The State of Tamil Nadu v. Tvl.Essar Shipping Limited

-----For petitioner in Tax Case (Revision) Nos.184, 1563, 1589 and 1590 of 2006 and respondent in W.A.No.1140 of 2010:Mr.A.NavaneethakrishnanAdvocate GeneralAssisted by Mr.R.SivaramanSpecial Government PleaderFor respondent in Tax Case (Revision) Nos.184, 1563, 1589 and 1590 of 2006 and appellant in W.A.No.1140 of 2010:Mr.C.NatarajanSenior Advocate forMr.N.InbarajanCOMMON ORDER(Order of the Court was made by CHITRA VENKATARAMAN,J.)These Tax Case Revisions and the Writ Appeal arise out of the order of the Sales Tax Appellate Tribunal, relating to the AssessmentYears 1992-93 to 1997-98. The Revenue is on revision before us. Since the issues raised in all these revisions are common and the Tribunal had also considered the issues in respect of AssessmentYears 1992-93 to 1994-95 under a common order and with reference to the subsequent years, under a separate order, we feel, it is better that the entire case is dealt with under a common order.2.

The substantial questions of law raised in the Revision cases are as follows:T.C.(R)No.184 of 2006:(i)Whether the Sales Tax Appellate Tribunal is right in holding that both the execution of contract as well as the act of passing ofthecontrol/domain of the goods should take place for the transfer tobe completed and for levy of tax under Section 3A of the TamilNadu General Sales Tax Act, 1959?(ii) Whether the Sales Tax Appellate Tribunal is right in holding that the impugned transactions are eligible for deduction in Section 3-A(2a) of the Tamil Nadu General Sales Tax Act, 1959?T.C.(R) Nos.1563, 1589 and 1590 of 2006: (i) Whether the Tribunal has erred in treating the leasing of ship as not falling under Section 3A of the Tamil Nadu General Sales TaxAct, 1959?(ii) Whether the Tribunal, after accepting all the contentions put forth by the Revenue that the leasing transactions involved https://hcservices.ecourts.gov.in/hcservices/ would attract tax under Section 3-A, is right in holding that the transactions would fall under Section 3(A)(2)(a) of the Act when there are no findings in regard to inter-State trade, commerce, etc.

(iii) Whether the Tribunal is correct in arriving at such aconclusion that the transactions would fall under Section 3(A)(2)(a) of the Act when such a ground was not raised either before the Assessing Authority or before the First Appellate Authority?(iv) Whether the order of the Tribunal is legally tenable in the context of the order of the Apex Court reported in 119 STC 182since the situs of sale of a deemed sale would be the place where the contract is executed?(v) Whether the Tribunal has erred in observing that the sale of used and discarded ships did not conclude within the State of TamilNadu as per Explanation 3 to Section 2(n) of the Tamil NaduGeneral Sales Tax Act, 1959, read with Section 4(2) of the Central Sales Tax Act, 1956?(vi) Whether the order of the Tribunal in deleting the consequent penalty levied is valid in law?3. T.C.Nos.1589, 1590, 1563 and 184 of 2006 and W.A.No.1140 of2010 relate to assessment years 1992-93, 1993-94, 1994-95, 1995-96and 1997-98 respectively.

The assessment for the assessment years1992-93 and 1994-95 were made originally on M/s.South India ShippingCorporation Ltd., which got amalgamated with M/s.Essar Shipping Ltd.,with effect from 1.4.1996. The assessment for the assessment year1993-94 was made on the present assessee and the assessment orders for all the assessment years concerned herein, were served on the assessee herein. 4. The assessee herein is a Public Limited Company. The assesseeowned fleet of ships used for transport of cargo and passengers. Thebusiness of the assessee included entering into charterpartyagreement to hire out the Vessels to charterers. It is stated that in the course of assessment year 1992-93, the assessee company hadlet on hire, 11 ships owned by them, to various parties within and outside Tamil Nadu and also parties outside India and collected charges on rendering services. Of the several parties, M/s.PoompuharShipping Corporation Ltd., Chennai, is one with whom the assessee had time charter agreement in respect of three vessels, by name, ChennaiValarchi, Chennai Veeran and Chennai Polivu.

Time charter agreements were executed on 25.02.1992 as regards Chennai Valarchi and ChennaiPolivu on 25.2.1992 and Chennai Valarchi on 12.1.1993 forM/s.Poompuhar Shipping Corporation Ltd., to transport coal to the Tamil Nadu Electricity Board. It is stated that apart from the above, the assessee also sold ships and old assets. Similar to the transaction relevant to the assessment year 1992-93, the assessee had entered into time charter agreement during the subsequent relevant assessment year too. The terms of the time charter agreement are one https://hcservices.ecourts.gov.in/hcservices/ and the same. 5. It is seen that the assessee was not originally registered asa dealer under the provisions of the Tamil Nadu General Sales Tax Act(hereinafter referred to as "the Act"). It is stated that on8.8.1996, the place of business of the assessee was inspected and the accounts were called for and checked.

Based on this, the Revenueviewed that the transaction under the charterparty agreement was lease of the ships for valuable consideration, attracting charge under Section 3A of the Act. The Assessing Officer viewed that asper the agreement, there was a transfer of possession of the Vesselsto the charterers. Thus, going by the terms of lease, the receipt of lease rentals were held as assessable to tax under Section 3A of the Act.6. The petitioner objected to the proposal, contending that the essential control of the Vessel remained with the owner/assessee. Considering the nature and characteristics of the time charter agreement, in contradistinction to bareboat charter and voyage charter, the actual possession of the Vessel remained always with the owner. Referring to the various clauses in the agreement, the essential ingredients of transferring possession for effective control not being there, there was no liability to be met by theassessee.

