Agreement to Transfer of Right to use the Vessel would amount to a ‘Deemed Sale’, liable to be Taxed: SC [Read Judgment]

In a recent ruling, the Supreme Court of India has ruled that, agreement to Transfer of Right to use the Vessel would amount to a ‘Deemed Sale’ and hence liable to be taxed under Karnataka Sales Tax Act.

A writ petition is filed before the Apex Court 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 court held that Agreement amount to a deemed sale as there was a transfer of right to use the vessel and the concerned authorities are competent to impose a tax on goods within the territorial area.

The appellant – The Great Eastern Shipping Co. Ltd. Owns a tug. The company entered into a Charter Party Agreement with New Mangalore Port Trust. It agreed to make available the services of tug, for the purposes of the Port Trust for six months The Assistant Commissioner of Income Tax 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, failing which he would be compelled to file charge­sheet against the company for the offence under section 29(2)(aaaa) of the KST Act.  The company in the reply 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 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. 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.

The company submitted that the Time Charter Agreement 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. 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. None of the maritime States has been given the territorial waters as part of their territory. 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 in view of the provisions inserted in Article 366(29A) (d), section 5C, of the KST Act, there is no room for doubt that there is a transfer of right to use the vessel

State of Karnataka submitted in the light of judgements in cases 20th Century Finance Corporation Ltd. V. State of Maharashtra and Baliram Waman Hiray v. Justice B.Lentin, 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 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”

While dismissing the appeal, the bench comprising of Justice Arun Mishra, Justice M.R. Shah and Justice B.R. Gavai held that the Charter Party Agreement amount 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.