CIVIL APPELLATE JURISDICTION : Civil Appeal No. 450 of 1969. Appeal by special leave from the judgment and order, dated November 15, 1967 of the Calcutta High Court in Income-tax Reference No. 19 of 1958. A. K. Sen, Leila Seth, O. P. Khaitan and S. P. Maheshwari, for the appellant. B. Sen, A. N. Kripal and S. P. Nayar, for the respondent. The Judgment of the Court was delivered by JAGANMOHAN REDDY, J. 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, 1922 :
"Whether 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. The aforesaid question related to the assessment year 195253 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 Rs. 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 over-ruled the contention of the assessee and found that the quandary 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 buyer’s mill-siding or at the what 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 Chitterlings 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 aperture 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 Ashurgani in Pakistan. Immediately the loadine on the shin had commenced the seller had further to advice the buvers about the ouality ascertainment 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 documents to the purchaser. According to the Income-tax officer these transactions disclosed that the property in the good,, had passed to the assessee in India and on this basis he assessed the appellant. 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 appelllant 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 Commissioner of Income-tax v. Mysore Chromite Ltd.(1) 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 assessee’s agent at Calcutta, the sales were effected in India. (1) 27 I.T.R. 128. 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 re arding 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 bases 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 & 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 Commissioner of Income-tax v.’ Mysore Chromite Ltd. (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. (1) 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 buyer’s 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 canceling 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 ? Is it 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 buyer’s ban& in Pakistan or as held by the High Court having regard to cls. (7) and (9) of the contract no unconditional appropriation of the goods was effected in India even though the goods were placed on board the steamer on c.i.f. terms. Before we examine the terms of the contract and the dealings between the parties to ascertain where exactly the unconditional appropriation of the goods under the contract was effected, it is, we think appropriate to set out the principles which are applicable for the determination of that question. It would also be useful to an understanding of the terms of the contract and the intention of the parties, if we were to ascertain what exactly is the significance of an irrevocable letter of credit. In this case we are dealing with the sale of unascertained goods in a deliverable state in respect of which where the property in the goods passes is the question to be determined. Sections 23 and 39 of the Sale of Goods Act which are in identical terms with rule 5 of s. 18 and s. 32 of the English Sale of Goods Act lay down the principles for ascertaining where the property in the goods passes. They are in these terms :-
"23.(1) Where there is a contract for the sale
of unascertained or further goods by
description and goods of that description and
in a deliverable state are unconditionally
appropriated to the contract, either by the
seller with the assent of the buyer or by the
buyer with the assent of the seller, the
property in the goods thereupon passes to the
buyer. Such assent may be express or implied,
and may be given either before or after the
appropriation is made.
(2) Where, in pursuance of the contract, the
seller delivers the goods to the buyer or to a
carrier or other bailer (whether named by the
buyer or not) for the purpose of transmission
to the buyer, and does not reserve the right
of disposal, he is deemed to have un-
conditionally appropriated the goods to the
contract.
39.(1) Where, in pursuance of a contract of
sale, the seller is authorised or required to
send the goods to the buyer, delivery of the
goods to a carrier, whether named by the buyer
or not, for the purpose of transmission to the
buyer, or delivery of the goods to a
wharfinger for safe custody, is prima facie
deemed to be delivery of the goods to the
buyer.
(2) Unless otherwise authorised by the
buyer, the seller shall make such contract
with the carrier or wharfinger on behalf of
the buyer as may be reasonable
having regard to the nature of the goods and
the other circumstances of the case. If the
seller omits so to do, and the goods are lost
or damaged in course of transit or while in
the custody of the wharfinger, the buyer may
decline to treat the delivery to the carrier
or wharfinger as a delivery to himself, or may
hold the seller responsible in damages.
