The Commissioner Of Income-Tax, Madras vs Mysore Chromite Limited

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: supreme-court

Case Number: Civil Appeal No. 117 of 1953

Decision Date: 01/11/1954

Coram: Mehar Chand Mahajan, Ghulam Hasan, Natwarlal H. Bhagwati, Sudhi Ranjan Das

In the matter titled The Commissioner of Income-Tax, Madras versus Mysore Chromite Limited, the Supreme Court of India delivered its judgment on 1 November 1954. The case was heard by a bench that included Mehar Chand Mahajan, Ghulam Hasan and Natwarlal H. Bhagwati, with the Chief Justice identified as Mehar Chand Mahajan and other members noted as Das and Sudhi Ranjan. The official citation of the decision is reported in 1955 AIR 98 and 1955 SCR (1) 849. The dispute arose under the Indian Income-Tax Act of 1922, specifically section 4, which concerns the determination of whether profits derived by the assessee arose or were received within British India.

The assessee, Mysore Chromite Limited, maintained its registered office in the State of Mysore while its management functions were vested in Oakley Bowden Co. Ltd., located in Madras. The company engaged in the sale of chrome ore primarily to purchasers located outside India, including buyers in the United States of America and in various European countries. Transactions involving European purchasers were conducted through Borden Oakely and Co. Ltd., based in London, which acted as the company’s European agent and executed the sale contracts in London. Sales to American buyers were facilitated through W. R. Grace & Co., located in New York; this firm acted on behalf of undisclosed principals. For American sales, the contracts were signed both by W. R. Grace & Co., Ltd. in New York and by Oakley Bowden & Co. Ltd. in Madras. In each type of contract the price terms were expressed as FOB Madras, and the agreements provided for the weighing, sampling and assaying of the ore at the destination.

The customary course of dealing between Mysore Chromite Limited and its overseas purchasers was as follows: prior to the physical shipment of the ore, the buyer would arrange a confirmed irrevocable bankers’ credit with a first-class bank in London. Upon the opening of such a credit, Eastern Bank Ltd., London, would send a notice to its counterpart in Madras, Eastern Bank Ltd., Madras. The Madras branch would then forward this notice by letter to the assessee company. After receiving the notification, the company would load the contracted quantity of ore onto a steamer at Madras and obtain a bill of lading in its own name. Subsequently, the company would issue a provisional invoice based on the weight shown on the bill of lading and the contract price of 48 percent chromium (Cr. 203). The company would then draw a bill of exchange on the buyer’s bank—where the letter of credit had been opened—for ninety percent of the provisional invoice amount in the case of European contracts, and for eighty percent of the provisional invoice amount payable after ninety days in the case of American contracts. In each instance the bill of exchange was drawn in favor of Eastern Bank Ltd., London, and was accompanied by the bill of lading endorsed in blank and the provisional invoice, which were then presented for negotiation.

The Eastern Bank Ltd., Madras, acted as the banker of the assessee company and would credit the assessee’s account with the amount specified in the bill of exchange. After receiving the bill of exchange, the Eastern Bank Ltd., Madras, forwarded the accompanying documents—namely the bill of lading and the provisional invoice—to its counterpart, the Eastern Bank Ltd., London. The London branch then presented the bill of exchange to the buyers’ bank situated in London. When the buyers’ bank accepted the bill of exchange, the Eastern Bank Ltd., London, delivered the bill of lading together with the invoice to the buyers’ bank. Subsequently, the buyers’ bank paid the sum indicated in the bill of exchange to the Eastern Bank Ltd., London. Following the arrival of the cargo, the goods were weighed and assayed, the final sale price was determined, and the balance of the price—after deducting the amount already paid under the bill of exchange—was paid to the Eastern Bank Ltd., London, which functioned as the assessee’s agent and banker in London. Both the Income-Tax Department and the assessee agreed that income should be recognized at the place where the sale was deemed to have occurred. The Department argued that the sale must be treated as having taken place in British India for three reasons: (i) the price and delivery were on F.O.B. terms; (ii) in the European contracts the buyers were responsible for any insurance; and (iii) the initial payment of either eighty or ninety percent of the invoice amount was made in Madras by the Eastern Bank Ltd., Madras, leading the Department to conclude that title passed in Madras and the sales were completed in British India. The Court rejected this contention, holding that, based on the contractual terms and the actual course of transactions, title could not pass to the buyer before the bill of exchange was accepted by the bank in London and the documents were delivered by the assessee’s agent, the Eastern Bank Ltd., London, to the buyers’ bank—a step that always occurred in London. Accordingly, the Court held that the sale was consummated outside British India and, ex hypothesi, the profits derived from such sales arose outside British India. The Court further rejected the Department’s additional argument that, regardless of the place of sale, the profits were received in Madras because after shipment the assessee, through its managing agent in Madras, prepared provisional invoices, drew bills of exchange for the applicable eighty or ninety percent, handed these to the Eastern Bank Ltd., Madras, and received the corresponding payments in Madras, thereby allegedly receiving the price of the goods in Madras. The Court found this line of reasoning untenable, holding that the actual receipt of the price—and consequently the profit—occurred in London, not in Madras.

