Holding

The charter party agreement is a deemed sale involving a transfer of the right to use the vessel, making it taxable under section 5C of the Karnataka Sales Tax Act, with the situs of tax liability being the place where the contract was executed (Mangalore).

Summary

The Great Eastern Shipping Co. Ltd., owner of a tug, entered into a six‑month time charter agreement with New Mangalore Port Trust. The Karnataka tax authorities directed the company to register under the Karnataka Sales Tax Act, 1957, claiming the agreement attracted tax under section 5C, which taxes the transfer of the right to use goods. The company contended that no such transfer occurred because it retained possession and control of the vessel and argued that Karnataka could not tax activities in India’s territorial waters. The Supreme Court examined the terms of the charter party, held that the agreement amounted to a transfer of the exclusive right to use the vessel – a deemed sale under Article 366(29A)(d) of the Constitution and section 5C of the Act. It further ruled that the situs of the taxable event is the place where the contract was executed (Mangalore), not where the vessel was used, and that the state’s jurisdiction to levy the tax was valid. The Court dismissed the appeal.

Issues considered

Whether the time charter party constitutes a transfer of the right to use the vessel within the meaning of section 5C of the Karnataka Sales Tax Act and Article 366(29A)(d).
Whether the State of Karnataka has jurisdiction to levy sales tax on a transaction occurring in India’s territorial waters.
Whether the situs of the agreement, rather than the location of the vessel, determines the tax liability.
Whether Explanation 3(d) to section 2(t) of the Karnataka Sales Tax Act is constitutionally valid.

Legislation cited

Constitution of Indias. Article 366(29A)(d)
Karnataka Sales Tax Act, 1957s. 2(j), s. 2(t), s. 5C
Marine & Fishing (Regulation) Act, 1986s. 2(j)
Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976

Subjects

sales taxtransfer of right to usedeemed saleKarnataka Sales Tax ActArticle 366(29A)(d)situs of contractterritorial waterstime chartermaritime law

Judgment

856 [2019]
SUPREME COURT 17 S.C.R. 856
REPORTS [2019] 17 S.C.R.

A THE GREAT EASTERN SHIPPING CO. LTD.
v.
STATE OF KARNATAKA & ORS.
(Civil Appeal No. 3383 of 2004)
B DECEMBER 04, 2019
[ARUN MISHRA, M. R. SHAH AND B. R. GAVAI, JJ.]
Karnataka Sales Tax Act, 1957:
s.5C r/w. Art.366(29A)(d) of the Constitution of India –
C Charter Party Agreement – By the company (owner of the ship)
with Manglore Port Trust for a period of six months – Notification
by the Revenue asking the company to get itself registered as a
dealer under the Act, as the agreement attracted tax u/s.5C of the
Act – The company repudiated its exigibility to tax on the ground
that it had not transferred the rights to the Port Trust – Writ petition
D
inter alia on the ground that the Act does not extend to territorial
waters of India and hence State not authorised to levy tax – Single
Judge as well as Division Bench rejected the case of the company
– Appeal to Supreme Court – Held: In the facts of the present case,
the Charter Party Agreement tantamount to a deemed sale as there
E was a transfer of right to use the vessel as provided in
Art.366(29A)(d) r/w. 5C or s.2(j) of the Act – For realization of
tax imposed within the ken of power u/Art.366(29A)(d), it is not
material where the goods are passed, but the situs of agreement is
determinative for realization of tax – Thus, location of delivery of
goods cannot be made the basis for levy of tax on the sale of goods
F
– The question as to extent of power of coastal ”State with respect
to territorial waters, is left open – Constitution of India –
Art.366(29A)(d).
Dismissing the appeal, the Court
G HELD: 1.1 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 tender documents pursuant to which agreement has
been entered into contains the conditions and instructions to
tenderers. The pre-qualification criteria provide that the
tenderer has to submit the documents regarding ownership or
H
856
THE GREAT EASTERN SHIPPING CO. LTD. v. 857
STATE OF KARNATAKA & ORS.

possession of tug on bareboat/committed demise charter hire A
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.
B
Tugs should be deployed at harbors at New Mangalore Port
during the contract period. [Para 22] [873-B-D]
1.2 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,
C
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 anti-pollutants.
The provisions for maintenance and operation are also contained D
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 E
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. [Para 27] [882-D-F] F
1.3 On perusal of 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 G
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, merely by providing the staff, insurance, H
858 SUPREME COURT REPORTS [2019] 17 S.C.R.

