Mahabir Commercial Co. Ltd Vs. C.I.T.
West Bengal, Calcutta [1972] INSC 210 (8 September 1972)
REDDY, P. JAGANMOHAN REDDY, P. JAGANMOHAN
KHANNA, HANS RAJ
CITATION: 1973 AIR 430 1973 SCR (2) 134 1972
SCC (2) 704
ACT:
Income tax Act (11 of 1922) Place, where
property passes.
Sale of Goods Act (3 of 1930), s.
23(2)-Effect of appropriation on passing of property.
Letter of Credit and C.I.F. contract-Nature
of, explained.
HEADNOTE:
In all transactions of sale of goods the time
and place of appropriation are important elements for determining when the
property in the goods passes. In the case of a sale of unascertained goods in a
deliverable state, under s.23(2) of the Sale of Goods Act, 1930, if, in
pursuance of the contract the seller delivers the goods to the buyer or to a
carrier or other bailer, whether named by the buyer or not, for the purpose of
transmission to the buyer, and the seller does not reserve the right of
disposal, he is deemed to have unconditionally appropriated the goods to the
contract and the buyer's assent to the passing of the property is implied. But
appropriation of the goods to the contract by itself would not be such as to
pass the property in the goods if it appears on can be inferred that there was
no actual intention to pass the property. The intention of the parties
therefore determines the situs of the passing of property to the buyer in pursuance
of the contract. [142D-H;155D] in the case of transactions of sale of goods
between the buyer and seller living in two different countries the seller sends
the goods through a carrier and the contract may envisage the payment being
made either at the place where the seller resides or where the buyer resides.
In such a transaction the banks and the bankers, commercial credit system,
which assures payment to the seller on the one hand and delivery of the goods
to the buyer on the other play an important part. One of the means of effecting
commercial credit is by letters of credit. The buyer request his bank to facilitate
credit in the country of the seler, where the bank or its constituent for some
consideration, assumes liability for payment of price against specified
documents. The buyer agrees also to indemnity the bankers in respect of such
advances and of any claim arising out of the credit. On receipt of the bankers'
application, the bank issues the credit. These letters of credit are given for
the purpose of being shown to third parties who may act thereon. Such letters
are either revocable or revocable and where they are the latter, they may be
confirmed or unconfirmed. If confirmed, it means that words of confirmation of
another banker are added to it by which that banker also commits himself
irrevocably. The letter of credit notifies the seller that the issuing banker
or his correspondent will accept or honour drafts drawn for the prim of the
goods, provided that the documents of title and other documents specified in
the letter of credit are simultaneously presented to the banker.
On receipt of the information the seller
ships the goods, insures them and obtains a bill of lading. He then draws a
draft for the price of the goods and presents it Tor acceptance, payment and
negotiation together with the other documents specified in the letter of creditsuch
as the bill of lading, policy, invoice etc. The documents are sent by the
Banker to the 13 5 buyer's bank and on the bill of exchange being accepted by
him by payment, the bill of lading and the invoice are delivered to the buyer
to enable him to obtain delivery of the goods. [143A-D; 144G-H; 145A-E] In a
C.I.F. contract, that is, where the contract is for the sale of goods at a
price to cover cost, insurance and freight and ex-ship, the seller has first to
ship at the port of shipment goods of the description contained in the
contract. He must then procure the shipping documents as contemplated by the
contract upon the terms current covering the whole transit of the goods. He
must arrange for insurance, must make out an invoice which is a written account
of the particulars of goods delivered and their price and charges etc. This
invoice is made out debiting the buyer with the agreed price and giving him
credit for the amount of freight which he will pay the shipowners on actual
delivery. The shipper should tender the shipping documents to enable the buyer
to deal with the goods in them usual way of business. He is also required to
tender such other document& as are specified in the contract and if the
contract is silent, it is. sufficient if the seller tenders the bill of lading,
insurance policy and invoice. Under such a contract prima facie, the property
in the goods, passes once the documents are tendered by the seller to the buyer
or his agent as required under the contract. But when the seller retains
control over the goods by either obtaining a bill of lading in his own name or
to his order, the property in the goods does not pass to the buyer until he
endorses the bill to the buyer and delivers the documents to him. if however
the seller's dealing with the bill of lading is only to secure the contract
price, not with the intention of withdrawing the good from the contract, and he
does nothing inconsistent with an intention to pass the property, the property
may pass either forthwith subject to the seller's lien or conditional on
performance by the buyer of his part of the contract. Even though the property.
in the goods may pass to the buyer when the documents are handed over, the
buyer may yet retain the right to examine, and repudiate the goods. But this
right generally, which a buyer has in a C.I.F. Contract, does not by itself
indicate that the property in the goods has not passed to him. The ascertainment
of the obligations under the contract will determine to what extent the
transfer of property is subject to a condition, or, if the property passes conditionally
whether the ownership left in the seller is the reversionary interest in the
property in the event of the conditions subsequent operating to restore it to
him. In any case where the performance of some condition is imposed upon the
buyer but is not made a condition of the transfer of the property, the'
property once passed s not re-vested in the seller by the buyer's subsequent
default. [149C-D, E-H;
150A-C; 152D-G] In the present case, the
assessee-company dealt in sale and purchase of jute in Pakistan and India, and
certain sales were made under a contract executed in Calcutta. The terms of the
contract included delivery free to the buyer's millsiding or at the ghat in
India, provisions for weighment and assay of goods for short weight and quality
claimed at the destination in Calcutta, a-provision that before the goods were
actually shipted the buyers should open an irrevocable letter of credit with a
bank in Calcutta and that the seller should advise the buyers immediately after
the loading commenced. The buyers opened letters of credit with banks in
Calcutta which had branches, in Pakitan and the banks in Pakistan informed the
assessee that they were prepared to negotiate drafts as per the terms of the
contract. The assessee thereupon placed the contracted goods on board a steamer
in Pakistan and advised the buyers about the quality a-id weight of goods. The
assessee the" obtained bills of lading in the name of the buyers, Prepared
invoices on the basis of the bills of lading, drew bills of exchange on the
buyers' bank where the letters of 136 credit were opened and negotiated the
bills of exchange together with the bill of lading and the invoices and
obtained payment from the bank less freight and insurance which were payable by
the buyers on account of the sellers.
