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Place of Agreement relevant while imposing sales tax on goods: SC

Place of Agreement relevant while imposing sales tax on goods: SC

The Supreme Court has held that a state government cannot impose sales tax on the transfer of rights in a sea vessel on India’s territorial waters based on the nearest mainland from the ship, but must be adduced from the site where an agreement to that effect was signed. The physical delivery of possession is only a factor in the chain of events and not the condition precedent to the entire contract.

A bench of Justices Arun Mishra, M.R. Shah, B.R. Gavai in The Great Eastern Shipping Co. Ltd V. State of Karnataka & Ors, has held a transaction liable to be taxed by the State of Karnataka on the ground that the Charter Party Agreement entered into for the use of a sea vessel tantamount to a deemed sale as there was a transfer of right to use the vessel as provided in Article 366(29A)(d) [tax on the sale and purchase of goods] read with section 5C or section 2(j) of the Karnataka Sales Tax Act (KST Act).

The bench discussed 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 petitioning company, Great Eastern Shipping, contended 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 authorized to exact any tax on the hire charges received from the Port Trust.

Arvind Datar, 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 hire of a tug – on payment of Rs.1.5 lakh per day. The expression used in the agreement is ‘service.’ He contended that there is a difference between the ‘right to use goods’ and ‘the transfer of the right to use goods.’

The Court held under Section 2(t) of the KST Act, which defines sale, every transfer of property in goods includes the transfer of right to use any goods for any purpose.

Datar further submitted that the Entries 25 to 27 of List I indicate that the entire shipping industry is exclusively within the domain of Parliament. Entry 27 of List ­I cover the ports, and the agreement is with the Port Trust.

Senior counsel Mohan Parasaran contended that according to Article 297 of the Constitution, the territorial waters are within the exclusive jurisdiction of the Union of India, and a state government has no jurisdiction to impose a sales tax. He also relied on provisions from the Territorial Waters Act, 1976 which was enacted in furtherance of Article 297(3).

Supreme Court has relied on 20th Century Finance Corporation Ltd. v. State of Maharashtra (2000) to dismiss arguments on territorial waters, quoting the Constitution Bench verdict’s binding ratio – “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.”

The court thus held, “the location of the delivery of goods cannot be made the basis for the levy of tax on the sale of goods… The deemed sale takes place at the site where the right to use the goods is transferred.”

In the present case, the agreement has been admittedly signed in Mangalore. Thus, it was held that the liability to pay tax under the Act, to the state government, cannot be countenanced.

Rights and liabilities in territorial waters

The apex court exercised judicial restraint in pronouncing judgment on the rights and liabilities of the States and the Centre as the finding concerning the exaction of tax under the KST Act was based on the situs where the transfer right to use the vessel took place, which is a deemed sale.

The question was left open, for appropriate consideration in a future case where the issue might be taken up. Thus, the High Court’s finding was diluted by the apex court as the instant case was determined not on the question of territorial waters, but the agreement of the transfer of right to use the vehicle.

— India Legal Bureau