(3) Unless otherwise agreed, where goods are
sent by the seller to the buyer by a route
involving sea transit, in circumstances in
which it is usual to insure, the seller shall
give such notice to the buyer as may enable
him to insure them during their sea transit,
and if the seller fails so to do, the goods
shall be deemed to be at his risk during such
sea transit." It is apparent that for the purposes of sub-s. (1) of s. 23 there should be an unconditional appropriation with the assent of the parties as indicated before the property in the goods passes to the buyer. This sub-section is quite independent of sub-s. (2) and does not contemplate an unconditional appropriation in pursuance of the contract. Sub-s. (2) on the other hand requires the delivery to a carrier in pursuance of a contract which operates or is deemed to operate as an unconditional appropriation. Where in pursuance of the contract the seller delivers the goods to the buyer or to a carrier or other bailee whether named by the buyer or not for the purposes of transmission to the buyer and does not reserve the right of disposal he is deemed to have unconditionally appropriated the goods to the contract. The buyer’s assent to the passing of the property in the said circumstances is implied and that when the seller despatches the goods and delivers them to the common carrier for purposes of transit to the buyer, the common carrier not only receives the goods as agent of the buyer but also assents to the appropriation made by the seller. Where however the intention is clearly indicated and the carrier assents it is immaterial by what document the consignment is effected. In cases where the seller bears the freight for the transmission of the goods free of cost to the buyer, the property in the goods passes to the buyer as soon as they are sent to the carrier, though there may be a provision that they are to be paid for by the buyer on behalf of the seller after the arrival of the goods. But where however the seller exercises a right of disposal or where he agrees to deliver the goods at their destination, the carrier is the seller’s agent and the delivery is not a final appropriation. The intention of the parties is therefore one of the important elements in determining the situs where the property passes to the buyer in pursuance of the contract. The decided cases are of little help and are only illustrative of the principles which are applicable for determining when the goods are unconditionally appropriated to the contract. In the case of transactions of sale of goods between the buyer and seller living in two different countries, the contract may envisage, the seller sending the goods through a carrier and the payment being made either at that place or at the place where the buyer resides. In such a transaction the banks have come to play an important part and the bankers’ commercial credit system facilitates merchants domiciled in different countries and assures payment to the seller on the one hand and delivery of the goods contracted for to the buyer on the other. This is done by means of what are known as letters of credit which under the terms of the contract the seller may insist on the buyer to provide for in a bank doing business in the place of the seller’s domicile. This may be effected by the buyer requesting the bank to facilitate a letter of credit in the country of the seller where the bank or its constituent assumes liability for payment of the price for some consideration which may either be by loan or an over-draft arrangement or perhaps on the security by the pledge of documents of title to the goods or by some other arrangement arrived at between them. An understanding of the mechanism of credit made available to the buyer and the seller by the banks in the sale of goods and the manner in which these transactions take place through the banking institutions will greatly facilitate the ascertainment of the question when and at what place the property in ,the goods passes from the buyer to the seller. Inasmuch as those innovation of commercial credit have been developed by the maritime powers of which England was the leader a reference to English decisions will be of assistance. In Guaranty Trust Company of New York v. Hannay & Co.(1) Lord Justice Scrutton set out at p. 659 the manner in which commercial credit operates. He said :-
"The enormous volume of sales of produce by a
vendor in one country to a purchaser in
another has led to the creation of an equally
great financial system intervening between
vendor and purchaser, and designed to enable
commercial transactions to be carried out with
the greatest money convenience to both
parties. The vendor, to help the finance of
his business, desires to get his purchase
price as soon as possible after he has des-
patched the goods to his purchaser; with this
object he draws a bill of exchange for the
price, attaches to the draft the documents of
carriage and insurance of the goods sold and
sometimes an movie for the price, and
discounts the bill-that is, sells the bill
with documents
(1) [1918] 2K. B. 623.
attached to an exchange house. The vendor
thus gets his money before the purchaser
would, in ordinary course, pay; the exchange
house duly presents the bill for acceptance,
and has, until the bill is accepted, the
security of a pledge of the documents attached
and the goods they represent. The buyer on
the other hand may not desire to pay the price
till he has resold the goods. If the draft is
drawn on him, the vendor or exchange house may
not wish to part with the documents of title
till the acceptance given by the purchaser is
met at maturity. But if the purchaser can
arrange that a bank of high standing
shall accept the draft, the exchange house may
be willing to part with the documents on
receiving the acceptance of the bank. The
exchange house will then have the promise of
the bank to pay, which, if in the form of a
bill of exchange, is negotiable, and can be
discounted at once. The bank will have the
documents of title as security for the
liability on the acceptance, and the purchaser
can make arrangements to sell and deliver the
goods. Before acceptance the documents of
title are the security, and an unaccepted bill
without documents attached is not readily
negotiable. After acceptance the credit of
the bank is the security............"
