5.9 Query
Applicability of the Sale of Goods act to CIF & FOB Contracts.
1. ‘When the property in goods’ passes-is a technical question, depending upon circumstances of each case. Is it practical to prepare accounts after taking into account in each and every case as to when the property in goods has passed?
2. Will provisions of ‘Sale of Goods act of India’ invariably apply even though the goods may in relevant time be in territorial waters of another country or irrespective of the terms of sales negotiated or entered into a foreign country?
3. It may be desirable that as far as possible, the annual accounts should only include all the legal assets/liabilities of a concern as on a particular date. However, this may not be possible for various reasons. On the contrary, the accounts are being prepared on the basis of the accounting principles of conservatism/consistency, etc.
4. It is suggested that on such similar matters, legal opinion may be obtained by the clients and based on legal opinion (if found acceptable by the Institute), desirable accounting treatment should be indicated by the Institute. In the instant case there is no reason why A.T.C. should not obtain competent legal opinion.
Opinion September 15, 1973
The basic issue involved in your simulations is the point of time when the property in the goods passes from the seller to the buyer.
(i) Under a C.I.F. Contract, the property passes to the buyers when the shipping documents [if they are considered to be “document of title to the goods” according to Section 2(4) of the Sale of Goods Act] are handed over to them.
(ii) Under an FOB contract the property passes to the buyers when the goods are delivered on board the ship.
Illustration No. 1: In this particular case the shipping documents have been negotiated by the foreign bank on 30th March. We presume the foreign bankers acted as agents on behalf of the A.T.C. and obtained the shipping documents. In case the contract was on C.I.F. basis, the property would have passed over to the A.T.C. on the date the seller handed over the shipping documents to the buyer or to his agent. As soon as the property has passed to the A.T.C. the transaction has to be recorded in the A.T.C. books of account. In this case goods must be recorded as having been received in the year ended 31st March. Of course for purposes of final accounts, these goods must be treated as part of closing stock.
Illustration No. 2: Even though in the case of F.B.O. contract the property is deemed to pass to the buyer as soon as delivery of the goods on board of ship is completed, the accounting treatment in this specific case will be the same as in the case cited under Simulation No. 1, if the goods have been delivered on board of ship on 30th March. However, a very great deal will depend on the terms of the contract. The main point is that accounting record should faithfully reflect the legal position. It has to be determined whether the property has passed to the buyer with reference to the specific terms and conditions of the contracts.
Illustration No. 3: It is stated in this case that the goods were delivered by A.T.C. suppliers to the railways, in their capacity as carriers, acting as agents of A.T.C. A Railway receipt (RR) is a “documents of the title to the goods”. If it has been endorsed in favour of the buyers by the A.T.C. while they were in transit, as far as A.T.C. is concerned, the transaction can be taken as a sale and recorded as such, though in certain circumstances the goods may be stopped while in transit. In case the document of the title to the goods namely, RR, was endorsed in favour of the buyers after the end of the year, the transaction has to be recorded in the sub-sequent year.
Illustration No. 4 : Since A.T.C. has collected the documents from the bankers before 31st March, the transaction should be recorded in the year ending on 31st March.
According treatment, it is clear, will follow the legal position. In case of doubt it may be necessary to obtain legal opinion.
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