Case: Ramalingam &amp; Co Vs. The State Of Madras

Messrs. Ramalingam & Co.-hereinafter called the assessees-are a firm doing business principally as exporters of vegetable fibres to foreign countries. They have their place of business at Tuticorin in the district of Tirunelveli in the State ofcontracts of sale are made by correspondence on approval of samples sent by the assessees to the foreign buyers. The contracts are C.I.F. or C.F. and the price is payable by draft upon bank credit to be opened by the buyer. The course of dealing between the assessees and the foreign buyers was as follows:- After the contract for a quantity of goods was finalised by correspondence and the price ascertained the foreign buyer opened with his own bankers an irrevokable Letter of Credit in favour of the assessees for 95% of the net invoice value. Intimation of the opening of the Letter of Credit was then given to the assessees through a bank operating in the Province of Madras. The assessees then shipped the goods, obtained Bills of Lading in their own names and lodged the shipping documents endorsed in blank with their own bankers together with the invoice and Bill of Exchange for 95% of the invoice value. The assessees then discounted the Bills through their own bankers. The shipping documents were forwarded to the foreign banker who on presentation paid 95% of the invoice amount. The Bill of Lading was then delivered by the foreign banker to the buyer and the goods werethe year 1945-46 the Commercial Tax Officer, Tirunelveli determined for the purpose of computing tax liability under the Madras General Sales Tax Act, 1939, the turnover of the assessees at Rs. 15, 61, 200/-. The Commercial Tax Officer rejected the claim of the assessees that the amount of Rs. 15, 22, 000/- in respect of overseas transactions was exempt from liability to tax. He held that the export transactions in respect of which the exemption was claimed were sales within the province of Madras and subject to sales-tax under the Madras General Sales Tax Act, 1939. The order of the Sales-tax Officer was confirmed by the Board of Revenue, Madras, except as to the amount of freight. The Board of Revenue held that the property in the goods passed to the buyers in a large majority of the export transactions when the goods were shipped. On remand, the commercial Tax Officer recomputed the turnover at Rs. 11, 23, 603/8/8 inclusive of the local sales of the value of Rs. 75, 082/14/0. After paying the tax the assessees sued the Province of Madras in the Court of the Subordinate Judge, Tuticorin for a decree for Rs. 10, 485/- being the amount of tax paid by them on export sales pursuant to the order of assessment and interest thereon at 6% until realisation. The assessees contended that the export sales were at the material time "totally outside the provisions of the Madras General Sales Tax Act, and the order of assessment was ultra vires and beyond the powers of the authorities". The Subordinate Judge decreed the claim for Rs. 10, 323/- with interest at 6% till realization. In appeal, the High Court of Madras reversed the decree and dismissed the suit filed by the assessees. With certificate granted by the High Court this appeal is preferred by the assessees.It is common ground that in the year 1945-46, under the Madras General Sales Tax Act; 1939, the taxing authorities had no power to levy sales-tax on sales which took place outside the Province.