The operation of the banker’s commercial credit is
generally and in an increasing manner resorted to
by the exporters stipulating in contracts for the
sale of goods the responsibility for the payment
of price by a banker which is done by means of a
documentary credit. It takes the form of a promise
by the buyer’s bank to accept or honour bills of
exchange if drawn on him or his guarantee of
payment if drawn on the buyer, the security for
which resides in the pledge of the documents of
title to the goods exported. Where the device of
commercial credit is resorted to as indeed in all
overseas transactions this has become a general
practice-there is to be a prior contract for the
sale of goods the payment of price for which is to
be made by a banker. We are here not concerned for
the purpose of this case, with the various
intricacies and practical technicalities of
different means which are adopted to meet different
situations. But a simple example of the device may
be indicated. The buyer requests his bank and
arranges with it the issuance of credit for payment
at the place of the seller’s domicile specifying
the documents against which it has to make payment.
The buyer agrees also to indemnify the bankers in
respect of such advances and of any claim arising
out of the credit. The letter constitutes the
memorandum of the buyer’s instructions to the
banker. On receipt of this application
the banker issues the credit which is addressed to
and sent to the seller or it may take the form of a
request to an intermediary banker who is asked
either merely to advice the seller or advise and to
add his confirmation. The credit may be issued by
cable which is later followed by writing. These
letters may be given for the purpose of being shown
to third parties who may act thereon. Letters of
credit are either revocable or irrevocable and
where it is the latter it may be confirmed or
unconfirmed. If confirmed it means that words of
confirmation of another banker is added to it by
which that banker also commits himself irrevocably.
The letter of credit notifies the seller that the
issuing banker or his correspondent will (if they
are drawn on him) accept or honour drafts drawn for
the price of the goods, provided that the documents
of title and other documents specified in the
credit are simultaneously presented to the banker.
On receipt of the credit the seller ships the goods
and insures them, obtaining a bill of lading
normally made out to his order but perhaps to that
of the banker, and also a policy of marine
insurance. He then draws a draft for the price of
the goods and with the documents i.e. the bill of
lading, policy- and invoice specified in the credit
presents the draft for acceptance, payment and
negotiation.. In this way the exporter gains the
advantage of receiving payment for his goods
without delay. The documents are then sent by the
banker to the buyer’s bank and on the bill of
exchange being accepted by him by payment of the
price the bill of lading and the invoice is
delivered to him; see Halsbury, Vol. 2, p. 213 and
Gutteridge and Megrah on The Law of Commercial
Credits (1968 edition).
The contract that has been entered into between the
buyer and the seller in this case is in the form of
a sold note by the seller’s broker in Calcutta in
the form of the Indian Jute Mills Association for
jute contracts with variations in respect of some
of the terms. Under cl. (1) of this contract the
amount of tax payable under the Bengal Raw Jute
Taxation Act, 1941 is to be on the seller’s account
and to be deducted by the buyers from the price
quoted for payment, to the Provincial Government in
the prescribed manner unless at the time of
concluding the contract the seller satisfies the
buyer by means of satisfactory evidence that tax is
not payable on the sale. Any increase or decrease
in the existing Bengal Jute Tax or in any other
form of tax by whomsoever levied or any new taxes
on raw jute after the contract also shall be on the
buyer’s account. It also states that the contract
is accepted by the buyers on the seller’s
representation and assurance that the jute as shown
in the margin is under a mark entered in the said
register and that its bailing and packing is in
strict accord with the particulars contained
therein. Should tenders not be in accordance with
it the buyers shall be entitled to reject the goods
and the sellers shall be liable for all losses
sustained in-
1-348SupCI/73
cluding the difference between the contract and the
market prices. Cl. (2) provides for delivery to the
mills specified therein and the carrier or carriers
through which that delivery should be made to the
mills. Cl. (3) which is varied deals with the
transit insurance to be covered by the buyers at
contract value plus 10% under their open cover and
premium to be paid for by sellers in India.
