1972 (9) TMI 2 - SC - Income Tax

Appropriation of goods in cross-border sales: delivery of bill of lading and payment under letter of credit transfers property, profits arise abroad.

Appropriation occurs where the goods are situated at the time of appropriation; where bills of lading and contract documents are delivered to the bank and ... Appropriation of the goods - transactions of sale of goods between the buyer and seller living in two different countries - operation of the banker's commercial credit - Whether, on a proper construction of the terms of the relevant contracts the sales covered by the bills of lading in the names of the buyers in five cases took place outside India and, therefore, the profits derived from the said sales arose outside India ? - HELD THAT:- 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 is well settled that an appropriation takes place where the goods are situate at the time of appropriation 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 shows 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 make 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 receives 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 advance 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. Appeal allowed. Issues: Whether, on the facts and in the circumstances of the case and on proper construction of the contracts, the sales covered by the bills of lading in the names of the buyers in five cases took place outside India and therefore the profits derived from those sales arose outside India.Analysis: The question is governed by principles in the Sale of Goods Act (notably sections 23 and 39) and commercial practice under c.i.f. contracts and documentary credits. Sections 23 and 39 require an unconditional appropriation with the buyer's assent or delivery to a carrier in pursuance of the contract without reservation of disposal for property to pass. In overseas transactions effected by documentary credits, the seller ships goods, procures shipping documents and insurance, draws drafts and presents documents to the bank; the bank's acceptance/payment against compliant documents operates to transfer control of the documents (and hence the goods) to the buyer. The contract and confirmed irrevocable letters of credit here required shipment, bills of lading to order endorsed in blank, presentation of the shipping documents and payment by the buyer's bank in Pakistan in equivalent Pakistan currency on presentation. Clauses permitting buyers to claim allowances for quality or moisture or clauses permitting sellers remedies on non-acceptance do not make such post-shipment contingencies conditions precedent to transfer of property where the letter of credit and documentary procedure operate to pass control on payment. The bills of lading and related documents, when handed over in accordance with the credit and the invoice value paid by the buyers' bank, effect appropriation and transfer of property at the place where those events occur.Conclusion: The sales in the five cases were effected in Pakistan and the profits from those sales arose outside India; answer to the referred question is affirmative and in favour of the assessee.