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REPORTABLE  

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.3383 OF 2004

THE GREAT EASTERN SHIPPING CO. LTD. … APPELLANT

VERSUS

STATE OF KARNATAKA & ORS. … RESPONDENTS

J U D G M E N T

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 the  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 Karnataka

Sales Tax Act, 1957 (for short, “the KST Act”) read with Article 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 Government to

impose a sales tax in respect of the goods which are used within the

territorial  waters of  India.  The appellant owns a tug (towing vessel,

namely "Kumari Tarini"). The company entered into a Charter Party

Agreement with New Mangalore Port Trust on 8.1.1998. It agreed to

make available the services of tug, for the purposes provided in the

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agreement along with the master and other personnel of the company

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 the agreement

attracted tax  under section  5C thereof. The company in the reply

dated 26.6.1998 repudiated the claim on the ground that there was no

transfer of right to use the goods given by the company to the Port

Trust as the possession and custody of the tug continued with it. The

Assistant Commissioner sent another communication dated

28.12.1998 informing that last chance was given to the company to

get itself registered under the KST Act within 15 days failing which he

would be compelled to file charge­sheet against the company for the

offence under section 29(2)(aaaa) of the KST Act. The Joint

Commissioner of Income Tax  (Commercial  Taxes)  on a  query being

made by the company wrote that he was not the competent authority

to issue a clarification regarding liability or otherwise to pay tax under

section 5C of the KST 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

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learned Single Judge dismissed the writ petition, aggrieved thereby the

company preferred a writ appeal. The same has also been dismissed;

hence, the appeal has been filed. A Division Bench of the High Court

of Karnataka has rejected the submission raised by the appellant that

over the territorial waters State of Karnataka has no power. The

learned  Single  Judge  was  not justified in refusing to consider the

question, whether there was a transfer of right to use the tug. It held

that there was a transfer of right to use the tug by the company to the

Port Trust.  

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 contract 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 'service.' Time Charters world

over are considered a contract of service. There is a difference between

the ‘right to use goods’ and ‘the transfer of the right to use goods.’ In

case  of  a lease, there is  a transfer  of an interest in the  property,

whereas, in a licence, there is a mere right to use the property. The

Time Charter is  recognised as an agreement  in  the nature of  pure

service. They are entirely distinct from Bareboat Charter Agreement or

charter by demise. The charters are of three kinds  viz. (a) Time

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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 right 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 the vessel

remain only with the owner through the master and crew. The delivery

to the Port Trust is only a symbolic one, and the legal and physical

possession of Tug continues to be with the company. Thus, the

arrangement is  a service,  not  a lease.  Learned  senior  counsel  has

made  reference to  Scrutton on  charter  parties,  Halsbury's  Laws  of

England, and have also relied upon various decisions.

6. Mr. Datar has further submitted that the Port Trust cannot use

the  Tug for any  purpose except, as  mentioned in clause  3 of the

Agreement.  The  Port Trust cannot take  away the  Tug outside 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 disposal 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. For the performance of service, the Bank Guarantee also

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has to be given. 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 disposal of the Port

Trust, does not mean that there is a transfer of right to use it. The

expression must be understood in a proper context of the agreement

itself. It would be absurd to suggest that the vessel can be partly in

possession of the Port Trust and partly with the company. Any

interpretation otherwise  of the contract  may create  mayhem in the

scheme of indirect taxation in India.

8. Mr. Datar has also referred to international laws relating to time

charter and Bareboat Charter Agreements that have 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 clarification 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 the 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

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service tax under the category of ‘supply of tangible goods for use by

way of  service without possession and control.’  The fact that time

charters are subject to service tax and bareboat charters 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 submitted 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 waters.

An agreement cannot be signed in the high seas.

10. It was submitted that the High Court has erred in treating the

territorial water as part of the territory of Karnataka, in contravention

to  Article 297 as well as the  provisions of the Territorial  Waters,

Continental Shelf, Exclusive Economic Zone, and other Maritime

Zones Act, 1976 (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

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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. The 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 Marine and Fishing (Regulation) Act, 1986

(Act of 1986) was passed by the State legislature, within purview of

powers as per Entry 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 Entry 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 territorial  waters  belong  to  Karnataka.  The State

cannot claim 12 nautical miles as part of its territory; otherwise, each

maritime State can pass 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 to  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 in the

territorial  waters is  outside the legislative competence  of the  State

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legislature. Entries 25 to 27 of List I indicate that the entire shipping

industry is exclusively within the domain of Parliament. Entry 27 of

List­I cover the ports, and the agreement is with the Port Trust. 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 base­line.