The contention thus taken by referring to various clauses in the agreement was, however, rejected by the Assessing Officer. Heheld that the Clauses in the agreement clearly spelt out on giving possession and control over the Vessel to the charterer andredelivery by the Charterer at the end of the lease period. So too, the claim on the sale of ships was also rejected. Thus ultimately, the order of assessment was made on the assessee, treating the transaction as transfer of right to use, hence a deemed sale, attracting charge under Section 3A of the Act. So too the sale of the named ships as local sale. Thus on the time charter, apart from tax, penalty was also imposed under Section 12(5)(1) and 12(3)(a) of the Act for the assessment year 1993-94 and under Section 12(5)(i) of the Act for the assessment years 1994-95, 1995-96, 1996-97 and 1997-98. Aggrieved by the above-said assessments, the assessee preferred statutory appeals before the Appellate Assistant Commissioner.7.

Reiterating the contention that the time charter agreement did not involve transfer of possession of the Vessel from the assessee to the charterer and referring to the various Clauses in the agreement, the assessee submitted that the charterparty agreement did not involve demise of the ship; the Master of the ship and the crew ever remained the employees of the assessee. Referring to the phrases used, namely, "let", "hire", "delivery" and "redelivery", learnedSenior Counsel submitted that Courts have held that these terms intime charter agreements are not to be understood in a literal sense and that these generally used terms, however, do not mean that under the time charter, the owner of the Vessel parted with the possession https://hcservices.ecourts.gov.in/hcservices/ of the Vessel. Thus, he relied on the decision of the Apex Courtreported in (1990) 3 SCC 481 (British India Steam Navigation Co.

Ltd. Vs. Shanmughavilas Cashew Industries and Ors.) and submitted that the agreement has to be read as a whole to ascertain the intention of the parties. After going through the various clauses in the agreement, the Appellate Assistant Commissioner agreed with the assessee that the time charter agreement did not involve transfer of right to use the goods. Thus the assessment under Section 3A of the Act was setaside. As regards the sale of ships, when the contract of sale in respect of specific Vessels was entered into, they were outside the State of Tamil Nadu. In the above circumstances, sale being one of ascertained goods, the assessment made on the sale of ships was setaside. However, on other aspects regarding sale of bunders, the Appellate Assistant Commissioner remanded the same for fresh consideration. On the penalty levied under Section 12(3)(a), for the assessment year 1992-93, the same was reduced; similarly for the other assessment years, penalty stood modified.

8. Aggrieved by this, the Revenue went on appeal before the TamilNadu Sales Tax Appellate Tribunal. Agreeing with the Revenue that the lessee had the control over the economic benefit of the Vesselhired, the Tribunal referred to the decision reported in [1999] 113STC 403 (Upasana Finance Ltd. Vs. State of Tamil Nadu) and held that the transaction attracted the charge under Section 3A of the Act. The assessee took an alternate plea that at the time of entering into the charterparty agreement, the Vessels were not inside the State. Further, the object of the charterparty agreement was transportation of coal from outside; thus with the inter-state movement providing for bringing coal under the charterparty, the Tribunal accepted the plea of the assessee, holding that transactions of inter-State sale for the entire transactions were not assessable under Section 3A(2)of the Act. The Tribunal pointed out that at the time of entering into the charterparty agreement, the Vessels were berthed indifferent States and thus, they were not available for delivery within the State.

Thus the Tribunal held that even though the transactions are assessable under Section 3A of the Act, the assesseewas entitled to deduction under Section 3A(2)(a) of the Act. TheTribunal relied on the decision reported in (1986) 63 STC 391 (VinayCotton Waste Company v. The State of Tamil Nadu) and concluded that even though the seller and the purchaser might be in the same State, yet, there could be an inter-state sale. As regards the sale of ships, the Tribunal upheld the order of the Appellate AssistantCommissioner, holding that they were not taxable, since the same were outside the State of Tamil Nadu. Thus the Tribunal also upheld the deletion of penalty. 9. Apart from reiterating the grounds taken in the Tax CaseRevisions, learned Advocate General appearing for the Revenue took us through the time charterparty agreement and the provisions of Section3-A of the Tamil Nadu General Sales Tax Act and pointed out that in https://hcservices.ecourts.gov.in/hcservices/ terms of the charterparty agreement, M/s.Poompuhar ShippingCorporation had taken possession of the Vessels for use by the said party.

Going by the amendment brought forth under Article 366(29A)of the Constitution and the corresponding provisions under the TamilNadu General Sales Tax Act under Section 3-A, treating the transfer of right to use as a deemed sale, with possession thus transferred to the other contracting party, the transaction clearly falls under the charging provision under Section 3A of the Act. He pointed out that the assessee had received consideration on the transfer of right touse the Vessel by the contracting party. He pointed out that it is not denied by the assessee that M/s.Poompuhar Shipping Corporationhad had the possession to use the Vessel for transporting coal from Tuticorin to different places. On the admitted fact that the namedVessel was outside the State of Tamil Nadu for movement to otherState, he submitted that it is clear that the cause of action had arisen in Chennai and hence, the same was liable to be taxed under Section 3A of the Act.

