Legal Aspects in SCM 432 v1 PDF

LEGAL ASPECTS IN SUPPLY
CHAIN MANAGEMENT
Sub Code-432
Developed by
Prof. Ravikiran Mhalas
On behalf of
Prin. L.N. Welingkar Institute of Management Development & Research
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Advisory Board
Chairman
Prof. Dr. V.S. Prasad
Former Director (NAAC)
Former Vice-Chancellor
(Dr. B.R. Ambedkar Open University)
Board Members
1. Prof. Dr. Uday Salunkhe  2. Dr. B.P. Sabale  3. Prof. Dr. Vijay Khole  4. Prof. Anuradha Deshmukh 
Group Director  Chancellor, D.Y. Patil University, Former Vice-Chancellor  Former Director 
Welingkar Institute of Navi Mumbai  (Mumbai University) (YCMOU)
Management Ex Vice-Chancellor (YCMOU)
Program Design and Advisory Team
Prof. B.N. Chatterjee Mr. Manish Pitke

Dean – Marketing Faculty – Travel and Tourism
Welingkar Institute of Management, Mumbai Management Consultant
Prof. Kanu Doshi Prof. B.N. Chatterjee

Dean – Finance Dean – Marketing
Welingkar Institute of Management, Mumbai Welingkar Institute of Management, Mumbai
Prof. Dr. V.H. Iyer Mr. Smitesh Bhosale

Dean – Management Development Programs Faculty – Media and Advertising
Welingkar Institute of Management, Mumbai Founder of EVALUENZ
Prof. B.N. Chatterjee Prof. Vineel Bhurke

Dean – Marketing Faculty – Rural Management
Prof. Venkat lyer Dr. Pravin Kumar Agrawal

Director – Intraspect Development Faculty – Healthcare Management
Manager Medical – Air India Ltd.
Prof. Dr. Pradeep Pendse Mrs. Margaret Vas

Dean – IT/Business Design Faculty – Hospitality
Welingkar Institute of Management, Mumbai Former Manager-Catering Services – Air India Ltd.
Prof. Sandeep Kelkar Mr. Anuj Pandey

Faculty – IT Publisher
Welingkar Institute of Management, Mumbai Management Books Publishing, Mumbai
Prof. Dr. Swapna Pradhan Course Editor

Faculty – Retail Prof. Dr. P.S. Rao
Welingkar Institute of Management, Mumbai Dean – Quality Systems
Welingkar Institute of Management, Mumbai
Prof. Bijoy B. Bhattacharyya Prof. B.N. Chatterjee

Dean – Banking Dean – Marketing
Mr. P.M. Bendre Course Coordinators

Faculty – Operations Prof. Dr. Rajesh Aparnath
Former Quality Chief – Bosch Ltd. Head – PGDM (HB)
Welingkar Institute of Management, Mumbai
Mr. Ajay Prabhu Ms. Kirti Sampat

Faculty – International Business Assistant Manager – PGDM (HB)
Corporate Consultant Welingkar Institute of Management, Mumbai
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Ex Senior V.P. (Sify) Welingkar Institute of Management, Mumbai
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1st Edition (June-2015)
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CONTENTS
Contents
Chapter No. Chapter Name Page No.
1 Supply Chain Management – Legal Aspects 3-11

2 Mercantile and Commercial Laws 12-22
3 Laws of Agency 23-54
4 Arbitration Law 55-72
5 Contracts in Supply Chain Management 73-135
6 Contracts of Indemnity and Guarantee 136-151
7 Sale of Goods and Contracts 152-187
8 Carriage Contracts 188-215
9 Negotiable Instruments Act 216-252
10 The Act of Environmental Protection 253-315
11 Details of Central Excise Tariff 316-389
12 Insurance Law and Contracts 390-450
13 Types of Intellectual Property Rights (IPR) 451-491
14 GST and Supply Chain Management 492-512
15 Global Supply Chain Management and WTO 513-542
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SUPPLY CHAIN MANAGEMENT – LEGAL ASPECTS
Chapter 1
SUPPLY CHAIN MANAGEMENT – LEGAL
ASPECTS
Objectives
At the end of the chapter, you will be able to understand the definition of
Supply Chain Management, the evaluation of Supply Chain Management,
the need of Legal Aspects in the Supply Chain Management, and the
importance of various legal aspects in the Supply Chain Management.
Structure:
1.1 Introduction to Supply Chain Management (SCM)