The bank forwarded the documents to its
office in Calcutta and the Calcutta office sent them to the purchaser. [138 EH;
139 A-DI The Income-tax Officer, and the Appellate Assistant Commissioner held
that the property in the goods passed to the buyer in India and hence the
assessee was liable to tax on the profits derived from the sales. The Tribunal
held in favour of the assessee on the ground that the sales were effected in
Pakistan.
The High Court, on reference held against the
assessee on the basis that under cis. 7 and9 of the contract, there was no
unconditional appropriation of the goods by the buyer as soon as they were
placed on board the steamer on C.I.F. terms, and that the appropriation took
place in India where the title to the goods passed to the buyers. Clauses 7 and
9 dealt with the non-acceptance of documents and the buyer's failure to pay
against documents and/or in cases where buyers make any claim in respect of
quality or excess moisture, in which case, an option is given to the buyer
either of accepting the goods with allowances or of cancelling the contract in
respect of a particular lot or lots or of rejecting the particular lot or lots
and claiming fresh tender.
Allowing the appeal to this Court,
HELD : A consideration of the terms of the
contract and the letter of credit makes it evident that once the bills of
lading and documents contemplated under the contract were handed over to the
bank to be delivered to the buyer and the seller received the value thereof as
shown in the invoice and in terms of the contract, he no longer retained any
property in the goods. [155G-H] (a)The sale was of unascertained goods in a
deliverable state the letter of credit is a confirmed irrevocable letter of
credit and the contract is a C.I.F. contract. [149C-D] (b)The bill of exchange
which the assessee had to draw in accordance with the invoice was for the price
of the goods less the premium and freight which the buyer was paying in India
on account of the seller. On the presentation of the shipping documents, the
bank in Pakistan, under the irrevocable letter of credit, was to make payment
of the invoice value to the seller. Once the seller has performed his part and
presented the documents for being sent to the buyer 'for acceptance and
received payment in Pakistan he has no longer any control over the goods and
the property in the goods passes to the buyer. The bill of lading when it is
handed over to the buyer by the bank, on the buyer accepting the bill of
exchange and paying the amount specified in the invoice, confers on him the
right to take delivery of the goods at the place of disembarkation. [153BD]
(c)There is nothing in cls. 7 and 9 of the contract which Justified the
conclusion that the property passed in India.
Under cl.7, where there is a total failure on
the part of the buyer to perform the contract, the seller has a right to cancel
the contract or treat it as cancelled and resort to the remedies be under. But
that is a condition where the buyer fails or refuses to perform the contract
altogether by not accepting the documents or in not paying against the documents.
Even under cl. 9, the condition as to the quality and of excessive moisture is
not a condition of the transfer of property. The right of the buyer there under
is not a right to cancel the 137 contract in to but only to adjust claims in
respect of the quality or moisture for which a remedy has been provided for there
under. There is nothing in the agreement which envisages the property in the
goods being in the seller even after the value of the invoice had been paid by
the bank under the letter of credit in Pakistan. Where a purchase is financed
by an irrevocable credit the transaction would not be affected by rejection of
the goods after acceptance of the documents if the latter were such as were
called for by the credit or where under that credit, the payment of the invoice
value is payable on presentation of the documents.
[152G-H, 154H; [55A-D] (d) It is well-settled
that an appropriation takes place where the goods are situated at the time of
appropriation and not where the contract of sale is made. There may be an
authority given by one party to the other to appropriate and that appropriation
is presumed to be finally made where by the terms of the contract the party so
authorised has determined his election by doing such act or thing which cannot
be done until the goods are appropriated. Generally, Pi seller appropriates the
goods by delivery of the bill of lading-the document giving control over the
goods-in exchange of payment of price, by which, be shows that be does not
intend to retain the right of disposal of the property in the goods., [155D-G]
(e) The provision in the contract that all drafts drawn under the letter of
credit are to be treated as advance bills through their Pakistan office does
not in any way affect the nature of the transaction inasmuch as they are
intended as advance notice to the buyer who may want to make arrangements
regarding the taking of delivery or dealing with the goods. In fact, under the
contract, it is provided that immediate notice should be given to the buyer as
soon as the seller begins to load the goods. [155H] (f) In any case, under the
letter of credit the bank informed the seller that it guarantees to protect the
drawers, endorses and bona fide holders from any consequences which may arise
in the event of the non-acceptance or non-payment of the drafts drawn in
accordance with the terms of the credit. This clause, in the letter of credit,
assures the seller of the performance of the contract and does not affect the
property in the goods passing to the buyer in Pakistan. [156 B-C] Commissioner
of Income-tax v. Mysore Chromite Ltd. 27 I.T.R.
128, Guaranty Trust Company of New York v.
Hannay & Co., [1918] 2 K.B. 623, Biddell Brothers v. E. Clemens Hurst
Company, [1911] 1 K.B. 934, E. Clemens Horst Company v. Biddeli Brothers,
[1912] A.C. 18 and Kwei Tek Chao v.British Traders and Shippers Ltd. [1954] 2
K.B. 459, referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 450 of 1969.
Appeal by special leave from the judgment and
order, dated November 15, 1967 of the Calcutta High Court in Income-tax
Reference No. 19 of 1958.
A. K. Sen, Leila Seth, O. P. Khaitan and S.
P. Maheshwari, for the appellant.
B. Sen, A. N. Kripal and S. P. Nayar, for the
respondent.
The Judgment of the Court was delivered by
JAGANMOHAN REDDY, J. The following question was referred to the High Court of
Calcutta by the Income-tax Appellate Tri138 bunal (hereinafter called the
'Tribunal') under s. 66(1) of the Income-tax Act, 1922 :
"Whether on the facts and in the
circumstances of the case and on a proper construction of the terms of the
relevant contracts the sales covered by the bills of lading in the name of the
buyers in five cases took place outside India and therefore the profits derived
from the said sales arose outside India The High Court answered the question in
the negative and against the assessee against which this appeal is by special
leave.