A indemnity, and other responsibilities 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
B that the control and possession of the vehicle are with the
contractor. The possession and control are clearly with the
charterer. 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 charter-party clauses,
C there is a transfer of right to use the vessel for the purposes
specified in the agreement. [Para 33] [884-C-F]
1.4 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
D 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
E
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)
of the Constitution of India, Section 5C, and definition of ‘sale’
in section 2 of the Karnataka Sales Tax Act, there is no room
F for doubt that there is a transfer of right to use the vessel. [Para
34] [884-G-H; 885-A]
1.5 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
G 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.
H [Para 37] [888-F-G]
THE GREAT EASTERN SHIPPING CO. LTD. v. 859
STATE OF KARNATAKA & ORS.

1.6 The Court is not turning the decision upon the terms A
used like ‘let’, ‘hire’, ‘delivery’ and ‘re-delivery’ 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
B
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 the Court is concerned in the instant matter, and that is a
deemed sale as specified in Article 366(29A)(d). It depends upon C
the terms and conditions of the charter-party when it is to be
treated as only for service and when it is the transfer of right to
use. [Para 43] [897-H; 898-A-C]
1.7 In a charter-party by demise, it may be charter without
master or crew or bareboat charter, and another may be a D
charter with master and crew under which ship passes to the
charterer for the purposes of mercantile adventure. As held in
the present case, full control has been given, and use is
exclusively for the charterer. He has the right to use the space
and burden. [Para 52] [904-C-D]
E
1.8 It is not correct to say that charter agreements are only
for service purpose. It depends upon the charter-party, and there
is no super-check formula to find out the nature of the contract.
It depends upon the terms and conditions of each contract.
Merely use of specific words is not determinative, but the real
F
crux is to be seen as per relevant conditions as agreed to
between the parties. [Para 53] [904-E-F]
1.9 It is not correct to say that as per the scheme of the
Harbour Craft Rules the owner retains the control of the vessel.
Merely by ss. 4, 6 and 8 of the Harbour Craft Rules which
G
pertain 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 H
860 SUPREME COURT REPORTS [2019] 17 S.C.R.

A 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.
[Para 55] [905-C-E]
B 1.10 Therefore, 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. [Paras 68] [916-C]
C
Bharat Sanchar Nigam Ltd. & Anr. v. Union of India
& Ors., (2006) 3 SCC 1 : [2006] 2 SCR 823 ; British
India Steam Navigation Co. Ltd. v. Shanmughavilas
Cashew Industries & Ors., (1990) 3 SCC 481 : [1990]
1 SCR 884 – relied on.
D
State of A.P. & Anr. v. Rashtriya Ispat Nigam Ltd.,
(2002) 3 SCC 314 – distinguished.
DLF Universal Ltd. & Anr. v. Director, Town, and
Country Planning Department, Haryana & Ors.,
E (2010) 14 SCC 1 : [2010] 15 SCR 85 ; Union of India
v. Gosalia Shipping (Pvt.) Ltd., (1978) 3 SCC 23 :
[1978] 3 SCR 943 ; State of Tamil Nadu & Ors. v. Tvl.
Essar Shipping Ltd. & Ors., (2012) 47 VST 209 (Mad.)
– referred to.
F In re: An Arbitration between sea and land securities
Ltd. and William Dickinson & Co. Ltd. The Alresford,
(1942) 2 KB 65 ; Scandinavian Trading Tanker
Co. A.B. v. Flota Petrolera Ecuatoriana, (1983) 2 LLR
253 ; Port Line, Ltd. v. Ben Line Steamers, Ltd. (1958)
1 AER 787 ; Torvald Klaveness A/S v. Arni Maritime
G
Corporation (1993) 2 LLR 335 ; Skibsaktieselskapet
Snefonn, Skibsaksjeselskapet Bergehus, and Sig.
Bergesen D.Y. & Co. v. Kawasaki Kisen Kaisha Ltd.
(1975) 1 LLR 422 ; Hyundai Merchant Marine Co.
Ltd. v. Gesuri Chartering Co. Ltd. (1991) 1 LLR 100
H – referred to.
THE GREAT EASTERN SHIPPING CO. LTD. v. 861
STATE OF KARNATAKA & ORS.