He further pointed out that even though the Tribunal had accepted that the transaction is exigible to tax under Section 3(a) of the Central Sales Tax Act, it committed a serious error in granting the relief under Section 3A(2)(a) of the Tamil NaduGeneral Sales Tax Act when that was not the case of the assessee too. On the question as to whether the inter-State trade and commerce would qualify for deduction, on the facts thus fitting in with Section 3A of the Act, no exception could be taken to the order of the Assessing Officer in bringing them to tax under the provisions of the Tamil Nadu General Sales Tax Act. 10. In this connection, he placed reliance on the decision reported in [2000] 119 STC 182 (20th Century Finance Corporation Ltd. Vs. State of Maharashtra), particularly to paragraph 27, that on the admitted fact that there was a written contract between the parties, the place of execution shall be the place where transaction took place.

Hence, the provisions of the Tamil Nadu General Sales Tax Actstood attracted. He also referred to the decisions reported in[1999] 113 STC 317 (SC) (Aggarwal Brothers Vs. State of Haryana and Another) and [2007] 8 VST 314 at page 328 (HLS Asia Ltd. Vs. State of Assam (Gauhati)), to contend that once possession is handed over to the contracting party, the provisions of Section 3A of the Tamil NaduGeneral Sales Tax Act stood clearly attracted. Going by the decision reported in [2000] 119 STC 182 (20th Century Finance Corporation Ltd. Vs. State of Maharashtra), it is immaterial where the goods were delivered. Since the transfer of right to use is a deemed sale and the lease is effective only when the ships are put into lessee'seconomic benefit, the assessee is not entitled to deduction under Section 3A(2)(a) of the Act. Learned Advocate General further submitted that when the assessee had not filed any Tax Case to challenge the order of the Tribunal as regards its finding on possession, on the admitted fact that possession had been given to the contracting party, the assessee cannot, in any manner, dispute the said aspect. https://hcservices.ecourts.gov.in/hcservices/

As regards the sale of ships, learned Advocate Generalpointed out to Section 3(29) as well as Section 28 of the MerchantShipping Act, 1958 and submitted that the port of transport assumes significance in the matter of fixing the chargeability under the provisions of the Act. 12. Countering the submissions of the learned Advocate General, Mr.C.Natarajan, learned senior counsel appearing for the assessee, made submission first on the fallacy in the reasoning of the Tribunalas to the applicability of Section 3A of the Tamil Nadu General SalesTax Act to a time charterparty agreement. Making his submission on the maintainability of the above-said contention from the assessee in the Tax Case filed by the Revenue, he placed reliance on the decisions reported in [1998] 109 STC 205 (Sree Ayyanar Spg. & Wvg. Mills Ltd. Vs. State of Tamil Nadu (Mad.)), [1980] 121 ITR 572, at page 579 (Commissioner of Income Tax Vs.

In sum and substance, he submitted that all that the agreement herein provided for was only service by use of the Vesselin the context of charter hours. The word "possession", as used in the time charter, cannot be understood as had been normally understood. Thus going by the characteristics of the timecharterparty agreement, the question of bringing the transaction under the provisions of Section 3A of the Act does not arise. Insupport of this contention, he placed reliance on the decisions of the Apex Court reported in [2000] 119 STC 182 (20th Century FinanceCorporation Ltd. Vs. State of Maharashtra), [2002] 126 STC 114 (Stateof A.P. Vs. Rashtriya Ispat Nigam Ltd. (S.C.), [2006] 145 STC 91(Bharat Sanchar Nigam Ltd. Vs. Union of India (S.C.), [2008] 16 VST193 (Srei International Finance Ltd. Vs. State of Orissa and others)and [2011] 39 VST 257 (Hyderabad Engineering Industries Vs. State of Andhra Pradesh (SC)), that in the absence of any effective control and possession given to the charterer, the right of invoking Section3A of the Act does not arise.

On what would constitute transfer of right to use, learned senior counsel also referred to the decisions reported in [1959] 10STC 584 (The State of Madras Vs. Asher Textiles Ltd.), [1998] 109 STC205 (Sree Ayyanar Spg. & Wvg. Mills Ltd. Vs. State of Tamil Nadu(Mad.)), [1980] 121 ITR 572, at page 579 (Commissioner of Income TaxVs. Damodaran (V) (SC)), AIR 1970 SC 1 (Shankar Ramchandra AbhyankarVs. Krishnaji Dattatreya Bapat) and [2008] 16 VST 193 (SreiInternational Finance Ltd. Vs. State of Orissa and others) and submitted that the transaction under the time charter was more in the nature of service rather than in the nature of deemed sale, to fit into the concept of "transfer of right to use the property in goods", aphrase as has been judicially interpreted. He pointed out to the decision reported in [1984] 145 ITR 124 (Ker) (Commissioner of Gift-Tax vs H.H. Sethu Parvathi Bai) that in a contract of transfer ofright to use, the contracting party must have the possession of the articles or goods to attract the charge Section 3A of the Act.

In support of his contention that the time charter is only in the nature of providing of service, learned senior counsel pointed out to the service tax provisions of the Finance Act, 1994, as amended by Finance Act, 2010, dated 08.05.2010, with effect from01.07.2010 in particular, as to the definition of "taxable service"under Section 65(105)(zzzzj) to include the service provided or to be provided to any person by any other person in relation to supply of taxable goods for use without transferring right of possession and effective control of the machinery, equipment and appliance. He also referred to the provisions of the Income Tax Act under Chapter XIIGunder Section 115V to the definition of "bare boat charter" with reference to the provision relating to income of shipping companies. In the context of the service tax provisions and the well recognized distinct characteristics of the time charter agreement, learned senior counsel submitted that possession given under the time charter was never treated as an effective possession transferred to thecharterer so as to result in transfer of right to use goods, to attract the charge under Section 3A of the Act. The consistent view taken by Courts on the nature of possession given under thecharterparty agreements, thus assumes significance, that on facts, the possession given to the charterer has to be understood in the context of the services rendered by the assessee to enable the contracting party to transport the coal from one place to another. He also took us through the provisions of the [The Indian] Carriageof Goods by Sea Act, 1925 with reference to the responsibilities of the owner of the goods and the definition of "owner" under the Merchant Shipping Act. In the light of the above provisions, he https://hcservices.ecourts.gov.in/hcservices/ contended that considering the peculiarity of the transactions under the time charterparty agreement, the term "possession", hence, has tobe understood in the background of the well settled propositions of law in India and elsewhere.