The aforesaid question related to the
assessment year 195253 of which the accounting year is 1951-52 ending 31st
December 1951. The assessee company deals in sale and purchase of jute in
Pakistan as well as in India. During the year of account relevant for the
assessment year it sold jute of the value of Rs. 23,93,767/out of which Rs. 10,06,772
were sales in foreign countries and Rs. 2,44,015/in India. The balance of sales
worth Rs. 11,42,979/according to the assessee were effected in Pakistan. The
Income-tax Officer over-ruled the contention of the assessee and found that the
quandary sales in India amounted to Rs.13,86,995 which included Rs. 11,42,979
alleged to have been sold in Pakistan and assessed the appellant accordingly.
It appears from the statement of the case that the sales were made under a
contract executed in Calcutta between the buyer and the seller. The terms of the
contract included delivery free to the buyer's mill-siding or at the what in
India. It further contained provisions for weighment and assay of goods for
their short weight and quality claimed at the destination in Calcutta. It was
also a term of the contract that before the goods were actually shipped the
buyers were required to open an irrevocable letter of credit with a bank in
Calcutta and accordingly the buyers opened letters of credit with the Imperial
Bank of India, the Chartered Bank of Australia and China and Hind Bank Ltd.,
Calcutta. All these banks had their branches in Pakistan, at Chitterlings and
at Narayangunj. The fact that letters of credit had been opened was
communicated by the respective banks to their branches in Pakistan and the banks
in Pakistan in their turn informed the assessee that they were prepared to
negotiate the draft aperture of the contract. On receiving information from the
bank in Pakistan that they were prepared to negotiate the draft drawn as per
the terms of the contract, the assessee placed the contracted goods on board
the steamer at Ashurgani in Pakistan. Immediately the loadine on the shin had
commenced the seller had further to advice the buvers about the quality
ascertainment and the weight of goods in maunds. The assessee had to then
obtain a 139 complete set of shipping documents and present them to the bank
for payment of invoices' value in terms of the contract in the equivalent
Pakistan currency at the exchange rate prevailing on the presentation of the
documents at the bank less freight and insurance which were payable in India by
the buyers on account of the sellers. The manner in which this was done was
that as soon as the goods were placed on board the steamer the seller obtained
the bills of lading in the name of the buyers in five cases and in two cases in
the name of Mahabir Trading Co. Ltd., an agent of the assessee company. The
assessee then prepared invoices for contracted bills on the basis of the bills
of lading and drew bills of exchange on the buyers' bank where the letters of
credit had been opened. The bill of exchange together with the bill of lading
and the invoices were negotiated with the bank and the bank forwarded the
documents to their offices in Calcutta which in their turn sent the documents
to the purchaser.
According to the Income-tax officer these
transactions disclosed that the property in the good,, had passed to the
assessee in India and on this basis he assessed the appellant.
In the appeal before the Appellate Assistant
Commissioner, the assessee further contended that the Income-tax Officer in
Pakistan held that a sum of Rs. 18,06,772 represented the sales effected in
Pakistan because of the fact that the delivery of the goods had been made to
the common carrier and the consideration money was also paid in Pakistan
through the State Bank of Pakistan. In this view, the Income-tax Officer
assessed the appelllant in Pakistan on the ground that he had taken
constructive delivery in Pakistan where according to him the sales were made. This
finding the assessee submitted was correct. The Appellate Assistant
Commissioner however rejected the contention and dismissed the appeal. When the
matter was agitated in appeal before the Tribunal the, assessee filed an
affidavit disputing the findings. The Tribunal, having regard to the facts
stated therein remanded the matter to the Income-tax Officer and directed him
to enquire and send a report on the facts disputed by the assessee. After the
remand report was received, the Tribunal having considered the terms of the
contract, the course of the dealings between , the parties and applying the
principles laid down in Commissioner of Income-tax v. Mysore Chromite Ltd.(1)
held that in respect of the five cases in which the assessee drew the bills in favour
of the buyers the sales were effected in Pakistan whereas in the two cases in
which the bills were drawn in favour of the assessee's agent at Calcutta, the
sales were effected in India.
(1) 27 I.T.R. 128.
140 On hearing the reference the High Court
directed the Tribunal to submit a supplementary statement of case because in
its view, in order to deal with a rather complicated question raised in that
reference in respect of which there was a great divergence of authority, it was
absolutely essential for giving an effective answer to it to have before it the
exact form of acceptance by Pakistan banks regarding negotiations of the draft
drawn as per the terms of the contract. It therefore required the Tribunal to
set out "the exact wording and content of the documents", namely, the
particular contracts that have to be construed, the exact form of acceptance by
Pakistan banks regarding negotiation of the draft drawn as per the terms of the
contract and to annex therewith true copies of the contracts, the bills of
exchange, bills of lading and the letters of credit. It was also asked to
indicate on what bases it came to the conclusion that the Pakistan banks were
prepared to negotiate the drafts drawn as per the terms of the contract. The
High Court considered and rejected the two contentions urged on behalf of the
Revenue that (1) until assay and weighment of the goods at the destination the
buyers would not unconditionally appropriate the goods and (2) that the bank
was not the banker but merely an agent of Thomas Duff & Co. (India) Ltd.
and as such the presentation of the documents were made to the principals in
Calcutta. The first of these which were said to have been supported by the case
of this Court in Commissioner of Income-tax v.' Mysore Chromite Ltd. (supra)
was rejected on the ground that this Court did not desire to express any
opinion on the "extreme contention" and the second on the ground that
there is little to establish an agency and even if there is any such agency
that it is limited to the extent that the banker stands as agent to the person
whose banker it is. After having rejected these contentions it observed
"but all these notwithstanding" cls. (1) and (9) in the contract go
to show that there was no unconditional appropriation of the goods by the buyer
as soon as they were placed on board the steamer on c.i.f. terms which
appropriation took place in India where the title to the goods passed to the
buyers. It may be mentioned that cls. (7) and (9) deal with the non-acceptance
of documents in the event of the buyer's failure to accept or pay against
documents and/or in cases where buyers make any claim in respect of quality or
excess moisture in which case an option was given to the buyer either of
accepting the goods with allowances or of canceling the contract in respect of
particular lot or lots or of rejecting the particular lot or lots and claiming
fresh tender. What is to be considered in this case therefore is, under the
terms of the contract and the dealings between the parties, where did the
property in the goods pass ? Is it in Pakistan where the seller pursuant to an
irrevocable letter of credit placed the goods on board the ship, drew the bills
of exchange and invoices and along with the 141 bill of lading etc. negotiated
them through a constituent of the buyer's ban& in Pakistan or as held by
the High Court having regard to cls. (7) and (9) of the contract no
unconditional appropriation of the goods was effected in India even though the
goods were placed on board the steamer on c.i.f. terms.