The Court observed that the consideration for the sales was actually paid by the buyers’ respective banks located in London. Those payments were made to the Eastern Bank Limited, London, which functioned as the agent of the assessee company. Consequently, the initial receipt of the purchase price was effected by the Eastern Bank Limited, London, acting on behalf of the sellers. After the goods were weighed and assayed, the balance of the price, after deducting the amount that had already been paid by way of a bill of exchange, was likewise received in London by the Eastern Bank Limited, again on behalf of the assessee company. The Court further noted that the subsequent accounting entries recorded by the Eastern Bank Limited, London, did not constitute a receipt of profits within British India. In support of this view, the Court referred to the authority of Promz Adalbert reported in L.R. (1917) A.C. 586. The judgment that follows is rendered in the civil appellate jurisdiction of the Supreme Court in Civil Appeal No. 117 of 1953. The appeal was taken from the judgment and order dated 29 March 1951, delivered by the High Court of Judicature at Madras in Case Referred No. 44 of 1948. Counsel for the appellant comprised the Solicitor-General for India, assisted by a colleague, while counsel for the respondent were appointed to represent the opposing party. The judgment was delivered on 1 November 1954 by Justice Das. This appeal concerned the decision of the Madras High Court, which had answered affirmatively both of the questions referred by the Income-Tax Appellate Tribunal under section 66(1) of the Income-Tax Act. The first question examined whether, according to the facts and circumstances of the case, the profits earned by the assessee company from sales made to European and American purchasers arose outside British India. The second question considered whether, under the same facts and circumstances, those profits were received outside British India. These questions of law emerged from income-tax assessment proceedings against the respondent, Mysore Chromite Ltd., hereinafter referred to as the assessee company, for the assessment years 1939-1940, 1940-1941, 1941-1942 and 1942-1943. The Tribunal’s findings, as summarized by the Court, indicated that the assessee company was a private limited corporation incorporated under the Mysore Company Regulations, with its registered office situated at Sinduvalli in Mysore State. Control and management of the company were vested in Messrs Oakley Bowden & Co. (Madras) Ltd., another private limited entity incorporated under the Indian Companies Act and having its registered office at No. 15 Armenian Street, Madras. The assessee owned chromite mines in Mysore State, extracted chromite ore, processed it into a merchantable product and primarily sold the product to buyers outside India. Only a very small portion of total sales was made within India, and for the purposes of this reference that minor domestic trade was disregarded. The overwhelming majority of sales were directed to purchasers in America and Europe, and the narrative then proceeds to describe the mechanisms of those sales.