As regards the outright sale of Vessels, he pointed out that even though the agreement had been entered into in Tamil Nadu, the appropriation of Vessels took place only outside the State of TamilNadu. The agreements specifically named the ships sold. Going by the Explanation to the definition of "sale" under Section 2(n) of the Act, rightly, the Tribunal agreed with the assessee and hence, no exception could be taken to the reasoning of the Tribunal.

Heard learned Advocate General for the Revenue and the learned senior counsel appearing for the assessee and considered the material placed on record.

On the preliminary objection raised, objecting to theassessee's right to question the very levy of sales tax under Section3A in a Tax Case filed by the State, we do agree with the assesseethat even in the absence of a separate Tax Case filed by the assesseeand the Tribunal had granted relief to the assessee as by way of deduction under Section 3A(2)(a) of the Tamil Nadu General Sales TaxAct, the assessee is entitled to canvass the legal issue as to its liability under the Tamil Nadu General Sales Tax Act. 20. As to the right of the assessee to question the very applicability of Section 3A of the Tamil Nadu General Sales Tax Actto the transaction of the assessee in a revision filed by the State, even in the absence of any revision filed by the assessee, we agree with the submission of the learned senior counsel appearing for theassessee.

The decision relied on by the assessee reported in [1959] 10STC 584 (The State of Madras Vs. Asher Textiles Ltd.) provides direct answer to the objection made by the Revenue. We have no hesitation in following the time tested law laid down by this Court as early as1959, on the jurisdiction of this Court under Section 12B(4) of the Madras General Sales Tax Act, which is equivalent to Section 34 of the Tamil Nadu General Sales Tax Act, 1959.

The issue therein in the reported decision related to the effect of the Sales Tax Laws Validation Act, (Act VII of 1956) as regards the "explanation sales" during the period 1.4.1951 to6.9.1955. The validation Act passed subsequent to the decision of the Tribunal had the effect of validating the assessments on explanation sales, the correctness of which were pending before various forums. In the revision preferred as against the order of the Tribunal cancelling the assessment, the Revenue contended therein that on the date when the Tribunal passed the orders on the https://hcservices.ecourts.gov.in/hcservices/ "explanation sales", no doubt, the assessee had the benefit of the decision rendered in the case of Bengal Immunity Co. Vs. State of Bihar reported in (1955) 6 S.T.C. 446. However, subsequent ordnance and enactment had the effect of validating the assessment and hence, the Revenue took the plea that the Tribunal's order was to be setaside.

The assessee objected to the Court applying the provisions of the Act to set aside the order of the Tribunal, since the powers of the Court in revision would be limited to considering the question of correctness of the order of the Tribunal made in the light of the law existing when the Tribunal passed the order. Repelling such acontention, this Court considered the ambit of revisionaljurisdiction under Section 12B(4) of the Madras General Sales TaxAct.

This Court pointed out that the authority of the Court "to take note of the change in law subsequent to the original Court'sdecision and mould the relief in accordance therewith does not rest merely on the provisions like Order 41 Rule 33, C.P.C." Such poweris inherent in the very nature of the appellate jurisdiction possessed by it. In considering the nature of revisionaljurisdiction under Section 115, C.P.C., this Court held that the jurisdiction therein is wider than the jurisdiction of an appellateCourt, that the High Court can call for reference of the case suomotu. It observed: " Although the party had not moved in the matter, the High Court could interfere with the order of the lower court within the ambit of the provision, irrespective of the fact that the party against whom the order was passed did ordid not complain against it, whereas in an appeal the powers of the court would be circumscribed or limited to the actual matter in dispute before it, and would not extend to the matter which was not the subject matter of the appeal. " Touching on the scope of Section 12B of the Madras General Sales TaxAct, 1939, this Court pointed out that it is a special jurisdiction conferred by a statute. Referring to the decision of the Full Benchin the case of Chidambara Nadar Vs. Rama Nadar reported in (1957)I.L.R. 1937 Mad 616, this Court further held that a Court of revision would have all the powers of an appellate Court except that the conditions of interference would have to be in accordance with the relevant statutory provisions. Thus it is open to the revisionalCourt to take note of the subsequent change in law and grant relief to the parties on the basis of such law.

Thus, on the scope of Section 12-B(4) of the Madras GeneralSales Tax Act, this Court pointed out that the provisions therein give a wider jurisdiction than even Section 115 C.P.C. to this Court https://hcservices.ecourts.gov.in/hcservices/ and that the Court has plenary powers of interference where there isan error of law. The said errors of law would include an error calling for interference by reason of any subsequent retrospective enactment and a validation provision. Thus this Court viewed that incases of errors of law, the Court has every jurisdiction to rectify it under Section 12B of the Madras General Sales Tax Act. 26. This Court referred to the decision in the case of Chappan v.Moidin Kutti, ILR 22 Mad 68, holding that the power to review or revise may be confined to points of law or may extend to matters offact also.