Before we examine the terms of the contract
and the dealings between the parties to ascertain where exactly the
unconditional appropriation of the goods under the contract was effected, it
is, we think appropriate to set out the principles which are applicable for the
determination of that question. It would also be useful to an understanding of
the terms of the contract and the intention of the parties, if we were to
ascertain what exactly is the significance of an irrevocable letter of credit. In
this case we are dealing with the sale of unascertained goods in a deliverable
state in respect of which where the property in the goods passes is the
question to be determined.
Sections 23 and 39 of the Sale of Goods Act
which are in identical terms with rule 5 of s. 18 and s. 32 of the English Sale
of Goods Act lay down the principles for ascertaining where the property in the
goods passes. They are in these terms :"23.(1) Where there is a contract
for the sale of unascertained or further 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. Such assent may be express or implied, and may be given either
before or after the appropriation is made.
(2) Where, in pursuance of the contract, the
seller delivers the goods to the buyer or to a carrier or other bailer (whether
named by the buyer or not) for the purpose of transmission to the buyer, and
does not reserve the right of disposal, he is deemed to have unconditionally
appropriated the goods to the contract.
39.(1) Where, in pursuance of a contract of
sale, the seller is authorised or required to send the goods to the buyer,
delivery of the goods to a carrier, whether named by the buyer or not, for the
purpose of transmission to the buyer, or delivery of the goods to a wharfing
for safe custody, is prima facie deemed to be delivery of the goods to the
buyer.
(2) Unless otherwise authorised by the buyer,
the seller shall make such contract with the carrier or wharfinger on behalf of
the buyer as may be reasonable 142 having regard to the nature of the goods and
the other circumstances of the case. If the seller omits so to do, and the
goods are lost or damaged in course of transit or while in the custody of the
wharfinger, the buyer may decline to treat the delivery to the carrier or
wharfinger as a delivery to himself, or may hold the seller responsible in
damages.
(3) Unless otherwise agreed, where goods are
sent by the seller to the buyer by a route involving sea transit, in
circumstances in which it is usual to insure, the seller shall give such notice
to the buyer as may enable him to insure them during their sea transit, and if
the seller fails so to do, the goods shall be deemed to be at his risk during
such sea transit." It is apparent that for the purposes of sub-s. (1) of
s. 23 there should be an unconditional appropriation with the assent of the
parties as indicated before the property in the goods passes to the buyer. This
sub-section is quite independent of sub-s. (2) and does not contemplate an
unconditional appropriation in pursuance of the contract.
Sub-s. (2) on the other hand requires the
delivery to a carrier in pursuance of a contract which operates or is deemed to
operate as an unconditional appropriation. Where in pursuance of the contract
the seller delivers the goods to the buyer or to a carrier or other bailee
whether named by the buyer or not for the purposes of transmission to the buyer
and does not reserve the right of disposal he is deemed to have unconditionally
appropriated the goods to the contract. The buyer's assent to the passing of
the property in the said circumstances is implied and that when the seller
despatches the goods and delivers them to the common carrier for purposes of
transit to the buyer, the common carrier not only receives the goods as agent
of the buyer but also assents to the appropriation made by the seller.
Where however the intention is clearly
indicated and the carrier assents it is immaterial by what document the
consignment is affected. In cases where the seller bears the freight for the
transmission of the goods free of cost to the buyer, the property in the goods
passes to the buyer as soon as they are sent to the carrier, though there may
be a provision that they are to be paid for by the buyer on behalf of the
seller after the arrival of the goods. But where however the seller exercises a
right of disposal or where he agrees to deliver the goods at their destination,
the carrier is the seller's agent and the delivery is not a final
appropriation. The intention of the parties is therefore one of the important
elements in determining the situs where the property passes to the buyer in
pursuance of the contract. The decided cases are of little help and are only
143 illustrative of the principles which are applicable for determining when
the goods are unconditionally appropriated to the contract.
In the case of transactions of sale of goods
between the buyer and seller living in two different countries, the contract
may envisage, the seller sending the goods through a carrier and the payment
being made either at that place or at the place where the buyer resides. In
such a transaction the banks have come to play an important part and the bankers'
commercial credit system facilitates merchants domiciled in different countries
and assures payment to the seller on the one hand and delivery of the goods
contracted for to the buyer on the other. This is done by means of what are
known as letters of credit which under the terms of the contract the seller may
insist on the buyer to provide for in a bank doing business in the place of the
seller's domicile. This may be effected by the buyer requesting the bank to
facilitate a letter of credit in the country of the seller where the bank or
its constituent assumes liability for payment of the price for some
consideration which may either be by loan or an over-draft arrangement or
perhaps on the security by the pledge of documents of title to the goods or by
some other arrangement arrived at between them.
An understanding of the mechanism of credit
made available to the buyer and the seller by the banks in the sale of goods
and the manner in which these transactions take place through the banking
institutions will greatly facilitate the ascertainment of the question when and
at what place the property in ,the goods passes from the buyer to the seller.
Inasmuch as those innovation of commercial
credit have been developed by the maritime powers of which England was the
leader a reference to English decisions will be of assistance. In Guaranty
Trust Company of New York v. Hannay & Co.(1) Lord Justice Scrutton set out
at p. 659 the manner in which commercial credit operates. He said :"The
enormous volume of sales of produce by a vendor in one country to a purchaser
in another has led to the creation of an equally great financial system
intervening between vendor and purchaser, and designed to enable commercial
transactions to be carried out with the greatest money convenience to both
parties. The vendor, to help the finance of his business, desires to get his
purchase price as soon as possible after he has dispatched the goods to his
purchaser; with this object he draws a bill of exchange for the price, attaches
to the draft the documents of carriage and insurance of the goods sold and
sometimes an movie for the price, and discounts the bill-that is, sells the
bill with documents (1) [1918] 2K. B. 623.
