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.=
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.
1
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
2
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
3
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
4
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
5
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
6
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
7
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
8
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.
9
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
10
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
11
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
12
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
13
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 salestax 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-
14
Notwithstanding anything contained in sub-section (1) or subsection (3) of section 5, but subject to sub-sections (4), (5) and (6) of
the said section, every dealer shall pay for each year a tax under this
Act on his taxable turnover in respect of the transfer of the right to use
any goods mentioned in column (2) of the Seventh Schedule for any
purpose (whether or not for a specified period) at the rates specified in
the corresponding entries in column (3) of the said Schedule.”
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
15
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
16
documents pursuant to which agreement has been entered into
contains the conditions and instructions to tenderers. The prequalification 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
17
(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 :
18
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
19
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.
20
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:
21
The Charterers shall have the right to require the vessel to be drydocked 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
22
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:
23
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 antipollutants. 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
24
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
25
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 offhire 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
26
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
27
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
28
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
31
"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
32
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
34
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:
37
“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, charterparties 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."
38
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
39
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.
41
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.”
43
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
44
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.
45
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
46
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.
47
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 supercheck 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.
48
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;
49
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
50
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 subclauses (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 subclauses 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; subclause (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 subclause (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 subclause (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
54
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
55
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
56
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 abovementioned 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
57
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
58
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.
59
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.
60
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)
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.=
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.
1
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
2
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
3
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
4
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
5
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
6
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
7
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
8
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.
9
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
10
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
11
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
12
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
13
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 salestax 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-
14
Notwithstanding anything contained in sub-section (1) or subsection (3) of section 5, but subject to sub-sections (4), (5) and (6) of
the said section, every dealer shall pay for each year a tax under this
Act on his taxable turnover in respect of the transfer of the right to use
any goods mentioned in column (2) of the Seventh Schedule for any
purpose (whether or not for a specified period) at the rates specified in
the corresponding entries in column (3) of the said Schedule.”
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
15
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
16
documents pursuant to which agreement has been entered into
contains the conditions and instructions to tenderers. The prequalification 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
17
(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 :
18
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
19
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.
20
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:
21
The Charterers shall have the right to require the vessel to be drydocked 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
22
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:
23
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 antipollutants. 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
24
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
25
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 offhire 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
26
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
27
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
28
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
31
"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
32
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
34
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:
37
“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, charterparties 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."
38
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
39
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.
41
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.”
43
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
44
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.
45
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
46
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.
47
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 supercheck 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.
48
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;
49
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
50
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 subclauses (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 subclauses 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; subclause (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 subclause (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 subclause (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
54
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
55
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
56
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 abovementioned 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
57
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
58
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.
59
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.
60
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)