Reasoning: It is clear from the terms of the two letters dated April 16, 1945, and May 28, 1945, that the foreign buyers had opened letters of credit for the benefit of the assessees, for the amounts set out therein. These, it appears, were general credits and intimation thereof was given by the local bankers in India who were agents of the foreign bankers. The local bankers, however, did not undertake any liability by intimating the opening of the letter of credit and the assessees were expressly informed that they (the assessees) would not be released from their liability under the Bills of Exchange drawn by them. The assesses negotiated the Bills through their bankers after receiving an intimation of the opening ofis necessary to appreciate the true nature of the commercial letter of credit extensively used in foreign trade. During the last few decades, expansion of international trade involving overseas transactions has raised problems of peculiar difficulty. The parties to a contract to supply goods are generally unknown to each other and the contract is the result of correspondence between the parties. Often neither the seller nor the buyer is prepared to trust the other. Again, between the delivery of the goods in such trade on board the ship and its ultimate delivery at the destination, the seller is reluctant to tie up his funds. The seller himself in generally a purchaser of goods from the local market and has invested funds in purchasing the goods. The buyer is also unwilling to make payment in advance. To tide over the problem created by this reluctance of the seller and the buyer, bankers of international repute and credit interpose. They for a small commission undertake by opinion letters of credit to honour the Bill of Exchange drawn by the seller accompanied by the insurance policy and the invoice relating to the goods forming the subject matter of the contract. At the instance of the buyer the banker issues a letter of credit which is addressed to the world at large or more frequently to specified person or persons: thereby the banker undertakes to honour the Bills of Exchange drawn on the faith of that letter. Invariably, the Bills are payable in future but the exporters as the beneficiaries under the contract, have the guarantee of the banker that payment will be forthcoming and are also entitled to discount the bills with any party cognisant of the undertaking of the original banker. There are generally four parties to such a transaction-the buyer, the seller, the banker who issues the letter of credit, called the issuing banker and the intermediary or the negotiating banker who allows credit to the seller on the bills lodged with him. Between the buyer and the issuing banker, the contract is that he will pay bills drawn by the seller of the goods against delivery of the Bill of Lading, insurance certificate and invoice. The buyer undertakes to put the banker in funds to enable him to make payment if the documents are presented. The relation between the buyer and the banker is not of pricipal and agent. The contract between the issuing banker and the negotiating banker may be of a dual character. Where the issuing bankers instructions are merely to advise the credit, and the credit calls for bills to be drawn either on the issuing banker or on the buyer, the intermediary banker may negotiate the beneficiarys bills. In such a case he stands qua the issuing banker as principal to principal, for either he succeeds to the rights of the beneficiary under the credit or, if he negotiates relying on the credit alone, as acceptor of the offer it contains. If the instructions call upon the intermediary banker to pay or to negotiate the beneficiarys bills, the intermediary banker is the issuing bankers agent.Under the terms of the contract between the assessees and the foreign buyer the price was to be paid "by draft after 90 days under bank credit to be opened by the buyer for 95% of the net invoice amount." By the letter of credit the foreign banker guaranteed to pay the amount in London. The issuing bank intimated the opening of the letter of credit, but there is no evidence of any express directions to its agent in India to pay or negotiate the draft. The letter of credit was general; and it was open to any bank on the faith thereof to negotiate the bill issued by the assessees. The payment made by the intermediary bank was not and could not therefore be on behalf of the issuing bank much less on behalf of the buyer. By negotiating the bill, the banker of the assessees became the acceptor of the offer contained in the letter of credit of the issuing bank, and as such acceptor obtained the Bill of Lading, the invoice and the Bill of Exchange and presented them for payment. This arrangement was not an arrangement for payment of price on behalf of theappears clear from the two letters dated April 4, 1945, and May 28, 1945, that the banks accepted no liability by intimating the opening of the letter of credit and the liability attaching to the assessees by drawing Bills of Exchange was not discharged. If the liability of the assessees, as drawers of the Bills of Exchange continued, the arrangement made by the buyer could not be regarded as one to pay the price through his banker in India. As stated hereinbefore, the relation between the buyer and his issuing banker was not of principal and agent, nor was the relation between the issuing bankar and the intermediary banker that of principal and agent. The two bankers were interposed for the protection of the seller as well as the buyer. The issuing banker did not purport to act as agent of the buyer and the intermediary banker accepted the general offer of the issuing banker by negotiating the draft. By so accepting the offer and by taking over the Bill of Lading, the insurance certificate and the invoice which represented title to the goods the intermediary banker did not act as an agent of the seller.The price in respect of the goods was not received in the Province of Madras, and the property in the goods also did not pass to the buyer within the Province. Tax in respect of the sale of fibre by the assessees under the disputed transactions was therefore not exigible under the Madras General Sales Tax Act.