01.98, 26.03.1999; 30.03.1999; 92-93, 93-94,94-95 against the Commercial Tax Officer, Rattan Bazaar Assessment Circle dated 26.03.1999 for the Assessment No and Year RC 1545/98, 1993/94 (TNGST). W.A.No.1140 of 2010 under Clause 15 of the Letters Patent against the order of this Court dated 26.02.2010 made in W.P.No.11159 of 2004. WP.No.11159/04:Writ petition filed under Article 226 of the Constitution of India, calling for the records on the file of the Respondent herein RC.859/2000 97-98 dated 26.03.2004 and quash the proceedings of the Respondent herein, in RC.859/2000 97-98 dated 26.03.2004. https://hcservices.ecourts.gov.in/hcservices/ ----- For petitioner in Tax Case (Revision) Nos.184, 1563, 1589 and 1590 of 2006 and respondent in W.A.No.1140 of 2010 : Mr.A.Navaneethakrishnan Advocate General Assisted by Mr.R.Sivaraman Special Government Pleader For respondent in Tax Case (Revision) Nos.184, 1563, 1589 and 1590 of 2006 and appellant in W.A.No.1140 of 2010 : Mr.C.Natarajan Senior Advocate for Mr.N.Inbarajan COMMON ORDER (Order of the Court was made by CHITRA VENKATARAMAN,J.) These Tax Case Revisions and the Writ Appeal arise out of the order of the Sales Tax Appellate Tribunal, relating to the Assessment Years 1992-93 to 1997-98. The Revenue is on revision before us. Since the issues raised in all these revisions are common and the Tribunal had also considered the issues in respect of Assessment Years 1992-93 to 1994-95 under a common order and with reference to the subsequent years, under a separate order, we feel, it is better that the entire case is dealt with under a common order. 2. The substantial questions of law raised in the Revision cases are as follows: T.C.(R)No.184 of 2006: (i) Whether the Sales Tax Appellate Tribunal is right in holding that both the execution of contract as well as the act of passing of the control/domain of the goods should take place for the transfer to be completed and for levy of tax under Section 3A of the Tamil Nadu General Sales Tax Act, 1959? (ii) Whether the Sales Tax Appellate Tribunal is right in holding that the impugned transactions are eligible for deduction in Section 3-A(2a) of the Tamil Nadu General Sales Tax Act, 1959? T.C.(R) Nos.1563, 1589 and 1590 of 2006: (i) Whether the Tribunal has erred in treating the leasing of ship as not falling under Section 3A of the Tamil Nadu General Sales Tax Act, 1959? (ii) Whether the Tribunal, after accepting all the contentions put forth by the Revenue that the leasing transactions involved https://hcservices.ecourts.gov.in/hcservices/ would attract tax under Section 3-A, is right in holding that the transactions would fall under Section 3(A)(2)(a) of the Act when there are no findings in regard to inter-State trade, commerce, etc. (iii) Whether the Tribunal is correct in arriving at such a conclusion that the transactions would fall under Section 3(A)(2) (a) of the Act when such a ground was not raised either before the Assessing Authority or before the First Appellate Authority? (iv) Whether the order of the Tribunal is legally tenable in the context of the order of the Apex Court reported in 119 STC 182 since the situs of sale of a deemed sale would be the place where the contract is executed? (v) Whether the Tribunal has erred in observing that the sale of used and discarded ships did not conclude within the State of Tamil Nadu as per Explanation 3 to Section 2(n) of the Tamil Nadu General Sales Tax Act, 1959, read with Section 4(2) of the Central Sales Tax Act, 1956? (vi) Whether the order of the Tribunal in deleting the consequent penalty levied is valid in law? 3. T.C.Nos.1589, 1590, 1563 and 184 of 2006 and W.A.No.1140 of 2010 relate to assessment years 1992-93, 1993-94, 1994-95, 1995-96 and 1997-98 respectively. The assessment for the assessment years 1992-93 and 1994-95 were made originally on M/s.South India Shipping Corporation Ltd., which got amalgamated with M/s.Essar Shipping Ltd., with effect from 1.4.1996. The assessment for the assessment year 1993-94 was made on the present assessee and the assessment orders for all the assessment years concerned herein, were served on the assessee herein. 