The Central Government has the exclusive power to make laws

concerning customs and other  fiscal matters on activities that take

place in 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  20th  Century Finance Corporation Ltd. v. State of

Maharashtra, 2000 (6) SCC 12 is not attracted in which this Court

was concerned with the controversy as to which State could levy sales

tax, where signing of the contract, delivery of the goods or use of the

rights 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 conferred no jurisdiction to levy sales­tax 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.

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12. Mr. Mohan Parasaran, learned senior counsel has taken us in

detail to various clauses of the agreement. The agreement is  in the

nature of a time charter as approved by the New York 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 has

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

should 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 re­delivery  are  not to  be

understood 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

tug is always operated, controlled, run, maintained, and insured by

the 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

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party  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 charter­party  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 bunkered by

them, shall carry specified cargo on an agreed voyage in exchange for

freight, characteristically a "single payment." Under Mercantile

jurisprudence, it is well­settled 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  Shipping

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 charter­party in Black’s Law

Dictionary. For the period during which the transferee has such legal

right, it has to be to the exclusion of the transferor company, which is

explicitly necessary to constitute a transfer of the right to use, which

is not merely a licence to use the goods. Service tax is already leviable

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treating it as service agreement as such sales­tax cannot be exacted

by the State Government. The territorial waters are within the

exclusive jurisdiction of the Union of India. In view of Article 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

waters  and  the seabed and subsoil  underlying and air  space  over,

such waters 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 occurs when

the agreement has been entered into and not when the delivery of the

goods takes place. He has referred to various clauses of the agreement

to take home the aforesaid submission and has relied upon  20th

Century Finance Corporation Ltd.  v.  State  of  Maharashtra  (supra),  a

decision of the Constitution Bench of this Court which has been

approved in  BSNL  (supra). He has further urged that a coastal State

has jurisdiction to levy sales­tax in the territorial waters abutting the

coast.  He has also referred  to  Article  297.  He has relied upon Dr.

Ambedkar’s speech in the Constituent Assembly that “State laws will

prevail over that area, whatever law you make will have its operation

over the area of three miles from the physical territory” and has also

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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 than 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 section 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 clauses 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 territorial

waters  and  has  submitted that the territorial  waters  vested in the

Union  of India  as  per  Entries  25 to  27  and  30  of  List I and the

Territorial Waters Act. The decision of the Karnataka High Court to the

extent of territorial waters, cannot be said to be correct. He has relied

upon the debates in the Constituent Assembly as to Article 297. In

accordance with Article 297(3), the Parliament has enacted the

Territorial Waters Act, 1976; he has referred to sections 3, 5, and 7 of

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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 sales­tax

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 constitutes “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 waters, 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 charter­party 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-

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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 entries in column (3) of the said Schedule.”

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 consideration,  and includes,—  

(i) a transfer otherwise than in pursuance of a contract of property in  any  goods  for  cash,  deferred  payment  or  other  valuable consideration;

(ii) a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;

(iii) a delivery of goods on hire purchase or any system of payment by installments.

(iv) a  transfer  of  the  right  to  use  any  goods  for  any  purpose (whether  or  not  for  a  specified  period)  for  cash,  deferred payment or other valuable consideration;----  

Explanation 1.—x x x  Explanation 2.— x x x Explanation 3.— (a) The sale or purchase of goods (other than in the course of inter-State trade or commerce or in the course of import or export) shall be deemed, for the purposes of this Act, to have taken place in the State wherever the contract of sale or purchase might have been made, if the goods are within the State. (i) n  the  case  of  specific  or  ascertained  goods,  at  the  time  the

contract of sale or purchase is made; and (ii) in the case of unascertained or future goods, at the time of their

appropriation to the contract of sale or purchase by the seller or by the purchaser, whether the assent of the other party is prior or subsequent to such appropriation.  

3(b) x x x 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

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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 (46th 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, 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 transfer 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

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documents pursuant to which agreement has been entered into

contains the conditions and instructions to tenderers. The pre­

qualification criteria provide that the tenderer has to submit the

documents regarding ownership or possession of tug on

bareboat/committed demise charter hire of tugs. In case he does not

own the tug, he has to provide documents to prove that he has entered

into a lease for charter hire of tug(s) for deploying them in the Port

Trust  during the  period  of the  contract.  The tenderer  should  have

experience of manning and harbor practice for one year during the last

3 years. Tugs should be deployed at harbors at New Mangalore Port

during the contract period.  

