Case: Mahabir Commercial Co. Ltd Vs. Commissioner of Income Tax, West Bengal

1. The following question was referred to the High Court of Calcutta by the Income-tax Appellate Tribunal (hereinafter called the "Tribunal") under S. 66 (1) of the Income-tax Act,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.2. The aforesaid question related to the assessment year 1952-53 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 Rupees 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 overruled the contention of the assessee and found that the quondam 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 buyers mill-siding or at the ghat 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 Chittagong 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 as per terms 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 Ashurganj in Pakistan. Immediately the loading on the ship had commenced the seller had further to advice the buyers about the quality, assortment and the weight of goods in maunds. The assessee had to then obtain a 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 document to the purchaser.3. According to the Income-tax officer these transactions disclosed that the property in the goods had passed to the assessee (sic) in India and on this basis he assessed the appellant.4. 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 appellant 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 Commr. of Income-tax v. Mysore Chromite Ltd. (1955) 27 ITR 128 (SC) 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 assessees agent at Calcutta, the sales were effected in India.5. 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 basis 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 and 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 (1955) 27 ITR 128 (SC) (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. (7) 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 buyers 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 cancelling 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 ? It is 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 bill of lading etc. negotiated them through a constituent of the buyers bank in Pakistan, or as held by the High Court having regard to cls. (7) and (9) of the contract no unconditional appropriated of the goods was effected in India even though the goods were placed on board the steamer on c.i.f. terms.

Court's reasoning:
12. On the facts as found, (1955) 27 ITR 128 (supra) by this Court is clearly distinguishable, because in that case the assessee 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 buyers 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 Europoe were entered into between the buyers and the assessees agents in London and the contracts of sale to persons in America were signed by the assessees managing agents in Madras and by a company in Amercia who bought for undisclosed principles. 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 irrevocable bankers credit with a bank in London. The fact that letters of credit had been opened was communicated by the assessees 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 assessees 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 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 buyers bank against the acceptance of the relative bill of exchange. The sales therefore took place outside British India and ex-hypothesi, 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.is submitted that 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 companys 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 ofwill be observed that the terms of the contract and the course of dealings between the parties is not the same as in his 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 buyers bank in London when the documents would be delivered by him to the companys 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 seller has a right to cancel the contract or treat it as cancelled and resort to the remedies thereunder. 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 thereunder is not a right to cancel the contract in toto but only to adjust claims in respect of the quality or moisture for which a remedy has been provided thereunder.There is nothing in the agreement which envisaged 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 and/or 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 places where the goods are situate at the time of appropriation 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 shows that he does not intend to retain the right of disposal of the property in the goods.13. A consideration of the terms of the contract and the letter of credit make 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 retained the property in the goods. The provision that all drafts drawn under the letter of credit are to be treated as advance 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, 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 this credit." This clause in the letter of credit further assures the seller of the performance of the contract and does affect the property in the goods passing to the buyer in Pakistan.