4. The assessee herein is a Public Limited Company. The assessee owned fleet of ships used for transport of cargo and passengers. The business of the assessee included entering into charterparty agreement to hire out the Vessels to charterers. It is stated that in the course of assessment year 1992-93, the assessee company had let on hire, 11 ships owned by them, to various parties within and outside Tamil Nadu and also parties outside India and collected charges on rendering services. Of the several parties, M/s.Poompuhar Shipping Corporation Ltd., Chennai, is one with whom the assessee had time charter agreement in respect of three vessels, by name, Chennai Valarchi, Chennai Veeran and Chennai Polivu. Time charter agreements were executed on 25.02.1992 as regards Chennai Valarchi and Chennai Polivu on 25.2.1992 and Chennai Valarchi on 12.1.1993 for M/s.Poompuhar Shipping Corporation Ltd., to transport coal to the Tamil Nadu Electricity Board. It is stated that apart from the above, the assessee also sold ships and old assets. Similar to the transaction relevant to the assessment year 1992-93, the assessee had entered into time charter agreement during the subsequent relevant assessment year too. The terms of the time charter agreement are one https://hcservices.ecourts.gov.in/hcservices/ and the same. 5. It is seen that the assessee was not originally registered as a dealer under the provisions of the Tamil Nadu General Sales Tax Act (hereinafter referred to as "the Act"). It is stated that on 8.8.1996, the place of business of the assessee was inspected and the accounts were called for and checked. Based on this, the Revenue viewed that the transaction under the charterparty agreement was lease of the ships for valuable consideration, attracting charge under Section 3A of the Act. The Assessing Officer viewed that as per the agreement, there was a transfer of possession of the Vessels to the charterers. Thus, going by the terms of lease, the receipt of lease rentals were held as assessable to tax under Section 3A of the Act. 6. The petitioner objected to the proposal, contending that the essential control of the Vessel remained with the owner/assessee. Considering the nature and characteristics of the time charter agreement, in contradistinction to bareboat charter and voyage charter, the actual possession of the Vessel remained always with the owner. Referring to the various clauses in the agreement, the essential ingredients of transferring possession for effective control not being there, there was no liability to be met by the assessee. The contention thus taken by referring to various clauses in the agreement was, however, rejected by the Assessing Officer. He held that the Clauses in the agreement clearly spelt out on giving possession and control over the Vessel to the charterer and redelivery by the Charterer at the end of the lease period. So too, the claim on the sale of ships was also rejected. Thus ultimately, the order of assessment was made on the assessee, treating the transaction as transfer of right to use, hence a deemed sale, attracting charge under Section 3A of the Act. So too the sale of the named ships as local sale. Thus on the time charter, apart from tax, penalty was also imposed under Section 12(5)(1) and 12(3)(a) of the Act for the assessment year 1993-94 and under Section 12(5)(i) of the Act for the assessment years 1994-95, 1995-96, 1996-97 and 1997- 98. Aggrieved by the above-said assessments, the assessee preferred statutory appeals before the Appellate Assistant Commissioner. 7. Reiterating the contention that the time charter agreement did not involve transfer of possession of the Vessel from the assessee to the charterer and referring to the various Clauses in the agreement, the assessee submitted that the charterparty agreement did not involve demise of the ship; the Master of the ship and the crew ever remained the employees of the assessee. Referring to the phrases used, namely, "let", "hire", "delivery" and "redelivery", learned Senior Counsel submitted that Courts have held that these terms in time charter agreements are not to be understood in a literal sense and that these generally used terms, however, do not mean that under the time charter, the owner of the Vessel parted with the possession https://hcservices.ecourts.gov.in/hcservices/ of the Vessel. Thus, he relied on the decision