23. General conditions of the contract are also specified in the

tender documents. Paras 5(a), 6(ii) of the instructions to tenderers are

extracted hereunder:

“5.  PRE-QUALIFICATION CRITERIA:

    Tenderers must fulfill the following pre-qualification criteria to prove the techno-commercial competence and submit the 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 charter 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.  (i) x x x

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(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 force in respect of or in accordance  with  the  execution  of  a  contract.  The  contractor  shall further be liable to pay such an increase in tax, levy, duty, etc. under existing law or which may be leviable as a result of introduction of any laws, increase in taxes, levy, 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 wholly 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 valid 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 :

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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 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 respects 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

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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 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  Vessel ……………..   for  a  period  of  six  months  with  effect  from commencement of service. (Not a Sunday or a legal holiday unless taken over) the Vessel is delivered and placed at the disposal of the Charterers and the contractor undertakes 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 spraying 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.  

      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 clause 16 of the Charter Party Agreement shall apply.

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4. CONTRACTORS TO PROVIDE:  

    Except as otherwise stated in this charter or a: may be agreed from time  to  time  the  contractors  shall  provide  and/  or  pay  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 (as per minimum wages act)etc., shipping and discharging fee; and all other expenses of  the  Master, Officers and Crew (c)Deck , cabin and ongoing room stores (d) Adequate No. of Towing ropes tested and certified (o) galley fuel, (f) Marine and war 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 imposed 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 case of actual fire  fighting  as  ordered  by  Charterer,  the  cost  of  foam/chemicals consumed for the fire fighting will be reimbursed by 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 lubricants 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 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:

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    The Charterers shall have the right to require the vessel to be dry- docked  if  the  contractor  is  not  docking  vessel  at  normal classification/statutory intervals. The fees for such 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 charter period, and clause 16 of the Charter Party Agreement shall apply.

11. INSURANCE:  

(a) During the Charter period, the vessel shall be kept 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 kept insured by the contractors at their expense against protection and indemnity risks in such form as the 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,  Officers,  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  instructions  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 dissatisfied with the conduct or efficiency of the Master, Officer of the crew, the Contractors on

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receiving particulars of the complaint, promptly investigate the matter and, if necessary, shall make a change in the appointment. However, the  Charterers  shall  have  the  right  to  demand  the  changes  of  any Master or other crew, which 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 Charterers.  

16. PENALTY:  

(a) If the vessel is inoperative and/or unavailable, and the Charterer are denied use of the vessel, penalty will be levied 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 discretion of the charterer, and clause 22 of the Charter Party Agreement shall 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 approval 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 applicable.

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  allow the discharge, spills or leaks of any pollutants from any source whatsoever.  

22. PERFORMANCE GUARANTEE:

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     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  have  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 vessel has

been taken by the Port Trust for various lawful services 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 charterer to

provide fuel, lubricants, water, electricity, port charges, and for anti­

pollutants. The  provisions for  maintenance and operation are also

contained in the agreement. As per clause 7, the vessel shall during

the charter period be for all purposes at the disposal of the 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

time of delivery. Insurance charges have to be borne by the contractor.

The vessel shall be kept insured by the contractors at their expense

against protection and indemnity risks. The whole reach and burthen

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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 prove that he has entered into a lease for charter hire of tug for

deploying them at Mangalore Port during the period of the contract. No

doubt 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

responsible for all damages to the property of the charterer during the

currency 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 keep the tug

operational has to be on the contractor’s account. As per condition 3

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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 accepted for

service in the Port to assess the condition. Capability and performance

of the vessel and the quantity of fuel, lubricants, etc. On­hire and off­

hire survey charges shall be borne equally by the charterer and the

contractors as provided in condition 5. The charterer will not be

responsible for any damage suffered by the tug is provided 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 shall be

made available for  port  operations round the clock  throughout  the

contract period as per condition No.8. The contractor has to comply

with the provisions of the Indian Merchant Shipping Act and the law

as to licenses/permissions to  operate tug. It is the liability  of the

contractor to pay revised minimum wages to its staff. The contractor

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 port.

The contractor has to pay the expenses for the master and crew. As

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per clause 5, the charterer has to provide whilst the vessel is on hire,

fuel,  lubricants, water, electricity, port charges, and anti­pollutants.

