Case: The Commissioner Of Income-Tax, Madras Vs. Mysore Chromite Limited

The above Questions of law arose out of proceedings for the assessment to income-tax of the respondent, Mysore Chromite Ltd. (hereinafter referred to as the asseessee company), for the years 1939-1940, 1940 1941, 1941-1942 and 1942-1943. The facts leading up to the reference as found by the Income-tax Appellate Tribunal are shortly as follows: 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 the 22nd January, 1948, out of which the present reference arises. Under both forms of contracts the price was F.C.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 terms of payment under the European contract were as follows:- Payment.-Buyers to open a confirmed irrevocable Bankers credit in favour of Messrs. Mysore Chromite Ltd., Madras (to be advised to sellers) through the Eastern Bank Ltd., for 90 per cent. (ninety per cent..) of the Provincial (sic) Invoice against documents. Documents to consistBills of Lading,2. Provisional Invoice.Provisional invoice to be based on Bill of Lading weight and contract price for 48 per cent. Cr. 203. Balance on ascertainment of weight and analysis to be paid in London to Bowden Oakley & Co., Ltd., within 10 days of the final invoice, based on outturn weights andcorresponding terms of payment under the American contracts were as follows:- Payment.-Letter of credit for eighty per cent. (80 per cent.) of invoice value to be available against drafts at ninety (90) days sight with documents attached to be opened immediately in London in favour of the seller. Balance estimated twenty (20 per cent.) of the margin due to be paid by telegraphic transfer through London on receipt of information as to assay and outturn which should be submitted within a month after the arrival of the steamer at destination, Charges for such telegraphic transfer for account ofEuropean contracts also provided for insurance by buyers but no such provision was made in the American contracts.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 I 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 pound. 7, 300 (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 above mentioned 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 rosponsi- bility 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 theEastern Batik 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 companys agent and banker inthe facts stated above the Income-tax Officer assessed the assessee company on the entire profits in respect of these sales on the footing that they arose and were also received in British India. On appeal, the Appellate Assistant Commissioner confirmed the assessment. The assessee company went up on appeal to the Income-tax Appellate Tribunal. The Tribunal by its order dated the 22nd January, 1948, came to the conclusion that the sales took place outside British India and that the money in respect of such sales was also received by the agent of the. assessee company in London. The Commissioner of Income-tax thereupon applied to the Appellate Tribunal requiring the latter to state a case and refer certain questions of law said to &rise out of the order of the Tribunal. The Appellate Tribunal accordingly referred the two questions of law hereinbefore set out. The High Court of Madras in a well reasoned judgment upheld the decision of the Appellate Tribunal and answered the two questions in the affirmative and against the Commissioner of Income-tax. The Commissioner of Income-tax has now preferredthis appeal with a certificate of fitness from the High Court.

Reasoning: According to section 4 of the Indian Sale of Goods Act a contract of sale of goods is a contract whereby the seller transfer, % 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, areargument, 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 bailer 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 areis 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 termthe assessee company clearly reserved the right of disposal, of the goods until the bill of exchange *as 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 wasit 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 thedocuments were delivered by the assessee companys agent, he Eastern Bank Ltd., London, to the buyers"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 hypothesis the profits derived from such sales arose outside Britishdo 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.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 thepayment 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.