1962 (2) TMI 60 - SC - VAT and Sales Tax

Whether the export sales which are the subject-matter of dispute in this appeal were completed within the Province of Madras? Held that - Appeal allowed. The price in respect of the goods was not received in the Province of Madras, and the property in the goods also did not pass to the buyer within the Province. Tax in respect of the sale of fibre by the assessees under the disputed transactions was therefore not exigible under the Madras General Sales Tax Act.

Issues Involved:

1. Determination of the location of the sale for tax purposes.
2. Validity of the tax assessment under the Madras General Sales Tax Act, 1939.
3. Passing of property in goods and receipt of price.
4. Nature and effect of commercial letters of credit.

Issue 1: Determination of the location of the sale for tax purposes

The primary question was whether the export sales took place within the Province of Madras. The taxing authorities determined that the sales were effected in the Province of Madras and, therefore, subject to sales tax under the Madras General Sales Tax Act, 1939. The Supreme Court needed to examine whether the property in the goods and the receipt of the price occurred within the Province.

Issue 2: Validity of the tax assessment under the Madras General Sales Tax Act, 1939

The assessees contended that the export sales were "totally outside the provisions of the Madras General Sales Tax Act," making the tax assessment ultra vires and beyond the powers of the authorities. The Commercial Tax Officer initially determined the turnover, including overseas transactions, and taxed the assessees. This assessment was confirmed by the Board of Revenue, Madras, except for the amount of freight. The Subordinate Judge ruled in favor of the assessees, but the High Court reversed this decision, leading to the appeal.

Issue 3: Passing of property in goods and receipt of price

The Court examined the process of the transactions, particularly focusing on the role of the Bill of Lading, the invoice, and the Bill of Exchange. The assessees argued that the property in the goods did not pass to the buyers until payment was made, which occurred outside the Province. The Court noted that the foreign buyers opened irrevocable Letters of Credit, and the assessees shipped the goods, obtained the Bill of Lading, and lodged the shipping documents with their bankers. The significant point was whether the payment received against the Bill of Lading occurred within the Province, which the Court determined it did not.

Issue 4: Nature and effect of commercial letters of credit

The Court elaborated on the nature of commercial letters of credit used in international trade. The letters of credit guaranteed payment by the foreign banks, and the local banks in India acted as agents without liability. The Court clarified that the relationship between the buyer and the issuing banker, and between the issuing banker and the intermediary banker, was not that of principal and agent. The intermediary bank, by negotiating the bill, acted on its own behalf and not as an agent of the buyer or seller. This arrangement meant that the price was not paid within the Province of Madras.

Conclusion:

The Supreme Court concluded that the property in the goods and the payment did not occur within the Province of Madras. Thus, the tax on the sale of fibre by the assessees was not exigible under the Madras General Sales Tax Act. The appeal was allowed, the decree of the High Court was set aside, and the decree of the trial court was restored, with costs awarded to the assessees in both the Supreme Court and the High Court.

Appeal allowed.

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