As per clause 7(a), the vessel shall be for all purposes at the disposal

of the charterer and under the control of the contractor, and as

provided in clause 7(b) of the charter agreement, the charterer shall

have the use of all outfits, equipment, and appliances. No doubt about

it that insurance is the liability of the contractor. The indemnification

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 provides that the contractors

“let”  and the charterer “hire” the goods vessel for  six  months.  The

expression ‘let’ has been used, and the vessel most significantly during

the charter period has been placed at the “disposal” of the charterers

and under their control in every respect.  The charterers have been

given the right to use all outfits, equipment, and appliances on board

the vessel at the time of the delivery, including the  whole reach,

burthen, and deck capacity. Thus, in our considered opinion, merely

by providing the staff, insurance, indemnity, and other responsibilities

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of bearing officials costs. Effective control for the entire period of six

months has been given to the charterers. It is a case of transfer of

right to use the vessel for which certain expenses and staff are to be

provided by the contractor, which is not sufficient to make out that

the control and possession of the vehicle are with the contractor. The

possession and control are clearly with the charterer. As in essence, it

has to be seen from a conjoint reading of various conditions whether

there is a transfer of right to use the vessel. In our considered opinion

there is not even an iota of doubt that under the charter agreement

coupled  with the instructions to tenderers, general conditions  and

special conditions for the contract as specified in the tender

documents and charter­party 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

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six months, the contractor has no right to give the vessel for use to

anyone else. Thus in view of the provisions inserted in Article 366(29A)

(d),  section 5C, and definition of  ‘sale’ in section 2 of the KST Act,

there is no room for doubt that there is a transfer of right to use the

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  bring 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 this 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 transactions, the drafters of the Forty-sixth Amendment chose three specific situations, a works contract,  a  hire-purchase  contract,  and  a  catering  contract  to  bring them within the fiction of a deemed sale. Of these three, the first and third involve a kind of service and sale at the same time. Apart from these two cases where splitting of the service and supply has been constitutionally 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 treatment 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 out 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 the doctor or lawyer for the documents in both cases.

29

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 the exceptions in Article 366(29-A), unless  the  transaction  in  truth  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 composite contracts other than those mentioned in Article 366(29-A) continues to be: Did the parties have in mind or intend separate rights arising out of the sale of goods? If there was no such intention, there is no sale even if the contract could be disintegrated. The test for deciding whether a contract  falls  into  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,  therefore,  remains primarily  a  matter  of  contract  and  intention.  The  seller  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 subject-matter of sale or purchase. In arriving at a conclusion,  the  court  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 goods in the State pursuant to agreements of transfer while some other States levied a tax on deemed sales on the premise that the agreement for the transfer of the right to use had been executed within that State (vide para 2 of the judgment as reported). This Court upheld the third view, namely, merely that the transfer of the right to use took place where  the  agreements  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

30

view that where the goods are in existence, the taxable event on the transfer of the right to use goods occurs when a contract 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 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  use  the goods,  the  Court  did  not  say  that  the  delivery  of  the  goods  was inessential for the purposes of completing the transfer of the right to use. The emphasized portions in the quoted passage evidences that the goods must be available when the transfer 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 actual delivery of the goods is not necessary for effecting the transfer of the right to use the goods, but the goods must be available at the time of transfer, must be deliverable and delivered at some stage. It is assumed, at the time of execution of any agreement to transfer the right to use, that the goods are available and deliverable. If the goods, or what is claimed to be goods by the respondents, are not deliverable at all by the service providers  to  the  subscribers,  the  question  of  the  right  to  use those goods, 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

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"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 laid down by this

Court. Applying the substance of the contract and the nominal nature

test, the vessel was available when the agreement for the right to use

the goods has taken place. The vessel was available at  the time of

transfer, deliverable, and delivered and was at the exclusive disposal

for six months round the clock with the charterer port trust. The use

of license and permission was at the disposal of the charterer and to

the exclusion  of the contractor/transferor. It  was  not open to the

contractor to permit the use of the vessel by any other person for any

other 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 thus:

“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  statutory  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

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13. It  is  a  settled  principle  in  law  that  a  contract  is  interpreted according to its purpose. The purpose of a contract is the interests, objectives, values, policy that the contract is designed to actualize. It comprises the joint intent of the parties. 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  with  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 its 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 obligations 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 done to the interests of the community at large."