Sellers to advise buyers the contract and
assortment in mounds to be supplied immediately
loading is commenced. Cl. (4) which deals with
reimbursement of cash is again varied by the
following
"Bank in favour of seller’s nominee. A
complete set of shipping documents to be
presented to the bank and payment of invoice
valid in terms of the contract to be made to
the shippers in the equivalent of Pakistan
currency at the exchange rate ruling on the
date of presentation of documents at the bank,
less freight, if payable in India." Cl. 6 deals with non-delivery of documents. Cl. 7 provides for non-acceptance of documents. Cl. 8 provides for maximum amount of moisture the jute should contain and cl. 9 provides for claims with the variation that the amount of short weight value and claim to be paid by sellers to buyers in Indian currency: The High Court, as we have earlier stated, relied on cls. 7 and 9(3) for coming to the conclusion that the appropriation took place in India. These clauses are given below:-
"7. Non-acceptance of documents should buyers
fail to accept or pay against documents
properly submitted under the terms of the
contract Sellers have the right to exercise
any of the following options
(a) Cancelling the contract.
(b) Cancelling the contract and charging
buyers the market difference between the
contract rate and the market rate of the date
of the breach of contract.
(c) Selling against buyers in the open
market on the first working day following the
default. 9. (3) In any case where buyers make any claim in respect of quality and/or excessive moisture and the Award on the dispute being referred to arbitration as provided for in Clause 13 provides for an allowance of not less than 50 percent on the market difference between the grades of the goods contracted for and the goods supplied and/or finds a moisture content in the goods supplied in excess of the maximum percentage of moisture allowed under clause 8 by not less than 3 per cent and stipulates an allowance therefore, buyers shall thereupon be entitled to exercise any of the following options :-
(a) Of accepting the goods with the
allowance(s) awarded.
(b) Of cancelling the contract in respect of
the particular lot or lots of goods supplied
and charging sellers for the market difference
on the goods as contracted for and those
offered in fulfilment of the contract and on
which the award has been made.
(c) Of rejecting the particular lot or lots
of goods supplied and claiming a fresh tender
in lieu there of to be made within days from
the date on which the option is declared." The letter of credit which has been referred to in the contract is by the Chartered Bank of India, Australia and China and since several contentions have been urged on the import of this letter we give below its contents in entirety :"THE CHARTERED BANK OF INDIA, AUSTRALIA AND CHINA Messrs. Mahabir Commercial Co. Ltd., P.O. Ashuganj, Distt. Tipperah East Pakistan Calcutta, 14th August 1951. This letter of Credit was wired through the Chartered bank, Cittagong on and is only to be delivered to beneficiaries against surrender of the letter advis ing contents of the telegram, and any negotiations made in the interval are to be transferred to the original credit before it is handed over. Confirmed Letter of Credit No. 94/743 Irrevocable. Dear Sirs, You are hereby authorised to draw on M/s Thomas Duff & Co. (India) Ltd. a/c. The Titaghur Jute Factory Co. Ltd., of Calcutta for a sum not exceeding Rs. 2,00,750/- (Rupees two lacks seven hundred and fifty) available by your drafts on them at sight accompanied by :
(1) Complete set of Bills of lading and/or
Railway receipts to order and blank endorsed,
"Shipped on Board". . . . Bills of Lading are
essential and the statement ’freight paid’
must appear thereon.
The Bills of Lading must cover shipment as
detailed below.
(2) The Insurance to be covered by buyers
under Open Cover No. 1249 and premium to be
deducted from shipper’s invoice.
(3) Signed Invoices in triplicate.