In this case the Court described that the sales of chromite to European purchasers were conducted through Bowden Oakley & Co. Ltd., a firm located in London that acted as the agent of the assessee company in Europe. The agent held a power of attorney issued by the assessee company. All contracts for sales to European buyers were executed and signed by Bowden Oakley & Co. Ltd., London. Sales to purchasers in America were carried out through Messrs. W. R. Grace & Co., which bought the ore on behalf of undisclosed principals. The contracts for the American sales were signed by W. R. Grace & Co., presumably in the United States, and also by Oakley Bowden & Co. (Madras), Ltd., in Madras. The Tribunal’s order dated 22 January 1948, from which the present reference arises, reproduced specimen forms of the contracts used for European and American purchasers. Both forms stipulated that the price would be quoted on a free carrier basis from Madras or from Marmagoa, although a very small quantity of goods sold on a free on board basis from Marmagoa was not material to the present dispute. The contracts also contained provisions for the weighing, sampling and assay of the goods at the destination.

The Court further explained the payment arrangements contained in the two types of contracts. Under the European contract the buyers were required to open a confirmed irrevocable bankers’ credit in favour of Messrs. Mysore Chromite Ltd., Madras, to be advised to the sellers through Eastern Bank Ltd. The credit had to cover ninety percent of the provisional invoice and was to be drawn against documents consisting of the bill of lading and a provisional invoice. The provisional invoice would be based on the weight shown on the bill of lading and the contract price of forty-eight per cent Cr. 203. The remaining balance, determined after the actual weight and assay were ascertained, was to be paid in London to Bowden Oakley & Co., Ltd. within ten days of the final invoice based on the outturn weights and assays. By contrast, the American contracts stipulated that a letter of credit covering eighty percent of the invoice value would be available against drafts at ninety days’ sight, with the required documents to be opened immediately in London in favour of the seller. The estimated twenty percent balance of the margin was to be paid by telegraphic transfer through London after the assay and outturn information were received, which had to be furnished within one month after the steamer arrived at its destination; the charges for the telegraphic transfer were to be borne by the beneficiary. The European contracts also required the buyers to obtain insurance for the goods, a provision that was absent from the American contracts. The Tribunal observed that, prior to shipment, the buyers would open a confirmed irrevocable bankers’ credit with a first-class bank in London. Upon receipt of notice of such credit, Eastern Bank Ltd., London would inform Eastern Bank Ltd., Madras, which in turn would forward a letter of intimation to the assessee company. A specimen of this letter was also set out in the Tribunal’s order.

The Eastern Bank Ltd., Madras, informed the assessee company that, in accordance with advice received by letter from its London Office, a confirmed and irrevocable credit had been opened in the assessee’s favour by Messrs. Morgan Grenfell & Co., Ltd., London, for the account of Messrs. W. R. Grace & Co., New York, for a sum not exceeding seven thousand three hundred pounds sterling (£7,300) in all, and that the credit would be available upon delivery to the bank on or before 15 January 1940 of the documents specified in the letter. Towards the end of the same letter the Eastern Bank Ltd., Madras, wrote that it was “prepared in our options as customary to negotiate drafts drawn in terms of the arrangement provided that the documents as above mentioned appear to us to be in order.” The letter concluded with a warning that the advice was “given for your guidance and without involving any rosponsi- bility on the part of this Bank.” On receipt of this intimation the assessee company placed the contracted goods on board the steamer at Madras and obtained a bill of lading in its own name; the shipments were made principally at Madras Port. Subsequently the assessee company prepared a provisional invoice on the basis of the bill of lading weight and the contract price for 48 per cent Cr. 203 and drew a bill of exchange on the buyer’s bank, where the letter of credit had been opened, for ninety per cent of the amount of the provisional invoice payable at sight in the case of European contracts, and for eighty per cent of the amount of the provisional invoice payable at ninety days’ sight in the case of American contracts. In either case the bills of exchange were drawn in favour of the Eastern Bank Ltd., London. The bill of exchange, together with the corresponding bill of lading endorsed in blank by the assessee company and the provisional invoice, were then negotiated with the Eastern Bank Ltd., Madras, the assessee’s bankers, which bank credited the assessee company with the amount of the bill of exchange. The Eastern Bank Ltd., Madras, subsequently forwarded the documents to the Eastern Bank Ltd., London, which presented the bill of exchange to the buyer’s bank in London; upon acceptance of the bill of exchange the London bank delivered the bill of lading and the invoice to the buyer’s bank. The buyer’s bank, in due course, paid the amount of the bill of exchange to the Eastern Bank Ltd., London. After the goods arrived, were weighed and assayed, the sale price was ascertained and the balance of the price, after deduction of the payments made against the bill of exchange, was paid to the Eastern Bank Ltd., London, which acted as the assessee company’s agent and banker in London. On the basis of the foregoing facts the Income-Tax Officer assessed the assessee company on the

