GOVINDA MENON, J. - (1.)THIS appeal arises out of a suit for the recovery of a sum of Rs. 10, 485-3-4 collected by the Government of Madras as sales tax from the plaintiff for the year 1945-46, on the ground that such collection was ultra vires and illegal, because the export trade of the plaintiff during that period was not assessable to any sales tax prior to the amendment by Act XXV of 1947.
(2.)IN the plaint, a list of several exports giving the names of the constituents and the net turnover deducting the freight, and the nature of the contracts have been given, and it is stated that the order of assessment on exports detailed there was wholly ultra vires and beyond the powers of the government. The lower court agreed with the contentions raised by the plaintiff with regard to a refund of the sum of Rs. 10, 325 and decreed the suit to that extent. The State of Madras, through the District Collector, Triunelveli, is the appellant herein. Exhibit A-7 contains a list of exports to various foreign countries and the amount of money for which each transaction was entered into. There are 17 transactions listed therein to the total tune of over Rs. 10 lakhs. Items 1 to 5 in that document deal with contracts for selling fibre to firms in London and Exhibits A-8 to A-12 also relate to these contracts. Items 6 to 8 are with respect to the sale of goods to firms in Australia and Exhibits A-13 to A-15 deal with them. Items 9 and 10 are purchases by Egyptian firms and Exhibits a-16 and A-17 relate to them. Items 11 to 13 are with respect to sale of goods to New York firms, and Exhibits A-18 to A-20 deal with them. Items 14 to 17 deal with the sale of goods to Colombo and we are not concerned with those transactions in this appeal. It is conceded by the appellant that the appeal does not relate to the three transactions with colombo and one of the transactions with Egypt. According to P. W. 1, one of the partners of the plaintiff firm, the mode of transactions is in the following manner. Contracts are entered into by correspondence with foreign firms for the sale of quantities of fibre, which are purchased by the plaintiff in open markets in INdia, or they order manufactured goods. After the goods are shipped, the plaintiff obtains a bill of lading made out in their name as shippers, and draw a bill of exchange along with the bill of lading and invoice. At the instance of the foreign buyer a recognized exchange bank in that country opens a letter of credit with a local bank for a certain sum of money, and when goods are shipped the plaintiff draws a bill of exchange payable 90 days hence, presents the same with the invoice and the shipping documents, to the local bank, who would pay 95 per cent of the amount stated on the invoice, and the documents are handed over to the local bank, who would forward them to the foreign bank on whose instance, they have agreed to pay the money. When the goods reach the foreign port, and the shipping documents along with the bill of exchange and the invoice are received by that foreign bank, the buyer pays the invoice amount on the bills after taking delivery of them, and recovers the goods when they are unloaded. It is also stated that the bill of lading is made out in the name of the consignor as the shipper, and also endorsed in blank. The prices fixed are either C. I. F. , that is cost, insurance and freight; or C. F. , that is cost and freight alone; insurance to be paid by the purchaser. It is stated that there is no actual delivery of goods but only of documents of title to the goods to the foreign buyer. The contracts are stated to be "d. P. " that is demand on payment. Where the contracts are c. I. F. , price includes insurance money paid by the seller; it is C. F. where the buyer pays the insurance charges. It is stated by P. W. 1 that the credit opening bank opens credit on behalf of the purchasers, and those banks are not known to the sellers at all. Exhibits A-9 to A-12, which deal with the export of goods to London, where the buyer is Hindley and Co. , show the nature of the transactions. Exhibit A-8 contains a copy of the original letter of credit held by the National Bank of INdia, Tuticorin, and the terms are mentioned there.
