Supreme Court Upholds Sales Tax on Time Charter Agreements: Great Eastern Shipping Co. Ltd. vs. State of Karnataka (2019)

Date of the Judgment: 4 December 2019
Citation: (2019) INSC 1234
Judges: Arun Mishra, J., M.R. Shah, J., B.R. Gavai, J.

Can a shipping company be taxed for providing a vessel under a time charter agreement? The Supreme Court of India recently addressed this question, focusing on whether such agreements constitute a ‘transfer of the right to use goods’ under the Karnataka Sales Tax Act, 1957. This judgment clarifies the tax implications of time charter agreements, a common practice in the shipping industry.

The Supreme Court, in this case, examined whether a time charter agreement, where a vessel is provided for a specific period, amounts to a transfer of the right to use goods, thus making it liable for sales tax under the Karnataka Sales Tax Act, 1957. The bench, comprising Justices Arun Mishra, M.R. Shah, and B.R. Gavai, delivered a unanimous judgment.

Case Background

The Great Eastern Shipping Co. Ltd. (the appellant) owns a tug named “Kumari Tarini.” On 8 January 1998, the company entered into a Time Charter Agreement with the New Mangalore Port Trust, agreeing to provide the tug along with its crew for six months. The agreement stipulated that the tug would be used for various port-related services. The Assistant Commissioner of Income Tax directed the company to register as a dealer under the Karnataka Sales Tax Act, 1957 (KST Act), claiming the agreement attracted tax under Section 5C of the KST Act. The company contested this, arguing that there was no transfer of the right to use the tug, as its possession and custody remained with the company.

The company filed a writ petition challenging the State’s authority to impose sales tax on the hire charges received from the Port Trust, arguing that the KST Act does not extend to the territorial waters of India. The High Court of Karnataka dismissed the petition, leading to the present appeal before the Supreme Court.

Timeline

Course of Proceedings

The Assistant Commissioner of Income Tax directed the company to register under the KST Act, which the company contested. The Joint Commissioner of Income Tax stated he was not the competent authority to issue a clarification regarding tax liability. The company then filed a writ petition in the High Court of Karnataka, arguing that the KST Act does not extend to India’s territorial waters. The Single Judge dismissed the writ petition, and the Division Bench of the High Court upheld this decision, stating that there was a transfer of the right to use the tug to the Port Trust. This led to the appeal before the Supreme Court.

Legal Framework

The core legal provisions in this case are:

• Section 5C of the Karnataka Sales Tax Act, 1957 (KST Act): This section provides for the levy of tax on the transfer of the right to use any goods. It states: “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.”
• Section 2(t) of the KST Act: This section defines “sale” to include the transfer of the right to use any goods. It states: “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,—(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;
• Article 366(29A)(d) of the Constitution of India: This article defines “tax on the sale or purchase of goods” to include a tax on the transfer of the right to use any goods. It states: “tax on the sale or purchase of goods” includes–(d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;

These provisions, particularly Article 366(29A)(d), were inserted to expand the definition of ‘sale’ to include transactions that might not traditionally be considered sales, such as the transfer of the right to use goods. This amendment allows states to levy sales tax on such transactions.

Arguments

Appellant’s Arguments (The Great Eastern Shipping Co. Ltd.):

• The Time Charter Agreement is a contract for service, not a transfer of the right to use goods. The term ‘service’ is used in the agreement, and globally, time charters are considered service contracts.
• There is a difference between the ‘right to use goods’ and the ‘transfer of the right to use goods.’ A lease involves a transfer of interest in property, while a license is merely a right to use. Time charters are distinct from bareboat charters, where the ship itself is transferred.
• In a time charter, the master and crew remain employees of the owner, and the owner retains control and possession of the vessel. The delivery to the Port Trust is symbolic, with legal and physical possession remaining with the company.
• The Port Trust can only use the tug for purposes specified in the agreement and cannot take it outside the harbor limits. Legal possession and fiscal control were not transferred.
• International laws and a clarification from the Ministry of Finance treat time charters as service contracts, subject to service tax, unlike bareboat charters, which are subject to sales tax.
• The State of Karnataka lacks the competence to levy sales tax on activities in territorial waters, which are under the exclusive jurisdiction of the Union of India.