The assessing officer had levied tax on the whole profit earned from the transactions, holding that the profit arose within British India and was also received there. The Appellate Assistant Commissioner upheld that assessment. Dissatisfied, the company appealed to the Income-tax Appellate Tribunal. By its order dated 22 January 1948, the Tribunal ruled that the sales were effected outside British India and that the proceeds of those sales were collected by the company’s agent in London. Subsequently, the Commissioner of Income-tax petitioned the Tribunal to state a case and to refer certain questions of law that emerged from the Tribunal’s order. The Tribunal therefore transmitted two specific questions of law to the higher court. The Madras High Court, after a detailed judgment, affirmed the Tribunal’s decision and answered both questions in the affirmative, thereby ruling against the Commissioner. The Commissioner now seeks review of that judgment, having obtained a certificate of fitness from the High Court. Both the department’s records and the company’s submissions indicate that there was a consensus that income is deemed to arise at the location where the sale is effected, whatever that location may be. This consensus was not challenged before the Madras High Court nor before the present Court, although the Commissioner’s statement of case suggested that the earlier conclusion might have been erroneous. Consequently, the sole issue for determination is the exact place where the sales were deemed to have taken place.

The solicitor-general appearing on behalf of the Commissioner argued that, based on the contractual terms, the sales should be regarded as having occurred within British India. He relied on three principal facts: first, that the price and delivery of the goods were stipulated on a free-on-board (F.O.B.) basis; second, that under the European contracts any insurance, if required, was to be arranged by the buyers; and third, that either eighty percent or ninety percent of the sale price, as applicable, was paid in Madras by the Eastern Bank Ltd., Madras, to the company upon delivery of the pertinent documents. The solicitor-general contended that, taken together, these circumstances demonstrated that ownership of the goods passed in Madras and that the sale was therefore completed in British India. The Court was unable to accept this line of reasoning. It noted that Section 4 of the Indian Sale of Goods Act defines a contract of sale as one in which the seller transfers or agrees to transfer the property in the goods to the buyer for a price, and it distinguishes such a contract from an agreement to sell, where the transfer of property is to occur at a future date or upon fulfilment of a condition.

By reference to sub-section (4) of the same provision, the Court explained that an agreement to sell was transformed into a sale at the moment when the time specified in the agreement elapsed or when the conditions stipulated for the transfer of property were satisfied. The Court then turned to section 18 of the Sale of Goods Act, which plainly stated that in a transaction involving unascertained goods, ownership could not pass to the buyer until the goods were actually ascertained. In the present matter, identified as 857, the Court observed that every contract under consideration was for the sale of unascertained goods. After noting that sections 19 to 22 dealt with contracts for specific goods and therefore were not applicable, the Court proceeded to section 23. Section 23 provided that where a contract concerned unascertained or future goods described in a certain way, and those goods, in a deliverable condition, were appropriated to the contract unconditionally—either by the seller with the buyer’s assent or by the buyer with the seller’s assent—ownership in the goods would then pass to the buyer. The parties had argued that the moment the assessee company placed the goods on the steamer named by the buyer at Madras Port, the goods became ascertained and ownership passed instantly. The Court rejected this reasoning, emphasizing that the word “unconditionally” in section 23 was decisive. The provision required not only that the goods be appropriated to the contract, but that such appropriation be unconditional. The Court further referred to section 25, which clarified that in a contract for specific goods or where goods were later appropriated to a contract, the seller could, by the terms of the contract or by the manner of appropriation, retain the right to dispose of the goods until certain conditions were fulfilled. Consequently, even if the goods had been delivered to the buyer or to a carrier for transport, ownership would not transfer until the seller-imposed conditions were satisfied.

