Case: THE GREAT EASTERN SHIPPING CO. LTD Vs. STATE OF KARNATAKA

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 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 months3. 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 Act4. 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.

Reasoning: In Re: Section 5C of KST Act: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. 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 period33. When we peruse 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, in our considered opinion, merely by providing the staff, insurance, 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. 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. In our considered opinion 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 agreement34. 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), 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 vessel37. 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 purposeThere is no dispute with the proposition that the terms and conditions have to be seen as intended by parties, and it has to be based on the objectives, values, and policies that contract is designed to actualizeBased on stipulations, we have come to the conclusion that it is a case of transfer of right to use, which is a deemed sale. The decision buttresses our conclusion that the charter¬party has to be decided based on the stipulations43. We are not turning our 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 we are concerned in the instant matter, and that is a deemed sale as specified in ArticleOn the basis of the abovementioned decision, it was urged that all Charter Party Agreements are service. The submission cannot be accepted, as there is no general/invariable rule/law in this regard. 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 usePreceding discussion renders no help as it was not relating to the charter by demise. In the instant case control, excusive use is given to the charterer for six monthsAgain, the decision is based on the terms and conditions. Merely by employing the crew to render the service by the owner, is not decisive of the nature of charterMerely rendering service by the servants and crew to carry the goods will not make it a service contract. It depends upon the nature of each contract, and the terms and conditions agreed toThe decision lends no support in view of the terms and conditions of the charter-party in question and the general discussion. Otherwise, also, it does not espouse cause concerning whether there is a right to transfer the use of the vessel51. It is apparent from the discussion mentioned above that the services of the master and crew may or may not be superadded in the case of demise. Whether or not charter amount to demise would depend upon the particular terms of the charterIn 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 this case, full control has been given, and use is exclusively for the charterer. He has the right to use the space and burden. The discussion in Halsburys also makes it clear that each and every charter¬party need not be a service contract to provide services only53. The argument based upon the foreign courts decisions as to the charter agreements are only for service purpose, is not correct. As already discussed, even in the abovementioned foreign courts decisions, 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, as mentioned above, is not determinative, but the real crux is to be seen as per relevant conditions as agreed to between the parties54. When we consider the charter¬party in question in the context of applicable law, particularly in view of the constitutional provisions of Article 366(29A)(d), we find 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. We are of the considered opinion that 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 BSNL (supra)In our opinion, the submission cannot be accepted. Merely by the provisions mentioned above as 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 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 vesselIn Re: Situs of the agreement57. 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 taxIn 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. Thus, the liability to pay tax under the Act cannot be countenanced59. This Court also dealt with proposition whether the State can create a deemed fiction that in case the goods are for use within the State irrespective of the place where the contract of transfer of right to use the goods is made. That is not the question involved in the present matter. 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 20 th Century (supra) is binding on us and effectively repels the submission to the contraryThe said clarification as to service tax does not advance any cause as the levy of service tax is permissible or not is not the question to be examined by this Court. The question germane to the instant matter is not whether service tax can be levied. The question involved in the case is only to the extent whether the State of Karnataka can realize the sales tax on deemed sale under section 5C of the KST Act in view of the provisions contained in Article 366(29A) (d) of the Constitution. Thus, we refrain from going into the effect of the aforesaid notification/clarification as to service tax. That is not the question involved in the matterIn Re: Rights and liabilities in territorial waters63. 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 7 th Schedule of the Constitution. Entries 25 to 27 and 30 of List I, Entry 32 of List III, i.e., Concurrent List have been referred64. Learned senior counsel appearing for the parties have also referred to various decisions and the debates in the Constituent Assembly and answers given by Dr. B.R. Ambedkar as to scope of Article 293 of the Constitution. 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 7 th Schedule and in respect of fisheries Entry 21 of List II65. We need not go into the aforesaid questions. However, as the High Court has given a finding, and on being impleaded, coastal States have filed their response as notices were issued to them. We 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 our 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, we leave the question open and dilute the finding recorded by the High Court in this regard66. 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 20 th Century (supra), which has been affirmed in BSNL (supra) and has been followed in various other decisions of this CourtOnce it has gone against them; they cannot submit that this question should be left to be considered to be taken in another round of litigation for adjudication by the concerned tax authorities making an assessment. The submission is wholly untenable and stands repelled.