1.2 Definition of Supply Chain Management
1.3 The Evolution of SCM
1.4 Various Types of Legalities in SCM
1.5 Importance of Legal Aspects in SCM
1.6 Activities for the Students
1.7 Summary
1.8 Self Assessment Questions
1.9 Multiple Choice Questions
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1.1 INTRODUCTION TO SUPPLY CHAIN MANAGEMENT

(SCM)
In the era of competitive market, every company or a service providing

firm is trying to deliver the products/services at highly attractive price
without sacrificing quality and promised delivery time. In order to achieve
this systematically, the scientific process of Supply Chain Management is
being derived and followed. This system integrates supply, distribution and
customer’s logistic requirements into one cohesive process. This system of
SCM, if effectively applied, will reduce the time, redundant efforts and
inventory costs.
1.2 DEFINITION OF SUPPLY CHAIN MANAGEMENT
Supply chain is the complete process of receiving a customer order,

accepting it, to the delivery of the product/services to the customer. It also
includes purchasing and the production of the product and/or value
addition to the services. A supply chain includes all interdependent steps,
and it gives rise to a sole objective of meeting customer requirements.
SCM is a generic term, which includes the coordination of order generation
process, the order taking process and offer fulfillment of distribution of
products to the customer. Here, ‘product’ includes services or information
also.
Various independent suppliers, firms supplying products and service

providers are involved in the supply chain. These include manufacturers,
component/raw material suppliers/packagers/ shippers/couriers/postal
services/senders/receivers/wholesalers/retailers/agents/retailers, etc.
According to the Supply Chain Council, U.S.A., the Supply Chain

Management includes managing supply and demand, sourcing raw
materials and parts, manufacturing and assembly,warehousing and
inventory tracking, order entry and order management, distribution across
all channels, and delivery to the customer.
Thus, the Supply Chain Management encompasses every effort involved in

producing and delivering a final product or service, from the supplier’s
supplier to the customer’s customer.
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1.3 THE EVOLUTION OF SCM
• 1904 – Traces of outsourcing was seen when Charles S. Rolls became

selling agent for cars made by F. Henry Royce
• 1960-75 – The necessity of SCM was understood with the first phase of
inventory ‘push’ era that focused on physical distribution of finished
goods.
• 1975-1980 – Companies began migrating from an inventory ‘push’ to

customer ‘pull’ channel.
• 1980 – Emergence of SCM
• 1985 – WallMart introduced the concept of Cross-docking.
• 1996 – Internet revolutionized the distribution system of the business.
• 1998 – Concept of e-Commerce changed the definition of business and

logistics played a major role in SCM.
1.4 VARIOUS TYPES OF LEGALITIES IN SCM
Purchasing is one of the major activities of SCM. For each and every
transaction of purchase, several legal implications are involved. Several
laws are to be followed for every purchasing activity. If the purchasing is
made from outside the country, then the laws of country of origin will also
have to be studied and obeyed. This requires thorough knowledge of the
applicable laws and regulations. Thus, the laws sometimes play more
important role than the cost or price of desired component or service. Let
us study the following example to understand the importance of various
laws.
Illustration :
A company ‘ABC’ which is a public limited company, having its

manufacturing plant at Pune, places an order for raw material ‘RM’ with a
company ‘XYZ’ which is a partnership firm of Surat. The purchaser had
agreed to a bill of exchange drawn by the supplier for the full invoice value,
which the supplier could discount with his banker. The item ‘RM’ was
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excisable and also liable to sales tax. Further, it will attract octroi duty/LBT
while entering at Pune/PCMC corporation limits. The item is fragile and also
highly vulnerable to damage in transit. The price agreed was ` 300/- per
kg., ex-godown plus other taxes and levies. The material was to be
supplied by road.
Now, the following acts and laws become applicable in the purchasing
transaction –
1. Indian Contract Act – The order placed by company ‘ABC’ on company

‘XYZ’ is a contract between the two companies, which is to be honoured
throughout the transaction.
2. Sales of Goods Act – Since this contract is a sale for company ‘XYZ’,
the conditions of Sales of Goods Act are to be followed.
3. Indian Negotiable Instruments Act – To take care of the Bill of