In dealing with the scope of advisory jurisdiction under the Income Tax Act, in the decision reported in [1980] 121 ITR 572, at page 579 (Commissioner of Income Tax Vs. Damodaran (V) (SC)), the Apex Court pointed out that on a reference application filed by an aggrieved party, it was open to a non-applicant to ask for areference of those questions of law also which arise on its submissions but negatived in the appeal by the Appellate Tribunal. The Apex Court pointed out that even though the non-applicant might have succeeded before the Tribunal on some other ground, but rejecting one of the grounds taken therein, nevertheless, it was open to the non-applicant to seek a reference on a point which went against the assessee. The Apex Court pointed out that "it is as if recognising a right in the winning party to support the order of the Appellate Tribunal also on grounds raised before the AppellateTribunal but negatived by it. "

This Court reiterated the above principles in the decision reported in [1998] 109 STC 205 (Sree Ayyanar Spg. & Wvg. Mills Ltd. Vs. State of Tamil Nadu (Mad.)) and pointed out that as a revisionalauthority, this Court is certainly possessed of the jurisdiction to intervene with the order of the Tribunal, if travesty of justice results in to the parties by wrong construction or interpretation of the provisions of law. This Court viewed that if such mistake of law is not rectified, while sitting in revision, not only the manifested injustice resulted to the party aggrieved could not at all be removed, but also such injustice would be inflicted on the litigant public, in the system of administration of law. In the background of the well settled principles laid down as regards the jurisdiction of this Court, that the ultimate endeavour in recognising such a rightin the opposite party in a tax litigation being one of arriving at appropriate and correct tax adjustment, we hold that the assessee is entitled to make its submission on the very applicability of Section3A of the Act to the facts of this case.

A perusal of the order of the Tribunal shows that it rejected the plea of the assessee on the aspect of possession and upheld thechargeability of the transaction under Section 3A of the Act. It is not denied by the Revenue that having regard to the fact that the https://hcservices.ecourts.gov.in/hcservices/ assessee had succeeded in the appeal on the other contentions taken, there did not arise the need for filing a revision. Thus as laid down in the judgment of this Court in the decision reported in [1959]10 STC 584 (The State of Madras Vs. Asher Textiles Ltd.), even if theassessee had not filed a separate revision as against the order of the Tribunal on account of the relief granted on some other aspect, the assessee, nevertheless, can raise issues taken by it on the assessment under Section 3A but negatived by the Tribunal. The issue raised being principally a legal issue, the answer to it does not require consideration of fresh materials or facts. Hence, while supporting the plea that it had taken before the Tribunal, learned senior counsel made his submission on the aspect of possession in the matter of invoking Section 3A of the Act. Quite apart, even for considering the claim of the Revenue as to the assess ability of the transaction under Section 3A, it is necessary that this Court should permit the assessee to make his submission as to the nature of transaction, its legal effect and the applicability of Section 3A of the Act to the transaction without which we do not think that one can arrive at the legal effect of the transaction to consider the claims of either party herein relating to the assessment under Section 3A of the Act. It is a well settled principle of law that unless the transactions fall within the four corners of the charging provision, the same cannot be brought to tax under the Act. In this, the Stateis bound to prove that the transaction in question attracts the charge under the provisions of the Act. Thus this Court is bound to consider the claim of the assessee that the time charter would not attract the charge under Section 3A of the Act. Hence, we overrule the Revenue's objection.

Before going into the various contentions of the parties herein, we need to note what a charterparty is, the types ofcharterparty and how Courts have judicially interpreted certain phrases used therein - in particular, phrases like "delivery","redelivery" and "possession". The decisions on the various clauses therein, in particular, on "delivery", "redelivery" and "possession",have relevance in understanding the contentions of the Revenue, treating the time charterparty agreement between the assessee and the contracting party as assessable under Section 3A of the Tamil NaduGeneral Sales Tax Act, resulting in transfer of right to use and hence a deemed sale. The first of the agreements herein between the parties relates to a time charterparty agreement between the assesseeand M/s.Poompuhar Shipping Corporation dated 12.1.1993, relating to the assessment year 1992-93. The clauses in all the agreements relating to various assessment years before us are one and the same and they follow the form on time charter as approved by New YorkProduce Exchange published in "Time Charterer" 5th Edition by MichaelWilford.

Charterparty contract is a contract of affreightment in writing, by which the owner of a ship or Vessel let the whole or https://hcservices.ecourts.gov.in/hcservices/ part of her to a person for the conveyance of goods on a particular voyage in consideration of the payment of freight.

Black's Law Dictionary defines "Charterparty" to mean, acontract by which a ship or principal part of it is let by the owner, especially to a merchant, for the conveyance of goods on a pre-determined voyage to one or more places; a special contract between the ship owner and charterers, especially for the carriage of goods, etc. Contracts of affreightment may be either in the form of bill of lading or charterparty. While bill of lading is, pure and simple, acontract to carry goods, a charterparty may involve the hiring of the ship itself. In the decision reported in (1990) 3 SCC 481 (BritishIndia Steam Navigation Co. Ltd. Vs. Shanmughavilas Cashew Industriesand Ors.), the Apex Court pointed out that a bill of lading is intended to provide for the rights and liabilities of the parties arising out of a contract of affreightment. When a ship is under charter and the stipulations in the charter are expressly incorporated in the bill of lading, the bill of lading has to be read subject to the charterparty stipulations. Thus when a claim arises as regards the short landing of the cargo, it would be necessary to know not only the stipulation between the shipper i.e., the owner of the cargo and the charterer evidenced by the bill of lading, but also those between the charterer and the owner of the ship. Thus one has to know the kind of charterparty entered into, to fix the liability of the parties.

