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Hindustan Steel Limited, Bhilai Steel Plant Vs. the State of Madhya Pradesh and ors. - Court Judgment

LegalCrystal Citation
SubjectSales Tax;Contract
CourtMadhya Pradesh High Court
Decided On
Case NumberMiscellaneous Petition No. 312 of 1974
Judge
Reported in[1982]50STC287(MP)
AppellantHindustan Steel Limited, Bhilai Steel Plant
RespondentThe State of Madhya Pradesh and ors.
Appellant AdvocateG.M. Chaphekar and ;V.S. Dabir, Advs.
Respondent AdvocateM.V. Tamaskar, Government Adv. for Respondent Nos. 1 to 4
DispositionPetition allowed
Cases ReferredIn State of Tamil Nadu v. Mohammed Yousuff Sahib and Co.
Excerpt:
.....petitioner from the negotiating bank. such a case would clearly fall within section 25(2) of the sale of goods act and it would be deemed that the petitioner had reserved the right of disposal, and for this reason there was no unconditional appropriation of the goods to the contract at the time of shipment within the meaning of section 25(2) and the property did not pass at that stage. but as observed by benjamin, in modern conditions this result would only follow in highly exceptional circumstances (ibid, paragraph 1696, page 882). benjamin further observes that 'where the contract provides for payment against the bill of lading, the normal inference would be that the seller had reserved the right of disposal until payment in accordance with the contract had been made' (ibid,..........in favour of export promoters who entered into separate contracts with the foreign buyers were not export sales and did not qualify for exemption. it is this finding which the petitioner challenges in this petition before us.3. it is not disputed before us that the petitioner did not enter into direct contracts with the foreign buyers in respect of sales of the value of rs. 4,57,87,911 which were not granted exemption by the regional assistant commissioner and the deputy commissioner of sales tax. the petitioner's contracts were with the export promoters or indian exporters who entered into separate contracts with the foreign buyers. in these contracts with the export promoters, the price per metric tonne in us dollars was fixed f.o.b. calcutta. the contracts were subject to certain.....
Judgment:
ORDER

C.P. Singh, C.J.

1. By this petition under Article 226 of the constitution the petitioner challenges the assessment order dated 19th May, 1969, passed by the Regional Assistant Commissioner of Sales Tax, Raipur, and the order in appeal dated 27th February, 1971, passed by the Deputy Commissioner of Sales Tax, Raipur.

2. The facts briefly stated are that the petitioner is a Government company incorporated under the Companies Act, 1956. The petitioner's principal business is to manufacture steel and other steel products. A substantial portion of its manufacture is for purposes of export. The period of assessment with which we are concerned in this petition is from 1st April, 1967, to 31st March, 1968. The petitioner claimed exemption in respect of sales of the value of Rs. 28,13,24,951 on the basis that these sales were in the course of export outside the territory of India and were exempt from taxation under Article 286(1)(b) of the Constitution. The Regional Assistant Commissioner allowed exemption in respect of sales of the value of Rs. 23,55,37,040. These sales were clearly sales in the course of export, as the petitioner directly entered into contracts with the foreign buyers. The remaining sales of the value of Rs. 4,57,87,911 were not granted exemption as they were in favour of the export promoters who entered into separate contracts with the foreign buyers. The Deputy Commissioner of Sales Tax in appeal also held that the sales effected in favour of export promoters who entered into separate contracts with the foreign buyers were not export sales and did not qualify for exemption. It is this finding which the petitioner challenges in this petition before us.