(4) Freight "To Pay" to be deducted from
shipper’s invoice. SHIPMENT As per overload from Pakistan to Calcuta C.& F. by I.G.N.. R.S.N., B.A.S.S., E.B.R.S.S., I.S. Co.’s steamer and/or Flat and/ or Rail direct or indirect with or without transshipment. Partial shipments allowed. PRO-RATA: Shipments are permissible. CONDITION OF SHIPMENT: Shipment is to be affected not later than 15th August, 1951. CREDIT EXPIRY DATE: This credit expires on 30th August, 1951. Drafts should bear the following clause drawn under the Chartered Bank of India, Australia & China, Calcutta Credit No. 94/743, dated 14th August, 1951. Purchasers are to note the amount of the drafts separately on the back hereof. All drafts drawn under this letter of Credit are to be treated as Advance Bills, through our Chittagong Office. We hereby guarantee to protect the Drawers, Endorsers and bonafide holders from any consequences which may arise in the event of the non-acceptance or non-payment of drafts drawn in accordance with the terms of this Credit. SEAL Yours faithfully. Sd/ S.C.R. Northocote
P. Manager
Sd/ M.W. Whyte
Accountant
Rs.
,Mid. 1000 Mds. Raw Jute @ 103 per Md. (CIF)1,03,000
Bot, 1,000 Mds. Raw Jute Oa. 98 per Md. (CIF)98,000
2,01,000
Less Jute-tax on 2,000 Mds. @ /12/- per Md. Ind.250
Ind., 2,00,750 14 9 Under G. Das & Co., Ltd.’s Contract No. 3807 of 4-6-51. ,Under Import Licence Clearance Permit No. 0003. ,Goods of Pakistan Origin Sd/- S.C.R. Northcots
P. Manager
Sd/- M.W. Whyte,
Accountant The above document is a confirmed irrevocable letter of credit under which the sellers were authorised to draw on the clearing agents: of the buyer the sums mentioned therein. It will be seen from the contract between the parties and the irrevocable confined letter of credit that the transaction is one known as c.i.f. contract, that is, carriage, insurance and freight, which in the commercial parlance, indicates that the contract for the sale of goods is at a price to cover cost, insurance and freight and ex-ship. In f.o.b. contract (free on board) in the absence of a contract to the contrary, the buyer must nominate the ship and notify the seller when it is likely to arrive which is a condition precedent to the seller’s duty to bring the goods to the port. On the ship’s arrival the seller must deliver the goods on board at his own expense. Thereafter the goods are at the buyer’s risk and he is responsible for the freight and any subsequent charges. In a c.i.f. contract the seller has first to ship at the port of shipment goods of the description contained in the contract. He must then procure the shipping documents (contract of affreighment) as contemplated by the contract upon the terms current covering the whole transit of the goods. He must arrange for an insurance for an amount equal to their reasonable value of shipment upon the terms current in the trade which will be available and it should be for the benefit of the buyer. He must also make out an invoice which is a written account of the particulars of goods delivered to the buyer with value of the goods or their price and charges etc. annexed. This invoice is made out debiting the buyer with the agreed price and giving him credit for the amount of freight which he will pay the ship owner on actual delivery. And lastly the shipper should tender the shipping documents to enable the buyer to deal with the goods in the usual way of business. He is also required to tender such other documents as are specified on the contract and if the contract is silent, it is sufficient if the seller tenders the bill of lading, policy of insurance and invoice. All these documents must be valid on tender. Under the c.i.f. contract prima facie the property in the goods passes once the documents are tendered by the seller to the buyer or his agent as required under the contract. But where the seller retains control 1 5 0 over the goods by either obtaining a bill of lading in his name or to his order, the property in the, goods does not pass to the buyer until he endorses the bill to the buyer and delivers the documents to him. The appropriation, of the goods to the contract by itself would not be such as to pass the property in the goods if it appears or can be inferred that there was no actual intention to pass the property. But if however the seller’s dealing with the bill of lading is only to secure the contract price not with the intention of withdrawing the goods from the contract, and he does nothing inconsistent with an intention to pass the property the property may paseither forthwith subject to the seller’s lien or conditional on performance by the buyer of his part of the contract. Kennedy L. J. in Biddell Brothers v. E. Clemens Horst Company(1) dissenting with the majority stated the principles for ascertaining in c.i.f. contract when the property in the goods passes which was later confirmed in an appeal against that judgment in E. Clemens Horst Company v. Biddell Brothers (2 ) , the Lord Chancellor describing it as "the remarkable judgment illuminating as it does, the. whole field of controversy." In that case the seller was to ship a cargo of hops was to contract for freight, had to effect insurance and was, to receive 90 s. per 112 lbs. of hops. The buyer had to pay cash. The contract did not say when the price was to be paid. The buyer said that he is to pay cash against physical delivery and acceptance of the goods when they come to England. Under s. 28 of the Sale of Goods Act the payment was to be against delivery. But when was delivery of the goods which are on board ship said to take place. The Earl Loreburn L. C. said:
"The answer is that delivery of the bill of
lading when the goods, are at sea can be
treated as delivery of the goods themselves,
this law being so old that I think it is quite
unecessary to refer to authority for it.