Charterparties are broadly classified into three general categories - demise or bare boat charter, time charter and voyage charter. Demise charter is one wherein, in return for payment of hire, the possession of the chartered ship is given to the charterer; the charterer provides the crew and pays all running costs and undertakes the responsibility of the ship owner to those, whose goods are carried on in the vessel. Time charter, whether it is for aperiod or for a trip, are those wherein, for the payment of hire charges, the vessel's employment is put under the order of thecharterer, while possession remains with the owner who provides the crew and pays the running costs, excluding the voyage costs such as fuel and cargo. Voyage charters are those by which the owner agrees to perform one or more of the designated voyages in return for the payment of freight. Whether the charterparty is a voyagecharterparty or time charterparty or charter by demise or not, depends upon the intention of the parties.

According to Black's law Dictionary, a time charterparty isdistinct from a charter by demise. Time charterparty is a charter for a specified period rather than for a specific task or for avoyage where the ship owner agrees to the charterer to render services through his Master and crew to carry the goods that are puton board the ship by the charterer. The ship owner continues to manage and control the vessel and the charterer merely designates the https://hcservices.ecourts.gov.in/hcservices/ ports of call and the cargo carried and each party bears the expenses related to its function and for any damage it causes. The ownership and possession in this case remain with the owner of the ship through the Master and the crew, even though the charterer may have the temporary right to have his goods loaded and conveyed in the Vessel. In a charter by demise, there is a lease of a ship itself and thecharterer becomes, for a time being, the owner of the vessel; the Master and the crew become his servants and through them, the possession of the ship is with him.

Scrutton on "Charter-Parties" (Seventeenth Edn., 1964,defines "time charterparty" as a contract whereby the ship owner, during a certain period, agrees to do certain work for the charterer; but it is not a contract under which the charterer has any interestin the ship, except that the ship owner has to do the agreed work with the use of his Vessel.

Dealing with the nature of rights that a charterer has over the Vessel under a time charter, in the decision reported in (1978) 3SCC 23 (Union of India Vs. Gosalia Shipping (Pvt.) Ltd.), the SupremeCourt quoted from "Law of Carriage by Sea" by B.C.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 avoyage 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 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) Lloyds Rep 147 @ page 156 in the case of TheHill Harmony, 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".

Learned senior counsel for the assessee placed before us the various references contained in Venkataramaiya's "Law Lexicon with Legal Maxims", as to the meaning of various terms used, in particular, the concepts on "delivery", "redelivery" and "possession"in "Time charter-party", which reads as follows: " A time charterparty is, in fact, a document which is of a very misleading nature, because the real nature of what is undertaken by the shipowner is disguised by the use of language dating from acentury or more ago — language which was then appropriated to a contract of a totally different character. A century ago a time charterparty, then known as a demise charterparty, was an agreement under which the charterer was handed over the possession of the ship of the ship-owner to put his servants and crew upon her and to sail her for his own benefit. That form of charterparty, which as I say, was called a demise charterparty, has long since been obsolete.

Thus the law on the distinct nature and characteristics of ademise charter and bareboat, lease and time charter, shows that while in the former the legal owner gives the charterer sufficiency of the right of possession and control thereby the charter operates as alease of the ship, time charter, in essence, contracts for providing service. Thus the question as to whether a particular charter is acharter by demise or made the charterer only an agent of the owner, needs to be seen only from the terms of the charter, to ascertain the extent of privity established between the shipper and the shipowneras stipulated in the bill of lading. "If the charter is by way of demise the problem would be simple inasmuch as the bill of lading will be purely between the shipper and the charterer. In cases of a'voyage charter' or a 'time charter' one has to find out the actual terms of the charter to ascertain whether they operated as charter by demise or made the charterer only as an agent of the shipowner and ifso to what extent so as to ascertain the extent of privity https://hcservices.ecourts.gov.in/hcservices/ established between the shipper and the shipowner as stipulated in the bill of lading. - Refer (1990) 3 SCC 481 (British India SteamNavigation Co. Ltd. Vs. Shanmughavilas Cashew Industries and Ors.).

Keeping in mind the distinct character of time charter as providing for services only, under the Finance Act, 2010 (Act 14 of2010) Chapter V of the Finance Act, 1994, amendments were introduced, whereunder, by inserting sub clause (zzzz) to sub clause (105) of Section 65 of the Finance Act; under Service Tax, whereunder, subsection (105), defining "taxable service", the amendment sought to include services provided or to be provided to any person by anyother person in relation to supply of tangible goods including machinery, equipment and appliances for use, without transferring right of possession and effective control of such machinery, equipment and appliances.

In the notification issued by the Government of India, Ministry of Finance, to the President, Indian National Ship OwnersAssociation, Mumbai, by proceedings in R.No.146 F, North Block, NewDelhi, dated 18th June, 2008, with reference to the charterpartyagreement to grant charterparty to the charterer who acquired the right to use the vessel for transportation of merchandise, his own orof another person, or passenger, without having the right of possession and effective control of the vessel, it was pointed out that considering the object being chartering of vessel, the nature of services attracted service tax under Section 65(105)(zzzzj).