Respondent’s Arguments (State of Karnataka):

• The transfer of the right to use occurs when the agreement is entered into, not when the goods are delivered. Various clauses of the agreement indicate a transfer of the right to use the vessel.
• A coastal State has jurisdiction to levy sales tax in the territorial waters abutting the coast.
• The State has the power to tax the transfer of the right to use goods under Article 366(29A)(d), and the Parliament has not placed any restrictions on this power.
• The agreement clearly states that the vessel is at the disposal of the Port Trust and under their control, indicating a transfer of the right to use.

Submissions of Union of India:

• The territorial waters are 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 regarding territorial waters is not correct.

Submissions

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the State of Karnataka has jurisdiction to levy sales tax under Section 5C of the KST Act in respect of the Charter Party Agreement dated 8 January 1998?
2. Whether the agreement dated 8 January 1998 constitutes a “transfer of the right to use”?
3. Whether the State of Karnataka has the competence to levy sales tax on the agreement, which is effective within the territorial waters?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Bharat Sanchar Nigam Ltd. & Anr. v. Union of India & Ors., (2006) 3 SCC 1: The Court relied on this case to define the essential attributes of a transaction constituting a transfer of the right to use goods.
• 20th Century Finance Corporation Ltd. v. State of Maharashtra, 2000 (6) SCC 12: This case was crucial in determining that the taxable event is the transfer of the right to use goods, not the delivery, and that the situs of the sale is where the contract is executed.
• Other cases cited by the appellant, such as British India Steam Navigation Co. Ltd. v. Shanmughavilas Cashew Industries & Ors., (1990) 3 SCC 481 and various foreign court decisions, were distinguished based on the specific terms of the charter party agreement in this case.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the specific terms and conditions of the Charter Party Agreement, which indicated a clear transfer of the right to use the vessel to the Port Trust. The court emphasized the following points:

• The agreement explicitly stated that the vessel was at the disposal of the charterers and under their control.
• The charterers had the right to use all outfits, equipment, and appliances on board.
• The whole reach and burden of the vessel were at the charterers’ disposal.
• The court rejected the argument that the retention of crew, insurance, and other responsibilities by the owner negated the transfer of the right to use.

Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio:

Logical Reasoning

Key Takeaways

• Time Charter Agreements can be considered a transfer of the right to use goods, making them liable for sales tax.
• The situs of the taxable event is where the contract is executed, not where the goods are used.
• The effective control and disposal of the goods to the charterer are key factors in determining a transfer of the right to use.
• The court did not rule on the extent of the State’s power in territorial waters, as the situs of the agreement was within the State.

This judgment has significant implications for the shipping industry, clarifying that time charter agreements can attract sales tax if they meet the criteria of a transfer of the right to use goods. It also emphasizes the importance of the specific terms and conditions of such agreements.

Directions

No specific directions were given by the Supreme Court.

Specific Amendments Analysis

There were no specific amendments discussed in this judgment.

Development of Law

The ratio decidendi of this case is that a time charter agreement, where the vessel is placed at the disposal and control of the charterer, constitutes a transfer of the right to use goods, making it liable for sales tax under the KST Act. This case reinforces the principle established in 20th Century Finance regarding the situs of the taxable event being the place of contract execution. The court also clarified that the specific terms of each charter party agreement are crucial in determining its nature and tax implications.

Conclusion

The Supreme Court dismissed the appeal, holding that the Time Charter Agreement between The Great Eastern Shipping Co. Ltd. and the New Mangalore Port Trust constituted a transfer of the right to use goods, making it liable for sales tax under the Karnataka Sales Tax Act, 1957. The court emphasized that the situs of the taxable event is where the contract is executed, and that the specific terms of the agreement indicated a transfer of control and right to use to the charterer. This judgment provides clarity on the tax implications of time charter agreements in India.