Great Eastern Shipping Co. Ltd. v. State of Karnataka & Ors.
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 t he 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 Kar nataka
Sales Tax Act, 1957 (for short, “the KST Act”) read with Articl e 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 Gove rnment to
impose a sales tax in respect of the goods which are used w ithin the
territorial waters of India. The appellant owns a tug (tow ing vessel,
namely “Kumari Tarini”). The company entered into a Chart er Party
THE GREAT EASTERN SHIPPING CO. LTD. v.
STATE OF KARNATAKA & ORS.
Agreement with New Mangalore Port Trust on 8.1.1998. It agreed t o
make available the services of tug, for the purposes provi ded in the
agreement along with the master and other personnel of the com pany
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 th e 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 Ass istant
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 compelle d to
file charge-sheet against the company for the offence under se ction
29(2)(aaaa) of the KST Act. The Joint Commissioner of Incom e Tax
(Commercial Taxes) on a query being made by the company wrote that
he was not the competent authority to issue a clarificat ion regarding
liability or otherwise to pay tax under section 5C of the K ST 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 Hi gh Court
of Karnataka has rejected the submission raised by the ap pellant that
over the territorial waters State of Karnataka has no power. The learned
Single Judge was not justified in refusing to consider the questio n,
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 c ontract 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 ‘s ervice.’ Time
Charters world over are considered a contract of service . There is a
865
difference between the ‘right to use goods’ and ‘the trans fer of the
right to use goods.’ In case of a lease, there is a transfer o f an interest
in the property, whereas, in a licence, there is a mere r ight to use the
property. The Time Charter is recognised as an agreement in the nature
of pure service. They are entirely distinct from Bare boat Charter
Agreement or charter by demise. The charters are of three kin ds 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 ri ght 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 t he
vessel remain only with the owner through the master and crew. T he
delivery to the Port Trust is only a symbolic one, and the lega l and
physical possession of Tug continues to be with the company. Thu s,
the arrangement is a service, not a lease. Learned senio r counsel has
made reference to Scrutton on charter parties, Halsbur y’s Laws of
England, and have also relied upon various decisions.
6. Mr. Datar has further submitted that the Port Trust ca nnot
use the Tug for any purpose except, as mentioned in clause 3 of the
Agreement. The Port Trust cannot take away the Tug o utside 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 dis posal 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. F or the
performance of service, the Bank Guarantee also has to be g iven. 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 disp osal of the
Port Trust, does not mean that there is a transfer of right to use i t. The
expression must be understood in a proper context of the agr eement
itself. It would be absurd to suggest that the vessel can be partly in
possession of the Port Trust and partly with the co mpany. Any
interpretation otherwise of the contract may create ma yhem in the
scheme of indirect taxation in India.
THE GREAT EASTERN SHIPPING CO. LTD. v.
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]
8. Mr. Datar has also referred to international laws rela ting to
time charter and Bareboat Charter Agreements that h ave 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 clarif ication 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 th e 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 good s for use by
way of service without possession and control.’ The fact that time
charters are subject to service tax and bareboat charte rs 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 submitt ed 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 water s. An agreement
cannot be signed in the high seas.
10. It was submitted that the High Court has erred in tre ating
the territorial water as part of the territory of Karnataka, in contravention
to Article 297 as well as the provisions of the Terr itorial 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. T he 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 M arine
867
and Fishing (Regulation) Act, 1986 (Act of 1986) was passed by the
State legislature, within purview of powers as per Entr y 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 E ntry 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 territ orial waters
belong to Karnataka. The State cannot claim 12 nautical mil es as part
of its territory; otherwise, each maritime State can pa ss 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 t o 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 i n the
territorial waters is outside the legislative compete nce 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 List-
I cover the ports, and the agreement is with the Port Trus t. 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 i n 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 20 th
Century Finance Corporation Ltd. v. State of Mahara shtra , 2000
(6) SCC 12 is not attracted in which this Court was concerned wit h
the controversy as to which State could levy sales tax, whe re signing
of the contract, delivery of the goods or use of the ri ghts 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 conferr ed 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.]
nature of a time charter as approved by the New Yor k 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 ha s
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 shoul d 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 underst ood
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 tu g is always
operated, controlled, run, maintained, and insured by th e 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-part y 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 bunk ered by
them, shall carry specified cargo on an agreed voyage in exchange f or
freight, characteristically a “single payment.” Und er 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 Ship ping 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 s uch legal
right, it has to be to the exclusion of the transferor compa ny, which is
explicitly necessary to constitute a transfer of the right to use, which is
869
not merely a licence to use the goods. Service tax is al ready leviable
treating it as service agreement as such sales-tax cannot b e exacted
by the State Government. The territorial waters are within the exclusive
jurisdiction of the Union of India. In view of Arti cle 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 wat ers and
the seabed and subsoil underlying and air space over, such wa ters 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 occ urs
when the agreement has been entered into and not when the del ivery
of the goods takes place. He has referred to various cl auses of the
agreement to take home the aforesaid submission and has rel ied upon
20 th Century Finance Corporation Ltd. v. State of Mahara shtra
(supra), a decision of the Constitution Bench of this Court whi ch 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 re lied upon Dr.
Ambedkar’s speech in the Constituent Assembly that “State laws will
prevail over that area, whatever law you make will have i ts operation
over the area of three miles from the physical territory” a nd 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 tha n 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 secti on 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 cla uses 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 t erritorial
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.]
of India as per Entries 25 to 27 and 30 of List I and the T erritorial
Waters Act. The decision of the Karnataka High Court to the extent
of territorial waters, cannot be said to be correct. He ha s relied upon
the debates in the Constituent Assembly as to Article 297. In accordance
with Article 297(3), the Parliament has enacted the Territori al 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 constitute s
“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 w aters, 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
goods-
Notwithstanding anything contained in sub-section (1) or sub -
section (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 en tries in
column (3) of the said Schedule.”
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 considerati on,
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 tha n
in the course of inter-State trade or commerce or in the cour se
of import or export) shall be deemed, for the purposes of t his
Act, to have taken place in the State wherever the contra ct of
sale or purchase might have been made, if the goods are withi n
the State.
(i) n the case of specific or ascertained goods, at the ti me
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.]
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 (46 th 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,
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 trans fer 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 i nto
contains the conditions and instructions to tendere rs. The pre-
qualification criteria provide that the tenderer has to submit the
documents regarding ownership or possession of tug on b areboat/
committed demise charter hire of tugs. In case he does not ow n the
tug, he has to provide documents to prove that he has entered i nto 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 ye ars.
Tugs should be deployed at harbors at New Mangalore Port during the
contract period.
23. General conditions of the contract are also specified in the
tender documents. Paras 5(a), 6(ii) of the instructions to tende rers are
extracted hereunder:
“5. PRE-QUALIFICATION CRITERIA:
Tenderers must fulfill the following pre-qualification crite ria to
prove the techno-commercial competence and submit t he
documents in support thereof:
a) Tenderer should either own OR should be in possession of
tug on bareboat/committed demise charter hire or Tug(s). In case
the tenderer is not owning the tug(s), he should submit the valid
documents to prove that he has entered into a lease for chart er
hire of tug(s) for deploying them in NMPT during the period of
the contract.”
6. SUBMISSION OF TENDERS:
(a) ENVELOPE ‘A’ : The first Envelope shall be clearly marked
as ‘ENVELOPE NO.A.’ It shall contain the following documents
and information.
THE GREAT EASTERN SHIPPING CO. LTD. v.
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]
(i) x x x
(ii) Proof of ownership of Tug/Tugs of having entered into
a bareboat committed demise charter agreement and
other documents to be submitted, in accordance with
Clause 5(a).”
24. Instructions at paras 5, 6, 13 and 15 of General Conditions
of Contract are as under:
“5. PAYMENT OF TAXES:
The contractor shall pay all taxes, duties, etc. which he may be
liable to pay to State Government or Government of India or any
other authority under any law for the time being in forc e in
respect of or in accordance with the execution of a con tract.
The contractor shall further be liable to pay such an inc rease in
tax, levy, duty, etc. under existing law or which may be leviable
as a result of introduction of any laws, increase in taxes, l evy,
duty etc. or imposition of new taxes levy, duty etc.
6. INDEMNITY:
Notwithstanding that all reasonable and proper precautions may
have been taken by the Contractor at all times during the currency
of the agreement, the Contractor shall nevertheless be wholl y
responsible for all damages to the property of Charterers during
the currency of the agreement.”
“13. NOTIFICATION OF AWARD :
(a) x x x
(b) The Letter of Acceptance will be issued in the name of
the company which has purchased/submitted the tender.
(c) The time to count for delivery of tug shall commence
from the date of issue of the Letter of Acceptance.”
“15. PERFORMANCE GUARANTEE:
The successful tenderer shall furnish a bank guarantee from a
nationalized bank having its branch at Panambur/Mangalore, along
with the Charter Party Agreement, for compliance with the
contract terms and conditions, for an amount equivalent to 10%
of average annual contract value. This guarantee shall be va lid
875
for a total period of 9 months from the date of commencement
of service.”
25. Clauses 1 and 3 to 15 of the Special Conditions which are
relevant are extracted hereunder:
Special Conditions of Contract :
1. All operational costs, including wages (Minimum Wages
Act or any other Act, allowances, victualing, Insurance
(Personal), Hull and Machinery, Protection & Indemnity)
will be borne by the Contractor. Repairs, survey, and
other requirements to keep the tug operational will be
to the Contractor’s account and during any absence of
the tug from duty or inability of tug to perform for these
or any other reasons, will result in non payment of hire
charges, for the period the Tug was not made available
to the Charterer, on pro-rata basis and clause 16 of the
Charter Party Agreement shall apply.
2. xxxxxxx
3. On the date of commencement of the service, the tug
shall have completed all the necessary surveys and be
in possession of all valid certificates. Drydocking should
not be required for a minimum period of two years from
the date of delivery of Tug on charter.
4. A joint survey will be carried out at NMPT before the
tug is accepted for service in the port to assess the
condition, capability, and performance of the Tug and
the quantity of fuel, lubricants, etc.
5. On-hire and off-hire survey charges shall be borne
equally by the Charterer and the Contractors.
6. The Charterer will not be responsible for any damage
suffered by the tug due to failure of the tug or errors
of the Tug Master and crew or any reason whatsoever.
