Ramalingam & Co. v. The State of Madras

SW J. the Madras General Sales Tax Act, 1939. Tho order

t>f tho Salea-tax Officer was confirmed by tho Board of ~cvenne, Madras, except as to the amount of freight. The Board of Revenue held that the propc·rty in the goods passed to the buyers in a large majority of the expo1t transactions when the goods were shipped. On remand, the Commeroial Tax Officer recomputed the turnover at Rs. ll ,23,603/8/8 inclusive of the local sales of the value of Rs. 75,082/14/0. After paying the tax tho aBSessees sued the Province of Madras in the Court of the Subordinate Judge, Tuticorin for a decree for Rs. 10,485/· being the amount oi tax paid by them on export sales pursuant to the order of &88essment and interest thereon at 6% until realisation. The assesseee contl.'mled that the export salPs were at the matt'lial time "totally outside the provisions of the Madras Genna) Sales Tax Act, and the order of assessment was ultra i·fres and beyond the powers of the authorities". Tbfl !-'ubordinate Judge decreed the claim for Rs. 10,323/· with interest at 6% till realizaticn. Jn appeal, the High Court of Madras reversed the decree and dismissed the suit filed by the aSBeBBees. With certificate granted by the High Court this appeal is preferred by the a88ell8ees.

It is oommon ground that in the yeoar 1945-46, under the Madras GenPral Sales Tax Aot; 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 wert' properly taxed.

We may observe that the plea that a suit for a decree for refund of tax paid in pursuance of

2 S..C.R. SUPRElME COURT REPORTS 959

an order of assessment passed by the taxing autho-lHB rities on the basis that the sales took place within B""'alU., .tCo. the Province did not lie in the civil court, was not s,.,, M•• raised in the Court of First Instance, nor in the High Tho of Court. Counsel for the State of Madras has also Shi J. stated before us that he does not desire to contend in this case that the suit was, in view of the adjudi-cation 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 ar.e the subject matter of dispu~ in this app~al were completed within the Provmce 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 to Messrs Begbie Philips and Ha.yla.y, 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 ship-ment to Messrs Begbie Philips and Hayley, London a.bout a contract of sale of five tons pa.lmyra 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 tele-gram from our London office reading :- "We open irrevocable credit favour Ra.malin-gam Company, Tutioorin, £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 oovered in London about 5 tons palmyra fibre at £80 (eighty pounds) not per ton C and F. Shipment soonest India to

United Kingdom by approved ship. Part R__,..,__.c •. shipments allowed expiry 6th October, 1945 T• v. a/c Bagbie Phillips Hayley, Limittd, IicC'ncc

SI-. of Mo'1a• No. 198281."

8W .1. When submitting documents under this

credit we would emphasise the fact that the goods must be described beth 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 parti· culars on receipt of written confirmation.

Owing to frequent mutiliations in coded telegrams the above message is subject to any neooBBary corrections on receipt of eonfirma. tiou by mail.

Kindly note that the negotiation of bills under this credit is entirely optional on our part am! 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 unr!er this credit.

Yours faithfully (signed) ..• Manager". On May 28, 19!5, the National Bank of India, Tuticorin wrote a letter to the asseBBeell in regard to a sale of a qua.utity of fibre, which is as follows:-

"Dear Sirs, We beg to inform you that we are in reoeipt of advice by cable of 24th instant from our London office that they have receiv-l!J62 ed from Messrs Hindley and Company, Limi-Bamalingam Co. ted, No.35, Crutched Friars, London,.!<:. C. 3 v. an undertaking to honour your bills on The Slat• of Madras Messrs. Hindley and Company, Limited No. 35 Shah J, Crutched Friars, London E. C. to the c xtent 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-l/2 inches equally at £78 per ton in l 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 unlimit-ed transhipment covered in London.

Such shipping documents are to be dt-li-vered 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 condi-tions must be negotiated on or before-Extend-ed 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 lir.bility attaching to the drawer of a Bill of Exchange.

The above message lli continued by us on behalf of the opening bank for your informa-tion but without any responsibility on our

962 SUPREME OOURT REPOR'l'S [1962] SUPP. ...-.:

IHZ part eiroept for the correctness ot this copy n...i;.8,,.. .t Co. of the telegram as received by us.

v.

Tiu 814<• II/ Modru When uegotiating bills please produce

SAala J. this letter to have the amounts reoordcd on

the back hereof.

I am, Dear Sirs, Yours faithfully (Signed) ..... .

Manager." On receipt of intimation the asseBBees shipped the goods and banded 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 fon·ign banker. The aHBCS· dCes 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 tho 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 bu~ era only on pay. ment. They are what is styled in commercial paralance as D/P bills, i.e., documents to be handed over on payment". This averment in the plaint was not traversed in their written statement by the defendants. The only witness examim·cl at the trial was A.V. Samuel, one of tho partners of the a.Raes· sees' firm. He deposed to the practice which was follow1·d by the assessees. He stated .-

"After shipment we obtain Bill of Jadiug made out in our name as shipper. We draw a bill of Exchange and along with bill of ladil1g and invoice. These documents are deposited with National Bank. We endorHe in Rank on th" Dill of Lading. It is only after paymeut ol

the Bill of exchange by the foreign Bank on behalf of tho purchaser, the Bill of Lading is R1molio1..,•do, handed over. Till the bill is paid for no title v. in the goods pass and the goods are at our dis-Tlw St& oJ Mdr11 posal. If the bill is not honoured the Bank SWJ, will ask us for directions as regards the dispo-sal of goods. Under instruction from the buy-ers foreign banks give instruction to any local Bank to give credit up to a certain limit. In-spite of letter of credit as drawers we are res-ponsible 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 ope-ning b'1nk 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 2S, 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 intimatmg 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 asses-ees received an amount which represented the price f the goods against delivery of the Bills of Lading ndorsed in blank with authority to complete the ndorsement. In substance, the plea is that the oreign bank opening the letter of credit is an agent 1961 of the buyer, and that bank authorizea its own a._i0w,...,, c.. branch to pay the price to the ahippers and by the n. vef Mw arrangementa made by opening the letter of credit,

51 price is paid to the vendor in his own country against

SAaloJ. the bill of Lading endoraed in blank.