Exchange drawn on ABC and discounted by XYZ, the Indian Negotiable
Instruments Act is to be referred.
4. Companies Act – Since ABC is a public limited company, the provisions

as mentioned in the Companies Act are to be honored.
5. Indian Partnership Act – Since XYZ is a partnership firm, the

conditions as mentioned in Indian Partnership Act are to be honoured.
6. Law of Insurance – These provisions are to be taken care considering

that the material is fragile and sensitive.
7. Carriers Act – As the material is to be transported through road by a

public carrier, the Carriers Act comes into picture for the transaction.
8. Central Excise Act – Since the material is liable for central excise duty.
9. Central Sales Tax Act – Since the material is transported from Gujarat
State to Maharashtra State, Central Sales Tax rules are to be followed.
(From 01/04/2016, GST laws will prevail.)
10.Octroi/LBT Act at Pune – As may be applicable during the execution

of contract.
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Thus, so far in this illustration ten different acts have played their
important role in the transaction. This list cannot be made exhaustive in
the complexities of Indian Legal System. This is merely an illustrative list.
Each transaction of purchase is peculiar by itself and may invoke varieties
of provisions of various Laws and Acts.
The complexity can be further illustrated by studying the following

examples –
1. The company X buys valves to install in their boilers. This contract is

subject to the Indian Boilers Regulation Act.
2. The company Y manufactures cosmetics and buys chemicals for the

same. This is subject to the provisions of Drugs and Cosmetics Act.
3. The company Z makes cartons for packaging and supplies to various

companies to pack their products. It follows the provisions of Packaged
Commodities Act as well as Standards of Weights and Measures.
4. Companies doing procurement and storage of some petroleum products

follow the regulations made by the Directorate of Explosives.
Thus the list goes on and on depending on the activity or nature of product
involved.
1.5 IMPORTANCE OF LEGAL ASPECTS IN SCM
The following facts are to be considered while understanding the

importance of legal aspects in Supply Chain Management –
• There are many laws which are to be studied, followed and considered
before initiating any transaction of purchase or services in the supply
chain management.
• All such laws must be applicable within the framework of the basic law of
the land, Viz., Constitution of India for transactions between Indian
companies.
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• For global transaction, the latest laws applicable to the countries of trade
as well as the treaties and acts between the two countries are to be
strictly followed.
• The laws and regulations keep changing at regular as well as at sporadic

intervals.
• There are few laws which have not undergone any major change for
decades together, e.g., Contract Act, Partnership Act, etc. On the other
hand, some laws are amended frequently by notifications, clarifications
or circulars like Central Excise & Customs Laws.
• The interpretation of a law may change depending on the judicial

pronouncements.
• Sometimes, some laws are amended with ‘retrospective effect’. So the

latest and updated knowledge of the applicable laws and regulations is a
must and plays an important role in Supply Chain Management.
A TYPICAL FLOW CHART IN A MANUFACTURING COMPANY
!
SUPPLY CHAIN MANAGEMENT IS A MUST FOR COST REDUCTION
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1.6 ACTIVITIES FOR THE STUDENTS
1. Considering your daily meals as the product, and considering you as

customer, draw a line diagram of the supply chain of the food.
2. Study the supply chain management of a nearby grocery shop and list
the laws which are required to be followed for its basic operations.
3. Find out the evolvement of Supply Chain Management in the 20th

Century by doing Google search and list the major milestones year wise.
1.7 SUMMARY
Legal aspects play an important role in Supply Chain Management. All the
applicable acts and laws are to be followed while designing and
implementing the supply chain management system. Various Mercantile/
Commercial/Business laws of the local government and country where the
business is done, are to be considered while doing the business and
executing a contract. Thus, the legal aspects play a vital role in Supply
Chain Management.
1.8 SELF ASSESSMENT QUESTIONS
1. Give brief definition of ‘Supply Chain Management’.
2. Explain in details how the Legal Aspects play an important role in Supply
Chain Management.
3. Name minimum three major Legal Acts and Laws and their importance
in SCM.
4. Explain which are the factors of SCM those help to reduce the costs of
production/ intermediate services to ultimately reduce the product/
service costs.
5. Explain in brief the ways and means of cost reduction and how SCM is
playing important role to give the company the competitive edge.
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1.9 MULTIPLE CHOICE QUESTIONS
1. In SCM, C denotes which of the following?
a. Challenge
b. Chain
c. Commercial
d. Commerce
2. SCM relates to the activity of –
a. Purchase
b. Sales
c. Production
d. All of the above
3. SCM is applicable in case of following industry/activity –
a. Products
b. Services
c. Information
d. All of the above
4. In the term SCM, S denotes for –
a. Service
b. Several
c. Supply
d. Survival
5. SCM is to be effectively applied to mainly achieve the –
a. Cost reduction
b. Increase in exports
c. Satisfy the Government
d. Reduce the pollution
Answers : (1-b), (2-d), (3-d), (4-c), (5-a).
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REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
Video Lecture 
! !12
MERCANTILE AND COMMERCIAL LAWS
Chapter 2
Objectives
At the end of the chapter, you will be able to understand the definition and
objectives of the Mercantile or Commercial or Business laws. Also, you will
know about the scope of Mercantile Act and about the scope of Commercial
Act. The need and requirements of the Mercantile and Commercial Laws
will also be understood by the reader.
Structure:
2.1 Definition of Mercantile Law/Commercial Law/Business Law