7. The contract will be for a period of 6 months with effect
from the date of commencement of the service. The
contract may be extendable for a further period of one
year at the discretion and option of NMPT. The
THE GREAT EASTERN SHIPPING CO. LTD. v.
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]
Charterer may exercise the option for an extension not
later than 30 days prior to the expiry of the first one
year period.
8. The Tug shall be made available for port operations
round the clock (24 hours a day) throughout the contract
period.
9. The Contractor shall comply with the Indian Merchant
Shipping Act and any other legislation related to the
operation of a tug in Indian territorial waters, and if of
foreign registry, shall obtain the appropriate licenses/
permission from the Directorate General of Shipping,
Mumbai for operating the tug in NMPT.
10. The Contractor has to pay the revised minimum wages
to the crew engaged by them. If the crew is engaged
for more than 8 hours, they should be compensated for
the extra work. The contractor has to take the insurance
policy covering all types of risks of all employees
engaged by them.
11. The Contractor shall carry out the works strictly in
accordance with the contract to the satisfaction of the
Deputy Conservator and shall comply with and adhere
strictly to his instructions and direction on any matter
(whether mentioned in the contract or not).
12. The tug shall be delivered within 30 days from the date
of issue of the Letter of Acceptance, in seaworthy and
efficient condition, and should be in possession of all
necessary certificates.
13. If the contractor fails to deliver the tug in all re spects
within 30 days, from the date of issue of Letter of
Acceptance, liquidated damages at the rate of Rs.
30,000/- per day will be levied on the Contractor, and if
the Tug is not delivered for operation within 60 days from
the date of issue of Letter of Acceptance, the contract
shall be canceled and EMD forfeited.
14. The Contractor shall obtain necessary clearance, as
required from D.G.Shipping, Ministry of Surface
877
Transport, etc. for deploying the tug for service in the
port before the tug is put into the service.
15. The steady/sustained Bollard pull of the Tug should not
be less than 40 tonnes at the time of delivery. Bollard
Pull test certificate should be from Classification society
and should not be more than 6 months old from the date
of delivery of the Tug to NMPT.”
26. The relevant clauses of agreement viz ., clauses 1, 3, 4, 5, 7,
10, 11, 12, 13, 14, 14 (a), 15, 16, 17, 21 & 22 read thus:
“ANNEXURE – I
CHARTER PARTY AGREEMENT
x x x
NOW THIS AGREEMENT WITNESSETH.
1. The Contractors let and the Charterer hire the good Vess el
…………….. for a period of six months with effect fro m
commencement of service. (Not a Sunday or a legal holid ay
unless taken over) the Vessel is delivered and placed at the
disposal of the Charterers and the contractor under takes to
maintain the vessel during the period of this Charter.
3. The Vessel to be used for various lawful services required by
Charterers including towing, docking and undocking of vessel at
New Mangalore Port round the clock (24 hours a day) and
throughout the contract period of six months including but not
limited to:
a) berthing and unberthing of vessels in port.
b) To stand by as fire float, Oil spill dispersant spray ing
boat, etc.
c) To assist in double banking by way of acting as docking
tug.
d) To maintain communication by VHF.
e) All other operations required in connection with docking/
undocking operations of vessels at Port and related to
Harbour conservancy and/or movement of vessels within
the Port and such other operations as are conventionally
performed by Ports.
THE GREAT EASTERN SHIPPING CO. LTD. v.
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]
In the event the tug being unable to perform any of the operations,
no hire to be paid by the Charterer to the Contractor and claus e
16 of the Charter Party Agreement shall apply.
4. CONTRACTORS TO PROVIDE:
Except as otherwise stated in this charter or a: may be a greed
from time to time the contractors shall provide and/ or pa y for
all requirements, cost, or expense relating to the vessel, her master
and crew, which, without prejudice to the generality of the
foregoing shall include.
(a) Drydocking, repairs, docking for the contractor,: Purpose, and
all expenses associated therewith, (b) provisions, wages (a s per
minimum wages act)etc., shipping and discharging fee; and all
other expenses of the Master, Officers and Crew (c)De ck ,
cabin and ongoing room stores (d) Adequate No. of Towing ropes
tested and certified (o) galley fuel, (f) Marine and w ar risk
insurance of the vessel (g) fumigation and deratisation exemption
certificate (h) all customs, or import duties arising in connection
with any of the foregoing (1) all taxes, duties, and levies including
but not limited to the taxes, duties, and levies imposed on the
income of the contractor, its employees or any levies, etc. on any
purchase made by the contractors and/or any penalties impose d
by any authorities from time to time.
5. Charterers to provide whilst the vessel is on hire fuel, lubricants,
water, electricity, port charges, and anti-pollutants. In cas e of
actual fire fighting as ordered by Charterer, the cost of foam /
chemicals consumed for the fire fighting will be reimbursed b y
the Charterer at actuals.
6. The Charterers at port of delivery and the Contractors at port
of redelivery to take over and pay for all fuel and lubrican ts
remaining in the vessel at Mangalore.
7. MAINTENANCE AND OPERATION:
(a) The vessel shall, during the charter period, be for all
purposes at the disposal of the Charterers and under the
control in every respect. The Contractor shall maintain
Vessel, machinery, appurtenances and spare parts in a
good state of repair, inefficient operating condition and
879
in accordance with good commercial maintenance
practice and they, shall keep the vessel with unexpired
classification of the class/MMD and with other required
certificates in force at all times.
(b) The Charterer shall have the use of all outfits, equipment,
and appliances on board at the time of delivery. The
contractor shall, from time to time during the charter
period, replace such items of equipment as shall be so
damaged or worn as to be unfit for use. The Contractor
shall carry out all repairs or replacement of any
damaged, worn or lost parts or equipment in such manner
(both as regards workmanship and quality of materials)
as not to diminish the value and efficiency of the vessel.
x x x
10. INSPECTION:
The Charterers shall have the right to require the vessel to be
dry-docked if the contractor is not docking vessel at n ormal
classification/statutory intervals. The fees for suc h dry dock/
inspection and survey shall be borne by the Contractor. All time
taken in respect of dry docking, inspection, survey, or repairs shall
not count as time on hire and shall not form part of the chart er
period, and clause 16 of the Charter Party Agreement shall apply.
11. INSURANCE:
(a) During the Charter period, the vessel shall be kep t
insured by the Contractors at their expense against
marine Hull & Machinery and war risks. The Charterers
and/ or Insurers shall not have any right of recovery or
subrogation against the Contractors on account of the
loss of any damage to the vessel or her machinery or
appurtenances covered by such Insurance or on account
of payments made to discharge claims against or
liabilities of the vessel or the Charterers covered by such
insurance.
(b) During the charter period, the vessel shall be ke pt
insured by the contractors at their expense against
protection and indemnity risks in such form as the
THE GREAT EASTERN SHIPPING CO. LTD. v.
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]
charterers shall in writing approve which approval shall
not be unreasonably withheld. If the contractors fail to
arrange and keep any of the insurances provided for
under the provisions of sub-clause (b) in the manner
described therein, the Charterers shall notify Contractors
whereupon the contractors shall rectify the position
within seven running days.
(c) In the event of any act or negligence on the part of the
contractors which may vitiate any claim under the
insurance herein provided, the contractor shall indemnify
the Charterers against all claims and demands which
would otherwise have been covered by such insurance.
12. The whole reach and burthen of the vessel, including lawful
deck capacity to be at the Charterers’ disposal, reserving proper
and sufficient space for the vessel’s master, Officer s, Crew,
tackles, apparel, furniture, provisions and stores.
13. The vessel should have a set of competent and qualified Tug
Master and Crew, as required by statutory regulation.
14. (a) The Master to execute the Charterer’s instructi ons with
the utmost dispatch and to render customary assistance with the
vessel’s crew. The Master to be under the order of the Charterers
as regards employment, agency, or other arrangements. The
Contractors to indemnify the Charterers against all consequences
or liabilities arising from the Master, Officers, or Agents for their
unlawful actions as well as from any irregularity in the vessel’s
papers.
(b) If the Charterers have the reason to be dissatisfie d with the
conduct or efficiency of the Master, Officer of the cre w, the
Contractors on receiving particulars of the complaint, promptl y
investigate the matter and, if necessary, shall make a cha nge in
the appointment. However, the Charterers shall have the right
to demand the changes of any Master or other crew, w hich
demand shall not be unreasonable.
15. The Charterer or their representatives will give tile Master
all instructions in English and the Master and Engineer to keep
full and correct logs in English, accessible to the Chartere rs.
881
16. PENALTY:
(a) If the vessel is inoperative and/or unavailable , and the
Charterer are denied use of the vessel, penalty will be l evied
from the time and date of such in operation/non-availability after
allowing any downtime to the credit of the contractors up to the
time and date of break down/in operation as follows, in addition
to non payment of charter hire charges.
From the time and date of such incorporation non—availability,
after following any downtime to the credit of the contractor up
to the time and date of break down/in operation
to 14 days ……………………… 15% of hire charges per day.
15 to 21 days …………………… 30% of hire charges per day.
Beyond 22 days………………..… 50% of hire charges per day.
In case of non-deployment of the tug beyond 30 days , the
Contract shall be liable for termination at the discreti on of the
charterer, and clause 22 of the Charter Party Agreement shal l
apply.
(b) If the vessel is required to be dry-docked as required by Class
(LRS/any other Classification Society), or for any other reason
whatsoever, the Contractors will be permitted to dry dock the
Vessel to maintain her Class with the prior approva l of Dy.
Conservator, but no hire charges will be paid for that period, and
penalty will be levied as per clause 16(a) above, if applica ble.
17. The Contractors shall bear all expenses for mobilization and
demobilization.
x x x x x
21. The Contractors shall be liable for pollution damage and the
cost of clean up which has occurred due to the Contractor’s and/
or the Contractor’s personnel by willful, wanton, intentional acts
or omissions or gross negligence which cause or all ow the
discharge, spills or leaks of any pollutants from any s ource
whatsoever.
THE GREAT EASTERN SHIPPING CO. LTD. v.
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]
22. PERFORMANCE GUARANTEE:
The Contractors shall furnish to the Charterers, within 30 days
from the date of issue of the Letter of Acceptance, for chartering
the vessel, an irrevocable and unconditional Bank Guarantee from
a Nationalized Bank for a sum equivalent to 10% of the average
annual contract value computed for a period of one year charter.
