For Sales Tax On Transfer Of Right To Use Goods, Place Of Contract Is Relevant Than Location Of Goods : SC [Read Judgment]

In a significant judgment in the context of 'deemed sale', the Supreme Court has clarified that for the purposes of levy of sales tax, the place of the contract for transfer of right to use of good is relevant than the location of the goods.

This ruling was given by a three judges bench comprising Justices Arun Mishra, M R Shah and B R Gavai in the case The Great Eastern Shipping Company Ltd v State of Karnataka.

The appellant- Great Eastern Shipping Company- had owned a tug vessel named "Kumari Tarini", which was agreed to be transferred to the Mangalore Port Trust for use for a period of six months. The issue in the case was whether Karnataka Government could levy sales tax on the Time Charter Agreement regarding use of the tug vessel.

The company filed a writ petition in the Karnataka High Court challenging a notice asking it to take registration under the Karnataka Sales Tax Act, which got dismissed. This led the company to approach the Supreme Court, raising these contentions :

1. The Time Charter Agreement did not amount to 'sale', as it merely transferred right to use the vessel.
2. Karnataka has no jurisdiction to levy tax on the vessel, as it is located in the territorial waters, which is the territory of Union of India.

Transfer of right to use amounted to sale

The bench noted that the transaction came under the ambit of "deemed sale" as per Article 366(29)(d) of the Constitution of India. According to this provision, "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" is treated as 'deemed sale'.

From a conjoint reading of various conditions of the agreement, the Court found that there is complete transfer of the right to use.  

"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", observed the bench.

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. The  full control of the vessel had been given to the Port Trust to use exclusively for six months, and delivery had also been made, the Court observed.

Situs of contract is relevant than location of goods

Relying upon the Constitution bench decision in the 20th Century Finance Corporation Ltd vs State of Maharashtra (2000), the Court held that the situs of the agreement is determinative for the realization of tax than the place  where the goods are passed.

"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".

"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", observed the judgment authored by Justice Arun Mishra.

In the present case, the agreement has been admittedly signed in Mangalore, and the vessel is used in the territorial waters. It makes no difference as the situs of the deemed sale is in Mangalore, the Court said.

"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, it makes no difference with respect to exigibility of sale", the bench said.

 Whether coastal states can levy sales tax on vessels in territorial waters - Issue left open

While the matter was pending, an incidental issue regarding the power of coastal states to levy sales tax on goods in territorial waters arose. The High Court had found in favour of Karnataka on this issue. 

However, the Supreme Court found the issue to be not relevant for the case. Because, the sales tax liability was fixed on the basis of place of contract, regardless of the location of the goods. So, it did not matter whether the goods were in territorial waters or not. So, the findings of the HC on this point were diluted by the Court.

"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"

In conclusion, the Court held :

"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".

Case Details :

Title : The Great Eastern Shipping Company Ltd v State of Karnataka.

Case No : Civil Appeal No. 3383 of 2004.

Corum : Justices Arun Mishra, M R Shah, B R Gavai

Appearances :Senior Advocate Arvind P Datar (for appellant); Senior Adv Mohan Parasaran (for Port Trust); Senior Advocate Devadatt Kamat (for Karnataka); Solicitor General Tushar Mehta (for Union Government)

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