2.2 Objectives of Business Law
2.3 Sources of Mercantile Law
2.4 Business Law – Needs and Necessity
2.5 Mercantile Law – Scope and Boundaries
2.7 Summary
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2.1 DEFINITION OF MERCANTILE LAW/COMMERCIAL LAW/

BUSINESS LAW
All the three terms, i.e., Mercantile Law/Commercial Law/Business Law are
one and the same, or synonymous. Business law is the branch of a civil
law, i.e., a general law. It is dealing with the rights and obligations of
business persons arising out of business transactions in respect of business
operations or business property. A ‘Business person’ is a person who
carries on commercial transactions of the business. He/She may be a
single person or individual or a sole trader or a partnership firm or even a
company. The business transactions relate mostly to what is known as
merchandise in business language, or movable property or goods, which is
separately distinguishable than immovable property.
After the year 1960, the business in India has shown tremendous growth,
and this has made much impact on the Parliament and State Legislators to
introduce new chapters of legislation and amend the existing legislations to
regulate various business transactions. This growth has taken a big leap
since introduction of online business and e-transactions in the last decade.
A large amount of labor and capital are involved. In a socialistic form of
country like India, wealth should be adequately distributed to bridge the
gap between the rich and the poor. To achieve this objective, the law
regulates various transactions of business community. Though it is not
possible for every businessman to learn every clause of the law, he must
get the knowledge of the general principles of the law of the country. It
may be noted here that ignorance of the law is not an excuse for any
Indian Citizen doing business in India.
The modern business world has expanded, and accordingly, the scope of
business law has been largely widened. It is generally understood to
include the laws related to contracts, sale of goods, private limited,
proprietary and partnership companies, negotiable instruments, insurance,
property dealings, foreign exchange, competition, environment, pollution,
carriage of goods, arbitration, consumer protection, foreign country taxes
and bans, intellectual property, etc.
A point which should not be neglected is that Business Law is not

altogether separate from other branches of law and hence, has its own
importance. In its application, recourse is often taken to other pieces of
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legislation. Laws as such are all interrelated. It is a matter of convenience

that legislation is classified into Business Law, Labor Law, Mercantile Law,
etc.
2.2 OBJECTIVES OF BUSINESS LAW
Business Law’s nature and complex nature explains the fact that the
subject has many objectives to be achieved, a few of which are listed
below -
(a) The law explains the framework within which business activities shall
be carried out. For example, a company in India releases an
advertisement mentioning the products of its competitor company. The
former company also prohibits its dealers to distribute the products of
the latter company. This action of former company is not in conformity
with some legal rules prescribed by some statute or the other. In such
case, the latter can enforce its rights which have been infringed by the
former company.
(b) A business person can raise an issue to various legal and semi-legal
authorities against the government in case his legal rights have been
violated.
(c) Some laws are made to encourage the business persons to achieve
their goals fast. For example, business has been extended the facility
of doing business by getting a company incorporated, offering all the
advantages of incorporation, such as separate legal entity, limited
liability, etc.
(d) The Business Law also has social objectives to serve the society at
large. The Anti-competition laws, Pollution control laws, etc., are a few
examples. Also, the laws concerning the regulation of essential
commodities, prevention of food adulteration in the interest of
consumers, are some of the commonly known examples which serve
the social objectives. Recently, the control of prices of generic
medicines by law has also played a role of government in the interest
of the society.
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(e) Lastly, business laws tries to prevent the concentration of economic

power to some extent and helps in the fast settlement of claims of
individuals against business houses.
2.3 SOURCES OF MERCANTILE LAW
During the earlier days of constituting and implementation of the

