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Full Case Details
S.R. DAS, J. – This is an appeal from the judgment pronounced by the High Court of
Judicature at Madras on 29th March, 1951 on a consolidated reference by the Income Tax
Appellate Tribunal under Section 66(1) of the Income Tax Act whereby the High Court
answered in the affirmative both the referred questions which were expressed in the following
terms:
“(1) Whether on the facts and in the circumstances of the case the profits derived
by the assessee company from sales made to European and American buyers arose
outside British India?
(2) Whether on the facts and in the circumstances of the case the profits derived
by the assessee company from sales made to European and American buyers were
received outside British India?”
- The assessee company is a private limited company registered in the Mysore State
under the Mysore Company Regulations and has its registered office at Sinduvalli in Mysore
State. The management and control of the assessee company was vested in Messrs Oakley
Bowden & Co. (Madras) Ltd., another private limited company incorporated under the Indian
Companies Act, having its registered office at No. 15, Armenian Street, Madras. The assessee
company owns chromite mines in Mysore State. Chrome ores are extracted from the mines
and converted into a merchantable product and then sold to buyers mostly outside India. A
very small proportion of the total sales is effected in India and for the purposes of this case
may be left out of consideration. The sales are mostly to buyers in America and Europe. The
sales to the purchasers in Europe are put through in London by Bowden Oakley & Co. Ltd.,
London, which is the agent of the assessee company in Europe holding a power of attorney
from the assessee company. The contracts for sale to European purchasers are signed by
Bowden Oakley & Co. Ltd., in London. The sales to purchasers in America are effected
through Messrs W.R. Grace & Co., who buy for undisclosed principals. The contracts for sale
to American purchasers are signed by W.R. Grace & Co., presumably in America and by
Oakley Bowden & Co. (Madras) Ltd., in Madras. Specimen forms of contracts with European
purchasers and those with American purchasers are set out in the order of the Tribunal dated
22nd January, 1948 out of which the present reference arises. Under both forms of contracts
the price was F.O.B. Madras or Marmagoa. A very small quantity of goods was sold F.O.B.
Marmagoa and the same need not be considered here. Provision was made for weighment,
sampling and assay of goods at destination. - The course of dealing as found by the Appellate Tribunal was as follows: Before the
goods were actually shipped, the buyers used to open a confirmed irrevocable Bankers’ credit
with some first class bank in London. Being informed of the opening of such credit the
Eastern Bank Ltd., London sent intimation to the Eastern Bank Ltd., Madras, and the latter in
its turn used to pass on the intimation by letter addressed to the assessee company. A
specimen of such letter is also set out in the order of the Appellate Tribunal. In such
communication the Eastern Bank Ltd., Madras, informed the assessee company that “in
accordance with advices received by letter from our London Office, a confirmed and
irrevocable credit has been opened in your favour by Messrs Morgan Grenfell & Co., Ltd.,
London, for account of Messrs W.R. Grace & Co., New York, for a sum not exceeding £
7300 (seven thousand three hundred pounds sterling) in all, available by delivery to us on or
before 15th January, 1940 of the following documents.…” Towards the end of the letter the
Eastern Bank Ltd., Madras used to write that they were “prepared in our options as customary
to negotiate drafts drawn in terms of the arrangement provided that the documents as
abovementioned appear to us to be in order”. The letter concluded with a warning that the
advice was “given for your guidance and without involving any responsibility on the part of
this Bank”. On receipt of such intimation the assessee company placed the contracted goods
on board the steamer at Madras and obtained A bill of lading in its own name. As already
mentioned, the shipments were made principally at Madras Port. Thereafter the assessee
company used to make out a provisional invoice on the basis of the bill of lading weight and
contract price for 48 per cent Cr. 203 and used to draw a bill of exchange on the buyers’
Bank, where the letter of credit had been opened, for 90 per cent of the amount of the
provisional invoice payable at sight in the case of European contracts and 80 per cent of the
amount of the provisional invoice at 90 days’ sight in the case of American contracts and in
either case the bills of exchange used to be drawn in favour of the Eastern Bank Ltd., London.
The bill of exchange together with the relative bill of lading endorsed in blank by the assessee
company and the provisional invoice was then negotiated with the Eastern Bank Ltd., Madras,
the bankers of the assessee company, who used to credit the assessee company with the
amount of the bill of exchange. The Eastern Bank Ltd., Madras, then forwarded the
documents to the Eastern Bank Ltd., London, who used to present the bill of exchange to the
buyers’ Bank in London and upon the bill of exchange being accepted the Eastern Bank Ltd.,
London, used to deliver the bill of lading and the invoice to the buyers’ Bank. The buyers’
Bank in due course used to pay the amount of the bill of exchange to the Eastern Bank Ltd.,
London. Thereafter, on arrival of the goods and after weighment and assay, the sale price was
ascertained and the balance of price, after deducting the payments made against the bill of
exchange, used to be paid to the Eastern Bank Ltd., London, which was the assessee
company’s agent and banker in London.