This irrevocable Bank Guarantee shall be valid for a total period
of 30 months from the date of commencement of service. In the
event of the Contractors failing to honor any of the commitments
entered ‘into under this agreement, the Charterers shall hav e an
unconditional option under guarantee to invoke the said Bank
Guarantee and to claim the amount from the Bank. The Bank
shall be obliged to make payment to the Charterer upon demand.”
27. As per the Charter Party Agreement, Annexure I, the ves sel
has been taken by the Port Trust for various lawful service s 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 c harterer to
provide fuel, lubricants, water, electricity, port charge s, and for anti-
pollutants. The provisions for maintenance and opera tion are also
contained in the agreement. As per clause 7, the vessel sh all during
the charter period be for all purposes at the disposal of t he 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 ti me of
delivery. Insurance charges have to be borne by the co ntractor. The
vessel shall be kept insured by the contractors at their expense a gainst
protection and indemnity risks. The whole reach and burthen of the
vessel, including the lawful capacity to be kept at the charterer’s
disposal.
28. A performance guarantee has to be furnished by the
contractor to the charterer to the contract under clause 22.
29. It is apparent that to submit a tender, the tenderer should either
own or should be in possession of a Tug on bareboat/committed demise
charter hire of Tug(s), and in case he is not the owner, he has to p rove
that he has entered into a lease for charter hire of t ug for deploying
them at Mangalore Port during the period of the contract. N o doubt
883
about it that as provided in para 6(vii) of the instructions to the tenderers
that the Tugs should be manned appropriately as per the minimum
requirement of the Harbour Craft Rules during the contract period, and
this is the responsibility of the tenderer. As per clause 6 of the General
Conditions of Contract, the contractor is wholly responsibl e for all
damages to the property of the charterer during the curre ncy of the
agreement. The indemnity clause indemnifies, charterer for any damage
to its property; is to be provided by the contractor.
30. Condition 1 of the special conditions states that all operational
costs, including wages to be borne by the contractor. To k eep the tug
operational has to be on the contractor’s account. As per c ondition 3
of the special conditions, the tug shall have completed all the necessary
surveys and be in possession of all valid certificates. A joint survey to
be carried out at the Port Trust before the tug is accepte d for service
in the Port to assess the condition. Capability and perfor mance of the
vessel and the quantity of fuel, lubricants, etc. On-hire and of f-hire
survey charges shall be borne equally by the charte rer and the
contractors as provided in condition 5. The charter er will not be
responsible for any damage suffered by the tug is p rovided in
condition 6.
31. The contract would be for six months and extendable for one
year at the discretion and option of the Port Trust. The tug s hall be
made available for port operations round the clock th roughout the
contract period as per condition No.8. The contractor has to comply
with the provisions of the Indian Merchant Shipping Act and the la w
as to licenses/permissions to operate tug. It is the liability of the
contractor to pay revised minimum wages to its staff. The c ontractor
shall carry out the work strictly to the satisfaction of the Deputy
Conservator, and the tug shall be delivered within 30 days from the date
of issue of the letter of acceptance.
32. The charter agreement also provides round the clock services
throughout the contract period in clause 3 at the disposal of the p ort.
The contractor has to pay the expenses for the master and c rew. As
per clause 5, the charterer has to provide whilst the v essel is on hire,
fuel, lubricants, water, electricity, port charges, and anti-pollutants. As
per clause 7(a), the vessel shall be for all purposes at t he disposal of
the charterer and under the control of the contractor, and as provided
in clause 7(b) of the charter agreement, the charterer s hall have the
THE GREAT EASTERN SHIPPING CO. LTD. v.
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]
use of all outfits, equipment, and appliances. No doubt about it that
insurance is the liability of the contractor. The indemnificat ion also is
the liability of the contractor under the agreement. The whole reach
and burthen of a vessel, including lawful deck capacity, is at the disposal
of the charterer, reserving proper and sufficient space for the vessel’s
masters, officers, etc. A performance guarantee has also to be
submitted.
33. When we peruse the various terms and conditions of the
Charter Party Agreement (Annexure I), clause 1 provide s 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, e quipment, 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 ex penses and staff
are to be provided by the contractor, which is not suffic ient 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 consid ered opinion
there is not even an iota of doubt that under the charter a greement
coupled with the instructions to tenderers, general conditions and special
conditions for the contract as specified in the tender document s and
charter-party clauses, there is a transfer of right to use the vessel for
the purposes specified in the agreement.
34. 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,
885
the contractor has no right to give the vessel for use to a nyone 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, t here is no
room for doubt that there is a transfer of right to use the vessel.
35. What constitutes the transfer of right to use tangible property
has been dealt with in various decisions. In Bharat Sanchar Nigam
Ltd. & Anr. v. Union of India & Ors ., (2006) 3 SCC 1, this Court
has observed thus:
“42. All the sub-clauses of Article 366(29-A) serve to bri ng
transactions where one or more of the essential ingredients of a
sale, as defined in the Sale of Goods Act, 1930 are absent within
the ambit of purchase and sales for levy of sales tax. To t his
extent, only is the principle enunciated in State of Madras v.
Gannon Dunkerley Ltd. & Co. (Madras) Ltd., AIR 1958 SC
560 ( sic modified). The amendment especially allows specific
composite contracts viz. works contracts [sub-clause ( b)]; hire-
purchase contracts [sub-clause ( c)], catering contracts [sub-
clause ( e)] by legal fiction to be divisible contracts where the
sale element could be isolated and be subjected to sales tax.
44. Of all the different kinds of composite transaction s, the
drafters of the Forty-sixth Amendment chose three sp ecific
situations, a works contract, a hire-purchase contrac t, and a
catering contract to bring them within the fiction of a deem ed
sale. Of these three, the first and third involve a kind of service
and sale at the same time. Apart from these two cases w here
splitting of the service and supply has been constitu tionally
permitted in sub-clauses ( b) and ( f) of clause (29-A) of Article
366, there is no other service which has been permitted to be so
split. For example, the sub-clauses of Article 366(29-A) do not
cover hospital services. Therefore, if during the treatme nt of a
patient in a hospital, he or she is given a pill, can the Sales Tax
Authorities tax the transaction as a sale? Doctors, lawyers, and
other professionals render service in the course of which can it
be said that there is a sale of goods when a doctor writes o ut
and hands over a prescription or a lawyer drafts a document and
delivers it to his/her client? Strictly speaking, with the payment
of fees, consideration does pass from the patient or client to t he
doctor or lawyer for the documents in both cases.
THE GREAT EASTERN SHIPPING CO. LTD. v.
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]
45. The reason why these services do not involve a sale for the
purposes of Entry 54 of List II is, as we see it, for reasons
ultimately attributable to the principles enunciated in Gannon
Dunkerley case , namely, if there is an instrument of contract
which may be composite in form in any case other than th e
exceptions in Article 366(29-A), unless the transaction in tru th
represents two distinct and separate contracts and is discernible
as such, then the State would not have the power to separate
the agreement to sell from the agreement to render service , and
impose tax on the sale. The test, therefore, for co mposite
contracts other than those mentioned in Article 366 (29-A)
continues to be: Did the parties have in mind or intend separ ate
rights arising out of the sale of goods? If there was no such
intention, there is no sale even if the contract co uld be
disintegrated. The test for deciding whether a contract falls int o
one category or the other is to as what is “the substance of the
contract.” We will, for want of a better phrase, call this the
dominant nature test.”
50. What are the “goods” in a sales transaction, theref ore,
remains primarily a matter of contract and intention. The se ller
and such purchaser would have to be ad idem as to the subject-
matter of sale or purchase. The court would have to arrive at a
conclusion as to what the parties had intended when they entered
into a particular transaction of sale, as being the sub ject-matter
of sale or purchase. In arriving at a conclusion, the c ourt would
have to approach the matter from the point of view of a
reasonable person of average intelligence.
73. With respect, the decision in 20th Century Finance Corpn.
Ltd. v. State of Maharashtra, (2000) 6 SCC 12, cannot be cited
as authority for the proposition that delivery of possession of the
goods is not a necessary concomitant for completing a transaction
of sale for the purposes of Article 366(29-A)( d) of the
Constitution. In that decision, the Court had to determine where
the taxable event for the purposes of sales tax took place in the
context of sub-clause ( d) of Article 366(29-A). Some States had
levied a tax on the transfer of the right to use goods on the
location of goods at the time of their use irrespective of the place
where the agreement for such transfer of right to use such goods
was made. The other States levied a tax upon delivery of the
887
goods in the State pursuant to agreements of transfer while some
other States levied a tax on deemed sales on the premise t hat
the agreement for the transfer of the right to use had been
executed within that State (vide para 2 of the judg ment as
reported). This Court upheld the third view, namely, merely that
the transfer of the right to use took place where the agre ements
were executed. In these circumstances, the Court said that: (SCC
p. 42, para 28)
“28 . No authority of this Court has been shown on behalf of the
respondents that there would be no completed transfer of right
to use goods unless the goods are delivered. Thus, the delivery
of goods cannot constitute a basis for the levy of tax on the
transfer of right to use any goods . We are, therefore, of the
view that where the goods are in existence , the taxable event
on the transfer of the right to use goods occurs when a contr act
is executed between the lessor and the lessee and situs of sal e
of such a deemed sale would be the place where the contrac t in
respect thereof is executed. Thus, where goods to be transferred
are available , and a written contract is executed between the
parties, it is at that point situs of taxable event on the transfer of
right to use goods would occur, and situs of sale of such a
transaction would be the place where the contract is executed .”
(emphasis ours)
74. In determining the situs of the transfer of the right to us e
the goods, the Court did not say that the delivery of the goods
was inessential for the purposes of completing the transfe r of
the right to use. The emphasized portions in the quoted passage
evidences that the goods must be available when the transfe r of
the right to use the goods takes place. The Court also recognized
that for oral contracts, the situs of the transfer might be where
the goods are delivered (see para 26 of the judgment).
75. In our opinion, the essence of the right under Article 366(29-
A)( d) is that it relates to user of goods. It may be that the a ctual
delivery of the goods is not necessary for effecting the trans fer
of the right to use the goods, but the goods must be availa ble at
the time of transfer, must be deliverable and delivered a t some
stage. It is assumed, at the time of execution of any a greement
to transfer the right to use, that the goods are availa ble and
THE GREAT EASTERN SHIPPING CO. LTD. v.