Halsbury’s Laws of England, 4 th Edn., Vol. 43 – A
referred to.
2. 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 the situs of the agreement is
determinative for the realization of tax. The location of the B
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. In the present case, the C
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. [Paras 57, 58] [905-G-H; 908-G-H; 909-B-C] D
20 th Century Finance Corporation Ltd. v. State of
Maharashtra, (2000) 6 SCC 12 : [2000] 1 Suppl. SCR
120 – followed.
Aggarwal Brothers v. State of Haryana & Anr., (1999)
9 SCC 182 : State of Orissa & Anr. v. Asiatic Gases E
Ltd., (2007) 5 SCC 766 : [2007] 6 SCR 1182 –
referred to.
3. 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 F
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 G
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.
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 7 th Schedule and in
respect of fisheries Entry 21 of List II. However, as the High H
862 SUPREME COURT REPORTS [2019] 17 S.C.R.

A Court has given a finding, and on being impleaded, coastal States
have filed their response as notices were issued to them. The
Court 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 the finding concerning exaction of tax under
the KST Act owing to situs where the transfer right to use the
B
vessel, which is a deemed sale, had taken place. As such, the
question is left open and the finding recorded by the High Court
in this regard is diluted. [Paras 63- 65] [914-H; 915-A-E]
Baliram Waman Hiray v. Justice B. Lentin, (1988) 4
SCC 419 : [1988] 2 Suppl. SCR 942 ; P.T. Rajan v.
C
T.P.M. Sahir (2003) 8 SCC 498 : [2003] 4 Suppl. SCR
84 – referred to.
Case Law Reference
[1988] 2 Suppl. SCR 942 referred to Para 14
D [2003] 4 Suppl. SCR 84 referred to Para 14
[2006] 2 SCR 823 relied on Para 35
[2010] 15 SCR 85 referred to Para 38
(2002) 3 SCC 314 distinguished Para 39
E
[1990] 1 SCR 884 relied on Para 40
[1978] 3 SCR 943 referred to Para 41
(2012) 47 VST 209 (Mad.) referred to Para 42
(1942) 2 KB 65 referred to Para 44
F
(1983) 2 LLR 253 referred to Para 45
(1958) 1 AER 787 referred to Para 46
(1993) 2 LLR 335 referred to Para 47

G (1975) 1 LLR 422 referred to Para 48
(1991) 1 LLR 100 referred to Para 49
(1999) 9 SCC 182 referred to Para 60
[2007] 6 SCR 1182 referred to Para 61
H [2000] 1 Suppl. SCR 120 followed Para 57
THE GREAT EASTERN SHIPPING CO. LTD. v. 863
STATE OF KARNATAKA & ORS.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3383 A
of 2004.

From the Judgment and Order dated 23.01.2004 of the High
Court of Karnataka, Bangalore in Writ Appeal No. 5526 of 1999.

Tushar Mehta, SG, Balaji Srinivasan, AAG, Arvind P. Datar, B
Mohan Parasaran, Arijit Prasad, Devadatt Kamat, Sr. Advs., Amar
Dave, Mahesh Agarwal, Rishi Agrawala, Anshuman Srivastava, Parul
Shukla, Ms. Devika Mohan, Rohan Talwar, E. C. Agrawala, Kanu
Agrawal, Mrs. Anil Katiyar, V. N. Raghupathy, Aditya Bhat, Javedur
Rahman, Rajesh Inamdar, Parikshit P. Angadi, Ashwin G. Raj, Manendra C
Pal Gupta, Mrs. Shally Bhasin, Ms. Hemantika Wahi, Nishant
Ramakantrao Katneshwarkar, Anoop Kandari, G. Prakash, Jishnu
M. L., Ms. Priyanka Prakash, Ms. Beena Prakash, Ms. A. Jaswanthi,
Ms. P. Mitra, K. V. Vijayakumar, P. Venkat Reddy, Prashant Kumar
Tyagi, P. Srinivas Reddy, M/s. Venkat Palwai Law Associates,
D
Shibashish Misra, S. Debabrata Reddy, Chandan Kumar Mandal,
Suhaan Mukerji, Ms. Astha Sharma, Abhishek Manchanda, Ms. Kajal
Dalal, Prastut Dalvi, Ms. Dimple Nagpal, Naveen Kumar, M/s. PLR
Chambers and Co., Merusagar Samantaray, K. Luikang Michdel,
G. N. Reddy, Ms. Sujatha Bagadhi, T. Vijaya Bhaskar Reddy,
Ms. D. Priyanka, Anirudhha P. Mayee, Advs. for the appearing parties. E

The Judgment of the Court was delivered by

ARUN MISHRA, J.