- Learned Solicitor-General appearing in support of this appeal contends that having
regard to the terms of the contracts the sales must be regarded as having taken place in British
India. The facts strongly relied on by him are (i) that the price and delivery of goods were on
F.O.B. terms, (ii) that in the European contracts the insurance, if any, was to be the concern of
the buyers and (iii) that payment of the 80 per cent or 90 per cent as the case may be was
made in Madras by the Eastern Bank Ltd., Madras, to the assessee company on the delivery of
the documents. All these facts taken together indicate, according to his submission, that the
property in the goods passed at Madras and the sales accordingly were completed in British
India. We are unable to accept this line of reasoning. According to Section 4 of the Indian
Sale of Goods Act a contract of sale of goods is a contract whereby the seller transfers or
agrees to transfer the property in goods to the buyer for a price and where under a contract of
sale the property in the goods is transferred from the seller to the buyer, the contract is called
a sale, but where the transfer of property in the goods is to take place at a future time or
subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell.
By sub-section (4) of that section an agreement to sell becomes a sale when the time elapses
or the conditions are fulfilled subject to which the property in the goods is to be transferred.
Section 18 of the Act clearly indicates that in the case of sale of unascertained goods no
property in the goods is transferred to the buyer unless and until the goods, are ascertained. In
the present case, the contracts were always for sale of unascertained goods. Skipping over
Sections 19 to 22 which deal with contract of sale of specific goods we come to Section 23
which lays down that where there is a contract for the sale of unascertained or future goods by
description and goods of that description and in a deliverable state are unconditionally
appropriated to the contract, either by the seller with the assent of the buyer or by the buyer
with the assent of the seller, the property in the goods thereupon passes to the buyer. It is
suggested that as soon as the assessee company placed the goods on board the steamer named
by the buyer at the Madras Port the goods became ascertained and the property in the goods
passed immediately to the buyer. This argument, however, overlooks the important word
“unconditionally” used in the section. The requirement of the section is not only that there
shall be appropriation of the goods to the contract but that such appropriation must be made
unconditionally. This is further elaborated by Section 25 which provides that where there is a
contract for the sale of specific goods or where goods are subsequently appropriated to the
contract, the seller may, by the terms of the contract or appropriation reserve the right of
disposal of the goods until certain conditions are fulfilled. In such a case, notwithstanding the
delivery of the goods to the buyer, or to a carrier or other bailee for the purpose of
transmission to the buyer, the property in the goods does not pass to the buyer until the
conditions imposed by the seller are fulfilled. The question in this case, therefore, is: was
there an unconditional appropriation of the goods by merely placing them on the ship? It is
true that the price and delivery was F.O.B., Madras but the contracts themselves clearly
required the buyers to open a confirmed irrevocable Bankers’ credit for the requisite
percentage of the invoice value to be available against documents. This clearly indicated that
the buyers would not be entitled to the documents that is, the bill of lading and the provisional
invoice, until payment of the requisite percentage was made upon the bill of exchange.
The bill of lading is the document of title to the goods and by this term the assessee
company clearly reserved the right of disposal of the goods until the bill of exchange was
paid. Placing of the goods on board the steamer named by the buyer under a F.O.B. contract
clearly discharges the contractual liability of the seller as seller and the delivery to the buyer
is complete and the goods may thenceforward be also at the risk of the buyer against which he
may cover himself by taking out an insurance. Prima facie such delivery of the goods to the
buyer and the passing of the risk in respect of the goods from the seller to the buyer are strong
indications as to the passing also of the property in the goods to the buyer but they are not
decisive and may be negatived, for under Section 25 the seller may yet reserve to himself the
right of disposal of the goods until the fulfilment of certain conditions and thereby prevent the
passing of property in the goods from him to the buyer. The facts found in this case are that
the assessee company shipped the goods under bill of lading issued in its own name. Under
the contract it was not obliged to part with the bill of lading which is the document of title to
the goods until the bill of exchange drawn by it on the buyers’ Bank where the irrevocable
letter of credit was opened was honoured. It is urged that under the provision in the contract
for weighment and assay, which was ultimately to fix the price unless the buyer rightly
rejected the goods as not being in terms of the contract, the passing of property in the goods
could not take place until the buyer accepted the goods and the price was fully ascertained
after weighment and assay. It is submitted that being the position, the property in the goods
passed and the sales were concluded outside British India, for the weighment, sampling, assay
and the final fixation of the price could only take place under all these contracts outside
British India. It is not necessary for us to express any opinion on this extreme contention.
Suffice it to say, for the purposes of this case, that in any event upon the terms of the contracts
in question and the course of dealings between the parties the property in the goods could not
have passed to the buyer earlier than the date when the bill of exchange was accepted by the
buyers’ Bank in London and the documents were delivered by the assessee company’s agent,
the Eastern Bank Ltd., London, to the buyers Bank. This admittedly, and as found by the
Appellate Tribunal, always took place in London. It must, therefore, follow that at the earliest
the property in the goods passed in London where the bill of lading was handed over to the
buyers’ Bank against the acceptance of the relative bill of exchange. In the premises, the
Appellate Tribunal as well as the High Court were quite correct in holding that the sales took
place outside British India and, ex hypothesi, the profits derived from such sales arose outside
British India.