Chapter XII-G of the Income Tax Act contains specialProvisions relating to Income of Shipping Companies. The method of calculating the income in respect of the vessels operated on tonnage basis was sought to be considered in the light of certain definitions therein. Section 115V, containing definitions, reads as follows: Definitions. " 115V. In this Chapter, unless the context otherwise requires,— (a) "Bareboat charter" means hiring of a ship for astipulated period on terms which give thecharterer possession and control of the ship, including the right to appoint the master and crew; (b) "bareboat charter-cum-demise" means a bareboatcharter where the ownership of the ship is intended to be transferred after a specified period to the company to whom it has been chartered; "

Thus a reading of various decisions on the subject of timecharterparty shows: (i) Time charter and voyage charter are contracts of affreightment, pursuant to which, the owner agrees to carry goods by sea in https://hcservices.ecourts.gov.in/hcservices/ return of a sum of money. - (1990) 3 SCC 481 (British IndiaSteam Navigation Co. Ltd. Vs. Shanmughavilas Cashew Industriesand Ors.); Where the charter is a charter by demise, it is an ordinary contract, whereby possession of the ship stands with the charterer. (ii)In the case of time charter agreement, which is not a charter by demise, neither legal ownership nor beneficial ownership or equitable ownership is given in the hands of the charterer. -99 L.W. 517 (Transworld Shipping Services (I) (P) Ltd. Vs.Owners & Other); that it is impossible to construe the word"delivery" or "redelivery" in the literal sense. - [1919] 2 K.B.305 (Italian State Railways Vs.

In the context of the above, the various clauses in the time charter agreement need to be seen. As already pointed out, the various clauses in the agreements are one and the same.

In Line 13 of the charter, it was specifically agreed that the owners of the Vessel had agreed to let and the charterers agreed to hire the said Vessel from the time of delivery. The place of delivery is given under Line 18 as "Vessel to be placed at the disposal of the Charterers, at on passing the latitude of Madras in https://hcservices.ecourts.gov.in/hcservices/ ballast North Bound on passage to Charterers nominated load port anytime day or night sundays and holidays included. " Line 36 provides for the obligation of the owners, namely, the assessee herein and the obligation of the contracting party. It further stated that whilst on hire, the owners shall provide and pay for all provisions, wages and consular shipping and discharging fees of the crew, shall pay for the insurance of the vessel, also for all the cabin, deck, engine room and other necessary stores, including boiler water and maintainher class and keep the vessel in a thoroughly efficient state in hull, machinery and equipment for and during the service with Classification and Statutory Certificates necessary to comply with current requirements at ports of call during the service; that the Charterers have to provide and pay for all the fuel except as otherwise agreed, port charges, pilotages, Agencies, Commissions, Consular charges (Except those pertaining to the Crew), and all other usual expenses except those before started, but when the vessel puts into a port for causes for which vessel is responsible, then all such charges incurred shall be paid by the Owners.

In the background of the above-said clauses and the decisions relied on by the assessee, the claim of the assessee is that when there was no possession handed over to the charterer to result in transfer of right to use in the sense of having effective control over the vessel as held by the Courts in the cases relating to deemed sale on transfer of right to use for any purpose, the chargeabilityto Section 3A of the Tamil Nadu General Sales Tax Act does not arise. https://hcservices.ecourts.gov.in/hcservices/ Learned senior counsel submitted that what is true and applicable to the characteristics of a normal sale in the matter of handing over possession and control is equally applicable to a case of deemed sale. Thus when there is no handing over of possession in the true sense of the term, the question of assuming effective control does not arise.

Section 3A of the Tamil Nadu General Sales Tax Act is the relevant charging provision to levy tax on the deemed sale relating to transfer of right to use any goods for any purpose. Upholding the constitutional validity of the said provision under the Tamil NaduGeneral Sales Tax Act along with similarly worded provisions of otherState enactments, in the decision reported in [2000] 119 STC 182(20th Century Finance Corporation Ltd. Vs. State of Maharashtra), the Apex Court held that the State cannot levy tax on the transfer ofright to use goods on the basis that one of the events in the chain of events had taken place within the State. On the construction ofsub clause (d) of Clause 29A under Article 366 of the Constitution, the Apex Court pointed out that the taxable event is the transfer ofright to use goods, regardless of when or where the goods are delivered for use.

What would amount to transfer of right to use goods, however, came up for consideration in the decision reported in [1990] 77 STC182 (Rashtriya Ispat Nigam Ltd. Vs. Commercial Tax Officer, CompanyCircle, Visakhapatnam), which was confirmed by the Apex Court in the decision reported in [2002] 126 STC 114 (State of A.P. Vs. RashtriyaIspat Nigam Ltd. (S.C.). The said decision relates to a case where, for the execution of the work at Visakhapatnam Steel project, Rashtriya Ispat Nigam allotted work to various contractors. Tofacilitate the work, it undertook to supply the machinery to the contractors, for which it received charges. On an assessment made under Section 5E of the Andhra Pradesh General Sales Tax Act, which is similar to Section 3A of the Tamil Nadu General Sales Tax Act, the Andhra Pradesh High Court held that since there was no transfer of right to use goods, there could be no occasion for levying tax under Section 5E of the Andhra Pradesh General Sales Tax Act. A mere provision of a facility which involves the use of goods or even the right to use goods, per se, is not sufficient to attract the charging provision. "There must be a transfer of that right. " The High Courtfurther held that "the transfer of right to use goods necessarily involves delivery of possession by the transferor to the transferee. Delivery of possession to a thing must be distinguished from its custody. " On the terms of agreement, it was held "Thus the essence of transfer is the passage of control over the economic benefits of the property, which results in terminating the rights and other relations in one entity and creating them in another. " Going through the agreement, the Court held that all that the contractor was entitled was to make use of the machinery for the purposes of execution of the work for the assessee and there was no transfer ofright to use as such, in favour of the contractor. The effective https://hcservices.ecourts.gov.in/hcservices/ control of the machinery, even while it was in use by the contractor, was that of the assessee. Thus the High Court held that the charge under Section 5E of the Andhra Pradesh General Sales Tax Act was not attracted.