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]
deliverable. If the goods, or what is claimed to be goods by the
respondents, are not deliverable at all by the service provid ers
to the subscribers, the question of the right to use those g oods,
would not arise.”
36. In a concurring opinion, Dr. A R Lakshmanan, J. in BSNL
(supra) observed:
“97. To constitute a transaction for the transfer of the right to
use the goods, the transaction must have the following attributes:
(a) there must be goods available for delivery;
(b) there must be a consensus ad idem as to the identity of
the goods;
(c) the transferee should have a legal right to use the
goods—consequently, all legal consequences of such use
including any permissions or licenses required therefor
should be available to the transferee;
(d) for the period during which the transferee has such legal
right, it has to be the exclusion to the transferor—this
is the necessary concomitant of the plain language of
the statute viz. a “transfer of the right to use” and not
merely a license to use the goods;
(e) having transferred the right to use the goods during the
period for which it is to be transferred, the owner cannot
again transfer the same rights to others.”
37. The Charter Party Agreement qualifies the test lai d down
by this Court. Applying the substance of the contract and the nomi nal
nature test, the vessel was available when the agreement for the right
to use the goods has taken place. The vessel was available a t the time
of transfer, deliverable, and delivered and was at the exclusive disposal
for six months round the clock with the charterer port trus t. The use
of license and permission was at the disposal of the ch arterer 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 p erson for any
other purpose.
38. In DLF Universal Ltd. & Anr. v. Director, Town, and
Country Planning Department, Haryana & Ors ., (2010) 14 SCC 1
has been relied upon for interpretation of the contract thu s:
889
“12. The agreement with the Governor required to be entered
into by the owners of the land intending to set up a colony is
structured and regulated by Rule 11 of the Rules. The terms and
conditions of the agreement and the obligations of the owner of
the land and the covenants thereof are prescribed by statuto ry
rules. The contract between the owner of the land and its buyers,
unlike the agreement entered by the owner of the land with the
Government, is not required to be in any statutory form. It is a
contract between the two willing contracting parties whereunder
the terms and conditions are mutually agreed upon. The covenants
decide the mutual obligations between the owner of the land and
the buyers thereof.
Interpretation of contract
13. It is a settled principle in law that a contract is i nterpreted
according to its purpose. The purpose of a contract is the
interests, objectives, values, policy that the contract is desi gned
to actualize. It comprises the joint intent of the parti es. Every
such contract expresses the autonomy of the contractual parties’
private will. It creates reasonable, legally protected expectations
between the parties and reliance on its results. Consistent w ith
the character of purposive interpretation, the court is required to
determine the ultimate purpose of a contract primarily by the joint
intent of the parties at the time the contract so formed. It is not
the intent of a single party; it is the joint intent of both the parties
and the joint intent of the parties is to be discovered from the
entirety of the contract and the circumstances surrounding it s
formation.
14. As is stated in Anson’s Law of Contract :
“a basic principle of the common law of contract is that the parties
are free to determine for themselves what primary oblig ations
they will accept…. Today, the position is seen in a different light.
Freedom of contract is generally regarded as a reasonable, social,
ideal only to the extent that equality of bargaining power between
the contracting parties can be assumed, and no injury is don e to
the interests of the community at large.”
There is no dispute with the proposition that the t erms and
conditions have to be seen as intended by parties, and it has to be based
THE GREAT EASTERN SHIPPING CO. LTD. v.
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]
on the objectives, values, and policies that contract is designed to
actualize.
39. Reliance has also been placed on the State of A.P. & Anr.
v. Rashtriya Ispat Nigam Ltd ., (2002) 3 SCC 314 thus:
“3. The respondent is owning Visakhapatnam Steel Project. For
the purpose of the steel project, it allotted different works to
contractors. The respondent undertook to supply sophisticate d
machinery to the contractors for the purpose of being used in
the execution of the contracted works and received charges f or
the same. The appellant made a provisional assessment l evying
a tax on hire charges under Section 5-E of the Act. The
respondent filed a writ petition seeking a declaration that the tax
levied, exercising power under Section 5-E of the Act on the hire
charges collected during the period 1988-89, was illegal and
unconstitutional. The appellant filed a counter-affidavit in the writ
petition contending that the respondent was lending highly
sophisticated and valuable imported machinery to the contractors
engaged in the execution of the project work on specified hire
charges; the machinery was given in possession of the contractor
and he was responsible for any loss or damage to it and in view
of the terms and conditions contained in the agreement, there
was transfer of property in goods for use and on the amounts
collected by the respondent as charges for lending machinery
attracted tax liability under Section 5-E of the Act.
4. The High Court after scrutiny and close examination of the
clauses contained in the agreement and looking to the agreement
as a whole, in order to determine the nature of the transacti on,
concluded that the transactions between the responden t and
contractors did not involve transfer of right to use the machinery
in favour of the contractors and in the absence of satisfy ing the
essential requirement of Section 5-E of the Act, i.e., trans fer of
right to use machinery, the hire charges collected by the
respondent from the contractors were not exigible to sales ta x.
On a careful reading and analysis of the various clauses contained
in the agreement and, in particular, looking to clauses 1, 5, 7, 13,
and 14, it becomes clear that the transaction did not involve a
transfer of right to use the machinery in favor of contrac tors.
The High Court was right in arriving at such a conclusion. In
891
the impugned order, it is stated, and rightly so in our opinion, that
the effective control of the machinery even while the machinery
was in use of the contractor was that of the respon dent
Company; the contractor was not free to make use of the
machinery for the works other than the project work of the
respondent or move it out during the period the machinery was
in his use; the condition that the contractor would be responsible
for the custody of the machinery while it was on the site did not
militate against the respondent’s possession and control of the
machinery. It may also be noticed that even the Appellate Deputy
Commissioner, Kakinada, in the order dated 15-11-1999 in regard
to Assessment Years 1986-87 and 1987-88, held that under the
terms and conditions of the agreement, there was no transfer of
right to use the machinery in favor of the contractor. Although it
cannot be said that the appellant was estopped from contending
otherwise in regard to Assessment Year 1988-89, it is an
additional factor and circumstance, which supports the stand of
the respondent.”
It was a case of transfer of right to use the machinery. The High
Court held that there was no transfer of right to use the m achinery. In
the absence of satisfying the essential requirement of s ection 5-E of
the Andhra Pradesh General Sales Tax Act, 1957. What distinguishes
the aforesaid case on facts is that the effective control of the machinery
even while it was in use of the contractor, was that of the r espondent
company; the contractor was not free to make use of the mach inery
for the works other than the project work of the respondent or move it
out during the period the machinery was in his use; the conditi on that
the contractor was responsible for the custody of the machiner y, did
not militate against the company’s possession and control. It was a case
of hiring of the machinery for a specific purpose on speci fied hire
charges. The Charter Party Agreement is different in the present case.
40. Reliance has been placed on British India Steam Navigation
Co. Ltd. v. Shanmughavilas Cashew Industries & Ors ., (1990) 3 SCC
481 thus:
“47 . Whether a charterparty operates as a demise or not depends
on the stipulations of the charterparty. The princi pal test is
whether the master is the employee of the owner or the
charterer. In other words, whether the master becom es the
THE GREAT EASTERN SHIPPING CO. LTD. v.
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]
employee of the charterer or continues to be the ow ner’s
employee. Where the charterparty is by way of demise , the
charterer may employ ship in carrying either his goods or those
of others. Where the charterparty does not operate as a de mise,
the charterer’s right vis-a-vis the owner depends upon the terms
of the contract. “The contract of carriage is persona l to the
charterer, and he cannot call upon the shipowner to undertake
liabilities to third persons or transfer to third persons his liabilities
to the shipowner unless the contract so provides.” A charterparty
has to be construed so as to give effect, as far as poss ible, to
the intention of the parties as expressed in the written contract.
The stipulations of charterparty may be incorporated in a bill of
lading so that they are thereby binding on the parties. It is an
accepted principle that when stipulations of the charterparty are
expressly incorporated, they become terms of the co ntract
contained in the bill of lading, and they can be enforced by or
against the shipper, consignee or endorsee. The effect of a bi ll
of lading depends upon the circumstances of the particular case,
of which the most important is the position of the shipper and of
the holder. Where there is a bill of lading relating to the goods,
the terms of the contract on which the goods are carried are
prima facie to be ascertained from the bill of lading. H owever,
if a shipper chose to receive a bill of lading in a spec ific form
without protest, he should ordinarily be bound by it. Thus, it
cannot be said that the bill of lading is not conclusive eviden ce
of its terms and the persons executing it is not necessarily bound
by all its stipulations, unless he repudiates them on the grounds
that, as he did not know, and could not reasonably be expected
to know, of their existence, his assent to them is not to be inferred
from his acceptance of the bill of lading without objection. Where
there is a charterparty, the bill of lading is prima facie, as between
the shipowner and an endorsee, the contract on which the goods
are carried. This is so when the endorsee is ignorant of the terms
of the charterparty, and maybe so even if he knows of the m. As
between the shipowner and the charterer, the bill of lading may,
in some cases, have the effect of modifying the contra ct as
contained in the charterparty, although, in general , the
charterparty will prevail and the bill of lading will operate solely
as an acknowledgment of receipt.
893
50 . There is nothing to show that the charterparty was by way
of demise. Pacta dant legem contractui — the stipulations of
parties constitute the law of the contract. Agreements g ive the
law to the contract. Clause 4, having been a stipulation in the
contract evidenced by the bills of lading the parties, could not
resile therefrom. It is not clear whether the English Carria ge of
Goods by Sea Act, 1924, or the Indian Carriage of Goods by Sea
Act, 1925, was applied by the High Court. The articles and the
rules referred to are to be found in the Schedule to the Indi an
Act the Rules whereunder were not applicable to the fact s of
the case. The dispute could not have been decided p artly
according to municipal law and partly according to English law.
The English law was not proved before the court, according to
law.”
It has been observed by this Court in British India Steam
Navigation Co. Ltd . (supra) that whether a charter-party agreement
operates as a demise or not, depends upon the stipulations of the charter-
party. In the case of demise, the charterer may employ ship in carrying
either his own goods or those of others. A charter-pa rty has to be
construed to give effect, as far as possible, to the intenti on of parties
as expressed in a written contract. When stipulations of th e charter-
party are expressly incorporated, they become terms of the contract.