of the Apex Court reported in (1990) 3 SCC 481 (British India Steam Navigation Co. Ltd. Vs. Shanmughavilas Cashew Industries and Ors.) and submitted that the agreement has to be read as a whole to ascertain the intention of the parties. After going through the various clauses in the agreement, the Appellate Assistant Commissioner agreed with the assessee that the time charter agreement did not involve transfer of right to use the goods. Thus the assessment under Section 3A of the Act was set aside. As regards the sale of ships, when the contract of sale in respect of specific Vessels was entered into, they were outside the State of Tamil Nadu. In the above circumstances, sale being one of ascertained goods, the assessment made on the sale of ships was set aside. However, on other aspects regarding sale of bunders, the Appellate Assistant Commissioner remanded the same for fresh consideration. On the penalty levied under Section 12(3)(a), for the assessment year 1992-93, the same was reduced; similarly for the other assessment years, penalty stood modified. 8. Aggrieved by this, the Revenue went on appeal before the Tamil Nadu Sales Tax Appellate Tribunal. Agreeing with the Revenue that the lessee had the control over the economic benefit of the Vessel hired, the Tribunal referred to the decision reported in [1999] 113 STC 403 (Upasana Finance Ltd. Vs. State of Tamil Nadu) and held that the transaction attracted the charge under Section 3A of the Act. The assessee took an alternate plea that at the time of entering into the charterparty agreement, the Vessels were not inside the State. Further, the object of the charterparty agreement was transportation of coal from outside; thus with the inter-state movement providing for bringing coal under the charterparty, the Tribunal accepted the plea of the assessee, holding that transactions of inter-State sale for the entire transactions were not assessable under Section 3A(2) of the Act. The Tribunal pointed out that at the time of entering into the charterparty agreement, the Vessels were berthed in different States and thus, they were not available for delivery within the State. Thus the Tribunal held that even though the transactions are assessable under Section 3A of the Act, the assessee was entitled to deduction under Section 3A(2)(a) of the Act. The Tribunal relied on the decision reported in (1986) 63 STC 391 (Vinay Cotton Waste Company v. The State of Tamil Nadu) and concluded that even though the seller and the purchaser might be in the same State, yet, there could be an inter-state sale. As regards the sale of ships, the Tribunal upheld the order of the Appellate Assistant Commissioner, holding that they were not taxable, since the same were outside the State of Tamil Nadu. Thus the Tribunal also upheld the deletion of penalty. 9. Apart from reiterating the grounds taken in the Tax Case Revisions, learned Advocate General appearing for the Revenue took us through the time charterparty agreement and the provisions of Section 3-A of the Tamil Nadu General Sales Tax Act and pointed out that in https://hcservices.ecourts.gov.in/hcservices/ terms of the charterparty agreement, M/s.Poompuhar Shipping Corporation had taken possession of the Vessels for use by the said party. Going by the amendment brought forth under Article 366(29A) of the Constitution and the corresponding provisions under the Tamil Nadu General Sales Tax Act under Section 3-A, treating the transfer of right to use as a deemed sale, with possession thus transferred to the other contracting party, the transaction clearly falls under the charging provision under Section 3A of the Act. He pointed out that the assessee had received consideration on the transfer of right to use the Vessel by the contracting party. He pointed out that it is not denied by the assessee that M/s.Poompuhar Shipping Corporation had had the possession to use the Vessel for transporting coal from Tuticorin to different places. On the admitted fact that the named Vessel was outside the State of Tamil Nadu for movement to other State, he submitted that it is clear that the cause of action had arisen in Chennai and hence, the same was liable to be taxed under Section 3A of the Act. He further pointed out that even though the