1. The question involved in the appeal is whether it is open to F
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.
G
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 H
864 SUPREME COURT REPORTS [2019] 17 S.C.R.

A 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
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
B 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
C 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 charge-sheet against the company for the offence under section
29(2)(aaaa) of the KST Act. The Joint Commissioner of Income Tax
D (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
E 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
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
F
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
G 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
H Charters world over are considered a contract of service. There is a
THE GREAT EASTERN SHIPPING CO. LTD. v. 865
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]

difference between the ‘right to use goods’ and ‘the transfer of the A
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.
B
(a) Time 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 C
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.
D
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 E
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 has to be given. The F
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 G
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. H
866 SUPREME COURT REPORTS [2019] 17 S.C.R.

A 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
B
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
C 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.
D
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
E 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
F 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
G entire territorial waters would exclusively belong to 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
H control of the Union as per Entry 21, List II. The Karnataka Marine
THE GREAT EASTERN SHIPPING CO. LTD. v. 867
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]

and Fishing (Regulation) Act, 1986 (Act of 1986) was passed by the A
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
B
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 C
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
legislature. Entries 25 to 27 of List I indicate that the entire shipping
industry is exclusively within the domain of Parliament. Entry 27 of List- D
I 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 base-line. The Central
Government has the exclusive power to make laws concerning customs
and other fiscal matters on activities that take place in the contiguous E
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 F
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 sales-tax on the State of Karnataka. The decision G
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.
12. Mr. Mohan Parasaran, learned senior counsel has taken us
in detail to various clauses of the agreement. The agreement is in the H
868 SUPREME COURT REPORTS [2019] 17 S.C.R.

A 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
B
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
C language of the agreement makes it clear to be a contract of service.
The expressions like delivery and re-delivery 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.
D
Possession of the Tug remains with it. In the event the tug is disabled
from use, the charterer is not required to pay charter-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 charter-party is a charter for a
E 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
F them, shall carry specified cargo on an agreed voyage in exchange for
freight, characteristically a “single payment.” Under Mercantile
jurisprudence, it is well-settled 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
G 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 charter-party 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
H explicitly necessary to constitute a transfer of the right to use, which is
THE GREAT EASTERN SHIPPING CO. LTD. v. 869
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]

not merely a licence to use the goods. Service tax is already leviable A
treating it as service agreement as such sales-tax 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
B
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 C
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
20 th Century Finance Corporation Ltd. v. State of Maharashtra
(supra), a decision of the Constitution Bench of this Court which has D
been approved in BSNL (supra). He has further urged that a coastal
State has jurisdiction to levy sales-tax 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 E
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, F
(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 G
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 H
870 SUPREME COURT REPORTS [2019] 17 S.C.R.

A 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 the said Act. He
B
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
sales-tax under section 5C of the KST Act in respect
C 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 sales-tax on the agreement, which is effective
D 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.
E
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 charter-party on the ground that it is a transfer
of right to use vessel.
F 19. Section 5C of the KST Act reads:
“Section 5C - Levy of tax on the transfer of the right to use any
goods-
Notwithstanding anything contained in sub-section (1) or sub-
G section (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
H column (3) of the said Schedule.”
THE GREAT EASTERN SHIPPING CO. LTD. v. 871
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]

20. Section 2(t) of the KST Act defines “sale” and reads as under: A
“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, B
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;
C
(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.
D
(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
E
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 F
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 G
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 H
872 SUPREME COURT REPORTS [2019] 17 S.C.R.

A 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
course of trade or business, includes the transfer of right to use any
B
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
C
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
D 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
E 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;
F (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
G 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
H to be a sale of those goods by the person making the transfer,
THE GREAT EASTERN SHIPPING CO. LTD. v. 873
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]

delivery or supply and a purchase of those goods by the person A
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 B
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 documents pursuant to which agreement has been entered into
contains the conditions and instructions to tenderers. The pre-
qualification criteria provide that the tenderer has to submit the C
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. D
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: E
“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: F
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
G
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. H
874 SUPREME COURT REPORTS [2019] 17 S.C.R.