There was nothing to show that the Charter Party Agreeme nt was by
way of demise. Maxim “ Pacta dant legem contractui” has been relied
upon, which means that the stipulations of the parties constitute the law
of the contract. The case was remitted for trial. The decision in British
India (supra) lays down whether a charter-party should operate as a
demise or not, depends on the stipulations of the charter-part y. Based
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 stipulations.
41. In the Union of India v. Gosalia Shipping (Pvt.) Ltd .,
(1978) 3 SCC 23 question of charter-party arose, the terms of whi ch
indicated that the charterers agreed to pay the owners for use and hire
of the ship and not on account of carriage of goods. It was held that it
was not governed by section 172 of the Income Tax Act, 1961, because
the section creates a tax liability in respect of occasi onal shipping.
However, what is important is that this Court has considered the charter-
THE GREAT EASTERN SHIPPING CO. LTD. v.
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]
party and observed that all charter parties are not contracts of carriage.
Sometimes ship itself and control over her working and navigation are
transferred, for the time being to persons who use her. In s uch a case,
the contract is very much of letting the ship. This Court has observed
thus:
“ 10 . The weakness of the argument advanced by the appellant’s
Counsel consists in its assumption that the charter-party has to
be an agreement for the carriage of something like go ods,
passengers, livestock, or mail. A contract by charter-pa rty, says
B.C. Mitra in his Law of Carriage by Sea, Tagore Law Lectures
1972, “is a contract by which an entire ship or some principa l
part thereof is let to a merchant who is called the charter er, for
the conveyance of goods on a determined voyage to one or more
places, or until the expiration of a specified period; in the former
case it is called a ‘voyage charterparty’ and in the latt er a ‘time
charterparty’. A time charter, according to the author, is “one in
which the ownership and also possession of the ship remains with
the original owner and whose remuneration of hire is generally
calculated at a monthly rate on the tonnage of the ship. Whi le a
voyage charter is a contract to carry specified goods on a defined
voyage on remuneration or freight usually calculated according
to the quantity of cargo carried,”. In Carver’s Carriage b y Sea,
Eleventh Ed., 1963, p. 263, it is stated that “all charter-part ies
are not contracts of carriage. Sometimes the ship itself and the
control over her working and navigation are transferred for the
time being to the persons who use her. In such cases the contract
is really one of letting the ship, and, subject to the express terms
of the charterparty, the liabilities of the shipown er and the
charterer to one another are to be determined by the law which
relates to the hiring of chattels, and not by reference to the
liabilities of carriers and shippers”. According to Scrutton on
Charter-parties, Seventeenth Ed., 1964, p.4, charter-parties fall
into three main categories: (i) charters by demise, (ii) time
charters (not by way of demise), and (ii) voyage ch arters.
“Sometimes categories (i) and (ii) are both referred to as time
charters as distinguished from category (iii), and they have this
in common that the ship owner’s remuneration is reckoned by
the time during which the charterer is entitled to th e use of
services of his ship.” The contract in the instant case is of the
895
nature of time charter-party, whether there is a demise of the
ship or not being immaterial. Clause 4 of the chart er-party
provides for the payment by the charterers “for the use and hire”
of the vessel at the rate of U.S. 4.50 dollars per ton on vessel’s
total deadweight carrying capacity, per calendar mo nth,
commencing on and from the date of delivery of the ship, “hire
to continue until the hour of the day of her re-delivery”. Thes e
clauses of the charterparty shows that the Aluminium Company
took the ship from its owners on a time charterparty, t hat the
owners were entitled to payment for the use and hire of the ship,
that the amount was payable irrespective of what use the ship
was put to by the time charterers or indeed, whether it wa s put
to any use at all and that no part of the payment can be said t o
have been made on account of the carriage of goods. Similes
can be misleading, but if a hall is hired for a marriage, the charges
payable to the owner of the place are for the use and hire of
the place, not on account of marriage.”
42. The decision of the High Court of Madras in State of Tamil
Nadu & Ors. v. Tvl. Essar Shipping Ltd. & Ors ., (2012) 47 VST
209 (Mad.) has been referred to on behalf of the appellants. The H igh
Court of Madras has observed that whether the charte r-party is a
voyage charter-party or time charter-party or charter by demise or not,
depends upon the intention of the parties. It has been obse rved that
certain words in the charter-party are used in the standard fo rms of
the time charter, such as ‘let,’ ‘hire,’ ‘delivery,’ and ‘redelivery,’ there
is no hiring in the real sense. The High Court observed:
“55. In the light of the various clauses evidencing the natur e of
transaction as one of rendering of service only, we ha ve no
hesitation in accepting the plea of the assessee that t he use of
the terms ‘let’, ‘hire’, ‘delivery’ and ‘redelivery’ are not to be
understood in the literal sense of giving effective control a nd
possession to the charterer. On the other hand, the same are
referable to the time when the charter begins and ends. Even if
the charterers have the right to direct the course that the Vessel
will take so long as the Master and the crew remain the servants
of the owner and the parties have understood that there is no
demise of the ship in favour of the charterer, we do not f ind
any legal ground to sustain the assessment.
THE GREAT EASTERN SHIPPING CO. LTD. v.
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]
59. We have no hesitation in accepting the plea of the ass essee
that the Tribunal committed a serious error in its understandi ng
of what possession would mean, in the face of the time charte r
agreement. Going by the decision of the Apex Court reported
in (1990) 3 SCC 481 British India Steam Navigation Co. Ltd.
v. Shanmughavilas Cashew Industries and Ors . and the well
laid down principles on the concept of time charter party
agreement, we hold that the essence of the agreement between
the assessee and M/s. Poompuhar Shipping Corporation is one
of services; hence, not amenable under the provisions of Section
3A of the Act.”
In the abovesaid decision, reliance has been placed on the case
of ‘The Hill Harmony’ reported in (2001) 1 LR 147 at page 156. When
the ship can be arrested, was also discussed. It was obser ved that the
relationship of an agency is to be established between the own er and
the charterer. The question was of recovery of the amount due and
payable by the charterer. Following discussion has been m ade:
“36 . Dealing with the nature of rights that a charterer has over
the Vessel under a time charter, in the decision reported in (1978)
3 SCC 23 Union of India vs. Gosalia Shipping (Pvt.) Ltd., the
Supreme Court quoted from ‘Law of Carriage by Sea’ by B.C.
Mitra, that ‘a time charter is one in which the ownership a nd
also possession of the ship remain in the original owner, whos e
remuneration or hire is generally calculated at a monthly rate on
the tonnage of the ship, while a voyage charter is a contra ct to
carry specified goods on a defined voyage on a remuneration or
freight usually calculated according to the quantity of cargo
carried.’ Thus the consistent view of the Courts in India and
elsewhere is that under the time charter, the owners provide
services for the charterer with their ship, their officer s, and the
crew for an agreed period of time. In the decision reporte d in
2001 (1) LR 147 @ page 156 in the case of The Hill Harmony,
Lord Hobhouse said, the owner who time charters his ship,
transfers to the time charterer in return for payment of hire, ‘the
right to exploit the earning capacity of the vessel.’ It was pointed
out that despite the fact that certain keywords are used in most
standard forms of the time charter such as ‘let’, ‘hire,’ ‘delivery’
and ‘redelivery,’ there is no hiring in the true sense’ (Refer: The
London Explorer 1971 (1) LR 523). Keeping in line with the well
897
established and well-understood characteristic features on ti me
charter, in the decision reported in 99 L.W. 517 Trans world
Shipping Services (I) (P) Ltd. Vs. Owners & Other, this Cour t
held that in respect of an interim prayer made for arrest of the
ship, for the alleged amount due and payable by the charterer to
his agent, neither the legal ownership nor the beneficial ownership
or equitable ownership was in the hands of the charterer in the
case of time charter agreement. Thus this Court viewed tha t for
the amount due and payable by the charterer, unless the
relationship of agency had been established between the owne r
and the charterer, the question of arrest of the ship did not arise.
Time charterparty not being the demise of the ship but a contract
for hire of services, thus viewed as not resulting in giving
possession to the charterer to result in delivery or red elivery as
is normally understood or to be literally construed as though on
the delivery of the Vessel, the owner lost control to resume the
same on the expiry of the period of time charter. Courts have
also viewed that ‘delivery’ and ‘redelivery’ are not apt words to
express the obligations of either party to the other unde r the
contract. So long as the contract does not go as a charter by
demise, when the owner gives the services through the ship along
with her captain and the crew to transport cargo to the directions
of the charterer for a specific period on certain term s, the only
redelivery possible is to make such arrangements as would enable
the owner to put the ship for his own convenience. Nevertheless,
throughout the service extended, the Master and crew remain
the servants of the owner, to represent his interest in the Vessel.
Thus the word ‘delivery’ normally understood in a time charter
party denotes the charterer giving directions to the course that
the ship will take to determine the voyage. In the decision reported
in 1991 (1) LLR 100 @ 107 (The ‘Peonia’), referring to the
decision reported in 1975 (1) LLR 422, the English Court pointed
out ‘references to ‘delivery’ and ‘redelivery’ are strictly
inaccurate, since, the vessel never leaves the possession of the
shipowner, but the expressions are conventionally used to describe
the time when the period of the charter begins and ends (The
Berge Tasta, (1975) 1 LR. 422 at p. 424).”
43. We are not turning our decision upon the terms used like ‘let’,
‘hire’, ‘delivery’ and ‘re-delivery’ but on the other esse ntial terms of
THE GREAT EASTERN SHIPPING CO. LTD. v.
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]
the Charter Party Agreement entered in the instant case w hich clearly
makes out that there is a transfer of exclusive right to u se the vessel
which is a deemed sale and is liable to tax under the KST A ct. In the
instant case, full control of the vessel had been given to th e charterer
to use exclusively for six months, and delivery had also been made.
The use by charterer exclusively for six months makes it o ut 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 sal e as
specified in Article 366(29A)(d). On the basis of the abovementioned
decision, it was urged that all Charter Party Agreements a re service
agreements. 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 use.
44. A decision by the Court of Appeal In re: An Arbitration
between sea and land securities Ltd. and William Dickinson & Co.