There is  no  dispute  with the  proposition that the terms  and

conditions have to be seen as intended by parties, and it has to be

based on the objectives, values, and policies that contract is designed

to 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 sophisticated machinery to the contractors  for  the  purpose  of  being  used  in  the  execution  of  the contracted works  and received charges  for  the same.  The appellant made a provisional assessment levying 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

33

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 transaction, concluded that the transactions between the respondent and contractors did not involve transfer of right to use the machinery in favour of the contractors and in the absence of satisfying the essential requirement of Section 5-E of the  Act,  i.e.,  transfer  of  right  to  use  machinery,  the  hire  charges collected by the respondent from the contractors were not exigible to sales  tax.  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 contractors. The High Court  was  right  in  arriving  at  such a  conclusion.  In  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 respondent 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 machinery. In

the absence of satisfying the essential requirement of section 5­E of

the Andhra Pradesh General Sales Tax Act, 1957. What distinguishes

the aforesaid case on facts is that the effective control of the

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machinery even while it was in use of the contractor, was that of the

respondent 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 was responsible for the custody of the

machinery,  did  not  militate against the company’s  possession  and

control. It was a case of hiring of the machinery for a specific purpose

on specified 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 principal test is whether the master is the employee of the owner or the charterer. In other words, whether  the  master  becomes  the  employee  of  the  charterer  or continues to be the owner'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 demise,  the  charterer's  right  vis-a-vis  the  owner  depends  upon  the terms  of  the  contract.  "The  contract  of  carriage  is  personal  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 possible, 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 contract contained in the bill of lading, and they can be enforced by or against the shipper, consignee or endorsee. The effect  of  a  bill  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

35

goods, the terms of the contract on which the goods are carried are prima facie to be ascertained from the bill of lading. However, if a shipper chose to receive a bill  of lading in a specific form without protest, he should ordinarily be bound by it. Thus, it cannot be said that the bill of lading is not conclusive evidence 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 them. As between the shipowner and the charterer, the bill of lading may, in some cases, have the effect of modifying the contract 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.  

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  give  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 Carriage 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 Indian Act the Rules whereunder were not applicable to the facts of the case. The dispute could not have been decided partly 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  charter­party  agreement

operates  as  a demise or not,  depends upon the stipulations of the

charter­party. In the case of demise, the charterer may employ ship in

carrying either his own goods or those of others. A charter­party has

to be construed to give effect, as far as possible, to the intention of

parties as expressed in a written contract. When stipulations of the

charter­party  are  expressly incorporated, they  become terms of the

36

contract. There was nothing to show that the Charter Party Agreement

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 charter­party

should operate as a demise or not, depends on the stipulations of the

charter­party. 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 charter­party 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 charter­party arose, the terms of which 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 occasional shipping.

However,  what is important is that this  Court  has considered the

charter­party 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 such a case, the contract  is very much of  letting the ship. This

Court has observed thus:

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“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  goods,  passengers, livestock, or mail. A contract by charter-party, 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 principal part thereof is let to a merchant who  is  called  the  charterer,  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 latter 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. While 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 by Sea, Eleventh Ed., 1963, p. 263, it is stated that "all charter-parties 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 shipowner 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 charters. “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 the use of services of his ship." The contract in the instant case is of the nature of time charter-party, whether there is  a  demise  of  the  ship  or  not  being  immaterial.  Clause  4  of  the charter-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  month, commencing on and from the date of delivery of the ship,  "hire to continue until the hour of the day of her re-delivery". These clauses of the charterparty shows that  the Aluminium Company took the ship from its owners on a time charterparty, that 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 was put to any use at all and that no part of the payment can be said to 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."

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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 High Court of Madras

has observed that whether the charter­party is a voyage charter­party

or time charter­party or charter by demise or not, depends upon the

intention of the parties. It has been observed that certain words in the

charter­party are used in the standard forms 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  nature  of transaction as one of rendering of service only, we have no hesitation in accepting the plea of the assessee that the use of the terms ‘let’, ‘hire’, ‘delivery’ and ‘redelivery’ are not to be understood in the literal sense of giving effective control and 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 find any legal ground to sustain the assessment.