A (i) x x x
(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).”
B
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
C 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,
D 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
E 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
F
(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.”
G “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%
H of average annual contract value. This guarantee shall be valid
THE GREAT EASTERN SHIPPING CO. LTD. v. 875
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]

for a total period of 9 months from the date of commencement A
of service.”
25. Clauses 1 and 3 to 15 of the Special Conditions which are
relevant are extracted hereunder:
Special Conditions of Contract :
B
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
C
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. D
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
E
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. F

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 G
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 H
876 SUPREME COURT REPORTS [2019] 17 S.C.R.

A 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
B 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/
C 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
D 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
E 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
F 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.
G 30,000/- per day will be levied on the Contractor, and if
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
H required from D.G.Shipping, Ministry of Surface
THE GREAT EASTERN SHIPPING CO. LTD. v. 877
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]

Transport, etc. for deploying the tug for service in the A
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 B
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 C

xxx
NOW THIS AGREEMENT WITNESSETH.
1. The Contractors let and the Charterer hire the good Vessel
…………….. for a period of six months with effect from D
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 E
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.
F
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. G
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. H
878 SUPREME COURT REPORTS [2019] 17 S.C.R.

A 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.
4. CONTRACTORS TO PROVIDE:
Except as otherwise stated in this charter or a: may be agreed
B
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
C
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
D 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
E
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
F
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.
G 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
H good state of repair, inefficient operating condition and
THE GREAT EASTERN SHIPPING CO. LTD. v. 879
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]

in accordance with good commercial maintenance A
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 B
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
C
(both as regards workmanship and quality of materials)
as not to diminish the value and efficiency of the vessel.
xxx
10. INSPECTION:
D
The Charterers shall have the right to require the vessel to be
dry-docked 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 E
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
F
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 G
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 H
880 SUPREME COURT REPORTS [2019] 17 S.C.R.

A 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
B
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
C
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,
D 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
E 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
F 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 receiving particulars of the complaint, promptly
investigate the matter and, if necessary, shall make a change in
G 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
H full and correct logs in English, accessible to the Charterers.
THE GREAT EASTERN SHIPPING CO. LTD. v. 881
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]

16. PENALTY: A

(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 B
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
C
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.
D
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 E
(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. F
17. The Contractors shall bear all expenses for mobilization and
demobilization.

xxxxx

21. The Contractors shall be liable for pollution damage and the G
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. H
882 SUPREME COURT REPORTS [2019] 17 S.C.R.

A 22. PERFORMANCE GUARANTEE:
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
B 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
C 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
D 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 anti-
pollutants. The provisions for maintenance and operation are also
E 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
F 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.
28. A performance guarantee has to be furnished by the
G 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
H them at Mangalore Port during the period of the contract. No doubt
THE GREAT EASTERN SHIPPING CO. LTD. v. 883
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]

about it that as provided in para 6(vii) of the instructions to the tenderers A
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
B
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
C
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. On-hire and off-hire
survey charges shall be borne equally by the charterer and the D
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 E
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
F
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 G
per clause 5, the charterer has to provide whilst the vessel is on hire,
fuel, lubricants, water, electricity, port charges, and anti-pollutants. 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 H
884 SUPREME COURT REPORTS [2019] 17 S.C.R.

A 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
B
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
C 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,
D merely by providing the staff, insurance, indemnity, and other
responsibilities 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.
E 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
F
charter-party 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
G
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
H a transfer of right to use the goods, during the period of six months,
THE GREAT EASTERN SHIPPING CO. LTD. v. 885
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]

the contractor has no right to give the vessel for use to anyone else. A
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 B
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 C
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-
D
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 E
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 F
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
G
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. H
886 SUPREME COURT REPORTS [2019] 17 S.C.R.

A 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
B
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)
C 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
D 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
E 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.
F 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
G 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
H was made. The other States levied a tax upon delivery of the
THE GREAT EASTERN SHIPPING CO. LTD. v. 887
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]

goods in the State pursuant to agreements of transfer while some A
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
B
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 C
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 D
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.”
E
(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 F
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- G
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 H
888 SUPREME COURT REPORTS [2019] 17 S.C.R.

A 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
B (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;

C (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
(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 “transfer of the right to use” and not
merely a license to use the goods;
E
(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
F 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
G 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
H has been relied upon for interpretation of the contract thus:
THE GREAT EASTERN SHIPPING CO. LTD. v. 889
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]

“12. The agreement with the Governor required to be entered A
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,
B
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. C
Interpretation of contract
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
D
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 E
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.
F
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, G
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 H
890 SUPREME COURT REPORTS [2019] 17 S.C.R.

