SC: State of Karnataka has right to levy sales tax on time – charter agreement

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The Hon’ble SC in the matter of The Great Eastern Shipping Co. Ltd. v. UOI [Civil Appeal No. 3383 of 2014 decided on December 4, 2019] held the time charter of tug vessel by the Petitioner to New Mangalore Port Trust under Charter Party Agreement constitutes deemed sale and State of Karnataka has right to levy sales tax on the same.

Facts:

The Great Eastern Shipping Co. Ltd. (“the Petitioners” or “the Company” or “the Contractor”) owns a tug (towing vessel, namely “Kumari Tarini”). The Company entered into a Charter Party Agreement (“the Agreement”) with New Mangalore Port Trust (“Port Trust” or “the Charterers”) on January 8, 1998. It was 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 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 Agreement.

Issues involved:

  • 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.
  • Whether it is open to the State of Karnataka to levy Sales Tax in view of the Time Charter Agreement dated January 8, 1998?
  • Whether the State of Karnataka has the competence to levy sales tax on the Agreement, which is effective within the territorial waters?

Petitioner’s contentions:

  • 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 Agreement was only to provide service therefore it did not attract tax under Section 5C of the KST Act and hence not liable to be registered as dealer under the provisions of KST Act.
  • 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 collect any tax on the hire charges received from the Port Trust.

Held:

The Hon’ble SC in the Civil Appeal No. 3383 of 2014 decided on December 4, 2019 held as under:

Section 5C of the KST Act

  • Section 2(t) of the KST Act makes it 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 KST Act also provides levy of tax on the transfer of the right to use any goods.
  • Article 366 (29A) (d) of the Constitution further makes it clear that 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.
  • As per the terms and conditions of the Agreement 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, 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. Thus, there is a transfer of right to use the vessel for the purposes specified in the agreement.
  • 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 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.
  • The test of the transfer of right to use tangible property as laid down in Bharat Sanchar Nigam Ltd. & Anr. Union of India & Ors., [(2006) 3 SCC 1] is satisfied in the present case.

Situs of the Agreement

  • In the 20th Century Finance Corporation Ltd. v. State of Maharashtra [2000 (6) SCC 12] has considered for Article 366(29A)(d) of the 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. 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. Thus, the liability to pay tax under the KST Act cannot be countenanced.

Rights and liabilities in territorial waters

  • 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 sales­tax under the provisions of the KST Act in view of the decision of this Court in 20th  Century (supra),   which   has   been   affirmed   in  BSNL  (supra)   and   has   been followed in various other decisions of this Court.

Conclusion:

The Agreement tantamount to a deemed sale as there was a transfer of right to use the vessel as provided in Article 366 (29A) (d) of the Constitution read with Section 5C or Section 2(j) of the KST Act. Thus, the transaction is liable to be taxed by the concerned authorities in the State of Karnataka.

Relevant provisions:

Section 5C of the KST Act:

“5C – Levy of tax on the transfer of the right to use any goods-

Notwithstanding 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.”

Section 2(t) of the KST Act:

“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 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.”

Article 366 (29A) (d) of the Constitution:

“366 (29A) tax on the sale or purchase of goods” includes-

(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;

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, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made”

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