The Court then posed the critical question of whether merely loading the goods onto the ship amounted to an unconditional appropriation. It acknowledged that the price and delivery terms were FOB Madras, but pointed out that the contracts expressly required the buyers to open a confirmed irrevocable banker’s credit covering the stipulated percentage of the invoice value, which would be made available against the documents. This requirement demonstrated that the buyers would not receive the documents—specifically, the bill of lading and the provisional invoice—until they had paid the required percentage on the bill of exchange. Since the bill of lading constituted the document of title to the goods, the Court noted that the assessee company had clearly retained the right to dispose of the goods until the bill of exchange was paid in full. Accordingly, loading the goods onto the steamer named by the buyer under an FOB contract fulfilled the seller’s delivery obligations, but it did not, by itself, effect the transfer of ownership because the condition of payment of the bill of exchange remained unfulfilled.

In this case the Court observed that the seller’s contractual liability was discharged when the goods were delivered to the buyer, and at that moment the risk of loss passed to the buyer, who could protect himself by obtaining insurance. Although such delivery and transfer of risk ordinarily suggest that ownership of the goods also passed to the buyer, the Court explained that this inference is not conclusive because, under section 25 of the relevant statute, a seller may retain the right to dispose of the goods until certain conditions are fulfilled, thereby preventing the passage of title. The factual record showed that the assessee company shipped the merchandise under a bill of lading that bore its own name, and the contract specifically required the company to retain the bill of lading—the document of title—until the bill of exchange drawn on the buyer’s bank, against an irrevocable letter of credit, was honoured. The parties also agreed that the weight and assay of the goods would determine the final price, and that the buyer could reject the goods if they did not conform to the contract; consequently, the claim was made that ownership could not transfer until the buyer accepted the goods after weighing and assaying and the price was fully fixed. The appellant further argued that, because the weighing, sampling, assay and price fixation occurred outside British India, the sale and the resulting profits were likewise outside British India. The Court stated that it was unnecessary to pronounce on this extreme contention. For the purposes of the present dispute, the Court held that, based on the terms of the contracts and the parties’ course of dealing, ownership could not have passed to the buyer before the bill of exchange was accepted by the buyer’s bank in London and the accompanying documents were delivered by the assessee’s agent, Eastern Bank Ltd., London, to the buyer’s bank. This transfer of documents, as established by the Appellate Tribunal, always took place in London. Accordingly, the earliest moment at which title could have passed was in London, when the bill of lading was handed over to the buyer’s bank against acceptance of the corresponding bill of exchange. The Court therefore concluded that the Appellate Tribunal and the High Court were correct in holding that the sales occurred outside British India and, assuming the sales took place as alleged, the profits derived from those sales arose outside British India as well.

In this case the court noted that although the place where the sale might have been deemed to have occurred was outside British India, the profits that arose from such sales were actually received in Madras. The court recalled that after the goods had been shipped, the assessee company, acting through its managing agent situated in Madras, prepared provisional invoices and then drew bills of exchange for either eighty per cent or ninety per cent of the amounts shown in those invoices, as the circumstances required. Those bills of exchange were handed over to the Eastern Bank Limited, Madras, and the cash proceeds of the bills were subsequently received by the assessee company in Madras.

The solicitor-general argued that the receipt of this cash by the assessee company represented the actual receipt of the price of the goods and therefore constituted the receipt of profits within Madras. To support this contention, he referred to the terms of payment contained in the European contract and to a letter of intimation concerning the opening of a letter of credit that had been sent by the Eastern Bank Limited, Madras, to the assessee company. Portions of that letter had been quoted earlier in the judgment. The solicitor-general relied particularly on the phrase “through the Eastern Bank Ltd.” that appeared in the contract and on the wording “available by delivery to us” that was found in the letter.