Tribunal had accepted that the transaction is exigible to tax under Section 3(a) of the Central Sales Tax Act, it committed a serious error in granting the relief under Section 3A(2)(a) of the Tamil Nadu General Sales Tax Act when that was not the case of the assessee too. On the question as to whether the inter-State trade and commerce would qualify for deduction, on the facts thus fitting in with Section 3A of the Act, no exception could be taken to the order of the Assessing Officer in bringing them to tax under the provisions of the Tamil Nadu General Sales Tax Act. 10. In this connection, he placed reliance on the decision reported in [2000] 119 STC 182 (20th Century Finance Corporation Ltd. Vs. State of Maharashtra), particularly to paragraph 27, that on the admitted fact that there was a written contract between the parties, the place of execution shall be the place where transaction took place. Hence, the provisions of the Tamil Nadu General Sales Tax Act stood attracted. He also referred to the decisions reported in [1999] 113 STC 317 (SC) (Aggarwal Brothers Vs. State of Haryana and Another) and [2007] 8 VST 314 at page 328 (HLS Asia Ltd. Vs. State of Assam (Gauhati)), to contend that once possession is handed over to the contracting party, the provisions of Section 3A of the Tamil Nadu General Sales Tax Act stood clearly attracted. Going by the decision reported in [2000] 119 STC 182 (20th Century Finance Corporation Ltd. Vs. State of Maharashtra), it is immaterial where the goods were delivered. Since the transfer of right to use is a deemed sale and the lease is effective only when the ships are put into lessee's economic benefit, the assessee is not entitled to deduction under Section 3A(2)(a) of the Act. Learned Advocate General further submitted that when the assessee had not filed any Tax Case to challenge the order of the Tribunal as regards its finding on possession, on the admitted fact that possession had been given to the contracting party, the assessee cannot, in any manner, dispute the said aspect. https://hcservices.ecourts.gov.in/hcservices/ 11. As regards the sale of ships, learned Advocate General pointed out to Section 3(29) as well as Section 28 of the Merchant Shipping Act, 1958 and submitted that the port of transport assumes significance in the matter of fixing the chargeability under the provisions of the Act. 12. Countering the submissions of the learned Advocate General, Mr.C.Natarajan, learned senior counsel appearing for the assessee, made submission first on the fallacy in the reasoning of the Tribunal as to the applicability of Section 3A of the Tamil Nadu General Sales Tax Act to a time charterparty agreement. Making his submission on the maintainability of the above-said contention from the assessee in the Tax Case filed by the Revenue, he placed reliance on the decisions reported in [1998] 109 STC 205 (Sree Ayyanar Spg. & Wvg. Mills Ltd. Vs. State of Tamil Nadu (Mad.)), [1980] 121 ITR 572, at page 579 (Commissioner of Income Tax Vs. Damodaran (V) (SC)) and [1959] 10 STC 584 (The State of Madras Vs. Asher Textiles Ltd.), only to contend that the Tax Case Revisions before this Court are also in the nature of appeal proceedings; that even though the assessee might have succeeded on a different ground and hence there was no Tax Case by it, yet, in a Tax Case filed by the State, it is open to the assessee to place his objections as to the fallacy in the reasoning of the Tribunal that the time charter amounted to transfer of right to use goods and hence, deemed sale assessable under Section 3A of the Tamil Nadu General Sales Tax Act. He submitted that it is no doubt true that the State's appeal was dismissed by the Tribunal holding that the assessee was entitled to claim deduction under Section 3A(2)(a) of the Act. The contention of the assessee throughout had been that the provisions of Section 3A of the Act never stood attracted to the assessee's case. He stated that the fact of mere handing over of possession, by itself, did not attract the chargeability under Section 3A of the Act. Taking us through the nature of the different charterparty agreements and the distinction that time charterparty agreement has over voyage charter and bare boat charter, he placed reliance on the