In short the correspondence show that the local branch of the National Bank of india informs the plaintiff that they are in receipt of advice from their london office that the latter have received from Messrs. Hindley and Co. , london, an undertaking to honour the bills drawn by the plaintiff on Messrs. , hindley and Co. , to the extent of a sum of money being 95 per cent of the invoice value of certain goods on the following conditions which are : Bills to be drawn payable 90 days after sight and to be accompanied by invoices, full sets of on board bills of lading made out to order and blank endorsed representing shipments of various quantities of goods etc. and insurance including war risk with unlimited transhipment covered in London. Such shipping documents are to be delivered on payment of the bills which should bear the clause, "drawn under N. B. I. credit numbers dated so and so. " There is a clause in that document to the following effect : "please note that the bank accepts no liability for the above undertaking and that this advice does not release you from the liability attaching to the drawer of a bill of exchange. " *

There are similar clauses in other documents as well. The learned Subordinate Judge was of the opinion that the title in the goods passed to the purchaser only when they paid the money to the bank, which opened the latter of credit and took delivery of the documents, that is, the sale took place in a foreign country and not in India. According to the learned Judge the foreign banks on whose credit bills are negotiated are not agents of the buyer for the purpose of inferring that the right in the goods had passed to the buyer on the mere handing over of the shipping documents to the negotiating bank of India. Such being the case, the learned judge was of opinion that the intention gatherable from these transactions is that the seller has reserved to himself the jus disponendi, or the right of disposal of the goods. He further held that the question that foreign banks have issued letters of credit to the local bank on behalf of the buyers is not indicative of the foreign bank's acting as agents of the buyer for the purpose of inferring that by the act of delivery of the documents the negotiating bank's right in the property has passed, because letters of credit are only for the purpose of enabling the seller to negotiate the bill upon the shipment of the goods, without waiting for the goods or the documents reaching the foreign country. The question which we have to decide is whether the sale takes place within the State of Madras or outside it. The learned Assistant Government pleader contends that when the foreign bank opened a letter of credit and authorised the negotiating bank of India to pay 95 per cent of the invoice price, on presentation of the shipping documents, the invoices and the bill of lading drawn on the foreign buyer, the property in the goods passed to the buyer, and, therefore, the sales tax is payable in the Madras State. On the other hand, the learned counsel for the plaintiff-respondent contends that when a bill of lading is taken in the name of the seller, as in the present case, the intention is that the seller does not want to part with the title, and that is why it is not taken in the name of the buyer, in which case alone the title would pass. It is also urged that the discounting of the bill with the negotiating bank is only purchasing or taking endorsement on the bill of exchange by the bank, and if the bill is dishonored at maturity, the endorsee bank has got the right of recourse against the drawer. The handing over of the bill of exchange endorsed in blank to the negotiating bank is for the purpose of delivery of the bill of lading to the buyer if he pays or meets the bill of exchange. Further the bank is not authorised to hand over the bill of lading if the buyer has not honoured the bill of exchange by payment on demand. In that case the bill of lading remains the property of the seller, who is liable as the drawer of the dishonoured bill to the negotiating bank. The assets of the seller, namely, the bill of lading will be subject to the banker's lien in case the drawee does not pay the endorsee bank, and even if a lien exists the property still remains with the seller.

We have, therefore, to see what is the effect of the opening of a letter of credit. According to the learned counsel for the respondent, a letter of credit is giving credit facilities to the seller on the request of the buyer, who is only a surety and to whom in the ultimate instance resort is to be had. That being the case neither the bank, which opens a letter of credit, nor the negotiating bank is the agent of the buyer to pay the money to the seller, especially since the business is the bank's own, but it takes a surety from the buyer before the banking business is done. In these circumstances, we have to clearly understand the legal relationship that exists between the buyer and the issuing banker, as well as the paying banker and the seller. In Halsbury's Laws of England, Simonds'Edn. , Vol. 2, at page 213, a letter of credit is defined as an undertaking by a banker to meet drafts drawn under the credit by the beneficiary of the credit in accordance with the conditions laid down therein. A letter of credit may be addressed (i) as in a traveller's letter of credit, to all the issuing banker's correspondents throughout the world. We are not concerned with such a state of things here. Where the credit is designed to facilitate trade to the beneficiary, the relationship that exists between the buyer and the issuing banker is stated to be as follows :- "para 399.- The buyer who, pursuant to his sales contract, instructs his banker to open a credit undertakes to put the banker in funds, providing the documents against which the banker pays or what the buyer calls for. The banker is bound to apply the funds to the purpose to which they are appropriated; but if he fails before this is done, the buyer has only a right to prove. The banker must comply rigidly with his instructions, and the same applies to the paying banker (if there be an intermediary banker) the latter being indemnified by the former if he complies strictly with the instructions. There is ordinarily no privity between the buyer and the paying (intermediary) banker. " *

As between the paying banker and the beneficiary, which is the seller, the relationship is found in paragraph 401, at page 216 : "the contract between the paying banker and the beneficiary depends upon the terms in which the former's promise to pay is couched; it becomes binding, in the case of a confirmed creditor, that is, an irrevocable credit which has been confirmed by the intermediary or paying banker, as soon as the beneficiary acts on the strength of it. " *

(3.)IN Chitty on Contracts, 21st Edn. , the nature of letters of credit, their varieties and the relationship between the banker and seller, the exporter and the purchaser are described at page 185 onwards. IN paragraph 350 at page 196, it stated that where the correspondent does not assume sole liability but forwards to the exporter with or without confirmation a letter of credit issued by the originating banker an agency relationship is more easily imputed. IN para 353, the relationship between the originating or the correspondent banker and the exporter is discussed. From the observations of goddard, Lord Justice, in J. H. Raymer and Co. v. Hambro's Bank Ltd. 1943 (1)KB 37) one can see the exact jural relationship that exists between the originating banker and the importer, and it is to the effect that the originating banker is employed by the importer on a remuneration to pay money for the importer under certain conditions. The result would be that the bank which opens the letter of credit is an agent of the importer for the payment of the price of the goods to the exporter, when the documents of shipping are handed over to the negotiating bank, which is an agent of the originating banker. The position, therefore, is this. The importer in a foreign country employs a bank in his place by supplying it with funds or securities to be deposited to open a letter of credit and in doing so, the originating banker becomes an agent of the importer. IN turn the originating banker may use their agents as negotiating bankers to pay the money to the exporter.