144 attached to an exchange house. The vendor
thus gets his money before the purchaser would, in ordinary course, pay; the
exchange house duly presents the bill for acceptance, and has, until the bill
is accepted, the security of a pledge of the documents attached and the goods
they represent. The buyer on the other hand may not desire to pay the price
till he has resold the goods. If the draft is drawn on him, the vendor or
exchange house may not wish to part with the documents of title till the
acceptance given by the purchaser is met at maturity. But if the purchaser can
arrange that a bank of high standing shall accept the draft, the exchange house
may be willing to part with the documents on receiving the acceptance of the
bank. The exchange house will then have the promise of the bank to pay, which,
if in the form of a bill of exchange, is negotiable, and can be discounted at
once. The bank will have the documents of title as security for the liability
on the acceptance, and the purchaser can make arrangements to sell and deliver
the goods. Before acceptance the documents of title are the security, and an
unaccepted bill without documents attached is not readily negotiable. After
acceptance the credit of the bank is the security............" The
operation of the banker's commercial credit is generally and in an increasing
manner resorted to by the exporters stipulating in contracts for the sale of
goods the responsibility for the payment of price by a banker which is done by
means of a documentary credit. It takes the form of a promise by the buyer's
bank to accept or honour bills of exchange if drawn on him or his guarantee of
payment if drawn on the buyer, the security for which resides in the pledge of
the documents of title to the goods exported. Where the device of commercial
credit is resorted to as indeed in all overseas transactions this has become a
general practice-there is to be a prior contract for the sale of goods the
payment of price for which is to be made by a banker. We are here not concerned
for the purpose of this case, with the various intricacies and practical
technicalities of different means which are adopted to meet different
situations. But a simple example of the device may be indicated. The buyer
requests his bank and arranges with it the issuance of credit for payment at
the place of the seller's domicile specifying the documents against which it
has to make payment.
The buyer agrees also to indemnify the
bankers in respect of such advances and of any claim arising out of the credit.
The letter constitutes the memorandum of the buyer's instructions to the
banker. On receipt of this application 145 the banker issues the credit which
is addressed to and sent to the seller or it may take the form of a request to
an intermediary banker who is asked either merely to advice the seller or
advise and to add his confirmation. The credit may be issued by cable which is
later followed by writing. These letters may be given for the purpose of being
shown to third parties who may act thereon. Letters of credit are either
revocable or irrevocable and where it is the latter it may be confirmed or
unconfirmed. If confirmed it means that words of confirmation of another banker
is added to it by which that banker also commits himself irrevocably.
The letter of credit notifies the seller that
the issuing banker or his correspondent will (if they are drawn on him) accept
or honour drafts drawn for the price of the goods, provided that the documents
of title and other documents specified in the credit are simultaneously
presented to the banker.
On receipt of the credit the seller ships the
goods and insures them, obtaining a bill of lading normally made out to his
order but perhaps to that of the banker, and also a policy of marine insurance.
He then draws a draft for the price of the goods and with the documents i.e.
the bill of lading, policyand invoice specified in the credit presents the
draft for acceptance, payment and negotiation.. In this way the exporter gains
the advantage of receiving payment for his goods without delay. The documents
are then sent by the banker to the buyer's bank and on the bill of exchange
being accepted by him by payment of the price the bill of lading and the
invoice is delivered to him; see Halsbury, Vol. 2, p. 213 and Gutteridge and
Megrah on The Law of Commercial Credits (1968 edition).
The contract that has been entered into
between the buyer and the seller in this case is in the form of a sold note by
the seller's broker in Calcutta in the form of the Indian Jute Mills
Association for jute contracts with variations in respect of some of the terms.
Under cl. (1) of this contract the amount of tax payable under the Bengal Raw
Jute Taxation Act, 1941 is to be on the seller's account and to be deducted by
the buyers from the price quoted for payment, to the Provincial Government in the
prescribed manner unless at the time of concluding the contract the seller
satisfies the buyer by means of satisfactory evidence that tax is not payable
on the sale. Any increase or decrease in the existing Bengal Jute Tax or in any
other form of tax by whomsoever levied or any new taxes on raw jute after the
contract also shall be on the buyer's account. It also states that the contract
is accepted by the buyers on the seller's representation and assurance that the
jute as shown in the margin is under a mark entered in the said register and
that its bailing and packing is in strict accord with the particulars contained
therein. Should tenders not be in accordance with it the buyers shall be
entitled to reject the goods and the sellers shall be liable for all losses
sustained including 1-348SupCI/73 146 the difference between the contract and
the market prices. Cl. (2) provides for delivery to the mills specified therein
and the carrier or carriers through which that delivery should be made to the
mills. Cl. (3) which is varied deals with the transit insurance to be covered
by the buyers at contract value plus 10% under their open cover and premium to
be paid for by sellers in India.
Sellers to advise buyers the contract and
assortment in mounds to be supplied immediately loading is commenced. Cl. (4)
which deals with reimbursement of cash is again varied by the following "
"Bank in favour of seller's nominee. A complete set of shipping documents
to be presented to the bank and payment of invoice valid in terms of the
contract to be made to the shippers in the equivalent of Pakistan currency at
the exchange rate ruling on the date of presentation of documents at the bank,
less freight, if payable in India." Cl. 6 deals with non-delivery of
documents. Cl. 7 provides for non-acceptance of documents. Cl. 8 provides for
maximum amount of moisture the jute should contain and cl. 9 provides for
claims with the variation that the amount of short weight value and claim to be
paid by sellers to buyers in Indian currency: The High Court, as we have
earlier stated, relied on cls. 7 and 9(3) for coming to the conclusion that the
appropriation took place in India.
These clauses are given below:"7.
Non-acceptance of documents should buyers fail to accept or pay against documents
properly submitted under the terms of the contract Sellers have the right to
exercise any of the following options (a) Cancelling the contract.
(b) Cancelling the contract and charging
buyers the market difference between the contract rate and the market rate of
the date of the breach of contract.
(c) Selling against buyers in the open market
on the first working day following the default.