Ltd. The Alresford , (1942) 2 KB 65, has been relied upon in which
the question arose of certain cesser of hire for the period oc cupied in
fitting the degaussing apparatus. Since the employment of the ship did
not come within the terms of clause 12 of the charter-party , nor did it
constitute a breach of contract by the owners. The fact that the owners
had the degaussing apparatus fitted while it was waiting to load her
cargo did not result in her being withdrawn. It has been obser ved at
the outset that the respective rights and obligations of th e two parties
to the time charter party must depend upon its written t erms, for there
is no special law applicable to the particular form of co ntract. The
concept of demise charter parties is becoming an obsolete form of time
charter party. The modern form of time charter party is one under which
shipowner agrees with the time charterer that during a ce rtain named
period, the shipowner will render service as a carrier by his servants
and crew to carry the goods which are put on board his ship by t he
time charterer. The words like, delivery, letting, or hiring are not
determinative of the nature of the contract, there is no quarrel with the
said proposition. However, the crux is that it would depend upon the
terms and conditions of the charter-party.
45. Reliance has also been placed on Scandinavian Trading
Tanker Co. A.B. v. Flota Petrolera Ecuatoriana , (1983) 2 LLR 253,
wherein following observations have been made:
899
“A time charter, unless it is a charter by demise, with which your
Lordships are not here concerned, transfers to the charterer no
interest in or right to possession of the vessel; It is a contract
for services to be rendered to the charterer by the shipowner
through the use of the vessel by the shipowner’s own servant s,
the master and the crew, acting in accordance with such
directions as to the cargoes to be loaded and the voyages to be
undertaken as by the terms of the charter-party the ch arterer is
entitled to give to them. Being a contract for services it is thus
the very prototype of a contract of which before the fusi on of
law and equity, a Court would never grant specific performance.
Clarke v. Price, (1819) 2 Wils. Ch. 157; Lumley v. W agner,
(1852) 1 Dc G.M. & G. 604. In the event of failure to render
the promised services, the party to whom they were to be
rendered would be left to pursue such remedies in damages for
breach of contract as he might have at law. But as an unbr oken
line of uniform authority in this House, from Tankexpress (ubi
sup.) to The Chikuma [1981] 1 Lloyd’s Rep. 371; [1981] 1
W.L.R. 314 has held, if the withdrawal clause so provides, the
shipowner is entitled to withdraw the services of the vessel from
the charterer if the latter fails to pay an installme nt of hire in
precise compliance with the provisions of the charter. So the
shipowner commits no breach of contract if he does so, and the
charterer has no remedy in damages against him.”
Preceding 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 months.
46. Reliance has also been placed on Port Line, Ltd. v. Ben Line
Steamers, Ltd . (1958) 1 AER 787 in which the court has observed:
“The plaintiffs’ charterparty with Silver Line was a gr oss time
charter, not one by demise. It gave the plaintiffs no r ight of
property in or to possession of the vessel. It was one by which
Silver Line agreed with the plaintiffs that for thirty months from
Mar. 9, 1955, they would render services by their servants a nd
crew to carry the goods which were put on the vessel by the
plaintiffs.”
Again, the decision is based on the terms and conditions. Merely
by employing the crew to render the service by the owne r, is not
decisive of the nature of charter.
THE GREAT EASTERN SHIPPING CO. LTD. v.
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]
47. In Torvald Klaveness A/S v. Arni Maritime Corporation
(The Gregos”), 1993 (2) LLR 335, following observations have been
made:
“A time charter is a contract under which the owner agrees with
the charterer that during a certain specified period he will render
services by his servants and crew to carry goods which are p ut
on board his ship by the time charterer. The charterer is free to
decide, within the terms of the charter party, what use he will
make of the vessel for its duration, e.g., by carrying goods himself
or by sub-chartering. The vessel never leaves the posse ssion of
the owner, so that references to delivery and redelivery ar e not
strictly accurate, but those expressions are regularl y used to
identify the time when the charter begins and ends.”
Merely rendering service by the servants and crew to carry t he
goods will not make it a service contract. It depends upon the nature
of each contract, and the terms and conditions agreed to. What is of
relevance for our purpose is whether there is a transfer of ri ght to use.
48. Reliance has also been placed on Skibsaktieselskapet
Snefonn, Skibsaksjeselskapet Bergehus, and Sig. Berge sen D.Y. &
Co. v. Kawasaki Kisen Kaisha Ltd. (The “Berge Tasta ”), (1975) 1
LLR 422 in which as to time charter which is not a demise following
observations have been made:
“Under a time charter-party, not being a charter by way of demise,
the shipowner undertakes to make the vessel available t o the
charterer for the purposes of undertaking ballast and loaded
voyages as required by the charterer within a specified area over
a stated period. The shipowner’s remuneration known as “time
chartered freight” or “hire” is at a fixed rate for a unit of time
regardless of how the vessel is used by the charterer. Ris k of
delay thus falls on the charterer. The shipowner meets the cost
of maintaining the vessel and paying the crew’s wages, but t he
cost of fuel and port charges fall on the charterer.
At the end of the period covered by the time charter the vessel
is said to be “redelivered” to the shipowner. This is a misleading
term for the vessel never leaves the possession of the shipowner.
All that is meant is that the time charter then ends in exactly the
901
same way as a voyage charter-party ends when the last carg o
is discharged.”
49. In Hyundai Merchant Marine Co. Ltd. v. Gesuri
Chartering Co. Ltd. (The “Peonia ”), (1991) 1 LLR 100, the following
observations have been relied upon:
“The immediate legal background to the dispute is not now
controversial. A time charter-party such as this is a c ontract by
which the shipowner agrees with the time charterer that dur ing
a certain named period he will render services by his se rvants
and crew to carry the goods which are put on board his ship by
the time charterer (Sea and Land Securities Ltd. v. William
Dickinson and Co. Ltd., (1942) 72 I.I.L. Rep. 159 at p. 162, col.
2; [1942] 2 K.B. 65 at p. 69). It is for the time cha rterer to
decide, within the terms of the charter-party, what use h e will
make of the vessel. References to delivery and redeliver y are
strictly inaccurate since the vessel never leaves the poss ession
of the shipowner, but the expressions are conventionally used to
describe the time when the period of the charter begins and ends
(The Berge Tasta)”.
The 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 r ight to
transfer the use of the vessel.
50. In Scrutton on Charterparties and Bills of Lading , 20th
Edn., Section IV dealing with the charter parties, following is the relevant
discussion:
“Article 28 – Charterparties by Demise – Classificatio n
CHARTERPARTIES may be categorized according to whether
or not they amount to a demise or lease of the ship.
A charter by demise operates as a lease of the ship i tself, to
which the services of the master and crew may or may not b e
superadded. The charterer becomes for the time the owner of
the vessel; the master and crew become to all intents his servants,
and through them the possession of the ship is in him
THE GREAT EASTERN SHIPPING CO. LTD. v.
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]
Under a charter not by demise, on the other hand, the shipowner
agrees with the charterer to render services by his maste r and
crew to carry the goods which are put on board his ship by or
on behalf of the charterer. In this case, notwithsta nding the
temporary right of the charterer to have his goods loaded and
conveyed in the vessel, the ownership and also the possession
of the ship remain in the original owner through the master and
crew, who continue to be his servants. …
Whether or not the charter amounts to a demise must turn on
the particular terms of the charter. “The question depends, where
other things are not in the way, upon this: whether the owner
has by the charter, where there is a charter, parted with the whole
possession and control of the ship, and to this extent, that he has
given to the charterer a power and right independent of him, and
without reference to him to do what he pleases with regard to
the captain, the crew, and the management and employment of
the ship. That has been called a letting or demise of the ship.
The right expression is that it is a parting with t he whole
possession and control of the ship.”
“Time charters almost always contain expressions su ch as
“letting,” “hiring,” “hire,” “delivery,” and “redelivery,” which are
really apt only in charters by demise. These expressions serve
to distinguish such charters from voyage charters, but they do
not in themselves characterize such charters as cha rters by
demise.”
51. It is apparent from the discussion mentioned above that the
services of the master and crew may or may not be superad ded in the
case of demise. Whether or not charter amount to de mise would
depend upon the particular terms of the charter.
52. Halsbury’s Laws of England, 4 th Edn., Vol. 43, has also been
referred to in which the following discussion has been made:
“402. Meaning of „contract by charterparty.“ A contract by a
charterparty is a contract by which an entire ship or some
principal part of her is let to a merchant, called „the charterer,“
for the conveyance of goods on a determined voyage to one or
more places, or until the expiration of a specified peri od. In the
903
first case, it is called a „voyage charterparty,“ and in the second
a „time charterparty.“ Such a contract may operate as a demise
of the ship herself, to which the services of the master and crew
may or may not be added, or it may confer on the chartere r
nothing more than the right to have his goods conveyed by a
particular ship, and, as subsidiary to it, to have the use of the
ship and the services of the master and crew.
403. Charterparty by demise. Charterparties by way of demis e
are of two kinds: (1) charter without master or crew, or „bareboat
charter“, where the hull is the subject matter of the charterparty,
and (2) charter with master and crew, under which t he ship
passes to the charterer in a state fit for the purposes of mercantile
adventure. In both cases the charterer becomes for the time being
the owner of the ship; the master and crew are, or become to
all intents and purposes, his employees, and through them, the
possession of the ship is in him. The owner, on the other hand,
has divested himself of all control either over the ship or over
the master and crew, his sole right being to receive the stipulated
hire and to take back the ship when the charterparty come s to
an end. During the currency of the charterparty, therefore , the
owner is under no liability to third persons whose goods may have
been conveyed upon the demised ship or who may have done
work or supplied stores for her, and those persons must look only
to the charterer who has taken his place.
404. Charterparty which is not a demise. Although a charterparty
which does not operate as a demoise confers on the charterer
the temporary right to have his goods loaded and conveyed in
the ship, the ownership remains in the original owner, and through
the master and crew, who continue to be his employees, th e
possession of the ship also remains in him. Therefo re, the
existence of the charterparty does not necessarily dive st the
owner of liability to third persons whose goods may have been
conveyed on the ship, nor does it deprive him of his rights as
owner.
405. Test whether charterparty operates as demise. Whethe r a
charterparty operates as a demise or not is a quest ion of
construction, to be determined by reference to the language of
THE GREAT EASTERN SHIPPING CO. LTD. v.