59.  We have no hesitation in accepting the plea of the assessee that the Tribunal committed a serious error in its understanding of what possession would mean,  in  the face of  the time charter  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 charterparty 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 observed that the

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relationship of an agency is to be established between the owner and

the charterer. The question was of recovery of the amount due and

payable by the charterer. Following discussion has been made:

“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 and also possession of the ship remain in the original owner, whose remuneration or hire is generally calculated at a monthly rate on the tonnage of the ship, while a voyage charter is a contract 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 officers, and the crew for an agreed period of time. In the decision reported 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 established and well-understood characteristic features on time charter, in the decision reported in 99 L.W. 517 Transworld Shipping Services (I) (P) Ltd. Vs. Owners & Other, this Court 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  that  for  the  amount  due  and payable by the charterer, unless the relationship of agency had been established between the owner 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 redelivery 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 under 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 terms, 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

40

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 ‘re­delivery’ but on the other essential terms of the

Charter  Party  Agreement  entered in the instant  case  which clearly

makes out that there is a transfer of exclusive right to use the vessel

which is a deemed sale and is liable to tax under the KST Act. In the

instant case, full control of the vessel had been given to the charterer

to use exclusively for six months, and delivery had also been made.

The use by charterer exclusively for six months makes it out that it is

definitely a contract of transfer of right to use the vessel with which we

are concerned in the  instant matter,  and that  is  a deemed sale as

specified in Article 366(29A)(d).   On the basis of the abovementioned

decision, it was urged that all Charter Party Agreements are 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 charter­party when it is to be treated as only for

service and when it is the transfer of right to use.

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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 occupied in fitting the

degaussing apparatus. Since the employment of the ship did not come

within the terms of clause 12 of the charter­party, 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 observed at the outset

that the respective rights and obligations of the two parties to the time

charter  party  must  depend upon  its  written  terms, for there is  no

special law applicable to the particular form of contract. 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 certain 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 the

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 charter­party.

42

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:  

     “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  servants,  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 charterer is entitled to give to them. Being a contract for services it is thus the very prototype of a contract of which before the  fusion  of  law  and  equity,  a  Court  would  never  grant  specific performance.  Clarke  v.  Price,  (1819)  2  Wils.  Ch.  157;  Lumley  v. Wagner, (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 unbroken 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 installment 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 gross time charter, not one by demise.  It gave the plaintiffs no right 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 and crew to carry the goods which were put on the vessel by the plaintiffs.”   

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 Again, the decision is based on the terms and conditions. Merely

by  employing the  crew  to render the service  by the  owner, is  not

decisive of the nature of charter.  

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 put 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 possession of the owner, so that references to delivery and redelivery are not strictly accurate, but those expressions are regularly used to identify the time when the charter begins and ends.”  

Merely rendering service by the servants and crew to carry the

goods will not make it a service contract. It depends upon the nature

of each contract, and the terms and conditions agreed to. What is of

relevance for our purpose is whether there is a transfer of right to use.

48. Reliance has also been placed on  Skibsaktieselskapet Snefonn,

Skibsaksjeselskapet Bergehus, and Sig. Bergesen 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 to the charterer

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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.  Risk  of  delay  thus  falls  on  the  charterer.  The shipowner meets the cost of maintaining the vessel  and paying the crew’s  wages,  but  the  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 same way as a voyage charter-party ends when the last cargo 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 contract by which the  shipowner  agrees  with  the  time  charterer  that  during  a  certain named period he will render services by his servants 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 charterer to decide, within the terms of the charter-party, what use he will make of the vessel. 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)”.  

The decision lends no support in view of the terms and

conditions of the charter­party in question and the general discussion.

Otherwise, also, it does not espouse cause concerning whether there is

a right to transfer the use of the vessel.

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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 – Classification

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 itself, to which the services of the master and crew may or may not be 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

Under a charter not by demise, on the other hand, the shipowner agrees with the charterer to render services by his master and crew to carry the goods which are put on board his ship by or on behalf of the charterer.  In  this  case,  notwithstanding  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 the whole possession and control of the ship.”

“Time charters almost always contain expressions such 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 charters by demise.”  

51. It is  apparent from  the  discussion  mentioned  above that the

services of the master and crew may or may not be superadded in the

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case  of  demise.  Whether  or  not  charter  amount to  demise  would

depend upon the particular terms of the charter.

52. Halsbury’s  Laws of  England, 4th  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  period.  In  the  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 charterer 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 demise 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 the 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 comes 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, the possession of the ship also remains in him. Therefore, the existence of the charterparty does not necessarily divest 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.

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405.  Test  whether  charterparty  operates  as  demise.  Whether  a charterparty operates as a demise or not is a question of construction, to  be  determined  by  reference  to  the  language  of  the  particular charterparty. The principal test to be applied 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 regarded 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 demise, it is  immaterial  that  the  owner  reserves  the  right,  in  certain circumstances, of removing the master and appointing another in his place, or of appointing the chief engineer.”