9. (3) In any case where buyers make any
claim in respect of quality and/or excessive moisture and the Award on the
dispute being referred to arbitration as provided for in Clause 13 provides for
an allowance of not less than 50 percent on the market difference between the
grades of the goods contracted for 147 and the goods supplied and/or finds a
moisture content in the goods supplied in excess of the maximum percentage of
moisture allowed under clause 8 by not less than 3 per cent and stipulates an
allowance therefore, buyers shall thereupon be entitled to exercise any of the
following options :(a) Of accepting the goods with the allowance(s) awarded.
(b) Of cancelling the contract in respect of
the particular lot or lots of goods supplied and charging sellers for the
market difference on the goods as contracted for and those offered in fulfillment
of the contract and on which the award has been made.
(c) Of rejecting the particular lot or lots
of goods supplied and claiming a fresh tender in lieu there of to be made
within days from the date on which the option is declared." The letter of
credit which has been referred to in the contract is by the Chartered Bank of
India, Australia and China and since several contentions have been urged on the
import of this letter we give below its contents in entirety :"THE
CHARTERED BANK OF INDIA, AUSTRALIA AND CHINA Messrs. Mahabir Commercial Co.
Ltd., P.O. Ashuganj, Distt. Tipperah East Pakistan Calcutta, 14th August 1951.
This letter of Credit was wired through the Chartered bank, Cittagong on and is
only to be delivered to beneficiaries against surrender of the letter advising
contents of the telegram, and any negotiations made in the interval are to be
transferred to the original credit before it is handed over.
Confirmed Letter of Credit No. 94/743
Irrevocable.
Dear Sirs, You are hereby authorised to draw
on M/s Thomas Duff & Co.
(India) Ltd. a/c. The Titaghur Jute Factory
Co. Ltd., of Calcutta for a sum not exceeding Rs. 2,00,750/(Rupees two lacks
seven hundred and fifty) available by your drafts on them at sight accompanied
by :
(1) Complete set of Bills of lading and/or
Railway receipts to order and blank endorsed, "Shipped on Board". . .
. Bills of Lading are essential and the statement 'freight paid' must appear
thereon.
148 The Bills of Lading must cover shipment
as detailed below.
(2) The Insurance to be covered by buyers
under Open Cover No. 1249 and premium to be deducted from shipper's invoice.
(3) Signed Invoices in triplicate.
(4) Freight "To Pay" to be deducted
from shipper's invoice.
SHIPMENT As per overload from Pakistan to
Calcuta C.& F. by I.G.N..
R.S.N., B.A.S.S., E.B.R.S.S., I.S. Co.'s
steamer and/or Flat and/ or Rail direct or indirect with or without
transshipment. Partial shipments allowed.
PRO-RATA:
Shipments are permissible.
CONDITION OF SHIPMENT:
Shipment is to be affected not later than
15th August, 1951.
CREDIT EXPIRY DATE:
This credit expires on 30th August, 1951.
Drafts should bear the following clause drawn
under the Chartered Bank of India, Australia & China, Calcutta Credit No.
94/743, dated 14th August, 1951.
Purchasers are to note the amount of the
drafts separately on the back hereof.
All drafts drawn under this letter of Credit
are to be treated as Advance Bills, through our Chittagong Office.
We hereby guarantee to protect the Drawers,
Endorsers and bonafide holders from any consequences which may arise in the
event of the non-acceptance or non-payment of drafts drawn in accordance with
the terms of this Credit.
SEAL Yours faithfully.
Sd/ S.C.R. Northocote P. Manager Sd/ M.W.
Whyte Accountant Rs. ,Mid. 1000 Mds. Raw Jute @ 103 per Md. (CIF)1,03,000 Bot,
1,000 Mds. Raw Jute Oa. 98 per Md. (CIF)98,000 2,01,000 Less Jute-tax on 2,000
Mds. @ /12/per Md. Ind.250 Ind., 2,00,750 14 9 Under G. Das & Co., Ltd.'s
Contract No. 3807 of 4-6-51.
,Under Import Licence Clearance Permit No.
0003. ,Goods of Pakistan Origin Sd/S.C.R. Northcots P. Manager Sd/M.W. Whyte,
Accountant The above document is a confirmed irrevocable letter of credit under
which the sellers were authorised to draw on the clearing agents: of the buyer
the sums mentioned therein. It will be seen from the contract between the
parties and the irrevocable confined letter of credit that the transaction is
one known as c.i.f. contract, that is, carriage, insurance and freight, which
in the commercial parlance, indicates that the contract for the sale of goods
is at a price to cover cost, insurance and freight and ex-ship. In f.o.b.
contract (free on board) in the absence of a contract to the contrary, the
buyer must nominate the ship and notify the seller when it is likely to arrive
which is a condition precedent to the seller's duty to bring the goods to the
port. On the ship's arrival the seller must deliver the goods on board at his
own expense.
Thereafter the goods are at the buyer's risk
and he is responsible for the freight and any subsequent charges. In a c.i.f.
contract the seller has first to ship at the port of shipment goods of the
description contained in the contract. He must then procure the shipping
documents (contract of affreighment) as contemplated by the contract upon the
terms current covering the whole transit of the goods. He must arrange for an
insurance for an amount equal to their reasonable value of shipment upon the
terms current in the trade which will be available and it should be for the
benefit of the buyer. He must also make out an invoice which is a written
account of the particulars of goods delivered to the buyer with value of the
goods or their price and charges etc. annexed. This invoice is made out
debiting the buyer with the agreed price and giving him credit for the amount
of freight which he will pay the ship owner on actual delivery. And lastly the
shipper should tender the shipping documents to enable the buyer to deal with
the goods in the usual way of business. He is also required to tender such other
documents as are specified on the contract and if the contract is silent, it is
sufficient if the seller tenders the bill of lading, policy of insurance and
invoice. All these documents must be valid on tender. Under the c.i.f. contract
prima facie the property in the goods passes once the documents are tendered by
the seller to the buyer or his agent as required under the contract. But where
the seller retains control 1 5 0 over the goods by either obtaining a bill of
lading in his name or to his order, the property in the, goods does not pass to
the buyer until he endorses the bill to the buyer and delivers the documents to
him.
