Ramalingam & Co. v. the State of Madras

Judgment

~I GoPf /IUUe/BiMr Hi""'""'1JeA J. 1'11>1 .. 1 '· 95t SUPREHE COURT REPORTS [1962] SUPP. h11.rdly necessa.ry in this case to show how far a Mal!?istrate ca.n go to find that there is no ground for committing the accused to stand bis trial in a Court of Seesion. We seo no reason to interfere with the order of the High Court, 11.nd diemiAs the 11.ppeal. It is a matter of regret that much delay ha.s taken place in this ca.se, and it may harm the case on the one side or the other. We hope that now thll case will be he11.rd from day to day, 11.nd disposed of, 11.6 expeditiously 11.S possible. We further make it clear to the Court or Courts de11.ling with this case that any expression of opinion on the merits of th" case whether b:v us or by the High Court or the Magistrate, who first heard it, or elRe where, in this ordPr or the ordrrs prece· ding this, is to be completely ignored. and the case shall be decided without being influPncecl in any way by Ruch expression of opinion.

Appeal dismissed. RAMALINGAM & CO. THE Sl'ATE OF MADRAS (S. K. DAS, M. HrnAYATULLAH and J. C. SHAH. JJ.) Salu Taz-Contratt for sale of goud1 by corresponden«- C. I. F. or G. F. controcf.1-Bill of /fJding hand.d otier to ban~us tD port with only on paym.nt-Whtfh-r properly in good8 pa&Jed ;,. Mttdraa-Pooition of banker1 Vi•-a-Via wler and foreign buy.,,_J,.i.,,,.,diary bank<r if agent o/ ulkr-Madra1 Gtneral Salt1 Ta:r: Act (Marl. 9 of 1931!). The .._....,. were doing busine" principally as expor· ters of vcg<table fibres 10 fon:ign countri<s. The contracts of sale wen: C.I.F. or C.F. and wen: made by correspondence on approval of samples sen! by the a.scssr<S to the fo~ign buy<rs. The price was payable by draft upon bank credit to be opened by the buyer ; who opened with bis own bankers 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 U:1der 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 lading in their own names and lodged the shipping documents endorsed in blank with their own bankers together with the invoice and Bill of Ex~hange 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 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 Madra. General Sales Tax Act, 1930. The Commercial Tax Officer rejected the claim of the assessees lhat 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 th_e 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 . cred_it is an agent of the buyer, and that the bank authorises lls 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 g"oods 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 in temational trade involving overseas transactions has raised problems of peculiar difficulty. The Rmralingr.m th Co. Tiu Slate of Ma<ltas IHI B•Wlrtr••c..

TAI 111.,, •f JI.air., partiea to a contract (which is as a resu1t of .:orrtspoodence) are generally unknown IO each other; often neither the seller nor the buyer is pref."lred to trust the other and the seller is reluctant to tic up h11 funds and the buyer is al<0 unwilling to make payment in advance. To tide over the problem created by this reluctance of the seller and rhc buyer, b•nken of international repute and credit Interpose. They for small commission undertake by operuog letters or 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 in!lance of the buyers the bank ismes a letter of credit which ;, addressed to the world at large or more frequeotly 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 arc p~yable in future but the exporters a• the benefi. ciaries un:ler the contract, have the g iarantee of th' banker that payment will he forthc~ming an1 are also entitled to discount the Bills with any party cognisant of the undcrtak· ing of the original banker. The relation between the b,ycr and his issuing b,nker was not of principal and agent, nor was the relation between the i5'uing banker and the intermediary banker that of principal and agent. The tw.> b•nkcr; were interposed for the pr.,trction of the seller a• well a• the buyer. The issuing b inker did not purport to act a• agent of the buyer and the intermediary bankcn accepted the general offer of the issuing banker negotiatin~ t~e draft. By so accepting the offer and bv taking over the Bill of La~ing, the insurance certificate and the invoice which represented title to the goods the intermodiary bJnkcr did not act as an agent or the seller. C1vrr. APPELLATE JURISDICTION: C.A. No. 10 of 1961.

Appeal from the ju·l~ment a.nd decree dated March 5, 1956 of the Madras High Court in A.S. No. 256 of 1951, R. Ramamurlhi Aiyar and R. Gopalakrishnan, for the appellants. R. Ganapalhy Iyer and D. Gupln, for the Reepondent. 1962. February l. The Judgment of the Coitrt was delivered by I I v 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 correspon· dence 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 assesseee 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 irrevokitble 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 asses11ees 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 t.he 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 Commero~al Tax Officer, Tirunelveli determined for the purpose of computing tax liability under the Madras General Sales Tax Act, 1939, the turnover of the assesseee at Rs. 15,61,200/-. The Commercial Tax Officer rejected the claim of the ..esessees that the amount of Rs. 15,22,000/· in reepeot of overseas transactions Ramalingam dr Co. Tb• Slal1 •f Jl.wu SIW> J. -.1..,..cl:Co. TAI Btou of Modraa SW J. SUPREME OOURT REPORTS [1962) SUPP. was exempt from liability to tax. He held that the export transactions in respect of which the ex cm ption was claimed wer<' sales within the province of Madras and suhjPct to sales.tax under 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 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 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 shipment 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 telegram from our London office reading :- "We open irrevocable credit favour Ra.malingam 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 lHB B""'alU., ... .tCo. Tho s,.,, of M•• 1 Shi J. R__,..,__.c •. T• SI-. of Mo'1a• 8W .1. United Kingdom by approved ship. Part shipments allowed expiry 6th October, 1945 a/c Bagbie Phillips Hayley, Limittd, IicC'ncc No. 198281."

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 S.C.R. from our London office that they have received from Messrs Hindley and Company, Limited, No.35, Crutched Friars, London,.!<:. C. 3 an undertaking to honour your bills on Messrs. Hindley and Company, Limited No. 35 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 unlimited transhipment covered in London. Such shipping documents are to be dt-livered 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 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 information but without any responsibility on our l!J62 Bamalingam &: Co. The Slat• of Madras Shah J, IHZ n...i;.8,,.. .t Co. Tiu 814<• II/ Modru SAala J. 962 SUPREME OOURT REPOR'l'S [1962]

SUPP. part eiroept for the correctness ot this copy of the telegram as received by us. When uegotiating bills please produce 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 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 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 assesees 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 R1molio1..,•do, Tlw St& oJ Mdr11 SWJ, of the buyer, and that bank authorizea its own a._i0w,...,, c.. branch to pay the price to the ahippers and by the n.

51 vef Mw arrangementa made by opening the letter of credit, ~ "' 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 overseaa 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 destination, 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 unwilling 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 specified person or persons : thereby the banker undertakes 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 benefioiariea 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 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 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 negotiates 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 R11m11.biripam & Co. The 61ai. of Madras Slfah J, IHI 'f'/w SW. ~JI od< .. aw .1.

SUPRBMB OOURT REPOR~ [1982] SUPP. 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· ing bank much leee on behalf of the buyer. By negotiating 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 28.C.R. within the Province. Tax in respect of the ea.le of fibre by the assessees under tne disputed transac- Ramalingam.,, Co. tions was therefore not exigible under the Madras General Sales Tax Act. Tiu Stat• of Madras 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 allowe.d. M/S. BALLABHDAS AGARWAL 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 High Court after reframing the question answered it in 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. Shah J. J96B F•b•UJJry 2.