The court examined those expressions and concluded that they did not give rise to the solicitor-general’s argument. The words “through the Eastern Bank Ltd.” were seen to follow the preceding words “to be advised to sellers”, a phrase that had been placed within brackets and appeared to have been closed incorrectly after the word “sellers” instead of after the words “the Eastern Bank Ltd.”. Normally, a buyer opens a letter of credit with his own bank in favour of the seller; consequently the phrase “through the Eastern Bank Ltd.” would be meaningless unless it was intended to mean that the irrevocable credit in favour of the assessee company was to be operated by the assessee through that bank. Even if that interpretation were accepted, it would not transform the Eastern Bank Ltd. into the agent of the buyers.

The court further observed that the expression “available by delivery to us” occurring in the letter from the Eastern Bank Limited, Madras, did not form part of the contractual terms of the letter of credit. Instead, the court held that the sentence represented an intimation made in accordance with advice that the Eastern Bank Limited, Madras, had received from its London counterpart, indicating that the assessee company could avail itself of the letter of credit by delivering the required documents to the Madras bank. This understanding was reinforced by a later portion of the same letter in which the Eastern Bank Limited, Madras, expressed its willingness, at its option, to negotiate the drafts drawn under the arrangement provided that the documents were in proper order. The concluding sentence of that letter, in which the Madras bank disclaimed any responsibility for the advice it had given, directly contradicted the solicitor-general’s suggestion.

In view of these considerations, the court found it impossible to accept the argument that the payment of eighty per cent or ninety per cent of the provisional invoice amount by the Eastern Bank Limited, Madras, constituted a payment on account of the price of the goods. The court therefore rejected the contention that the receipt of that cash amounted to the receipt of profits in Madras.

The Court observed that the payment of ninety percent, or where applicable eighty percent, of the provisional invoice amount made by the Eastern Bank Ltd., Madras was characterised as a payment on account of the price. The Court noted that ordinarily the purchase price is paid by the buyer or by an entity acting on the buyer’s behalf. In the present case the Court found that both the Eastern Bank Ltd., Madras and the Eastern Bank Ltd., London were functioning as agents of the assessee company. The Court emphasised that neither of those banks had any direct relationship with the buyers of the chromite. Consequently the Court concluded that a payment made by those banks could not be treated as a payment of the price for the goods. The Court then referred to the authority of Lord Sumner in The Prinz Adalbert (1) L.R. [1917] A.C. 586, 589, explaining that when a shipper discounts a draft accompanied by an endorsed bill of lading, the shipper becomes liable as drawer and uses the goods represented by the bill of lading as security for payment. The Court further explained that when the discounting banker surrenders the bill of lading to the acceptor upon acceptance, the banker is satisfied to release his security in exchange for the additional liability of the subsequent party, and that this action is performed with the permission and mandate of the original shipper and drawer. Applying that principle, the Court held that the payment made by the Eastern Bank Ltd., Madras was merely an advance granted to its own customer, secured by the goods covered by the bill of lading and reinforced by the liability assumed by the assessee company as drawer of the exchange, which in turn was backed by the confirmed and irrevocable credit extended by the buyers’ London bank.

The Court questioned why, if the payment were truly on account of the price, the seller would have to assume any liability to the Eastern Bank Ltd., which was merely the drawer of the bill of exchange. The Court clarified that the actual price was paid on behalf of the buyers by their respective London banks in London to the Eastern Bank Ltd., London, which acted as the assessee’s agent. Accordingly the first receipt of the purchase price, as pointed out by the High Court, was made by the Eastern Bank Ltd., London on behalf of the sellers. The Court noted that there was no dispute that the remaining balance of the price, determined after weighing and assaying the cargo and after deducting the amount already paid on the bill of exchange, was likewise received in London by the Eastern Bank Ltd., London on behalf of the assessee company. The Court observed that the subsequent adjustment recorded in the books of the Eastern Bank Ltd., London did not constitute a receipt of profits within British India. In the Court’s opinion the High Court had correctly answered the second question in favour of the assessee company. For the reasons stated above, the Court dismissed the appeal, ordered costs, and directed that the appeal be dismissed accordingly.