5.7 Query
Booking of Purchases/Sales of Imported Commodities-1.
1. In a company which is mainly dealing with export of mineral ores and import of non-ferrous metals and other metals, the import contracts are concluded on FAS/FOB foreign port, C & F/CIF Indian port basis. The contracts also invariably contain a Clause that the shippers (overseas suppliers) should obtain “clean on board” ocean bills of lading, blank endorsed and made to the orders of the shippers. These bills of lading along with the other shipping documents and the sight bills stipulated in the relevant contracts are negotiated by the overseas suppliers against the L/C opened by the Company. The foreign banks after effecting the payment to the overseas sellers, forward these documents for reimbursement to the State Bank of India, New Delhi, through whom the company opens the irrevocable L/C. The State Bank of India after reimbursing the amount to the foreign bankers by debiting the Company’s account release the documents to it. Except in the case of CIF Contract, the Company covers the insurance with the Indian Insurance Pool/L.I.C. immediately on receipt of a cable advice from the foreign suppliers about the quantity and value of the goods loaded into the ship. Thus the responsibility of claiming the insured amount from the insurers devolves on the company in the case of total loss of the goods owing to any unforeseen circumstances.
2. This being the position of the procedure of shipment and payment of the goods by the Company to foreign sellers, a question had arisen as to at what point of time the “purchase” of these imported commodities should be booked in the Company’s books, i.e. based on the date of bill of lading or on the date of retirement of shipping documents by the Indian Bank when the documents are delivered by the bankers to the Company.
3. The Company’s Law Officer expressed a view that “in the absence of any specific mention in the contract, the rule of thumb in the Sale of Goods Act has to be applied, which states that in the case of “unascertained” goods, the property does not pass until the goods are ascertained and such goods after ascertainment will have to be unconditionally appropriated to the contract. Thus if the Bill of Lading is taken to the order of shippers, there is no unconditional appropriation and in such a case the unconditional appropriation will be only when the Bill of Lading is physically transferred, which transfer takes place through the Bank under L/C”. Thus the Law Officer had made it very clear beyond any ambiguity that, if the Bills of Lading are made to the order of the shippers the property does not pass until the negotiation of he bills of lading by the Bank is complete.
4. According to this advice, the Company has been booking the purchase of these commodities only at the point of retirement of the shipping documents by the State Bank of India, New Delhi. In this process several shipments which are effected before 31st March (Company’s financial year is from April to March) but the documents of which are not retired before 31st March, are not taken in the books of the Company although in such cases the insurance liability would have been booked and taken to “Prepaid expenses account”, in the books of the Company. The Internal Audit Department has objected to this procedure of booking the purchases based on the date of retirement of documents by the Indian Banks on the ground that such procedure leading to a large amount of liabilities/stocks being left outside the books (although the profit remains unaffected) is against the established conventions in the accountancy profession, although it may be legally correct. The Internal audit department has recommended the booking of “purchases” based on the date of Bill of Lading.
5. In view of the conflicting advice the company has received from the professional chartered accountant (Chief Internal Audit Officer) and a legal adviser the opinion of the Committee is sought.
Opinion May 27, 1968
On consideration of the facts of the case, we are of the opinion the view expressed by the Company’s Law Officer, is correct that the shipments in question should not be taken as purchases until such time as the documents are transferred to the Company through the Bank.
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