The nature of the particular form of the letter of credit, with which we are concerned, has been the subject of a decision in chandanmul Benganey v. National Bank of India, Ltd. ( 1923 (51) ILR (Cal) 43)where both the learned Judges define the import and effect of ordinary letters of credit. Rankin, J. , (as he then was) at page 58 lays down the law in the following terms : "in order that the main purpose may be effected, it is every day business for the buyer to arrange with a bank to consent that the seller draw on the bank for the purchase price. In this, the common form of a banker's credit, the drawee is the bank and when this procedure is adopted then in ordinary times the seller is not only sure of being paid ultimately, but he will have litter difficulty in getting his drafts negotiated at once. Letters of credit are, however, by no means restricted to this form, and in particular there is another form or type of banking facilities, under which the purchaser arranges not that a bank shall be ultimately responsible for payment of the drafts but merely that when the seller draws upon the buyer he will be able to negotiate his draft with a particular bank. Such negotiation is in itself an important credit facility, and it may be important to an exporter who contemplates making different consignments of goods under a contract to know that this facility will be afforded to him for all his consignments and is not likely to be withdrawn in the middle of the transaction. Apart from these considerations it has to be noticed that a bank will frequently be instructed as agent for another bank, or firm, to advise an intending seller of the fact that for certain business between the seller and other people, facilities for negotiation of bills will be afforded or are likely to be afforded by the advising bank. " *

There can, therefore, be no doubt that when the plaintiff drew the bill on the foreign buyer and had 95 per cent of the price of the goods paid by honouring the bill by the negotiating bank on behalf of the issuing bank, the transaction is as if the buyer at the other end has constituted the issuing bank is his agent for the purpose of paying the part of the purchase price to the seller as and when the goods are shipped. We have also to remember that the contract is C. I. F. in most of the cases, which would mean that the cost price would include the price of the goods, insurance and freight, and that is paid in advance by the seller, which will be paid over to him by honouring of the bills drawn by him on the buyer. Where the contract is C. F. , the insurance is paid by the purchaser, and for any loss in transit, the purchaser will be indemnified by the insurers. From the statement of the principles applicable to the present case, we have to find out, after applying the provisions of the Sale of Goods Act as to when the property in the goods passed to the purchaser. According to section 19 of the Sale of Goods Act, where there is a contract for the sale of specific or ascertained good, the property in them is transferred to the buyer at such time as the parties to the contract intend to be transferred, and for the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case. Sections 20 to 24 deal with the rules for ascertaining the intention of the parties as to the time at which the property in the goods passed to the buyer. Section 23, sub-clause (2), of the act lays down that where in pursuance to the contract the seller delivers the goods to the buyer or to a carrier or other bailee 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. We are concerned in this case with section 25, sub-clauses (2) and (3 ). Sub-clause (2) lays down that where goods are shipped and by the bill of lading goods are deliverable to the order of the seller or to his agent, the seller is prima facie deemed to reserve the right of disposal. Sub-clause (3) says that where the seller of goods draws on the buyer for the price and transmits the bill of exchange and the bill of lading to the buyer together, to secure the acceptance or payment of the bill of exchange, the buyer is bound to return the bill of lading if he does not honour the bill of exchange and if he wrongfully retains the bill of lading, the property in the goods does not pass to him. This would mean that where the bill of lading is transmitted to the buyer together with the bill of exchange for acceptance, the moment the transaction take place there is a transfer of the title in the goods to the buyer, if he honours the bill of exchange. But where the bill of exchange is not honoured and the bill of lading is wrongfully retained, the title in the goods does not pass to the buyer. If we consider the fact that the payment of the price by the negotiating bank on the receipt of the shipping documents, the bill of lading and the bill of exchange, is done as the agent of the buyer, then there is no difficulty in holding that the