In a charter­party by demise, it may be charter without master

or crew or bareboat charter, and another may be a charter with

master  and crew under which ship passes to  the charterer for  the

purposes of mercantile adventure. As held in this case, full control has

been given, and use is exclusively for the charterer. He has the right to

use the space and burden. The discussion in Halsbury’s also makes it

clear that each and every charter­party 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 charter­party, and there is no super­

check formula to find out the nature of the contract. It depends upon

the terms  and conditions of each contract.  Merely use of specific

words, as mentioned above, is not determinative, but the real crux is

to be seen as per relevant conditions as agreed to between the parties.

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 54. When we consider the charter­party in question in the context of

applicable law, particularly in view of the constitutional provisions of

Article 366(29A)(d), we find that there is transfer of right to use

tangible goods, which is determinative of deemed sale as per the

Constitution of India and provisions of section 5C reflecting the said

intendment.  We are of the considered opinion that there is transfer of

right to  use exclusively  given  to  charterer for  six  months,  and the

vessel has been kept under the exclusive control. The charterer

qualifies the test laid down by this court in BSNL (supra).

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 upon by

Deputy Conservator.  He has also referred to Rule 8 which provides

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 reported to the

Deputy Conservator. In case of any alteration in the cabin capacity,

the licence is liable to be cancelled. The submission made by learned

senior counsel is that as per the scheme of the Harbour Craft Rules;

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also, the owner retains the control of the vessel. In our opinion, the

submission cannot be accepted. Merely by the provisions mentioned

above as to license, its production/change of ownership etc., it cannot

be said that the owner has not transferred the right to use the vessel.

The ownership in such a deemed sale is retained by owner. He does

not cease to be an owner by transferring right to use the property.

Merely by the fact that a license to be obtained with certain

stipulations and to be produced by Tindal  on being demanded and

change incapacity to be reported to the Deputy Conservator, the

provisions are not of any help for interpreting the Charter Party

Agreement, and to decide the question whether there is a transfer of

right to use the vessel.    

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  sales­tax

though charter­party has been signed in Mangalore in view of the fact

that vessel was to be used in territorial  waters, it  was open to the

State Government to impose and realize the sales­tax 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

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the situs of the agreement is determinative for the realization of tax. In

this regard decision of Constitution Bench of this Court in  20th

Century  (supra) is relevant, in  which  this  Court  has discussed  the

concept of deemed sale by a legal fiction created as 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  can  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 delivered 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 ingredients, 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 fiction created by the  appropriate  legislature,  the location of  sale  would be the  place where the property in goods passes. The Constitution Bench held that it was the passing of the property within the State that was intended to be fastened on for 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. We have traced the legislative  history  of  sales  tax  in  this  country  only  to  show  that excepting where the appropriate legislature 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

51

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 Punjab. Let us say that the seller has a godown in the State of Delhi where his goods are stored and that the buyer also has a retail 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 the 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 seller’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 such 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 views to consider, but it is certainly a possible view.

It is also possible to hold that this is not inter-State 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  postulates,  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 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 clause (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 explanation,  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  delivery  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 right to use has taken

52

place in another State. Therefore, if the contention on behalf of the respondents that there would be no completed transfer of right 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 transfer 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 goods are

available for delivery irrespective of the place where they are located,

the situs of sale where the property or goods passes, would be at the

place where the contract has been entered into.

58. This Court in the 20th 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 delivered for use.

The deemed sale takes place at the site where the right to use the

goods is transferred. It is of no relevance where the goods are delivered

under the right to transfer to  use them. In the  present case, the

agreement has been admittedly signed in Mangalore, and the vessel is

used in the territorial waters, which is as per the submission of the

company, fully in territory of the Union of India. It makes no difference

53

as the situs of the deemed sale is in Mangalore. Thus, the liability to

pay tax under the Act cannot be countenanced. This Court in the 20th

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 goods. 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 366 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 supply,  as  applicable,  used  in  the  various  sub-clauses.  Thus,  the transfer of goods will be a deemed sale in the cases of sub-clauses (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 hire, 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 transfer 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 when 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 place where the right to use the goods is transferred. Where the goods are when the right to use them is transferred is of no relevance 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

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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 takes place when the contract in respect thereof is executed. As soon 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 transfer that legally transfers  the  right  to  use  goods.  In  other  words,  if  the  goods  are available irrespective of the fact where the goods are located, and a written contract is entered into between the parties, the taxable event on such a deemed sale would be the execution of the contract for the transfer of right to use goods. 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 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 contract 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 between the parties, it is at that point situs of a 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."

