K'tka entitled to levy tax on right to use vessel: SC

The Supreme Court has held that a state, where contract was entered into, would be entitled to levy sales tax irrespective of the fact that transaction and sale of goods took place in high sea or Indian territorial waters.

The judgement would have far-reaching consequences in terms of revenue for coastal states of Karnataka, Goa, Maharashtra, Kerala, Tamil Nadu, Andhra Pradesh, and West Bengal, as the companies would not be able to take this argument that since sales and transactions occurred in territorial waters, the state cannot levy sales tax.

A three-judge bench presided over by Justice Arun Mishra rejected a contention by Great Eastern Shipping Company Ltd, that territorial waters are within the exclusive jurisdiction of the Union of India as under Article 297 of the Constitution, Karnataka has no jurisdiction to impose a sales tax.

The company owned a tug (towing vessel, namely "Kumari Tarini"). It entered into a Charter Party Agreement with New Mangalore Port Trust on January 8, 1998. It agreed to make available the services of tug as per the agreement along with the master and other personnel of the company to the Port Trust for six months.

Relying upon the Constitution bench decision in the 20th Century Finance Corporation Ltd vs State of Maharashtra (2000), the court dismissed an appeal filed by the company and concluded the transaction was liable to be taxed by the concerned authorities in Karnataka.

“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, it makes no difference with respect to exigibility of sales-tax under the provisions of the KST Act,” the bench, also comprising Justices M R Shah and B R Gavai, said.

Senior advocates Arvind Datar and Mohan Parasaran, appearing for the company, said the vessel was used in the territorial waters. The liability to pay tax cannot be countenanced.

Senior advocate Devdatt Kamat, appearing for the Karnataka government, said a coastal state has jurisdiction to levy sales-tax in the territorial waters abutting the coast. Referring to Article 297, he 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”.

Agreeing to his contention, the top court said the situs (place) of the agreement was relevant, which is within the territory of Karnataka. The court also said the location of delivery of goods here cannot be made the basis for the levy of tax on the sale of goods.