Confirming the decision reported in [1990] 77 STC 182(Rashtriya Ispat Nigam Ltd. Vs. Commercial Tax Officer, CompanyCircle, Visakhapatnam), in the appeal preferred by the State, in the decision reported in [2002] 126 STC 114 (State of A.P. Vs. RashtriyaIspat Nigam Ltd. (S.C.), the Apex Court held that so long as the effective control of machinery was with the owner, even while it was in use of the contract done and the contractor was not free to make use of the machinery for work other than the project work or move it out during the period the machinery was in its use, the requirements for attracting the charge did not stand satisfied. The fact that the contractor would be responsible for the safe custody while it was on the site, did not militate against the owner's possession and control of the machinery. Thus the Apex Court held that passing of aneffective control of the machinery to the contractor was a sine quanon for the purpose of attracting the levy under the concept of deemed sale relating to transfer of right to use goods. Thus the emphasis in the case of transfer of right to use goods, as laid down by the Apex Court in the decision reported in [1999] 113 STC 317 (SC)(Aggarwal Brothers Vs. State of Haryana and Another), is the transfer of the right to use goods and not transfer of goods. Theabove-said decisions came up for consideration in the decision reported in [2006] 145 STC 91 (Bharat Sanchar Nigam Ltd. Vs. Union of India (S.C.)

Explaining the decision reported in [2000] 119 STC 182 (20thCentury Finance Corporation Ltd. Vs. State of Maharashtra), the ApexCourt pointed out that the said decision cannot be cited as an authority for the proposition that delivery of possession of the goods is not a necessary concomitant for completing a transaction of sale for the purpose of Article 366(29A)(d) of the Constitution. TheApex Court pointed out that "the essence of right under Article 366(29A)(d) of the Constitution is that, it relates to user of goods. It may be that the actual delivery of the goods is not necessary for effecting transfer of right to use goods, but the goods must be available at the time of transfer, must be deliverable and delivered at some stage. Referring to the decision reported in [2002] 126 STC114 (State of A.P. Vs. Rashtriya Ispat Nigam Ltd. (S.C.) as well as the decision reported in (1999) 9 SCC 182 (Aggarwal Brothers Vs.State of Haryana), the Supreme Court observed as follows: "77. But in the case of Aggarwal Brothers v. State of Haryana (1999) 9 SCC 182 when the assessee had hired shuttering to favour of contractors to use it in the course of construction of buildings it was found that possession of the shuttering materials was transferred by the assessee to the https://hcservices.ecourts.gov.in/hcservices/ customers for their use and therefore, there was adeemed sale within the meaning of Sub-clause (d)of Clause 29-A of article 366. What is noteworthy is that in both the cases there were goods inexistence which were delivered to the contractors for their use. In one case there was no intention to transfer the right to use while in the other there was. "

In the separate judgment, His Lordship Dr.JusticeAR.Lakshmanan pointed out to the attributes in a transfer of right to use goods, as follows: " 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;b.There must be a consensus ad idem as to the identity of the goods;c. The transferee should have a legal right touse the goods - consequently all legal consequences of such use including any permissions or licenses required therefore should be available to the transferee;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 touse" and not merely a licence to use the goods;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. "

The Apex Court further pointed out that unlike in the case of composite contracts, namely, a works contract, hire purchase contract catering contract, where, by a legal fiction, a divisibility is brought in to the contract to isolate the sale element and subject itto sales tax, as far as the transfer of right to use is concerned, there is no such divisibility to be read into the contract as one of transfer of right to use goods and rendering of service. Referringto the contract between telecom service provider and subscriber, the Apex Court pointed out as follows: "119. It is not possible to interpret the contract between the service provider and the subscriber that the consensus was to mutilate the integrity of contract as a transfer of right to use goods and rendering service. Such a mutilation is not https://hcservices.ecourts.gov.in/hcservices/ possible except in the case of deemed sale falling under sub clause (b). Nor can the service element be disregarded and the entirety of the transaction be treated as a sale of goods (even when it is assumed that there is any goods at all involved)except when it falls under sub clause (f). Thiswill also result in an anomaly of the entire payment by the subscriber to the service provider being for alleged transfer of a right to use goods and no payment at all for service. The licence granted by the Central Government fixes the tariff rates and all are for services. "

In the circumstances, the Apex Court held that the transaction was purely one of service and there was no transfer ofright to use the goods at all. Thus the decisions referred to above show that in order to attract charge under the transfer of right touse any goods for any purpose as a deemed sale, what is emphasized is the intention to "transfer the right to use goods" which, in turn, imply transfer of effective control for use. Read in the context of the decision reported in [2002] 126 STC 114 (State of A.P. Vs.Rashtriya Ispat Nigam Ltd. (S.C.), so long as the owner retains effective control over the goods, on a mere possession given withouta right accompanying thereto to result in the transfer of right touse the goods as he likes, the question of bringing the transaction within the corners of the charging provision does not arise. As the Andhra Pradesh High Court pointed out in the decision reported in[1990] 77 STC 182 (Rashtriya Ispat Nigam Ltd.