decisions of the Supreme Court reported in (1990) 3 SCC 481 (British India Steam Navigation Co. Ltd. Vs. Shanmughavilas Cashew Industries and Ors.) and that of this Court in the decision reported in 99 L.W. 517 (Transworld Shipping Services (I) (P) Ltd. Vs. Owners & Other) and submitted that in a time charterparty agreement, neither the legal ownership nor the beneficial ownership or equitable ownership, is given to the charterer. He further submitted that going by the clear distinction recognised world over between the voyage charter, time charter and charter by demise, the agreement being one of time charter, the question of giving effective possession to the charterer does not arise at all. Learned senior counsel further took us through the standard format of the time charterparty agreement and the decisions in particular on the aspect of transfer of possession under the time charterparty agreement, contending that all that had https://hcservices.ecourts.gov.in/hcservices/ been given in the time charterparty to the charterer was only a right to use the Vessel and the hours of operation. 13. In sum and substance, he submitted that all that the agreement herein provided for was only service by use of the Vessel in the context of charter hours. The word "possession", as used in the time charter, cannot be understood as had been normally understood. Thus going by the characteristics of the time charterparty agreement, the question of bringing the transaction under the provisions of Section 3A of the Act does not arise. In support of this contention, he placed reliance on the decisions of the Apex Court reported in [2000] 119 STC 182 (20th Century Finance Corporation Ltd. Vs. State of Maharashtra), [2002] 126 STC 114 (State of A.P. Vs. Rashtriya Ispat Nigam Ltd. (S.C.), [2006] 145 STC 91 (Bharat Sanchar Nigam Ltd. Vs. Union of India (S.C.), [2008] 16 VST 193 (Srei International Finance Ltd. Vs. State of Orissa and others) and [2011] 39 VST 257 (Hyderabad Engineering Industries Vs. State of Andhra Pradesh (SC)), that in the absence of any effective control and possession given to the charterer, the right of invoking Section 3A of the Act does not arise. 14. On what would constitute transfer of right to use, learned senior counsel also referred to the decisions reported in [1959] 10 STC 584 (The State of Madras Vs. Asher Textiles Ltd.), [1998] 109 STC 205 (Sree Ayyanar Spg. & Wvg. Mills Ltd. Vs. State of Tamil Nadu (Mad.)), [1980] 121 ITR 572, at page 579 (Commissioner of Income Tax Vs. Damodaran (V) (SC)), AIR 1970 SC 1 (Shankar Ramchandra Abhyankar Vs. Krishnaji Dattatreya Bapat) and [2008] 16 VST 193 (Srei International Finance Ltd. Vs. State of Orissa and others) and submitted that the transaction under the time charter was more in the nature of service rather than in the nature of deemed sale, to fit in to the concept of "transfer of right to use the property in goods", a phrase as has been judicially interpreted. He pointed out to the decision reported in [1984] 145 ITR 124 (Ker) (Commissioner of Gift- Tax vs H.H. Sethu Parvathi Bai) that in a contract of transfer of right to use, the contracting party must have the possession of the articles or goods to attract the charge Section 3A of the Act. Referring to various Clauses in the agreement and to the provisions under [The Indian] Carriage of Goods by Sea Act, 1925, he submitted that the Bill of Lading in respect of the goods transported rested only with the Master of the Ship, who happens to be the employee of the owner of the Vessel. Thus going by the definition of "owner" in Section 3(23) of Merchant Shipping Act and the decisions reported in [2004] 136 STC 519 (Great Eastern Shipping Company Vs. State of Karnataka and others), [2008] 16 VST 381 (Commissioner, Trade Tax, U.P., Lucknow Vs. Nand Transport Co.) and [2004] 135 STC 107 (Ker.) (Alpha Clays Vs. State of Kerala), possession given under the agreement has to be read in the context of the obligation under the agreement to render service. Placing reliance on the decision of the Supreme Court reported in [2000] 119 STC 182 (20th Century Finance https://hcservices.ecourts.gov.in/hcservices/ Corporation Ltd. Vs. State of Maharashtra), he submitted that in the absence of any effective control and delivery