Territorial waters and transfer of right to use goods upheld as taxable under Karnataka sales tax law.

Territorial waters adjoining Karnataka were treated as part of the State for fiscal purposes because Article 297 and the Maritime Zones Act did not exclude State jurisdiction over the waters above the seabed, and no conflicting Parliamentary law displaced that position. The objection to taxability on territorial grounds therefore failed. A charter party for a tug was also held to amount to a transfer of the right to use goods: the vessel was placed at the charterer's disposal, used for its port operations, and controlled under its instructions, so maintenance by the owner did not alter the tax character of the transaction.

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Issues: (i) Whether the territorial waters abutting the landmass of the State of Karnataka form part of the State for the purpose of levy of tax under the Karnataka Sales Tax Act, 1957. (ii) Whether the charter party agreement concerning the tug amounted to a transfer of the right to use the goods in favour of the New Mangalore Port Trust.

Issue (i): Whether the territorial waters abutting the landmass of the State of Karnataka form part of the State for the purpose of levy of tax under the Karnataka Sales Tax Act, 1957.

Analysis: Article 297 of the Constitution of India vests the sea-bed and other things of value underlying the ocean within territorial waters in the Union, but that does not exclude the waters above from the territorial limits of the State. The power under the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 only fixes maritime limits and declares India's sovereignty over such waters; it does not denude State jurisdiction over territorial waters adjoining its coast. The definition of "State" in the Karnataka Marine and Fishing Regulation Act, 1986 also includes the territorial waters along the entire coastline. In the absence of any conflicting Parliamentary law, territorial waters adjoining Karnataka were treated as part of the State for fiscal purposes.

Conclusion: The territorial waters adjacent to Karnataka were held to be within the State, and the objection to taxability on that ground failed.

Issue (ii): Whether the charter party agreement concerning the tug amounted to a transfer of the right to use the goods in favour of the New Mangalore Port Trust.

Analysis: The agreement described the vessel as hired for a fixed period, placed it at the disposal of the charterer, and gave the charterer control over its use for specified port operations. The clauses showed that the vessel was to be used round the clock for the charterer's purposes, with the master under the charterer's instructions and the whole reach and burden of the vessel at the charterer's disposal. Maintenance by the owner did not negate transfer of the right to use. Applying the principles governing deemed sales and the transfer of the right to use goods, the transaction satisfied the statutory requirement under the sales tax law.

Conclusion: The agreement was held to involve transfer of the right to use the tug in favour of the New Mangalore Port Trust.

Final Conclusion: The challenge to the notice and to the liability to register and pay tax failed, and the appeal did not merit interference.

Ratio Decidendi: Territorial waters adjoining a coastal State may form part of the State for fiscal jurisdiction unless excluded by law, and a charter agreement that places a vessel at the disposal and control of the charterer constitutes a transfer of the right to use goods.

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