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 within 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  Karnataka  irrespective  of  the  place  where  the contract or transfer has taken place. This explanation is in excess of legislative power under 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 omitted 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 power 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,  accordingly,  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 the transactions of transfer of

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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.”

59. This  Court  also  dealt  with  proposition whether the  State  can

create a deemed fiction that in case the goods are for use within the

State irrespective of the place where the contract of transfer of right to

use the goods is made. That is not the question involved in the present

matter.  The situs of  the agreement  is  relevant,  which is  admittedly

within the territory of Karnataka. The situs of the deemed sale is in

Mangalore, and the decision of a Constitution Bench of this Court in

the 20th  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 be like a

lease, was not accepted by this Court. It has distinguished the 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 enables the State  to  levy  "taxes  on  the  sale  or  purchase  of  goods  other  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 by sub-clause (d) of

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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’ 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 on the constitutionality of these provisions of the said Act but of their interpretation and the application thereof to the facts of the present case.

5. The said Act defines “sale” to mean the transfer of property in goods for cash or deferred payment or other valuable consideration and includes 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."

Such transfer of the right to use goods for consideration 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 be deemed sale within the meaning of the provision as mentioned 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. They 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

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the nature of, transfer of right to use the goods, has been discussed

and Aggarwal Brothers (supra) has been relied upon, thus:

“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 the 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 behalf 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  from 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 amendment 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 that of

deemed sale. The said clarification as to service tax does not advance

any cause as the levy of service tax is permissible or not is not the

question to be examined by this Court. The question germane to the

instant matter is not whether service tax can be levied. The question

involved in the case is only to the extent whether the State of

Karnataka can realize the sales tax on deemed sale under section 5C

of the KST Act in view of the provisions contained in Article 366(29A)

(d) of the Constitution. Thus, we refrain from going into the effect of

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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 Court, and

specific findings have been recorded. The High Court has gone into the

question of whether the territorial waters abutting the landmass form

part of the State of Karnataka. It was not disputed that the extent of

territorial waters is up to 12 nautical miles from the landmass that is

the baseline. Article 297 has been considered by the High Court and

the Lists in the 7th Schedule of the Constitution. Entries 25 to 27 and

30 of List I, Entry 32 of List III, i.e., Concurrent List have been

referred.  

64. Learned senior counsel appearing for the parties have also

referred to various decisions and the debates in the Constituent

Assembly and answers given by Dr.  B.R.  Ambedkar as to  scope of

Article 293 of the Constitution. The High Court has also relied upon

the  definition  of  State  as  provided in section  2(j) of the  Marine  &

Fishing Act, 1986, Entries 13 and 21 of State List II of the 7th Schedule

and in respect of fisheries Entry 21 of List II.

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65. We need not go  into the aforesaid questions. However,  as the

High Court has given a finding, and on being impleaded,  coastal

States have filed their response as notices were issued to them. We

need not go into the question in respect of the right of the States and

the Central Government as to territorial waters at all because of our

finding concerning exaction of tax under the KST Act owing to situs

where the transfer right to use the vessel, which is a deemed sale, had

taken  place.  As  such,  we leave the  question open and  dilute the

finding recorded by the High Court in this 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, makes no

difference with respect to exigibility of sales­tax under the provisions

of the KST Act in view of the decision of this Court in  20th  Century

(supra), which has been affirmed in  BSNL  (supra) and has been

followed in various other decisions of this Court.  

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 transfer 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.

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They have submitted on merits not only before the High Court but this

Court  as  well,  after  having failed to convince  on  merits they  have

raised aforesaid submission that too at the fag end as an alternative.

They have questioned the notice and invited a decision. Once it has

gone against them; they cannot submit that this question should be

left to  be considered  to  be  taken  in another round of litigation  for

adjudication by the concerned tax authorities making an assessment.

The submission is wholly untenable and stands repelled.

68. Resultantly, we hold that the Charter Party Agreement

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 section 5C or

section 2(j) of the Karnataka Sales Tax Act. Thus, the transaction is

liable to be taxed by the concerned authorities in the State of

Karnataka.  However,  for  the reasons recorded by this Court  in the

judgment, the appeal is without merits and is dismissed. No costs.

…………………………J. (Arun Mishra)

……………….………..J. (M.R. Shah)

New Delhi; ………………..……….J. December 04, 2019. (B.R. Gavai)