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PETITIONER: RAMALINGAM & CO.

       Vs.

RESPONDENT: THE STATE OF MADRAS

DATE OF JUDGMENT: 01/02/1962

BENCH: SHAH, J.C. BENCH: SHAH, J.C. DAS, S.K. HIDAYATULLAH, M.

CITATION:  1962 AIR 1148            1962 SCR  Supl. (2) 954

ACT:      Sales  Tax-Contract  for  sale  of  goods  by correspondence-C. I.  F.  or  C.  F.  contracts-of lading handed over to bankers to part with only on payment  Whether   property  in  goods  passed  in Madras-Position of  banker.s Vis-a-Vis  seller and foreign  buyer-Intermediary  banker  if  agent  of seller-Madras general  Sales Tax  Act (Mad.  9  of 1939).

HEADNOTE:      The assessees were doing business principally as  exporters   of  vegetable  fibres  to  foreign countries. The  contracts of  sale were  C.I.F. or C.F. and  were made  by correspondence on approval of samples  sent by  the assessees  to the foreign buyers. The  price was  payable by draft upon bank credit to  be opened by the buyer; who opened with his own bankers 955 an irrevocable  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  by  the  local bankers in  India  who  were  the  agents  of  the foreign bankers.  The local  bankers, however, did not by  intimating the  opening of  the letter  of credit undertake  any liability, and the assessees were expressly  informed that  they would  not  be released from  their liability  under the  Bill of Exchange  drawn   by  them.   On  receipt  of  the information about  opening of the letter of credit the assessees shipped the goods, obtained bills of leading 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. Bills  of lading  were handed over  to the  assessees  bankers  with  the definite instructions  to  pass  on  the  shipping documents to  the  buyers  only  on  payment.  The assessees then  discounted the Bills through their

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own bankers. The shipping documents were forwarded to the  foreign bankers  who on  presentation paid 95% of  the invoice amount. The Bill of lading was then delivered  by the foreign banker to the buyer and goods were unloaded.      For  the  year  1945-46  the  Commercial  Tax officer  taxed  the  assessees  under  the  Madras General Sales  Tax Act,  1930. The  Commercial Tax officer rejected  the claim  of the assessees that the amounts  in respect  of overseas  transactions was exempt  from liability  to tax, because in his view the export transactions were sales within the province of Madras. The Board of Revenue confirmed the order  and held that the property in the goods passed to  the buyers  in a  large majority of the export transaction when the goods were shipped.      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 the  assessment was  ultra vires and beyond the  powers of  the Authority.  The plea of the State  of Madras  was that  the  foreign  bank opening the  letter of  credit is  an agent of the buyer, and that the bank authorises its own branch to pay  the price  to  the  shippers  and  by  the arrangements made by opening the letter of credit, price is  paid to  the vendor  in his  own country against the Bill of lading endorsed in blank. ^      Held, that  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.  Therefore  tax  in respect of  the sale transactions was not exigible under the Madras General Sales Tax Act 1939.      The   expansion    of   international   trade involving   overseas   transactions   has   raised problems of peculiar difficulty. The 956 parties to  a contract  (which is  as a  result of correspondence)  are  generally  unknown  to  each other; often  neither the  seller nor the buyer is prepared to  trust the  other and  the  seller  is reluctant to  tie up  his funds  and 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  small commission undertake  by opening letters of credit to honour the bill of exchange drawn by the seller accompanied  by   the  insurance  policy  and  the invoice relating  to  goods  forming  the  subject matter of  the contract.  At the  instance of  the buyers the bank issues a letter of credit which is addressed to the world at large or more frequently to specified  person or  persons thereby  the bank 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 benefit  ciaries  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.      The  relation   between  the  buyer  and  his

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issuing banker was not of principal and agent, nor was the  relation between  the issuing  banker 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 bankers  accepted the  general   offer   of   the   issuing   banker 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.