title in the goods would pass when part of the price is paid. On behalf of the respondent our attention was drawn to the decision of the supreme Court in Commissioner of Income-tax, Madras v. Mysore Chromite, Ltd. in which their Lordships held that with regard to the claim of the Government to levy income-tax on profits, at the earliest the property in goods passed in london where the bill of lading was handed over to the buyer's bank against the acceptance of the relative bill of exchange and accordingly the sales took place outside British India and ex hypothesi the profits derived from such sales arose outside British India. The difference between the facts of this case, and what we have to consider is that the bill of exchange there was drawn on the buyer's bank, where the letter of credit had been opened and negotiated with the bank of India, who are the bankers of the assessee company, and who used to credit the assessee company with the amount of the bill of exchange. In that case it cannot be held that the negotiating bank was the agent of the buyer, and that fact shows the difference between the instant case and that which their Lordships of the Supreme Court had to consider. The nature of a C. I. F. contract is discussed in extenso by Mccardie, J. , in Manbre Saccharine Co. v. Corn Products Co. 1919 (1) KB 198 ). In that case the learned Judge held that a vendor under a C. I. F. contract for the sale of goods who has shipped the appropriate goods under a proper contract of carriage and obtained the proper documents, can effectively tender those documents to the purchaser notwithstanding that he knows at the time of such tender the loss to the goods. The principle that can be gathered from this decision is that when the vendor ships the good he has done everything expected of him, and for the loss of the good during carriages he is not responsible, which would mean that the title in the goods passed to the buyer as and when the goods are shipped. Considerable help can also be got from the judgment of rowlatt, J. , in Urquhart Lindsay and Co. v. Eastern Bank, Ltd. 1922 (1) KB 318)for finding out as to when the title in the goods passed. In that case the facts are succinctly stated in the headnote as follows :- "the plaintiffs entered into a contract with buyers in Calcutta to manufacture and ship machinery by instalments over several months at agreed prices, but subject to a stipulation that should the cost of labour or wages increase, there should be a corresponding increase in the purchase price. The buyers were also to open a'confirmed irrevocable credit' in favour of the plaintiff with a bank in this country, and to pay for each shipment as it took place. In pursuance of this arrangement the defendants, who were the buyers'bankers in London, wrote to the plaintiffs stating that they would pay bills drawn on the buyers to the extent of Pounds 70, 000, the bills to be accompanied by documents and to be received before April 14, 1921,'this to be considered a confirmed irrevocable credit.' The plaintiffs shipped two instalments under the contract and received payment under the letter of credit. The buyers then found that the invoices included an increase in the purchase price on account of wages and material, and instructed the defendants only to pay so much of the next invoices as represented the original price. The defendants accordingly refused to pay the bill presented on the next shipment and the plaintiffs then cancelled the contract, claiming damages from the defendants as on a repudiation by the buyers; held, that the credit being irrevocable, the refusal of the defendants to take and pay for the particular bills on presentation of the proper documents constituted a repudiation of the contract as a whole, and that the plaintiff were entitled to damage so reckoned. The basis of this form of banking facility is that the buyer is taken, as between himself and the banker, to accept the seller's invoices as correct. Any adjustment must be made by way of refund by the seller and not by way of retention by the buyer. " * It is clear from this that when the defendant bank refused to pay the bill presented and the plaintiffs cancelled the contract claiming damages from the defendant as a repudiation by the buyers, the basis of the plaintiffs'claim for damages is the refusal of the buyers to accept the goods, for which the title has passed to the buyer. At pages 324 and 325 in assessing the damages the learned Judge observed as follows : "the damages to which the plaintiffs are entitled are the difference between on the one hand the value of the materials left on their hands and the cost of such as they would have further provided, and, on the other hand, what they would have been entitled to receive for the manufactured machinery from the buyers, the whole being limited to the amount they could in fact have tendered before the expiry of the letter of credit. " *