It ia necessary to appreciate the true nature of the commercial letter of credit extensively used in fo,eign trade. During the last fow decades, expanaion of international trade involving over-seaa tranaaotiona has raiaed problema of peculiar difficulty. The partiea to a contract to supply gooda are generally unknown to each other and the contract ia the result of correapondence 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 destina-tion, the seller ia reluctant to tie up his funds. The seller himself is generally a purchaaer of gooda from the local market and ha.8 in vested funda in purchaaing the goods. The buyer is also unwil-ling to make payment in advance. To tide over the problem created by thia reluctance of the seller and the buyer, bankers of international repute and credit interpose. They for a small commieaion undertak11 b;v opinion letters of credit to honour the Bill of Exchange drawn b;v the seller accompanied by the insuranc11 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 ia addreaaed to the world at largo or more frequently to speci-fied person or persons : thereby the banker under-takes to honour the Bills of Exchange drawn on the faith of that let.ter. Invariably, the Bille are payable in future but the exporters as tho bene-fioiariea under the contract, have the guarantee of the banker that payment will be forthcoming and are alao entitled to discount the bills with any party oogniaant of the undertaking of the original banker. There are generally four parties to such 1962 a transaction -the buyer, the seller, the banker Co. R11m11.biripam who issues the letter of credit, called the issuing v. banker and the intermediary or the negotiating The 61ai. of Madras banker who allows credit to the seller on the bills Slfah J, 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 certi-ficate and invoice. The buyer undertakes to put the banker in funds to enable him to make pay-ment if the documents are presented. The rela-tion between the buJer and the banker is not of pricipal and agent. The contract between the issuing banker and the negotiating bankllr may be of a durJ 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 nego-tiates relying on the credit alone, as acceptor of the offer it contains. If the instructions call upon the intermediary banker to p1ty or to negotiate the beneficiary's bills, the intermediary banker is tho issuing banker's agent.

Under the I erms 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 invofoe amount." By the letter of credit the foreign banker guaranteed to pay the amount in London.

The issuing hank intimated the opening of the letter of credit., but there is no evidence of any expri;ss directions to its agent in India to pay or negotiate the draft. The letter of credit was gomiral; and it was open to any bank on the faith

966 SUPRBMB OOURT REPOR~ [1982] SUPP.

..... IHI thereof to negotiate the bill issued by the asseesees.

The payment m&de by the intermediary bank was not and could not therefore be on behalf of the issu· 'f'/w SW. ~JI od< ing bank much leee on behalf of the buyer. By nego-

aw .1. tiating the bill, the banker of the weeeeee became

the acceptor of the offer contained in the letter of credit of the issuing bank, and as suoh aooeptor obtained the Bill of Lading, the invoice and the Bill of Exobange and presented them for payment. This arrangement was not an arrangement for pay, ment of prioe on behalf of the buyer.

It appear• clear from the two letters dated April 4, 19'5, 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 &SBell8etll by drawing Bills of Exchange was not discharged. If the liability of the &18e811008, as drawers of the Bills of Exchange continued, the arrangement made by the buyer could not be regarded as one to pay the prioe throngh his banker in India. As stated hereiDbefore, the relation between the buyer and his i.ssuin~ banker was not of principal and agent, nor was the relation between the issuing bankar and the inti>rmediary banker that of prinoipal and agent. Tho two bankers were interposed for the protection of the seller 1111 well as the buyer. The issuing banker did not purport to act as agent of the buyer and the intermediary banker acoepted 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 &et as an agent of the 11eller.

The price in respect of the goods was not received in the Province of Madras, and the pro· perty in the good& also did not p"88 to the buyer within the Province. Tax in respect of the ea.le of 1962 fibre by the assessees under tne disputed transac-Ramalingam.,, Co. tions was therefore not exigible under the Madras v. General Sales Tax Act. Tiu Stat• of Madras

The appeal is therefore allowed : the decree Shah J. 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 allowe.d.

M/S. BALLABHDAS AGARWAL J96B

"' F•b•UJJry 2.

THE STATE OF BIHAR

(·J.L. KAPUR, M. IIIDAYATULLAH and RAGHUBAR

DAYAL, JJ.)

Sales Tax-Appeal from order of Board of Revenue-No A 71peal from ordei· of High Oourt.--Assesaet if can agitate the correctness of deci•ion of Board by Special Leave-Remedy open lo assessre wlien que .. tion asked for, not replied by the Board to Tligh Court-Appeal not maintainabk where breach of Rule of Natural. Just·ice or violation of principle of law not shown-Bihar Sales Tax Act, 1947 (Bihar 19 of 1947), ss. 6,24,25,28.

The appellant, a Railway contractor, having Refresh· ment Rooms and Tea Stalls at various stations, was registered as a dealer under the Bihar Sales Tax Act, 1947. He being aggrieved bv the assessment for the year 1950-51 made by the Sales Tax Officer took the usual .appeals to the Sales Tax Authorities and after the appeals were rejected he took a revision under s. 24 of the Act before the Board of. Revenue Bihar which was dismissed. He then applied under s. 25 of the Act to refer six questions of law to the High Court. The Board referred only one question to the High Court. The

negative against him. Against the order of the Board of Revenue the appellant brought an appeal by special leave to the Supreme Court but he did not appeal against the judgment and order of the High Court.