A 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
B 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
C 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
D
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
E 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
F 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
G 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.
H The High Court was right in arriving at such a conclusion. In
THE GREAT EASTERN SHIPPING CO. LTD. v. 891
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]

the impugned order, it is stated, and rightly so in our opinion, that A
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
B
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 C
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
D
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 5-E of
the Andhra Pradesh General Sales Tax Act, 1957. What distinguishes
E
the aforesaid case on facts is that the effective control of the 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 F
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 G
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 H
892 SUPREME COURT REPORTS [2019] 17 S.C.R.

A 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
B 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.
C 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
D 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 goods,
the terms of the contract on which the goods are carried are
prima facie to be ascertained from the bill of lading. However,
E 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
F 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
G
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
H as an acknowledgment of receipt.
THE GREAT EASTERN SHIPPING CO. LTD. v. 893
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]

50. There is nothing to show that the charterparty was by way A
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
B
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. C
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 charter-party agreement
operates as a demise or not, depends upon the stipulations of the charter- D
party. In the case of demise, the charterer may employ ship in carrying
either his own goods or those of others. A charter-party 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 charter-
party are expressly incorporated, they become terms of the contract.
There was nothing to show that the Charter Party Agreement was by E
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 charter-party should operate as a
demise or not, depends on the stipulations of the charter-party. Based F
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 charter-party has to be decided based
on the stipulations.
41. In the Union of India v. Gosalia Shipping (Pvt.) Ltd.,
G
(1978) 3 SCC 23 question of charter-party 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 charter- H
894 SUPREME COURT REPORTS [2019] 17 S.C.R.

A party 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:
B “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
C 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
D 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,
E 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
F 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, charter-parties fall
into three main categories: (i) charters by demise, (ii) time
G 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
H services of his ship.” The contract in the instant case is of the
THE GREAT EASTERN SHIPPING CO. LTD. v. 895
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]

nature of time charter-party, whether there is a demise of the A
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
B
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 C
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.”
D
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 charter-party is a
voyage charter-party or time charter-party or charter by demise or not,
E
depends upon the intention of the parties. It has been observed that
certain words in the charter-party 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 F
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 G
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. H
896 SUPREME COURT REPORTS [2019] 17 S.C.R.

A 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
B
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.”
C 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
relationship of an agency is to be established between the owner and
the charterer. The question was of recovery of the amount due and
D 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.
E 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
F 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,
G 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
H London Explorer 1971 (1) LR 523). Keeping in line with the well
THE GREAT EASTERN SHIPPING CO. LTD. v. 897
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]

established and well-understood characteristic features on time A
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
B
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 C
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 D
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 E
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 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 F
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 G
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 ‘re-delivery’ but on the other essential terms of H
898 SUPREME COURT REPORTS [2019] 17 S.C.R.

A 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
B
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/
C invariable rule/law in this regard. It depends upon the terms and
conditions of the charter-party when it is to be treated as only for service
and when it is the transfer of right to use.
44. A decision by the Court of Appeal In re: An Arbitration
between sea and land securities Ltd. and William Dickinson & Co.
D 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 charter-party, nor did it
constitute a breach of contract by the owners. The fact that the owners
E 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
F 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
G 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 charter-party.
45. Reliance has also been placed on Scandinavian Trading
Tanker Co. A.B. v. Flota Petrolera Ecuatoriana, (1983) 2 LLR 253,
H wherein following observations have been made:
THE GREAT EASTERN SHIPPING CO. LTD. v. 899
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]

“A time charter, unless it is a charter by demise, with which your A
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 B
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, C
(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 D
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.” E

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 F
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 G
crew to carry the goods which were put on the vessel by the
plaintiffs.”
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. H
900 SUPREME COURT REPORTS [2019] 17 S.C.R.

A 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
B 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
C 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
D 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
E 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 for the purposes of undertaking ballast and loaded
F 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
G 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.
H All that is meant is that the time charter then ends in exactly the
THE GREAT EASTERN SHIPPING CO. LTD. v. 901
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]

same way as a voyage charter-party ends when the last cargo A
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:
B
“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
C
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 D
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
E
of the charter-party 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.
50. In Scrutton on Charterparties and Bills of Lading, 20th
Edn., Section IV dealing with the charter parties, following is the relevant F
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.
G
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 H
902 SUPREME COURT REPORTS [2019] 17 S.C.R.

