CIT v. Mysore Chromite Ltd. ((1955) 1 SCR 849 : AIR 1955 SC 98)

Facts of the Case

This landmark Supreme Court case addressed the critical issue of where income from international export sales is deemed to arise and where it is received for the purpose of taxing a non-resident company under the Indian Income Tax Act.

• The Assessee: Mysore Chromite Ltd. (the Company), a private limited company registered in Mysore State, mining and exporting chromite ore, primarily to Europe and America.

• Contract Terms: The sales were made on F.O.B. (Free on Board) terms (Madras/Marmagoa), meaning the seller's liability for costs and risk usually ends upon loading the goods onto the ship.

• Payment Mechanism (Key):

  1. Buyers opened confirmed irrevocable Letters of Credit with banks in London.

  2. The Company (Seller) shipped the goods and obtained a Bill of Lading (B/L) in its own name.

  3. The Company drew Bills of Exchange on the buyers' banks for payment (usually 80-90% of the provisional price).

  4. These documents (B/L, Invoice, B/E) were negotiated through Eastern Bank Ltd., Madras, who advanced the amount to the Company.

  5. The Eastern Bank Ltd., Madras, forwarded the documents to its London branch, which presented the Bill of Exchange to the buyer's bank in London. The Bill of Lading (the document of title) was only delivered to the buyer's bank upon acceptance/honouring of the Bill of Exchange in London.

  6. The balance of the price (after weighment and assay) was also received by Eastern Bank, London, on behalf of the Company.

Issue

Whether the profits derived by Mysore Chromite Ltd. from the F.O.B. export sales to European and American buyers arose (where the sale was completed) and were received in British India, making them subject to Indian Income Tax.

Judgment

The Supreme Court upheld the High Court's ruling in favour of the assessee. It held that both the sale and the receipt of profits occurred outside British India (in London).

Legal Analysis

The Court meticulously analyzed the contracts against the provisions of the Indian Sale of Goods Act, 1930 (SOGA).

1. Situs of Sale: Reservation of Right of Disposal

• Unascertained Goods: The contract was for unascertained goods, meaning property could only pass upon unconditional appropriation (Section 23, SOGA).

• F.O.B. vs. Contractual Intention: While F.O.B. terms usually suggest property passes upon shipment, the Court focused on Section 25 of SOGA (Reservation of Right of Disposal).

  • The Seller (Company) took the Bill of Lading in its own name.

  • The documents (including the B/L, the document of title) were not to be handed over to the buyer until the Bill of Exchange was accepted/paid in London.

• Conclusion on Property Passing: By taking the Bill of Lading in its own name and making its delivery conditional upon payment in London, the Company reserved the right of disposal over the goods. Therefore, the unconditional appropriation of the goods (and thus the passing of property and completion of sale) occurred in London when the condition (payment) was fulfilled and the Bill of Lading was delivered.

• The Profit Arose Outside India: Since the sale was complete in London, the profits derived from the sale were held to have arisen outside British India.

2. Situs of Receipt of Profits: Payment was an Advance

• Nature of Madras Payment: The payment received by the Company from the Eastern Bank Ltd., Madras, upon negotiation of the Bills of Exchange, was held not to be the "receipt of the price" for tax purposes.

• Bank's Role: This transaction was viewed as an advance or a loan by the Bank to its customer (the Company), secured by the documents of title (the Bill of Lading).

• Ultimate Receipt: The true receipt of the sale price occurred when the buyer's bank honoured the bill of exchange, which happened with the Eastern Bank Ltd., London, on behalf of the Company.

• Conclusion: As the first actual receipt of the sale price occurred in London, the profits derived were held to have been received outside British India.

Commentary: International Trade and Tax Planning

The Mysore Chromite case established a critical legal principle under the Sale of Goods Act and Income Tax Law: in international trade involving Bills of Exchange and Bills of Lading, the contractual mechanism used for reserving the right of disposal (Section 25, SOGA) determines the situs of sale, even if the goods are shipped F.O.B. from India.

This judgment affirmed that by carefully structuring payment through irrevocable credits and reserving the document of title until payment is made abroad, exporters can ensure that the income from the sale is deemed to accrue and be received outside India, thus impacting their tax liability (under the then-prevailing tax rules).