Now in this contract there is no time fixed at
which the seller is entitled to tender the
bill of lading. He therefore may do so at any
reasonable time; and it is wrong to say that
he must defer the tender of the bill of lading
until the ship has arrived; and it is still
more wrong to say that he must defer the
tender of the bill of lading until after the
goods have been landed, inspected and
accepted." By a reference to s. 32 of the Sale of Goods Act (corresponding to s. 38 of the Indian Sale of Goods Act) Kennedy L.J. at p. 956 of the judgment to which we have referred, observed : (1) [1911] I.K.B. 934,952. (2) [1912] A.C. 18, 22-
"Two further legal results arise out of the
shipment. The goods are at the risk of the
purchaser, against which he has protected
himself by the stipulation in his c.i.f.
contract that the vendor shall, at his own
cost, provide him with a proper of marine
insurance intended to protect the buyer’s
interest, and available for his use, if the
goods, should be, lost in transit; and the
property in the goods has passed to the
purchaser, either conditionally or
unconditionally. It passes conditionally
where the bill of lading for the goods, for
the purpose of better securing payment of the
price, is, made out in favour of the vendor
or his agent or representative : see the
judgments of Bramwell L. J. and Cotton L. J.
in Mirabita v. Imperial Ottoman Bank 1878-3
Ex.D.164). It passes unconditionally where the
bill of lading is made out in favour of the
purchaser or his agent or represemtative as
consignee. But the vendor, in the absence of
special agreement, is not yet in a position to deman d payment from the purchaser; his
delivery of the goods to the carrier is,
according to the express terms of s. 32 only
"prima facie deemed to be a delivery of the
goods to the buyer"; and under s. 28 of the
Sale of Goods Act, as under the common law (an
exposition of which win be found in the
judgments of the members of the Exchequer
Chamber in the old case of Startup v.
Macdonald (6 Man, & G. 593), a tender of
delivery entitling the vends to payment of
the, price must, in the absence of contractual
stipulation to the contrary, be a tender of
possession. How is such a tender to be made
of goods afloat under a c.i.f. contract? By
tender of the bill of lading, accompanied in
case the goods have been lost in transit by
the policy of insurance. The bill of lading
in law and in fact represents the goods.