A 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
B 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
C 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
D 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
E
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.”

F 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
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
G 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
H more places, or until the expiration of a specified period. In the
THE GREAT EASTERN SHIPPING CO. LTD. v. 903
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]

first case, it is called a „voyage charterparty,“ and in the second A
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 B
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 C
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 D
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 E
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 F
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 G
conveyed on the ship, nor does it deprive him of his rights as
owner.
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 H
904 SUPREME COURT REPORTS [2019] 17 S.C.R.

A 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
B 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.”
C
In a charter-party 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,
D 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 charter-party need not be a service contract to provide
services only.

53. The argument based upon the foreign courts decisions as to
E 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 charter-party, and there is no super-check 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
F above, is not determinative, but the real crux is to be seen as per relevant
conditions as agreed to between the parties.

54. When we consider the charter-party 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
G 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
H down by this court in BSNL (supra).
THE GREAT EASTERN SHIPPING CO. LTD. v. 905
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]

55. Mr. Mohan Parasaran, learned senior counsel has also A
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 B
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,
C
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;
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. D
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 E
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 F
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 sales-tax on the basis of situs
of agreement.
G
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 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 H
906 SUPREME COURT REPORTS [2019] 17 S.C.R.

A 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
sub-clauses (a) to (f) of clause (29-A) of Article 366 are not
actual sales within the meaning of “sale” but are deemed sales
B 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
C 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
D
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
E 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
F 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
G “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
H have traced the legislative history of sales tax in this country only
THE GREAT EASTERN SHIPPING CO. LTD. v. 907
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]

to show that excepting where the appropriate legislature by A
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 given in the decision in the B
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 C
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 D
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 E
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 F
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 G
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 H
908 SUPREME COURT REPORTS [2019] 17 S.C.R.

A 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
B 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
C 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
D situs of deemed sale for levy of tax if the transfer of right to use has
taken 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
E 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
F 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.”
G 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
H place where the contract has been entered into.
THE GREAT EASTERN SHIPPING CO. LTD. v. 909
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]

58. This Court in the 20th Century (supra) has considered for A
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, B
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. This Court in the 20th
Century (supra) has observed: C

“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 sub-clauses of clause (29-A) of Article 366 permit D
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; sub-clause (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 E
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 F
sub-clause (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 sub-clause (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 G
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, H
910 SUPREME COURT REPORTS [2019] 17 S.C.R.

A 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
B 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
C 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,
D 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 to use goods accrues only on account of the
transfer of right. In other words, the right to use arises only on
E 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
F 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
G
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
H respondents that there would be no completed transfer of right
THE GREAT EASTERN SHIPPING CO. LTD. v. 911
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]

to use goods unless the goods are delivered. Thus, the delivery A
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 B
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.” C

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
D
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 E
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 F
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 G
read down to this effect that it would not be applicable to the
transactions of transfer of 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.” H
912 SUPREME COURT REPORTS [2019] 17 S.C.R.

A 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
B 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)
C 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:
D “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
E
“(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
F of Part II of Schedule VII, the transfer contemplated by sub-
clause (d) of 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
G 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
H taxes on sales and purchases of goods including the ‘deemed’
THE GREAT EASTERN SHIPPING CO. LTD. v. 913
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]

sales and purchases of goods under clause (29-A) of Article 366 A
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 B
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
C
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.” D
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 E
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 F
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 above-mentioned provision of the said G
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 the nature of, transfer of right to use the goods, has been
discussed and Aggarwal Brothers (supra) has been relied upon, thus: H
914 SUPREME COURT REPORTS [2019] 17 S.C.R.

A “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
B 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
C 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
D 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
E 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
F 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 the aforesaid
G 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
H State can exercise power has been considered by the High Court, and
THE GREAT EASTERN SHIPPING CO. LTD. v. 915
STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]

specific findings have been recorded. The High Court has gone into A
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 B
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 C
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.
65. We need not go into the aforesaid questions. However, as D
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 E
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 F
difference with respect to exigibility of sales-tax 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 G
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. They have
submitted on merits not only before the High Court but this Court as H
916 SUPREME COURT REPORTS [2019] 17 S.C.R.

A 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
B 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
C 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.

D Kalpana K. Tripathy Appeal dismissed.

E

F

G

H