Contract Law

Mahabir Commercial Co. Ltd. v. Commissioner of Income Tax

AIR 1973 SC 430; (1972) 4 SCC 732

Facts

Mahabir Commercial Co. traded in jute between India and what was then East Pakistan.
Sales were structured through documentary credit and shipping arrangements.
The seller shipped goods and obtained:
bills of lading;
insurance documents;
invoices;
other documents required by the contract and letter of credit.
These documents were presented to a bank, which paid the seller and transmitted the documents for delivery to the buyer.
A tax dispute arose concerning where the sales were completed and when property in the goods passed.
The revenue authorities contended that property passed in India because final delivery, weighing or quality claims were connected with India.
The assessee argued that property passed when the shipping documents were tendered and paid for in Pakistan.

When does property pass under a CIF or documentary-credit transaction?
Whether the seller retained the right of disposal after handing over the shipping documents and receiving payment.

In a CIF contract, the seller ordinarily must:
ship goods matching the contractual description;
arrange insurance;
obtain the bill of lading;
prepare the invoice;
tender the required documents.
Property ordinarily passes when the documents of title are delivered to the buyer or the buyer’s bank in accordance with the contract.
Where the seller takes the bill of lading to his own order, property may remain reserved until endorsement and delivery.
Intention remains decisive.
A buyer’s right later to inspect, reject or claim an allowance does not necessarily prevent property from having already passed.

The seller shipped the jute and obtained documents controlling delivery.
It then presented those documents to the bank under the letter-of-credit arrangement.
On receiving the invoice value, the seller had obtained the contractual price.
The documents were thereafter to be delivered through banking channels to the buyer.
This showed that the seller no longer intended to retain control over the goods.
Provisions for later weighing, moisture claims or rejection did not necessarily reserve ownership.
Those provisions regulated remedies for non-conformity after transfer rather than postponing the passing of property.
Documentary-credit transactions separate physical possession from legal control:
the bill of lading represents the goods;
transfer of the document enables the buyer to obtain or deal with them.
The commercial purpose of the letter of credit was to assure payment to the seller against proper documents while giving the buyer control of the shipment.
On the contractual terms, property passed outside India when the documents were handed to the bank and the seller received payment.

The Supreme Court held that property passed when the shipping documents were delivered and paid for under the documentary-credit arrangement.
Use this case for: in a CIF sale, property ordinarily passes through transfer of the shipping documents, subject to the parties’ intention and any reservation of disposal.