The appropriation, of the goods to the
contract by itself would not be such as to pass the property in the goods if it
appears or can be inferred that there was no actual intention to pass the
property. But if however the seller's dealing with the bill of lading is only
to secure the contract price not with the intention of withdrawing the goods
from the contract, and he does nothing inconsistent with an intention to pass
the property the property may paseither forthwith subject to the seller's lien
or conditional on performance by the buyer of his part of the contract. Kennedy
L. J. in Biddell Brothers v. E. Clemens Horst Company(1) dissenting with the
majority stated the principles for ascertaining in c.i.f. contract when the
property in the goods passes which was later confirmed in an appeal against
that judgment in E. Clemens Horst Company v.
Biddell Brothers (2 ) , the Lord Chancellor
describing it as "the remarkable judgment illuminating as it does, the.
whole field of controversy." In that case the seller was to ship a cargo
of hops was to contract for freight, had to effect insurance and was, to
receive 90 s. per 112 lbs. of hops.
The buyer had to pay cash. The contract did
not say when the price was to be paid. The buyer said that he is to pay cash
against physical delivery and acceptance of the goods when they come to
England. Under s. 28 of the Sale of Goods Act the payment was to be against
delivery. But when was delivery of the goods which are on board ship said to
take place. The Earl Loreburn L. C. said:
"The answer is that delivery of the bill
of lading when the goods, are at sea can be treated as delivery of the goods
themselves, this law being so old that I think it is quite unnecessary to refer
to authority for it.
Now in this contract there is no time fixed
at which the seller is entitled to tender the bill of lading. He therefore may
do so at any reasonable time; and it is wrong to say that he must defer the
tender of the bill of lading until the ship has arrived; and it is still more
wrong to say that he must defer the tender of the bill of lading until after
the goods have been landed, inspected and accepted." By a reference to s.
32 of the Sale of Goods Act (corresponding to s. 38 of the Indian Sale of Goods
Act) Kennedy L.J. at p. 956 of the judgment to which we have referred, observed
:
(1) [1911] I.K.B. 934,952.
(2) [1912] A.C. 18, 22151 "Two further
legal results arise out of the shipment. The goods are at the risk of the
purchaser, against which he has protected himself by the stipulation in his
c.i.f.
contract that the vendor shall, at his own
cost, provide him with a proper of marine insurance intended to protect the
buyer's interest, and available for his use, if the goods, should be, lost in
transit; and the property in the goods has passed to the purchaser, either
conditionally or unconditionally. It passes conditionally where the bill of
lading for the goods, for the purpose of better securing payment of the price,
is, made out in favour of the vendor or his agent or representative : see the
judgments of Bramwell L. J. and Cotton L. J.
in Mirabita v. Imperial Ottoman Bank 1878-3
Ex.D.164). It passes unconditionally where the bill of lading is made out in
favour of the purchaser or his agent or represemtative as consignee. But the
vendor, in the absence of special agreement, is not yet in a position to deman
d payment from the purchaser; his delivery of the goods to the carrier is,
according to the express terms of s. 32 only "prima facie deemed to be a
delivery of the goods to the buyer"; and under s. 28 of the Sale of Goods
Act, as under the common law (an exposition of which win be found in the
judgments of the members of the Exchequer Chamber in the old case of Startup v.
Macdonald (6 Man, & G. 593), a tender of delivery entitling the vends to
payment of the, price must, in the absence of contractual stipulation to the
contrary, be a tender of possession. How is such a tender to be made of goods
afloat under a c.i.f. contract? By tender of the bill of lading, accompanied in
case the goods have been lost in transit by the policy of insurance. The bill
of lading in law and in fact represents the goods.
Possession of the bill of lading places the
goods at the disposal of the purchaser." Again dealing with the argument
of the plaintiffs that a right under the c.i.f. to withhold payment until
delivery of the goods and after having bad an opportunity of examining them,
the learned Judge says that this cannot possibly be effected except in one of
the two ways. At p. 959 he stated :
"Landing and delivery can rightfully be
given by the ship owner only to the holder of the bill of lading. Therefore. if
the plaintiffs' contention is Tight, one of two things must happen. Either the
seller must surrender to the purchaser the bill of lading, where under the
delivery can be obtained, without receiving payment, which, as 1 5 2 the bill
of lading carries with it an absolute power of disposition, is, in the absence
of a special agreement in the contract of sale, so unreasonable as to be
absurd; or, alternatively, the, vendor must himself retain the bill of lading,
himself land and take delivery of the goods, and himself store the goods on
quay (if the rules of the port permit), or warehouse the goods, for such time
as may elapse before the purchaser has an opportunity of examining_ them. But
this involves a manifest violation of the express terms of the contract
"90 s. per 112 lbs. cost freight and insurance". The parties have in
terms agreed that for the buyer's benefit the price shall include freight and
insurance, and for this benefit nothing beyond freight and insurance. But if
the plaintiff's contention were to prevail, the vendor must be saddled with the
further payment of those charges at the port of discharge which ex necessitate
rei would be added to the freight and insurance premium which alone he has by
the terms of the contract undertaken to defray." Even though the property
in the goods may pass to the buyer when the documents are handed over, the
buyer may yet retain the right to examine and repudiate the goods but this
right generally which a buyer has in c.i.f. contract does not by itself indicate
that the, property in the goods has not passed to him. This supposed
incongruity was sought to be explained per curium in Kwei Tek Chao v. British
Traders and Shippers Ltd.(1) that if property passed when the documents are
transferred that property is subject to the condition that the goods should
re-vest in the seller if on an examination by the buyer he finds them not to be
in accordance with the contract. It is not necessary to consider this, aspect
because in any case the ascertainment of the obligations under the contract
will determine to what extent the transfer of property is subject to a
condition or if the property passes conditionally whether the ownership left in
the seller is the reversionary interest in the property in the event of the conditions
subsequent operating to restore it to him. In any case where the performance of
some condition is imposed upon the buyer but is not made a condition of the
transfer of the property, the property once passed is not retested in the
seller by the buyer's subsequent default. But where however the purchase is
financed by an irrevocable credit the transaction would not be affected 'by
rejection of the goods after acceptance of the documents if the latter were
such as were called for by the credit or where under that credit the payment of
the invoice value is payable on presentation of the documents.
