Supreme Court ruling on Deemed Sale and Sales Tax on Time Charter arrangement

In a recent ruling, the Supreme Court of India ruled that the agreement to Transfer of Right to use the Vessel would amount to a ‘Deemed Sale. This article outlines everything you must know about deemed sale and the sales tax on time charter arrangement.

Deemed sales  are not really ‘sales’ but have been deemed as sales. For instance, leasing and hiring purchase transactions, works contracts, transfer of right to use goods are instances of deemed sales that are taxed under the sales tax / VAT (levied by states in India).

In the shipping industry, chartering is an activity whereby a ship owner provides their vessel(s) for use to a charterer. The four main types of charter are:

• Demise charter
• Voyage charter
• Time charter
• Contract charter

Under the time charter, the charterer undertakes to hire the ship for a specific period of time; incurs ,the fuel and store consumption cost, port charges, and vessels hire cost (to be paid to the owner of the vessel). 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.’

Recently, the Supreme Court in the case of The Great Eastern Shipping Co. Ltd. vs. UOI [Civil Appeal No. 3383/2014] has held the time charter of towing vessel (tug) by the taxpayer to New Mangalore Port Trust under charter party agreement constitutes ‘deemed sale’ and Karnataka State has right to levy sales tax on the same.

In this case, the taxpayer has entered into an agreement with the New Mangalore Port Trust. As per the agreement, the service of a tug vessel was made exclusively available to the port trust for defined purposes along with the ship master and operating personnel for six months.

The Revenue Authorities alleged that since the transaction is in the nature of transfer of right to use the goods, the same would be subject to sales tax under Section 5C of the Karnataka Sales Tax Act, 1957. Aggrieved by the High Court’s decision, the taxpayer approached the Supreme Court with a prayer to quash the High Court’s order.

The Supreme Court while determining whether the transaction qualifies as ‘right to use’ for the purpose of levy of sales-tax, the Court made the following observations:

• On perusal of the terms of the agreement, the charterer has been given the right to use all outfits, equipment, and appliances on board the vessel.
• To constitute a transaction of transfer of right to use goods, it is essential that goods must be available for delivery. In the instant case, the vessel was made available and subsequently delivered. Also, during the contract period, the charterer had no right to give the vessel for use to anyone else.
• For realisation of tax imposed under Article 366(29A)(d) of the Constitution of India, 1949, it was not material where the goods are passed, but the situs of the agreement which is determinative.
• The Court relied on the Constitutional Bench decision in the case of 20^th Century Finance Corporation Ltd. vs. State of Maharashtra [(2000) 6 SCC 1] to determine whether the States have the jurisdiction to levy sales-tax for transactions undertaken in territorial waters. Based thereon, the Court held that the location of the delivery of goods cannot be basis for levy of tax on transfer of rights in goods, the situs of sale would be at the place where the contract has been entered into.

For determining the situs of sale and whether the transaction undertaken by the taxpayer can be covered within the concept of deemed sale, the Court have considered and analysed decisions of 20^th Century Finance Corporation (supra), BSNL vs. UOI [(2006) 3 SCC 1], and Rashtriya Ispat Nigam Ltd., [(2002) 3 SCC 314].

It may however be noted that the Court has not dealt with the situation post the introduction of ‘supply of tangible goods for use by way of service without possession and control’, under the erstwhile Service Tax law.

This decision alters the taxation of time charter agreements; considering that such an arrangement qualifies as a ‘service’ and service tax is attracted thereon.

It may be prudent for taxpayers  to analyse whether this ruling has any GST implications on similar transactions, since certain rate categories are dependent on ‘transfer of right to use’ or ‘transfer of right in goods’.