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The Great Eastern Shipping Co. Ltd. v. State of Karnataka & Ors.

Civil Appeal · 2019 INSC 1314Decided 4 Dec 2019
Civil Appeal No. 3383 of 2004
Justice Arun Mishra · Justice M.R. Shah · Justice B.R. Gavai

Background

The appellant shipping company owned a tug which it hired out to the New Mangalore Port Trust under a "Time Charter Agreement" for six months, with the company's own master and crew continuing to operate the vessel. Karnataka's tax authorities sought to register the company as a dealer and levy sales tax under Section 5C of the Karnataka Sales Tax Act, treating the charter as a "transfer of the right to use goods": a deemed sale under Article 366(29A)(d) of the Constitution. The company argued this was purely a service contract (not a lease or transfer), since it retained full legal possession, custody and control of the tug throughout, and separately argued Karnataka had no power to tax a vessel's use within India's territorial waters at all. Both a Single Judge and a Division Bench of the Karnataka High Court rejected the company's arguments and upheld the tax.

Decision Breakdown

The Supreme Court held that whether a charter agreement amounts to a "transfer of the right to use goods" depends on whether effective control and possession of the vessel passed to the hirer, not merely on whether the contract is labelled a "time charter" or a "service", and on the facts, the Port Trust had obtained effective use and control of the tug for the charter period, satisfying the test for a deemed sale under Article 366(29A)(d). The Court held that the "situs" (location) of such a deemed sale is where the contract transferring the right to use is executed, and since the Charter Party Agreement was executed in Mangalore (within Karnataka), the state was entitled to levy sales tax regardless of whether the vessel actually operated in territorial waters, so the Court found it unnecessary to resolve the separate, broader constitutional question of a coastal state's taxing power over territorial waters, leaving that question open. The Court also rejected the company's late argument that the matter should be remanded to the tax authorities, since the company had argued the case entirely on merits throughout and could not seek a second round of adjudication after losing. The appeal was dismissed, with the Court confirming the transaction was taxable as a deemed sale.

Lesson Learnt

A contract's label (such as "time charter" or "service agreement") does not determine its tax treatment: what matters is the real substance of the transaction, particularly whether effective control and use of goods actually passed to the other party, and businesses cannot avoid state sales tax simply by structuring an arrangement as a service rather than a transfer of use.

Official source (sci.gov.in)View Judgment (PDF)

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