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]
the particular charterparty. The principal test to be a pplied is
whether the master is the employee of the owner or of the
charterer. Even where the charterparty provides for the
nomination of the master by the charterer, he must be rega rded
as the owner’s employee if the effect of the charterparty is that
he is to be paid or dismissed by the owner and that he is to be
subject to the owner’s orders as to navigation. However, if the
charterparty is otherwise to be regarded as a demis e, it is
immaterial that the owner reserves the right, in ce rtain
circumstances, of removing the master and appointing another
in his place, or of appointing the chief engineer.”
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 th e 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 Halsbury’s also makes it clear that
each and every charter-party need not be a service contract to provide
services only.
53. 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 court’s 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 t erms 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 parties.
54. 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 Const itution
of India and provisions of section 5C reflecting the said intendm ent.
We are of the considered opinion that there is transfer of r ight to use
exclusively given to charterer for six months, and the ves sel has been
kept under the exclusive control. The charterer qualifies t he test laid
down by this court in BSNL (supra).
905
55. Mr. Mohan Parasaran, learned senior counsel has also
referred to New Mangalore Port Harbour Craft Rules, 1976. He has
drawn our attention to Rule 4 relating to licensing of Harbour Craft
according to which an application has to be filed by the owner, furnishing
the required information concerning the vessel/harbor craft. A license
has to be produced by Tindal, as per Rule 6, whenever called up on by
Deputy Conservator. He has also referred to Rule 8 which prov ides
that in case of change of ownership of licensed harbor craft, the license
shall cease to be valid on expiry of six days. Changes in crew or
carrying capacity of licensed harbor craft has to be re ported to the
Deputy Conservator. In case of any alteration in the cabin ca pacity,
the licence is liable to be cancelled. The submissi on made by learned
senior counsel is that as per the scheme of the Harbour Craft Rules;
also, the owner retains the control of the vessel. In our opini on, the
submission cannot be accepted. Merely by the provisions menti oned
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. H e does
not cease to be an owner by transferring right to use t he 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 d ecide the
question whether there is a transfer of right to use the vesse l.
In Re: Situs of the agreement
56. The next question for consideration is whether the State of
Karnataka has power under section 5C of the Act to exact sales-tax
though charter-party has been signed in Mangalore in view of the f act
that vessel was to be used in territorial waters, it was open to the Sta te
Government to impose and realize the sales-tax on the basis of situs
of agreement.
57. 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. In this regard decision of Constitution Bench of this Court in 20 th
Century (supra) is relevant, in which this Court has discusse d the
THE GREAT EASTERN SHIPPING CO. LTD. v.
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]
concept of deemed sale by a legal fiction created a s per Article
366(29A) (e to f) and observed:
“21. It may be noted that the transactions contemplated under
sub-clauses ( a) to ( f) of clause (29-A) of Article 366 are not
actual sales within the meaning of “sale” but are deemed sales
by a legal fiction created therein. The situs of sale ca n only be
fixed either by the appropriate legislature or by judge-made law,
and there are no settled principles for determining the situs of
sale. There are conflicting views on this question. One of the
principles providing a situs of sale was engrafted in the
explanation to clause (1)( a) of Article 286, as it existed prior to
the Constitution (Sixth Amendment) Act, which provided that the
situs of sale would be where the goods are delivere d for
consumption. The second view is, the situs of sale would be the
place where the contract is concluded. The third view is that the
place where the goods are sold or delivered would be the situs
of sale. The fourth view is that where the essential ingredie nts,
which complete a sale, are found in the majority would be the
situs of sale. There would be no difficulty in finding out a situs
of sale where it has been provided by legal fiction by the
appropriate legislature. In the present case, we do not find that
Parliament has, by creating any fiction, fixed the location of sale
in case of the transfer of right to use goods. We, therefore, have
to look into the decisional law.
24. The aforesaid decisions unambiguously laid down that where
situs of sale has not been fixed or covered by any legal ficti on
created by the appropriate legislature, the location of sale would
be the place where the property in goods passes. Th e
Constitution Bench held that it was the passing of the proper ty
within the State that was intended to be fastened on f or the
purpose of determining whether the sale was “inside ” or
“outside” the State.
25. It was then urged on behalf of the respondents that it is the
location of goods where they are put to use, which would furnish
the situs of sale. According to them, there would be no completed
transfer of right to use goods until the goods are delivered. W e
have traced the legislative history of sales tax in this country only
907
to show that excepting where the appropriate legisl ature by
creating legal fiction fixed the situs of sale on location or delivery
of goods for consumption like the omitted explanation to Article
286(1)( a), there is no authority to show that mere location or
delivery of goods would be the situs of sale. Here, we would
like to cite an appropriate illustration given in the decision in the
Bengal Immunity case, AIR 1955 SC 661, only to resolve the
controversy before us. The illustration given is as under:
“Take, for instance, a case where both the seller and the buyer
reside and carry on business in Gurgaon in the State of Punja b.
Let us say that the seller has a godown in the State of De lhi
where his goods are stored and that the buyer also has a re tail
shop at Connaught Circus also in the State of Delhi. The buyer
and the seller enter into a contract at Gurgaon for the sale of
certain goods and a term of the contract is that th e goods
contracted to be sold will be actually delivered from the seller’s
godown to the buyer’s retail shop, both in the State of Delhi, for
consumption in the State of Delhi. Pursuant to this contract made
in Gurgaon in the State of Punjab, the buyer pays the full price
of the goods at Gurgaon and the seller hands over to the buyer
also at Gurgaon a delivery order addressed to the s eller’s
godown-keeper in Delhi to deliver the goods to the buyer’s retail
shop.
As a direct result of this sale, the seller’s godown-keeper, on the
presentation of this delivery order, actually delivers the goods to
the buyer’s retail shop at Connaught Circus for consumption in
the State of Delhi. On one view of the law, the ‘situs’ of s uch a
sale would be Gurgaon. We need not decide that it is, because
that type of case is not before us and there may be other v iews
to consider, but it is certainly a possible view.
It is also possible to hold that this is not inter-St ate trade or
commerce, because there is no movement of goods across a
State boundary. Again, we need not decide that because that also
may be controversial. But given these two postulate s, the
transaction would fall squarely within the explanation, and yet it
would not come within clause (2), for there is no movement of
the goods across the border of any State and both the seller and
THE GREAT EASTERN SHIPPING CO. LTD. v.
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]
the buyer are in the same place. Surely, the explanation will, ‘in
praesenti,’ govern such cases irrespective of whether Parliament
has lifted the ban under clause (2).
If these postulates are accepted then by virtue of claus e (1)( a)
read with the explanation the State of Delhi alone will be entitled
to impose a tax on such a sale or purchase and the State of
Punjab will be precluded from doing so by reason of the fictional
‘situs’ assigned to such a sale or purchase by the explanati on,
although the contract was made, price was paid, and symbolical
or constructive delivery of the goods by the handing over of the
delivery order took place in Gurgaon in the State of Punjab.”
We, therefore, find that the location or delivery of goods within
the State cannot be made a basis for levy of tax on sales of goods.
Under general law, merely because the goods are located or del ivery
of which has been effected for use within the State would not be the
situs of deemed sale for levy of tax if the transfer of ri ght to use has
taken place in another State. Therefore, if the contention on behalf of
the respondents that there would be no completed transfer of r ight to
use goods till the goods are delivered is to prevail, then the respondents
are further required to show that the contract of transfer of right to
use goods is also entered into in the said State in which the goods are
located or delivered for use. The State cannot levy a tax on the basis
that one of the events in the chain of events has taken place within the
State. The delivery of goods may be one of the elements of trans fer
of right to use, but the same would not be the condition precedent for
a contract of transfer of right to use goods. Where a party has entered
into a formal contract, and the goods are available for delivery
irrespective of the place where they have located the situs of such sale
would be where the property in goods passes, namely, where the
contract is entered into.”
This Court has observed that 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 goo ds are
available for delivery irrespective of the place where they ar e located,
the situs of sale where the property or goods passes, would be at the
place where the contract has been entered into.
909
58. This Court in the 20 th Century (supra) has considered for
Article 366(29A)(d), the taxable event is the transfer of the right to
use the goods regardless of when or whether the goods are delive red
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 t he goods are
delivered under the right to transfer to use them. In the p resent case,
the agreement has been admittedly signed in Mangalore, and the vessel
is used in the territorial waters, which is as per the sub mission 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 lia bility to
pay tax under the Act cannot be countenanced. This Court in the 20 th
Century (supra) has observed:
“26. The next question that arises for consideration is, where is
the taxable event on the transfer of the right to use any g oods.
Article 366(29-A)( d) empowers the State Legislature to enact
a law imposing sales tax on the transfer of the right to use goods.
The various sub-clauses of clause (29-A) of Article 36 6 permit
the imposition of tax thus: sub-clause ( a) on transfer of property
in goods; sub-clause ( b) on transfer of property in goods; sub-
clause ( c) on delivery of goods; sub-clause ( d) on transfer of
the right to use goods; sub-clause ( e) on supply of goods; and
sub-clause ( f) on supply of services. The words “and such
transfer, delivery or supply …” in the latter portion of clause (29-
A), therefore, refer to the words transfer, delivery, and suppl y,
as applicable, used in the various sub-clauses. Thus, the transfer
of goods will be a deemed sale in the cases of sub-clau ses ( a)
and ( b), the delivery of goods will be a deemed sale in case of
sub-clause ( c), the supply of goods and services respectively will
be deemed sales in the cases of sub-clauses ( e) and ( f) and the
transfer of the right to use any goods will be a deemed sale in
the case of sub-clause ( d). Clause (29-A) cannot, in our view,
be read as implying that the tax under sub-clause ( d) is to be
imposed not on the transfer of the right to use goods but on the
delivery of the goods for use. Nor, in our view, can a transfer of
the right to use goods in sub-clause ( d) of clause (29-A) be
equated with the third sort of bailment referred to in Bailment
by Palmer, 1979 Edn., p. 88. The third sort referred to there is
when goods are left with the bailee to be used by him for hir e,
THE GREAT EASTERN SHIPPING CO. LTD. v.
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]
which implies the transfer of the goods to the bailee. In the case
of sub-clause ( d), the goods are not required to be left with the
transferee. All that is required is that there is a tra nsfer of the
right to use the goods. In our view, therefore, on a plain
construction of sub-clause ( d) of clause (29-A), the taxable event
is the transfer of the right to use the goods regardless of w hen
or whether the goods are delivered for use. What is required is
that the goods should be in existence so that they may be used.