JUDGMENT:      CIVIL APPELLATE  JURISDICTION: C.A  No. 10 of 1961.      Appeal from  the judgment  and  decree  dated March 5, 1956 of the Madras High Court in A.S. No. 256 of 1951,      R. Ramamurthi  Aiyar and  R. Gopalakrishanan, for the appellants.      R. Ganapathy  Iyer  and  D.  Gupta,  for  the Respondent.      1962. February  1. The  Judgment of the Court was delivered by 957      SHAH, J.-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 of Madras.      The   contracts   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 were unloaded.      For  the  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

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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 958 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. The decision  of the  appeal,  therefore,  depends upon the determination of the question whether the export sales  took place  within the  Province. If they took  place within  the Province,  the  sales were properly taxed.      We may  observe that the plea that a suit for a decree for refund of tax paid in pursuance of 959 an  order  of  assessment  passed  by  the  taxing authorities on the basis that the sales took place within the  Province did  not  lie  in  the  civil court, was  not  raised  in  the  Court  of  First Instance, nor  in the  High Court. Counsel for the State of  Madras has also stated before us that he does not  desire to  contend in this case that the suit was,  in view  of  the  adjudication  by  the taxing authorities, not maintainable. We therefore proceed to  deal with  the only question which was debated before  us at  the Bar: whether the export sales which  are the  subject matter of dispute in this appeal  were completed within the Province of Madras.      The dispute relates to turnover in respect of seventeen export  transactions with  merchants  in different destinations overseas. As typical of the transactions the  files relating  to the shipments

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to Messrs  Begbie Philips  and Haylay,  London and Messrs Hindley  and Company,  London were tendered in evidence and the case proceeded to trial on the footing that  those transactions  were typical  of all other transactions.      On April  16, 1945,  the Mercantile  Bank  of India  wrote  a  letter  in  connection  with  the shipment to  Messrs  Begbie  Philips  and  Hayley, London about  a contract  of  sale  of  five  tons palmyra fibre.  The letter  is  in  the  following terms:-      "Dear Sirs,           Without any  responsibility on  the part      of this  bank we  beg to  advice receipt of a      telegram from our London office reading:-      "We open irrevocable credit favour Ramalingam      Company,  Tuticorin,   $400   (four   hundred      pounds) drafts  on Mercantile  Bank of  India      Limited, 60  d/st. invoices, full set shipped      bills   of   lading   order   bank   endorsed      certificate of  origin insurance  covered  in      London about  5 tons  palmyra  fibre  at  $80      (eighty pounds) not per ton C and F. Shipment      soonest India to 960      United  Kingdom   by  approved   ship.   Part      shipments allowed  expiry 6th  October,  1945      a/c Bagbie  Phillips Hayley, Limited, licence      No. 198281."           When  submitting  documents  under  this      credit we  would emphasise  the fact that the      goods must  be described  both in the bill of      lading and  invoice  identically  as  advised      above and  the relative  bill  marked  "Drawn      under telegraphic  credit No. 88-A/36 of 12th      April 1945".           We  shall   furnish  you   with  further      particulars    on    receipt    of    written      confirmation.           Owing to  frequent mutiliations in coded      telegrams the above message is subject to any      necessary   corrections    on   receipt    of      confirmation by mail.           Kindly  note  that  the  negotiation  of      bills under  this credit is entirely optional      on our  part and this advice does not release      you  from  the  liability  attaching  to  the      drawer of a Bill of Exchange.           This letter  must be  produced with  all      bills drawn under this credit.                                   Yours faithfully                                        (signed)...                                          Manager". On May  28, 1945,  the  National  Bank  of  India, Tuticorin wrote  a  letter  to  the  assessees  in regard to  a sale of a quantity of fibre, which is as follows:-      "Dear Sirs,           We beg  to inform  you that  we  are  in      receipt of advice by cable of 24th instant 961      from  our   London  office   that  they  have      received from  Messrs  Hindley  and  Company,      Limited, No.  35, Crutched Friars, London, E.      C. 3  an undertaking  to honour your bills on