3. It is not disputed before us that the petitioner did not enter into direct contracts with the foreign buyers in respect of sales of the value of Rs. 4,57,87,911 which were not granted exemption by the Regional Assistant Commissioner and the Deputy Commissioner of Sales Tax. The petitioner's contracts were with the export promoters or Indian exporters who entered into separate contracts with the foreign buyers. In these contracts with the export promoters, the price per metric tonne in US dollars was fixed f.o.b. Calcutta. The contracts were subject to certain standard terms and conditions. The relevant terms for our purposes are as follows:

3. Payment-Payment of the entire contracted quantity shall be made by the buyer in US dollars or equivalent sterling pounds by opening a confirmed irrevocable and without recourse letter of credit in favour of the seller at an agreed scheduled bank in Calcutta for the full value of the materials calculated at the contracted price including plus tolerance as provided in the contract. The letter of credit should provide for payment at the bank's buying rate of exchange on the date of negotiation of documents. All banking, collection and assigning charges of the negotiating bank shall be to the buyer's account. The letter of credit must be established by the buyer to the complete satisfaction of the seller within the time-limit as specified in the contract.

The buyer shall ensure that satisfactory letter of credit is established in time to enable the seller to adhere to the delivery schedule agreed upon. The credit must remain valid up to the time-limit specified in the offer/acceptance for the last shipment/railment and fifteen days thereafter for negotiation of documents. The credit must provide for partial shipments/railments and transhipments.

Payment under such letter of credit shall be made to the seller on presentation of the following documents to the negotiating banks :

1. Full set of on board bill of lading/railway receipt, as the case may be. The bill of lading/railway receipt shall be made out in the name of the seller and shall be endorsed in favour of the buyer or his nominee at the time of negotiation of documents or blank endorsed.

2. Invoice in six copies (including original).

3. Seller's packing, weight and specification list (six copies).

4. Weighment and inspection certificate (as stipulated in Clauses 4 and 6 herein below) issued by the independent inspecting agency.

The seller shall not be held responsible for not adhering to the delivery schedule offered by him, due to any default on the part of the buyer in establishing the satisfactory letter of credit within the stipulated period as required by the seller.

9. Export licence-The buyer shall arrange for obtaining the necessary export licence and shall forward the same to the seller along with a letter of authorisation from the Iron & Steel Controller authorising the seller to effect shipment on behalf of the buyer against the subject export licence. Export licence together with the letter of authorisation should reach the seller within 10 (ten) days from the date of the contract.

11. Title and risk.-Title with respect to each shipment/railment shall pass to the buyer when the seller has negotiated the documents and received the proceeds from the bank. Risk with respect to each shipment shall pass from the seller to the buyer when the materials have passed the ship's rail at the port of loading. Risk with respect to each railment shall pass from the seller to the buyer, when the materials are despatched from the seller's steel plant.

4. The principles for determining when a sale takes place in the course of the export of the goods out of the territory of India have been laid down in Section 5(1) of the Central Sales Tax Act, 1956. As provided therein, a sale or purchase of goods is deemed to take place in the course of the export of the goods out of the territory of India only when the sale or purchase either occasions such export or is effected by a transfer of documents of title to the goods after the goods have crossed the customs frontiers of India. Section 5(1) has thus two limbs. Under the first limb of the section, a sale is deemed to take place in the course of the export if the sale occasions the export. Under the second limb of the section, the sale is deemed to take place in the course of the export if it is effected by a transfer of documents of title to the goods after the goods have crossed the customs frontiers of India. Now it is settled law that there can be only one sale which occasions the export and which can be deemed to be an export sale under the first limb of the section. It was held in Mod. Serajuddin v. State of Orissa AIR 1975 SC 1564 that the word 'occasions' in Section 5 of the Act means the immediate and direct cause. The direct cause of export is the contract between the Indian exporters and the foreign buyers and not the contract between the petitioner and the Indian exporters. The Supreme Court in Mod. Serajuddin's case AIR 1975 SC 1564 upheld the view which was taken in the case of Coffee Board, Bangalore v. Joint Commercial Tax Officer, Madras AIR 1971 SC 870 that it is only the sale between the Indian exporter and the foreign buyer that occasions the export and that there cannot be two sales which occasion the export within the first limb of Section 5(1). Our High Court had also taken the same view in Manganese Ore v. Regional Assistant Commissioner 1974 MPLJ 639 which was affirmed by the Supreme Court in appeal AIR 1976 SC 410. Other cases taking the same view are, State of Punjab v. N. R. M. Syndicate AIR 1975 SC 1652 and Murarilal v. State of A.P. AIR 1977 SC 247. Since it is not in dispute before us that the petitioner did not enter into any direct contract with the foreign buyers in respect of the sales with which we are concerned in this petition and that the petitioner sold the goods to the export promoters, i. e, Indian exporters, it has to be held that the Regional Assistant Commissioner and the Deputy Commissioner of Sales Tax were right in holding that these sales did not qualify for exemption as export sales under the first limb of Section 5(1). The learned counsel for the petitioner, however, argued that these sales also fall within the second limb of Section 5(1) and it is this argument which we have now to examine. In other words, we have to see whether the sales in favour of the exporters were effected by transfer of documents of title to the goods after the goods had crossed the customs frontiers of India.