And further contract in respect thereof is also required to be
executed. Given that, the locus of the deemed sale is the pla ce
where the right to use the goods is transferred. Where the goods
are when the right to use them is transferred is of no re levance
to the locus of the deemed sale. Also of no relevance to the
deemed sale is where the goods are delivered for use pursuant
to the transfer of the right to use them, though it may be that in
the case of an oral or implied transfer of the right to use goods,
it is affected by the delivery of the goods.
27. Article 366(29-A)( d) further shows that the levy of tax is
not on the use of goods but on the transfer of the right to use
goods. The right to use goods accrues only on account of the
transfer of right. In other words, the right to use arises only on
the transfer of such a right, and unless there is a transfer of the
right, the right to use does not arise. Therefore, it is the transfer,
which is a sine qua non for the right to use any goods. If the
goods are available, the transfer of the right to use take s place
when the contract in respect thereof is executed. As s oon as
the contract is executed, the right is vested in the lessee . Thus,
the situs of a taxable event of such a tax would be the transf er
that legally transfers the right to use goods. In other wor ds, if
the goods are available irrespective of the fact where the goods
are located, and a written contract is entered into between t he
parties, the taxable event on such a deemed sale would be the
execution of the contract for the transfer of right to use g oods.
But in case of an oral or implied transfer of the right to use goods,
it may be affected by the delivery of the goods.
28. No authority of this Court has been shown on behalf of the
respondents that there would be no completed transfer of right
911
to use goods unless the goods are delivered. Thus, the delivery
of goods cannot constitute a basis for the levy of tax on the
transfer of right to use any goods. We are, therefore, of the view
that where the goods are in existence, the taxable event on t he
transfer of the right to use goods occurs when a con tract is
executed between the lessor and the lessee and situs of sale of
such a deemed sale would be the place where the contract in
respect thereof is executed. Thus, where goods to be transferred
are available, and a written contract is executed betw een the
parties, it is at that point situs of a taxable event on t he transfer
of right to use goods would occur, and situs of sale of such a
transaction would be the place where the contract is executed .”
40. A perusal of Explanation 3( d) to Section 2( t) shows that the
transfer of right to use any goods would be deemed to have taken
place in the State of Karnataka if the goods are for use w ithin
the State irrespective of the place where the contract of transfer
of right to use the goods is executed. The said Explanation 3( d)
to Section 2( t) widens the ambit of the definition of “sale” by
including sales outside the State of Karnataka and the sales which
occasioned import of goods into India, merely on the premise that
goods put to use are located within the State of Kar nataka
irrespective of the place where the contract or transfer has taken
place. This explanation is in excess of legislative power u nder
Entry 54 of List II of the Seventh Schedule. Another important
aspect to notice is that the provision of Section 5(3 ), which
provides for single-point taxation, has been omitte d in its
application to Section 5-C. Therefore, Explanation 3( d) to Section
2( t) of the Act has to be held in excess of the legislative pow er
conferred on the State Legislature under Entry 54 of List II of
the Seventh Schedule of the Constitution following the reasoning
given while discussing the Maharashtra Act. We, according ly,
direct that Explanation 3( d) to Section 2( t) of the Act shall be
read down to this effect that it would not be applicable to t he
transactions of transfer of right to use any goods if such deemed
sale is ( i) an outside sale; ( ii) sale in course of the import of the
goods into or export of the goods out of the territory of India;
and ( iii) an inter-State sale. ”
THE GREAT EASTERN SHIPPING CO. LTD. v.
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]
59. This Court also dealt with proposition whether the State can
create a deemed fiction that in case the goods are for use wit hin the
State irrespective of the place where the contract of tra nsfer 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 sal e is in
Mangalore, and the decision of a Constitution Bench of this Co urt in
the 20 th Century (supra) is binding on us and effectively repels the
submission to the contrary.
60. In Aggarwal Brothers v. State of Haryana & Anr ., (1999)
9 SCC 182, the submission was raised that to make a deemed sale there
must be a legal transfer of goods or that the transaction must b e like a
lease, was not accepted by this Court. It has distinguished t he transfer
of the right to use the goods for consideration. Following observations
have been made:
“3. The argument of learned counsel for the assessees goes thus:
Entry 54 of Part II of Schedule VII of the Constitution enabl es
the State to levy “taxes on the sale or purchase of goods oth er
than newspapers …”. Article 366 sets down definitions for the
purposes of the Constitution. Clause (29-A) thereof refers to “tax
on the sale or purchase of goods,” and it 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”.
In the submission of learned counsel, having regard to Entry 54
of Part II of Schedule VII, the transfer contemplated b y sub-
clause ( d) of clause (29-A) of Article 366 is a legal transfer of
the right in the goods. It has to be a transfer of goods. It has to
be permanent. It has to be something like a lease. The giving of
goods on hire is not such a transfer and, therefore, falls outside
the ambit of sub-clause ( d) of clause (29-A) of Article 366.
Learned counsel referred to para 40 of the judgment of this Court
in Builders’ Assn. of India v. Union of India , (1989) 2 SCC
645 which says: (SCC p. 675)
“As the Constitution exists today the power of the States to levy
taxes on sales and purchases of goods including the ‘deemed’
913
sales and purchases of goods under clause (29-A) of Article 366
is to be found only in Entry 54 and not outside it.”
4. The language used in Section 2( j)( iv ) and 2( l)( iv ) of the said
Act is the language used in Article 366(29-A)( d), Section 2( j)
dealing with the purchase and Section 2( l) with the sale. The
argument before us is, therefore, not an argument o n the
constitutionality of these provisions of the said Act but of their
interpretation and the application thereof to the fact s of the
present case.
5. The said Act defines “sale” to mean the transfer of pr operty
in goods for cash or deferred payment or other valu able
consideration and includes the
“transfer of the right to use any goods for any pur pose
(whether or not for a specified period) for cash, d eferred
payment or other valuable consideration.”
Such transfer of the right to use goods for consider ation is
“deemed” to be a sale. The provision expressly speaks of the
“transfer of the right to use goods” and not of the transfer of
goods. There is, therefore, no merit in the submission that to b e
deemed sale within the meaning of the provision as mention ed
above of the said Act, there must be a legal transfer of goods or
that the transaction must be like a lease.
6. Where there is a transfer of a right to use goods for a
consideration, the requirement of the above-mentioned provision
of the said Act is satisfied, and there is deemed to be a sale. In
the instant case, the assessees owned shuttering. T hey
transferred the shuttering for consideration to builders and building
contractors for use in the construction of buildings. There can,
therefore, be no doubt that the requirements of a deemed sale
within the meaning of the above-mentioned provision of the said
Act are satisfied.”
61. A reference has also been made to the decision in the State
of Orissa & Anr. v. Asiatic Gases Ltd ., (2007) 5 SCC 766 in which
what is the nature of, transfer of right to use the g oods, has been
discussed and Aggarwal Brothers (supra) has been relied upon, thus:
THE GREAT EASTERN SHIPPING CO. LTD. v.
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]
“8. Lastly, it is important to bear in mind that Section 2( g)( iv )
was placed on the statute in terms of Article 366(29-A)( d) of
the Constitution. In Aggarwal Bros. v. State of Haryana, (1999)
9 SCC 182 a Division Bench of this Court has held that t he
provision under Section 2( l)( iv ) of the Haryana General Sales
Tax Act, 1973 [which was similar to Section 2( g)( iv ) of this Act]
expressly spoke of “transfer of the right to use goods” and not
“transfer of goods”. In that matter, it was argued on behal f of
the assessee that in the case of a deemed sale within the meaning
of Section 2( l)( iv ), there must be a legal transfer of goods. This
argument was rejected by this Court, stating that the levy of tax
was not on transfer of the goods itself, but the levy was on the
transfer of the right to use such goods for consideration. In our
view, the judgment of this Court in Aggarwal case would
squarely apply to the present case. In the present case, as stated
above, the cylinders filled with medical oxygen/industrial gas
were loaned to the customers. The loan was free fro m the
payment of charges for 14 days. The over retention charges were
levied after 14 days. In the circumstances, the levy was on the
transfer of the right to use the goods for consideration.”
62. It was submitted on behalf of appellant that the amendm ent
to Finance Act had been made and a clarification dated 10.5.2008 has
been issued that service tax is to be levied on the Charter Party
Agreement. Hence it was urged that it cannot be treated as t hat of
deemed sale. The said clarification as to service tax does not advance
any cause as the levy of service tax is permissible or n ot is not the
question to be examined by this Court. The question germane to the
instant matter is not whether service tax can be levie d. 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 matter.
In Re: Rights and liabilities in territorial waters
63. With respect to territorial waters, to what extent the coastal
State can exercise power has been considered by the High C ourt, and
915
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 l andmass that is
the baseline. Article 297 has been considered by the High C ourt 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., Concurren t List have been
referred.
64. Learned senior counsel appearing for the parties have also
referred to various decisions and the debates in th e Constituent
Assembly and answers given by Dr. B.R. Ambedkar as to scope of
Article 293 of the Constitution. The High Court has also reli ed 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 II.
65. We need not go into the aforesaid questions. However, as
the High Court has given a finding, and on being impleaded, coas tal
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 Sta tes and
the Central Government as to territorial waters at all because of our
finding concerning exaction of tax under the KST Act owing to s itus
where the transfer right to use the vessel, which is a d eemed sale, had
taken place. As such, we leave the question open and dilute the finding
recorded by the High Court in this regard.
66. 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, m akes 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 Court.
67. Lastly, it was submitted that the High Court ought to have
remitted the matter to the concerned assessing authorities to decide the
aspect that whether there was deemed sale in view of tran sfer of right
to use vessel. The submission is, untenable as the appellant company
filed the writ petition, and a writ appeal too was filed by it . They have
submitted on merits not only before the High Court but this Court as
THE GREAT EASTERN SHIPPING CO. LTD. v.
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]
well, after having failed to convince on merits they have raised aforesaid
submission that too at the fag end as an alternativ e. They have
questioned the notice and invited a decision. Once it has gone aga inst
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.
68. Resultantly, we hold that the Charter Party Agr eement
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 secti on 5C or
section 2(j) of the Karnataka Sales Tax Act. Thus, the tr ansaction is
liable to be taxed by the concerned authorities in the State of Karnataka.
However, for the reasons recorded by this Court in the judgment, the
appeal is without merits and is dismissed. No costs.
Kalpana K. Tripathy Appeal dismissed.