CIT v. Mysore Chromite Ltd. (1955) 1 SCR 849

Introduction

• This case deals with Section 25 of the Sales of Goods Act, 1930 (SOGA) which says the seller reserves the right of disposal of goods until certain conditions are fulfilled, the property does not pass.

Facts

• The assessee company is a private limited company registered in the Mysore State and it has a registered office at Sinduvalli in Mysore State.
• 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 affected 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.
• On the basis of an exchange on the buyer's bank, the assessee firm used to issue a provisional invoice.
• Then, the buyer bank was notified of the exchange via the assessee bank, along with the related bill of lading.
• After determining the sale price after the goods arrived, were weighed, and were analysed, the buyers bank used to promptly pay the assessee the amount of the bill of exchange.
• The remaining balance used to be paid to the assessee agent at Eastern Bank in London and the banker in London to assessee agent after subtracting any payments made against the bill of exchange.
• Then the assessee company was forced to pay income tax on the profits derived by sales, and it was challenged.

Issues Involved

• Whether on the facts and in the circumstances of the case the profits derived by the assessee company from sales made to European and American buyers arose outside British India?
• Whether on the facts and in the circumstances of the case the profits derived by the assessee company from sales made to European and American buyers were received outside British India?

Observations

• The Court said that as soon as the assessee company placed the goods on board the steamer named by the buyer at Madras Port the goods became ascertained and the property in the goods passed immediately to the buyer.
• The Court elaborated 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.
• The Court said that it is true that the price and delivery was FOB Madras but the contracts themselves clearly required the buyers to open a confirmed irrevocable Bankers' credit for the requisite percentage of the invoice value to be available against documents.
• This clearly indicated that the buyers would not be entitled to the documents, that is, the bill of lading and the provisional invoice, until payment of the requisite percentage was made upon the bill of exchange.
  • The bill of lading is the document of title to the goods and by this term the assessee company clearly reserved the right of disposal of the goods until the bill of exchange was paid.
• Placing of the goods on board the steamer named by the buyer under a FOB 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.
• The Court further said that the facts found in this case are that the assessee company shipped the goods under bill of lading issued in its own name.
• Under the contract it was not obliged to part with the bill of lading which is the document of title to the goods until the bill of exchange drawn by it on the buyers' Bank where the irrevocable letter of credit was opened was honoured.
• It is urged that under the provision in the contract for weighment and assay, which was ultimately to fix the price unless the buyer rightly rejected the goods as not being in terms of the contract, the passing of property in the goods could not take place until the buyer accepted the goods and the price was fully ascertained after weighment and assay.
• The Court said as far as the first issue is concerned the Appellate Tribunal as well as the High Court were quite correct in holding that the sales took place outside British Indian and, ex hypothesis, the profits derived from such sales arose outside British India.
• The Court further said with respect to the second issue and observed that the words "through the Eastern Bank Ltd.," appear to us to go with the proceeding words "to be advised to sellers" which are put within brackets which seem to have been wrongly closed after the word 'sellers' instead of after the words “the Eastern Bank Ltd”.
  • Ordinarily, the buyer opens a letter of credit with his Bank in favour of the seller and the words "through the Eastern Bank Ltd." would be meaningless unless it was intended to mean that the irrevocable credit which was in favour of the assessee company was to be operated upon by the latter through the Eastern Bank Ltd.
• The Court said Ordinarily, the buyer opens a letter of credit with his Bank in favour of the seller and the words "through the Eastern Bank Ltd." would be meaningless unless it was intended to mean that the irrevocable credit which was in favour of the assessee company was to be operated upon by the latter through the Eastern Bank Ltd.
• If that were the true meaning, then that certainly does not make the Eastern Bank Ltd., the agent of the buyers.
• The words "available by delivery to us", occurring in the letter of the Eastern Bank Ltd., Madras, do not appear to us to indicate that this was any part of the terms of the letter of credit.
• This was an intimation in accordance with the advice received by the Eastern Bank Ltd., Madras, from the Eastern Bank Ltd., London, that the assessee company might avail itself of the letter of credit by delivery of the documents to the Eastern Bank Ltd., Madras.
• This is made further clear by the latter part of the letter where the Eastern Bank Ltd., Madras, expressed their willingness at their option to negotiate the drafts drawn in terms of the arrangement provided that the documents were in order.
• The Court observed that there is not 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.

Conclusion

• The Court dismissed the appeal.