5. We have already set out the relevant terms of the contract. The licence to export the goods was taken out by the export promoter in his name and along with it a letter of authorisation was issued by the Government of India permitting the petitioner to sell the goods to the export promoter against the export licence. The price of the goods sold to the export promoter was fixed on f.o.b. terms. The payment of the entire contracted quantity was to be made by the export promoter in US dollars or equivalent sterling pounds by opening a confirmed irrevocable and without recourse letter of credit in favour of the petitioner at an agreed scheduled bank in Calcutta for the full value of the goods calculated at the contracted price. The bill of lading was taken out in the name of the petitioner, a/c the export promoter. The payment under the contract was made to the petitioner on presentation to the negotiating bank full set of 'on board bill of lading' endorsed in favour of the export promoter or his nominee. Invoice in six copies, seller's packing, weight and specification list (six copies) and weighment and inspection certificate issued by the independent inspecting agency. It was clearly stipulated that title with respect to each shipment would pass to the buyer when the petitioner had negotiated the documents and received the proceeds from the bank. The risk, however, in respect of each shipment passed from the petitioner to the export promoter when the goods had passed the ship's rail at the port of loading.

6. The argument of the learned counsel for the petitioner is that the title in the goods passed in favour of the export promoter only after the bill of lading endorsed in favour of the export promoter had been negotiated and the payment had been received by the petitioner from the negotiating bank. It was pointed out by the learned counsel that although the price stipulated was on f.o.b. terms, the title in the goods did not pass at the time of shipment but some days thereafter when the payment was received, and as by that time in most of the cases the ship had crossed the customs frontiers, the sales came within the second limb of Section 5(1) and were thus export sales. The learned counsel for the petitioner also contended that a statement showing the date of invoice, date of bill of lading, date of sailing and date of negotiation in respect of each consignment was submitted before the Deputy Commissioner of Sales Tax and that he ought to have examined this statement and found out to what extent these sales came within the second limb of Section 5(1), or he should have given an opportunity to the petitioner to adduce further evidence in respect of its contention.

