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2019 (12) TMI 225 - SC - VAT and Sales TaxTerritorial Jurisdiction - Levy of sales tax - Karnataka Sales Tax Act - 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. Whether the State of Karnataka has jurisdiction to levy sales-tax under section 5C of the KST Act in respect of the Charter Party Agreement dated 8.1.1998? Whether the agreement dated 8.1.1998 constitutes transfer of the right to use ? Whether the State of Karnataka has the competence to levy sales tax on the agreement, which is effective within the territorial waters? HELD THAT - 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 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 - 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. Whether there is a transfer of the right to use the vessel? - HELD THAT - It has to be considered in view of the charter agreement entered into between the company and the Port Trust. The tender 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. 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 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 of the vessel, including the lawful capacity to be kept at the charterer's disposal. 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 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. Merely by the provisions mentioned 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. Whether the State of Karnataka has power under section 5C of the Act to exact sales tax though charter-party 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? - HELD THAT - 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. This Court in the 20TH CENTURY FINANCE CORPN. LTD. AND ANOTHER VERSUS STATE OF MAHARSHTRA 2000 (5) TMI 980 - SUPREME COURT 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 as the situs of the deemed sale is in Mangalore. Thus, the liability to pay tax under the Act cannot be countenanced. 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 - Appeal dismissed.
Issues Involved:
1. Jurisdiction of Karnataka to levy sales tax under Section 5C of the KST Act. 2. Nature of the Time Charter Agreement and whether it constitutes a "transfer of the right to use" under Section 5C of the KST Act. 3. Competence of Karnataka to levy sales tax on agreements effective within territorial waters. Detailed Analysis: Jurisdiction of Karnataka to Levy Sales Tax: The primary issue is whether Karnataka can levy sales tax under Section 5C of the KST Act based on the Time Charter Agreement dated 8.1.1998. The court examined the definition of "sale" under Section 2(t) of the KST Act, which includes the "transfer of the right to use any goods." Article 366(29A)(d) of the Constitution, which deems such transfers as sales, was also considered. The court concluded that since the agreement was executed in Mangalore, Karnataka has jurisdiction to levy the tax, irrespective of where the goods are used. Nature of the Time Charter Agreement: The court analyzed whether the Time Charter Agreement dated 8.1.1998 constitutes a "transfer of the right to use" the vessel under Section 5C of the KST Act. The agreement involved the appellant providing a tug to the New Mangalore Port Trust for six months, with the vessel being at the "disposal" of the charterers and under their "control." The court noted that the agreement allowed the charterers to use all outfits, equipment, and appliances on board, and the vessel was under their exclusive control for six months. Thus, the court held that the agreement constituted a transfer of the right to use the vessel, making it liable for sales tax under the KST Act. Competence to Levy Sales Tax in Territorial Waters: The court addressed whether Karnataka has the competence to levy sales tax on agreements effective within territorial waters. It was argued that the territorial waters are part of the Union, not the State. However, the court referred to the Constitution Bench decision in 20th Century Finance Corporation Ltd. v. State of Maharashtra, which held that the situs of the agreement is determinative for the realization of tax. Since the agreement was signed in Mangalore, Karnataka has the authority to levy the tax. Conclusion: The Supreme Court held that the Time Charter Agreement between the appellant and the New Mangalore Port Trust constitutes a "transfer of the right to use" the vessel, making it a deemed sale under Article 366(29A)(d) of the Constitution and Section 5C of the KST Act. Consequently, Karnataka has the jurisdiction to levy sales tax on the transaction. The appeal was dismissed, affirming the High Court's decision.
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