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    Messrs. Hindley  and Company,  Limited No. 35      Crutched Friars,  London E.  C. to the extent      of $370  (three hundred  and seventy  pounds)      sterling being  95 per  cent of invoice value      on the following conditions:-           Bill to  be drawn  payable 90 days after      sight and to be accompanied by-           Invoices.           Full sets  of on  board bills  of lading      made  out   to  order   and  blank   endorsed      representing shipments of:-           Five tons  Tuticorin medium cut and dyed      bassine 7  inches and 7-1/2 inches equally at      $78 per  ton in  1 Cwt.  (ballots)  C  and  F      United Kingdom  post Shipment  June/July from      Cochin freight  paid of  deducted and  credit      reduced accordingly - Freight basis 22nd May,      1945.           Insurance  including   was   risk   with      unlimited transshipment covered in London.           Such  shipping   documents  are   to  be      delivered  on  payment  of  the  bills  which      should bear  the clause-"Drawn  under  N.S.I.      credit number 83 cabled 24th May 1945".           Bills  fulfilling   the  above-mentioned      conditions must  be negotiated  on or before-      Extended till 30th April 1946.           Please note  that the  bank  accepts  no      liability for  the above undertaking and this      advice  does   not  release   you  from   the      liability attaching  to the  drawer of a Bill      of Exchange.           The above  message is continued by us on      behalf  of   the  opening   bank   for   your      information but without any responsibility on      our 962      part except  for the correctness of this copy      of the telegram as received by us.           When negotiating  bills  please  produce      this letter  to have  the amounts recorded on      the back hereof.                                   I am, Dear Sirs,                                   Yours faithfully                                     (Signed)......                                          Manager." On receipt of intimation the assessees shipped the goods and  handed over  the Bill of Lading and the invoice to  their own  bankers, accompanied  by  a Bill of  exchange for  the amount  for  which  the Letter of Credit was opened by the foreign banker. The assessees  then discounted  the bills  for the amount for  which credit  was opened.  The  taxing authorities taxed  these transactions, because, in their  view,   the  sales  were  effected  in  the Province of  Madras and not outside. The assessees in the  plaint in paragraph IV cl. (e) stated that one of  the salient  features of  the business was that "The  bills of  lading are handed over to the Plaintiffs bankers  with the  clear  and  definite instructions to  pass on the shipping documents to the buyers  only on  payment.  They  are  what  is styled in  commercial parlance as D/P bills, i.e., documents to  be handed  over  on  payment".  This averment in  the plaint was not traversed in their

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written statement  by  the  defendants.  The  only witness examined at the trial was A.V. Samuel, one of the partners of the assessees’ firm. He deposed to  the   practice  which   was  followed  by  the assessees. He stated.-      "After shipment we obtain Bill of lading made      out in our name as shipper. We draw a bill of      Exchange and  along with  bill of  lading and      invoice. These  documents are  deposited with      National Bank. We endorse in Bank on the Bill      of Lading. It is only after payment of 963      the Bill  of exchange  by the foreign Bank on      behalf of  the purchaser,  the Bill of Lading      is handed  over. Till the bill is paid for no      title in  the goods pass and the goods are at      our disposal. If the bill is not honoured the      Bank will  ask us  for directions  as regards      the disposal of goods. Under instruction from      the buyers  foreign banks give instruction to      any local Bank to give credit up to a certain      limit. Inspite of letter of credit as drawers      we  are   responsible  under   the  bill   of      exchange. We can discount in any bank and not      merely in the credit opening bank." In cross-examination  he stated  that the  "credit opening  bank   opens  credit  on  behalf  of  the purchasers.  Those  banks  are  not  known  to  us before."      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 assessees negotiated the  Bills through  their bankers after receiving an intimation of the opening of credit.      Counsel for  the State of Madras submits that the property  in the  goods which were the subject matter  of  sale  passed  in  Tuticorin  when  the assesees received  an amount which represented the price the  goods against  delivery of the Bills of Lading  endorsed   in  blank   with  authority  to complete the  endorsement. In  substance, the plea is that  the oreign  bank opening  the  letter  of credit is an agent 964 of the  buyer, and  that bank  authorizes its  own branch to pay the price to the shippers and by the arrangements made by opening the letter of credit, price is  paid to  the vendor  in his  own country against the bill of Lading endorsed in blank.      It is 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

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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 965 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 banker’s 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 beneficiary’s 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 beneficiary’s bills,  the intermediary  banker  is the issuing banker’s 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

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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 966 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 the buyer.      It appears  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 967 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.      The appeal  is therefore  allowed: the decree of the  High Court is set aside, and the decree of the trial  Court is  restored with  costs in  this Court and the High Court.                                    Appeal allowed.