7. A reading of the order of the Deputy Commissioner goes to show that his view was that as the goods were sold on f.o.b. terms, the property in the goods passed no sooner the goods were put on board the ship and that as the payment was fully secured to the petitioner by irrevocable letter of credit opened in a Calcutta bank, condition No. 11 relating to the passing of property did not really postpone the passing of property till the payment was received. We are unable to agree with the reasoning of the Deputy Commissioner. It is very often said that property under a f.o.b. contract as a general rule passes on shipment ; but as observed by Benjamin, 'this is only true where the seller has not reserved a right of disposal. As the seller quite commonly does reserve a right of disposal, it is somewhat misleading to describe the rule that property may pass on shipment as a general rule. It is more accurate to state the general rule negatively, that property does not pass before shipment' (Benjamin, Sale of Goods, paragraph 1690, page 878). Under Section 23(1) of the Sale of Goods Act, 1930, where there is a contract for the sale of unascertained or future goods by description, the property in the goods passes when the goods of that description and in a deliverable state are unconditionally appropriated. Section 23(2) provides that where, in pursuance of the contract, the seller delivers the goods to a carrier for the purpose 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. This provision must, however, be read with Section 25(2), which says that where goods are shipped or delivered to a railway administration for carriage by railway and by the bill of lading or railway receipt, as the case may be, the goods are deliverable to the order of the seller or his agent, the seller is prima facie deemed to reserve the right of disposal. It may be recalled that the bill of lading was taken in the petitioner's name who obtained the payment by endorsing it in the name of the export promoter or his nominee and by negotiating it with the bank with which irrevocable letter of credit was opened. Such a case would clearly fall within Section 25(2) of the Sale of Goods Act and it would be deemed that the petitioner had reserved the right of disposal, and for this reason there was no unconditional appropriation of the goods to the contract at the time of shipment within the meaning of Section 25(2) and the property did not pass at that stage. Section 25(2) of our Sale of Goods Act is similar in terms to Section 19(2) of the English Sale of Goods Act. Although there had been some suggestion that Section 19(2) of the English Act did not apply to f.o.b. contracts, but this suggestion has been criticised to be historically unsound and the correct view seems to be that the Section applies also to f.o.b. contracts. However, Section 25(2) of our Act and Section 19(2) of the English Act only embody prima facie rule, so that it is theoretically possible for property to pass on shipment in spite of the fact that the bill of lading made the goods deliverable to the seller's order. But as observed by Benjamin, in modern conditions this result would only follow in highly exceptional circumstances (ibid, paragraph 1696, page 882). Benjamin further observes that 'where the contract provides for payment against the bill of lading, the normal inference would be that the seller had reserved the right of disposal until payment in accordance with the contract had been made' (ibid, paragraph 1702, page 887). In P. Mansinghka Ltd. v. Income-tax Commissioner AIR 1967 SC 1626 at 1630 it was observed by the Supreme Court that 'if the seller discounts a draft upon the buyer with a bank, and authorises the bank to hand over to the buyer a bill of lading to the order of the seller and endorsed in blank by him upon his acceptance of the draft, the intention to be inferred, according to general mercantile understanding, is that the seller intends to transfer the ownership when the draft is accepted ; but intends also to remain the owner until this has been done.' In our opinion, therefore, although the petitioner's contract with the export promoter was on f.o.b. terms as the bill of lading was taken in the name of the petitioner and payment was obtained after endorsing the same in favour of the export promoter or his nominee by negotiating the same with the bank with whom an irrevocable letter of credit was opened by the export promoter, the property in the goods did not pass at the time of shipment, but passed later when the document of title, i. e., the bill of lading, was negotiated and payment was received. The specific provision made in condition No. 11 is also that the title with respect to each shipment shall pass to the buyer when the seller has negotiated the documents and received the proceeds from bank. Thus the provision in condition No. 11 as to the stage when the property passed to the buyer is quite consistent with the other terms and conditions of the contract. It is true that under condition No. 11 risk passed from the petitioner to the export promoter on shipment; but Section 26 of the Sale of Goods Act, which lays down the rule that risk prima facie passes with property, is subject to a contrary agreement between the parties. The contrary agreement is contained in condition No. 11 itself. In the case of a f.o.b. contract risk may pass on shipment even though property does not pass at this time, because the seller reserves a right of disposal (Benjamin, Sale of Goods, paragragh 1704, page 889). The passing of risk under condition No. 11 at the time of shipment did not, therefore, derogate from the condition that the property passed only on negotiation of the documents of title and receipt of price from the bank. The fact that the export promoters were obliged to open an irrevocable letter of credit in a bank at Calcutta for negotiation of the bill of lading and for securing payment to the petitioner, cannot lead to the inference that the parties did not intend to postpone the passing of property till negotiation of the bill of lading. The difference between revocable and irrevocable letters of credit is that in case of revocable credit the banker issuing it can cancel the authority at any time he chooses, but he will still be liable for bills negotiated before its cancellation. An irrevocable credit cannot be cancelled unless it has run its full course or unless its beneficiary agrees to such cancellation (see Banking Law and Practice in India by M. L. Tannan, page 506). The condition that the export promoters were obliged to open an irrevocable letter of credit in the bank was no doubt a measure adopted by the petitioner for securing the price ; but from this it does not mean that the petitioner could not adopt other measures for further securing the price, e.g., by retaining its control and property in the goods. The condition requiring opening of an irrevocable letter of credit is, therefore, not inconsistent with the condition that the property passed in the goods when the documents of title were negotiated and payment was received from the bank.