- As to the second question, the learned Solicitor-General contends that irrespective of
the place where the sale may have taken place the profits derived from such sales were
received in Madras. It is recalled that after shipment the assessee company, through its
managing agent in Madras, prepared provisional invoices and drew bills of exchange for 80
per cent or 90 per cent, as the case may be, of the amount of such invoices and handed over
the same to the Eastern Bank Ltd., Madras, and received the amount of the bill of exchange
from them in Madras. He contends that the receipt of this payment by the assessee company
was really the receipt of the price of the goods and amounted to receipt of profits in Madras.
He draws our attention to the terms of payment in the European contract and to the letter of
intimation of the opening of the credit sent by the Eastern Bank Ltd. Madras, to the assessee
company which have been quoted in part in the earlier part of this judgment. He relies on the
words “through the Eastern Bank Ltd”, appearing in the contract and the words “available by
delivery to us” appearing in the letter. We do not think that those words support the
contention of the learned Solicitor-General. The words “through the Eastern Bank Ltd.,”
appear to us to go with the preceding words “to be advised to sellers” which are put within
brackets which seem to have been wrongly closed after the word “sellers” instead of after the
words “the Eastern Bank Ltd.” Ordinarily, the buyer opens a letter of credit with his Bank in
favour of the seller and the words “through the Eastern Bank Ltd.” would be meaningless
unless it was intended to mean that the irrevocable credit which was in favour of the assessee
company was to be operated upon by the latter through the Eastern Bank Ltd. If that were the
true meaning, then that certainly does not make the Eastern Bank Ltd. the agent of the buyers.
The words “available by delivery to us” occurring in the letter of the Eastern Bank Ltd.,
Madras, do not appear to us to indicate that this was any part of the terms of the letter of
credit. This was an intimation in accordance with the advice received by the Eastern Bank
Ltd., Madras, from the Eastern Bank Ltd., London, that the assessee company might avail
itself of the letter of credit by delivery of the documents to the Eastern Bank Ltd., Madras.
This is made further clear by the latter part of the letter where the Eastern Bank Ltd., Madras,
expressed their willingness at their option to negotiate the drafts drawn in terms of the
arrangement provided that the documents were in order. The concluding sentence of that
letter whereby the Eastern Bank Ltd., Madras, disown any responsibility in respect of the
advice clearly militates against the suggestion of the learned Solicitor-General. It is, in these
circumstances, impossible to accede to the argument that the payment of 80 per cent or 90 per
cent, as the case may be, of the amount of the provisional invoice by the Eastern Bank Ltd.,
Madras, was a payment on account of the price. Normally, price is paid by or on behalf of the
buyer. In this case the fact found is that the Eastern Bank Ltd., Madras, and the Eastern Bank
Ltd. London, were agents of the assessee company. Neither of them had any relation with the
buyers. Therefore, a payment by them cannot be regarded as a payment of the price. The true
position is very clearly put by Lord Sumner in The Prinz Adalbert [LR (1917) AC 586, 589]:
“When a shipper takes his draft, not as yet accepted, but accompanied by a bill of
lading indorsed in this way, and discounts it with a banker, he makes himself liable
on the instrument as drawer, and further makes the goods, which the bill of lading
represents, security for its payment. If, in turn, the discounting banker surrenders the
bill of lading to the acceptor against his acceptance, the inference is that he is
satisfied to part with his security in consideration of getting this further party’s
liability on the bill, and that in so doing he acts with the permission and by the
mandate of the shipper and drawer.”
This payment by the Eastern Bank Ltd., Madras, therefore, is nothing but an advance made by
them to their own customer on the security of the goods covered by the bill of lading
reinforced by the benefit of the liability taken up by the assessee company as drawer of the
bill which in its turn is backed by the confirmed and irrevocable credit of the buyers’ London
Bank. If this payment was on account of the price, why should the assessee company, as the
seller, undertake any liability to the Eastern Bank Ltd., as the drawer of the bill of exchange?
The truth of the matter is that the price was paid on behalf of the buyers by their respective
London Banks in London to the Eastern Bank Ltd., London which was the agent of the
assessee company. The first receipt of the price, therefore, as pointed out by the High Court,
was by the Eastern Bank Ltd., London, on behalf of the sellers. There is no dispute that the
balance of the price ascertained after weighment and assay and deducting the amount paid on
the bill of exchange was similarly received in London by the Eastern Bank Ltd., London, on
behalf of the assessee company. The subsequent adjustment made in the books of the Eastern
Bank Ltd., London did not operate as a receipt of profits in British India. In our opinion the
High Court correctly answered the second question also in favour of the assessee company.
- For reasons stated above, this appeal must stand dismissed.
