THE GREAT EASTERN SHIPPING CO. LTD. v. STATE OF KARNATAKA & ORS.

The Judgment of the Court was delivered by

ARUN MISHRA, J.

1Copy pinpoint1. 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

2Copy pinpoint2. 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

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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.

3Copy pinpoint3. The Assistant Commissioner of Income Tax vide notification 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 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.

4Copy pinpoint4. The company filed a writ petition on the ground that the KST Act does not extend to territorial waters of India situated adjacent to the landmass of the State of Karnataka. 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 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.

5Copy pinpoint5. Shri Arvind Datar, learned senior counsel appearing on behalf of the company submitted that the Time Charter Agreement dated 8.1.1998 does not amount to transfer of right to use goods within the meaning of section 5C of the KST Act. It was only a contract of service. The 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

6Copy pinpoint6. 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.

7Copy pinpoint7. 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

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8Copy pinpoint8. 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 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 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

9Copy pinpoint9. 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 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.

10Copy pinpoint10. It was submitted that the High Court has erred in treating the territorial water as part of the territory of Karnataka, in contravention 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 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 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 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.

11Copy pinpoint11. Mr. Datar has further submitted that under Entries 56 and 57 of List II, the State legislature has the competence to levy tax on 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 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 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 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.

12Copy pinpoint12. Mr. Mohan Parasaran, learned senior counsel has taken us in detail to various clauses of the agreement. The agreement is in the H

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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 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 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.

13Copy pinpoint13. 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 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 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 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.

14Copy pinpoint14. Mr. Devadatt Kamat, learned senior counsel submitted on behalf of the State of Karnataka that the transfer of right to use occurs 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 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 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).

15Copy pinpoint15. 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

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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.

16Copy pinpoint16. 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 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 within the territorial waters?

17Copy pinpoint17. 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:

18Copy pinpoint18. 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.

19Copy pinpoint19. 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.]

20Copy pinpoint20. 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 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 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

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A 3(c) x x x 3(d) x x x”

21Copy pinpoint21. A reading of the definition of sale makes it crystal clear that every transfer of property in goods by one person to another in the course of trade or business, includes the transfer of right to use any goods for any purpose. Section 5C of the Act also provides levy of tax on the transfer of the right to use any goods. 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 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 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 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 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 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 to whom such transfer, delivery or supply is made;” (emphasis supplied)

22Copy pinpoint22. 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 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 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.

23Copy pinpoint23. 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

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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

24Copy pinpoint24. 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 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, 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 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.”

25Copy pinpoint25. 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

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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 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 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 of delivery of the Tug to NMPT.”

26Copy pinpoint26. 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

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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 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 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 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 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 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 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 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 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

p. 880

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 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 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 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 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 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 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

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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.”

27Copy pinpoint27. As per the Charter Party Agreement, Annexure I, the vessel has been taken by the Port Trust for various lawful services required by the chartered Port Trust, including towing, docking, and undocking at the Port round the clock for the contract period of 6 months. The 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 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.

28Copy pinpoint28. A performance guarantee has to be furnished by the contractor to the charterer to the contract under clause 22.

29Copy pinpoint29. 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 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 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 agreement. The indemnity clause indemnifies, charterer for any damage to its property; is to be provided by the contractor.

30Copy pinpoint30. 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 contractors as provided in condition 5. The charterer will not be responsible for any damage suffered by the tug is provided in condition 6.

31Copy pinpoint31. 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 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 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.

32Copy pinpoint32. 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

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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 submitted.

33Copy pinpoint33. 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 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, 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 charter-party clauses, there is a transfer of right to use the vessel for the purposes specified in the agreement.

34Copy pinpoint34. 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 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.

35Copy pinpoint35. 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

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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 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 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 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 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 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

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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.”

36Copy pinpoint36. 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.”

37Copy pinpoint37. The Charter Party Agreement qualifies the test laid down 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 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.

38Copy pinpoint38. 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 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, 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 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 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

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A on the objectives, values, and policies that contract is designed to actualize.

39Copy pinpoint39. 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 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 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 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 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 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 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 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 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 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 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.

40Copy pinpoint40. 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

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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 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 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 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 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.

41Copy pinpoint41. 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

p. 894

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 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 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 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 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 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 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 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 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

42Copy pinpoint42. 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, 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 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 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

p. 896

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 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 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 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 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 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 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 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).”

43Copy pinpoint43. 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

p. 898

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.

44Copy pinpoint44. 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 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 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 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.

45Copy pinpoint45. 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.

46Copy pinpoint46. 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