It will (1) (1954) 2 K.-B. 459.
153 be seen from the course of the
transactions between the parties that all the conditions of a c.i.f. contract
are fulfilled subject to the variations which the parties under the contract
agreed, and to which a reference has been earlier made. The bill of exchange
which he had to draw in accordance with the invoice was for the price of the
goods less the premium and freight which the buyer was paying in India on
account of the seller. On the presentation of the shipping documents as noted
already, the bank in Pakistan under the irrevocable letter of credit was to
make payment of the invoice value in terms of the contract to the sellers in
equivalent Pakistan currency at the exchange rate ruling on the date of
presentation of the documents at the bank.
Once the seller has performed his part and
presented the documents for being sent to seller for acceptance and received
payment in Pakistan he has no longer any control over the goods and the
property in the goods passes to the buyer. The bill of lading when it is handed
over to the buyer by the bank. on the buyer accepting the bill of exchange and
paying the amount specified in the invoice, confers on hint the right to take
delivery of the goods at the place of disembarkation.
On the facts as found, C.I.T. v. Mysore
Chromite Ltd. (supra) decided by this Court is clearly distinguishable, because
in that case the assess= company which is the seller had shipped the goods
under a bill of lading issued in its own name and that under the contract it
was not obliged to part with the. bill of lading until the bill of exchange
drawn by it on the buyer's bank where the irrevocable letter of credit was
opened was honoured. It is not necessary to relate all the details of the
contracts except to say that the contracts of sale of chromite by the Mysore
Company to purchasers in Europe were entered into between the buyers and the
assessee agents in London and the contracts of sale to persons in America were
signed by the assessee's managing agents in Madras and by a company in America
who bought for undisclosed principals. Under the contracts the price was F.O.B.
Madras. Provision was made for weighment, sampling and assay of goods at
destination. Before the goods were actually shipped, the buyers opened a
confirmed iffevocable bankers credit with a blank in London. The fact that
letters of credit had been opened was communicated by the assessee's bankers in
London, Eastern Bank Ltd., to their branch in Madras who thereupon wrote to the
assessee offering to negotiate the drafts drawn in terms of the contract
provided the documents were in order and concluded the letter with a warning
that the advance was given for the assessee's guidance without involving any
responsibility on the part of the bank. On receipt of this intimation the
assessee placed the contracted goods on board the steamer at Madras and
obtained a bill of lading in its own name. The 1 54 Court held that upon the
terms of the contract and the course of dealings between the parties the
property in the goods passed in London where the bill of lading was handed over
to the buyer's bank against the acceptance of the, relative bill of exchange. The
sales therefore took place outside British India and ex hypothesis, the profits
derived from such sales arose outside British India. An argument was advanced
before the Court that under the provisions 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 the property in
the goods could not take place until the buyer accepted the goods and the price
was fully ascertained after weighing and assay. Dealing with this contention
S.R. Das, J. (as he then was) speaking for the Court said at p. 135 :
"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
assesse~ 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 dust 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.' It will be observed
that the terms of the contract and the course (-if dealings between the parties
is not the same as in this case because in that case the seller clearly
retained the property in the goods by having a bill of lading issued in his own
name and would only part with the property after the bill of exchange was
accepted by the buyer's bank in London when the documents would be delivered by
him to the company's agent in London and that the fixation of price was
dependent on weighment and assay. In the case before us the High Court relied
on cls. (7) and 9(3) of the contract for its conclusions. In our view nothing
in those clauses justifies that conclusion. Under cl. (7) where there is a
total failure on the part of the buyer to perform the contract, the 1 55 seller
has a right to cancel the contract or treat it as cancelled and resort to the remedies
there under. But that is a condition where the buyer fails or refuses to
perform the contract altogether by not accepting the documents or in not paying
against the documents. Even under cl. (9) the condition as to the quality and
of excessive moisture is not a condition of the transfer of property. The right
of the buyer there under is not a right to cancel the contract in to but only
to adjust claims in respect of the quality ormoisture for which a remedy has
been provided there under.
There is nothing in the agreement which
envisages the property in the goods being in the seller even after the value of
the invoice had been paid by the bank under the letter of credit in Pakistan.
It may be further noticed that the bills of lading railway receipts have to be,
made out to order and endorsed in blank. In all transactions of sale of goods
the time and place of appropriation are important elements for determining when
the property in the goods passes. It is well settled that an appropriation
takes place where the goods are situate at the time of appropriation and not
where the contract of sale is made.
There may be an authority, given by one party
to the other to appropriate and that appropriation is presumed to be finally
made where by the terms of the contract the party so authorised has determined
his election by doing such act or thing which cannot be done until the goods
are appropriated.
Generally, subject to the limitations already
discussed a seller appropriates the goods by the delivery of the bill of
lading-the document giving control of the goods-in exchange for payment of the
price by which he that he does not intend to retain the right of disposal of
the property in the goods.
A consideration of the terms of the contract
and the letter of credit makes it evident that once the bills of lading and
documents contemplated under the contract are handed over to the bank to be
delivered to the buyer and the seller receives the value thereof as shown in
the invoice and in terms of the contract, he no longer retains the property in
the goods. The provision that all drafts drawn under the letter of credit are
to be treated as at lance bills through their Chittagong office do not in any
way affect the nature of the transaction inasmuch as they are intended as
advance notice to the buyer who may want to make arrangements regarding the
taking of delivery or dealing with the goods etc. In fact under the contract it
is provided that immediate notice should be given to the buyer as soon as the
seller begins to load the goods. In any case under the letter of credit the
bank informs the seller that it "guarantees to protect the drawers,
endorsers and bona fide holders from any consequences which may arise in the
event of the non-acceptance or non-payment of the drafts drawn in accordance
with the terms of this credit." This clause in the letter of credit
further assures the seller of the performance of the contract and does not
affect the property in the goods passing to the buyer in Pakistan.
In this view, agreeing with the Tribunal, our
answer to the question is in the affirmative and against the department.
The appeal is allowed with costs.
V.P.S. Appeal allowed.
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