Possession of the bill of lading places the
goods at the disposal of the purchaser." Again dealing with the argument of the plaintiffs that a right under the c.i.f. to withhold payment until delivery of the goods and after having bad an opportunity of examining them, the learned Judge says that this cannot possibly be effected except in one of the two ways. At p. 959 he stated :
"Landing and delivery can rightfully be given
by the shipowner only to the holder of the
bill of lading. Therefore. if the plaintiffs’
contention is Tight, one of two things must
happen. Either the seller must surrender to
the purchaser the bill of lading, whereunder
the delivery can be obtained, without
receiving payment, which, as
1 5 2
the bill of lading carries with it an absolute
power of disposition, is, in the absence of a
special agreement in the contract of sale, so
unreasonable as to be absurd; or,
alternatively, the,vendor must himself retain
the bill of lading, himself land and take
delivery of the goods, and himself store the
goods on quay (if the rules of the port
permit), or warehouse the goods, for such time
as may elapse before the purchaser has an
opportunity of examining_them. But this
involves a manifest violation of the express
terms of the contract "90 s. per 112 lbs. cost
freight and insurance". The parties have in
terms agreed that for the buyer’s benefit the
price shall include freight and insurance, and
for this benefit nothing beyond freight and
insurance. But if the plaintiff’s contention
were to prevail, the vendor must be saddled
with the further payment of those charges at
the port of discharge which ex necessitate rei
would be added to the freight and insurance
premium which alone he has by the terms of the
contract undertaken to defray." Even though the property in the goods may pass to the buyer when the documents are handed over, the buyer may yet retain the right to examine and repudiate the goods but this right generally which a buyer has in c.i.f. contract does not by itself indicate that the, property in the goods has not passed to him. This supposed incongruity was sought to be explained per curium in Kwei Tek Chao v. British Traders and Shippers Ltd.(1) that if property passed when the documents are transferred that property is subject to the condition that the goods should re-vest in the seller if on an examination by the buyer he finds them not to be in accordance with the contract. It is not necessary to consider this, aspect because in any case the ascertainment of the obligations under the contract will determine to what extent the transfer of property is subject to a condition or if the property passes conditionally whether the ownership left in the seller is the reversionary interest in the property in the event of the conditions subsequent operating to restore it to him. In any case where the performance of some condition is imposed upon the buyer but is not made a condition of the transfer of the property, the property once passed is not retested in the seller by the buyer’s subsequent default. But where however the purchase is financed by an irrevocable credit the transaction would not be affected ’by rejection of the goods after acceptance of the documents if the latter were such as were called for by the credit or where under that credit the payment of the invoice value is payable on presentation of the documents. It will (1) (1954) 2 K.-B. 459. be seen from the course of the transactions between the parties that all the conditions of a c.i.f. contract are fulfilled subject to the variations which the parties under the contract agreed, and to which a reference has been earlier made. The bill of exchange which he had to draw in accordance with the invoice was for the price of the goods less the premium and freight which the buyer was paying in India on account of the seller. On the presentation of the shipping documents as noted already, the bank in Pakistan under the irrevocable letter of credit was to make payment of the invoice value in terms of the contract to the sellers in equivalent Pakistan currency at the exchange rate ruling on the date of presentation of the documents at the bank. Once the seller has performed his part and presented the documents for being sent to seller for acceptance and received payment in Pakistan he has no longer any control over the goods and the property in the goods passes to the buyer. The bill of lading when it is handed over to the buyer by the bank. on the buyer accepting the bill of exchange and paying the amount specified in the invoice, confers on hint the right to take delivery of the goods at the place of disembarkation. On the facts as found, C.I.T. v. Mysore Chromite Ltd. (supra) decided by this Court is clearly distinguishable, because in that case the assess= 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 buyer’s 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 Europe were entered into between the buyers and the assessee agents in London and the contracts of sale to persons in America were signed by the assessee’s managing agents in Madras and by a company in America who bought for undisclosed principals. 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 iffevocable bankers credit with a blank in London. The fact that letters of credit had been opened was communicated by the assessee’s 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 assessee’s 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 1 54 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 buyer’s bank against the acceptance of the, relative bill of exchange. The sales therefore took place outside British India and ex hypothesis, 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. 135 :
"It is submitted 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
assesse˜ company’s 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
dust 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 of exchange.’ It will be observed that the terms of the contract and the course (-if dealings between the parties is not the same as in this 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 buyer’s bank in London when the documents would be delivered by him to the company’s 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 1 55 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 ormoisture for which a remedy has been provided thereunder. There is nothing in the agreement which envisages 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 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 place where the goods are situate at the time of appropriation and 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 that he does not intend to retain the right of disposal of the property in the goods. A consideration of the terms of the contract and the letter of credit makes 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 rceives the value thereof as shown in the invoice and in terms of the contract, he no longer retains the property in the goods. The provision that all drafts drawn under the letter of credit are to be treated as at lance 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, endorsers 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 not affect the property in the goods passing to the buyer in Pakistan. In this view, agreeing with the Tribunal, our answer to the question is in the affirmative and against the department. The appeal is allowed with costs. V.P.S. Appeal allowed.