8. The second limb of Section 5(1) of the Central Sales Tax Act requires two conditions before a sale can qualify for exemption. The first condition is that the sale should be effected by a transfer of documents of title to the goods. The second condition is that the sale should have taken place after the goods had crossed the customs frontiers of India. We have already examined that the property in the goods passed by transfer of documents of title from the petitioner to the export promoter when the bill of lading was negotiated by the bank and payment was made to the petitioner. The first condition is, therefore, satisfied. As regards the question whether the second condition is satisfied, the petitioner had filed statements showing as to when the goods were shipped and as to when the documents were negotiated and payments were received. It will appear from these statements that in most of the cases the gap between the date of sailing of the ship and the date of negotiation of the documents is considerable and it is quite likely that in most of the cases the documents were negotiated after the ship had crossed the customs frontiers. Having regard to the gap between the dates of sailing and the dates of negotiation, as disclosed in the statements, the Deputy Commissioner, in our opinion, should have given opportunity to the petitioner to prove definitely in respect of each shipment that the goods had crossed the customs frontiers before the date of negotiation of the documents, i. e., before the passing of the property. The Deputy Commissioner denied this opportunity to the petitioner in view of his conclusion that the property in the goods passed on shipment and not at the time when the documents were negotiated. That conclusion, as stated by us earlier, is erroneous. In State of Tamil Nadu v. Mohammed Yousuff Sahib and Co. [1978] 42 STC 335 the Madras High Court held that even if the case does not fall under the first limb of Section 5(1) it may still fall under the second limb of the Section. A reading of the Madras case goes to show that the opinion of the High Court was that if the property in the goods passed after shipment on payment against presentation of documents and if this event happened after the goods crossed the customs frontiers, the second limb of Section 5(1) will be attracted. In that case, however, the benefit of Section 5(1) was not given as there was no evidence to show that the property in the goods passed after the goods crossed the customs frontiers. In the case before us, the statements filed before the Deputy Commissioner, which were not disputed by the department, showed every likelihood that in most of the cases the property must have passed after the goods crossed the customs frontiers. Had the Deputy Commissioner taken the correct view on the question as to when the title in the goods passed, we are sure that he would have given opportunity to the petitioner to produce further evidence to show that the property passed after the goods crossed the customs frontiers.

9. The petition is allowed. The orders of the Regional Assistant Commissioner and the Deputy Commissioner of Sales Tax, Raipur, in so far as they relate to the sales of the value of Rs. 4,57,87,911 between the petitioner and the export promoters are quashed. The Regional Assistant Commissioner is directed to give an opportunity to the petitioner to lead evidence on the question whether the property in the case of these sales passed after the goods crossed the customs frontiers and to decide afresh the question whether these sales qualify for exemption under the second limb of Section 5(1) of the Central Sales Tax Act, or were liable to be assessed as sales in course of inter-State trade and commerce, in the light of the observations made above. There will be no order as to costs of this petition. The security amount be refunded to the petitioner.


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