Mercantile Law, business transactions were regulated by the personal laws
of the parties to the suit. The rights of the Hindus and the Muslims were
governed by their respective laws and usages. Where both parties were
Hindus, they were regulated by the Hindu Law, and where both parties
were Muslims, the respective religion’s Law was applied. In case where
one party was a Hindu and other party was a Muslim, the personal law of
the defendant was applied. In case of persons other than Hindus and
Muslims, and also where the laws of usages of Hindus and Muslims were
silent on any point, the courts generally applied the principles of the
English Law.
Subsequently, need for the enactment of a uniform law regulating the

contracts was realized and this gave birth to The Indian Contract Act ,
1872. Afterwards, a number of statutes have been enacted, viz., The
Negotiable Instruments Act,1881; The Sale of Goods Act, 1930; The Indian
Partnership Act 1932; The Insurance Act, 1938; The Arbitration Act, 1940,
etc.
Sources of Mercantile Law in India :
The English Mercantile Law, The Acts enacted by the Indian Legislature,
The Judicial decisions and precedents; The Customs and Trade Usages, and
The Justice, Equity and Good Conscience Laws are the main sources of
Mercantile (Commercial) Law in India. Let us examine them one-by-one.
1. English Mercantile Law: The English Mercantile Law constitutes the

foundation on which the main structure of the Indian Mercantile Law has
been constructed. Even now, despite the enactment of various statutes
relating to the matters falling within the purview of the Mercantile Law,
our courts generally take references from the English Law where, some
principles are not crystal clear, or where there are confusions in
understanding.
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2. Judicial Decisions and Precedents: Judicial decisions are usually

referred to as precedents and are binding on all courts having
jurisdiction lower to that of the court which gave the judgment. They
are also generally followed even by those of equal jurisdiction in
deciding similar points of law. Whenever, an Act is silent on a point or
there is ambiguity, as per the normal practice, the judge has to decide
the case according to the principles of justice, equity and good
conscience.
3. The Customs and Trade Usages: Customs or usage of a particular

trade also guides the courts in deciding disputes arising out of
mercantile transactions. Also, where a statute specifically provides that
the rules of law contained therein are subject to any well recognized
custom or usage of trade, then the custom may override the statute
law.
4. The Statute Law: When a bill is passed by the parliament and signed
by the President, it becomes an ‘Act’ or a ‘Statute’. Many of the clauses
and subclauses of Indian Mercantile Law is termed as Statute Law. The
Indian Contract Act, 1872; The Negotiable Instrument Act, 1881; The
Sale of Goods Act,1930; The Indian Partnership Act, 1932; The
Companies Act, 1956 (Now recently revised) ; are the examples of the
Statute Law.
5. Justice, Equity and Good Conscience: The equitable principles of law

developed by the British courts are the guiding force behind most of the
Indian statutes on business laws. Also whenever required, the Indian
courts make wide use of these principles of equity in interpreting the
Indian law.
2.4 BUSINESS LAW – NEEDS AND NECESSITY
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Each and every business has to be based on strong economics and

commercial activities. Thorough knowledge of business laws is therefore
necessary for survival and profits of the business houses. The general
knowledge of business law will definitely help the businessmen to solve
their business problems and avoid conflicts with others with whom they
carry the business activities. It will also save the valuable time, efforts and
money of the businessmen as it will avoid them from going into wrong
business activities. This is more important for those businessmen involved
in the area of exports and imports to have a proper information about the
business laws of the countries where they are dealing with.
2.5 MERCANTILE LAW – SCOPE AND BOUNDARIES
The following acts are most widely used and referred by most of the
businesses and consulting houses in India, for Mercantile Law/Business
Law :
The Companies Act, 1956 (Old); And
The Companies Act, 2013 (Latest Revised) Published on 29th

August, 2013.
Recently revised due to changed conditions and importance of the stock

market, the Companies Act controls all the registered companies.
Companies are registered in India under the Companies Act. The capital
issues of registered companies are regulated by the SEBI. The registrar of
Joint Stock Companies, the Department of Company Affairs, the High
Court, the Official Liquidator, the Corporate Auditors, etc., are acting as
watch-dogs in the public interest under this Act. This Act influences capital
market and distributional channel decisions particularly regarding
appointment of directors and selling agents. The Act is important to be
followed by the companies from their start to the end, and submit the
reports to government from time-to-time in the prescribed formats. This is
the most important Act amongst all the Mercantile Acts, and hence, to be
thoroughly studied.
The Indian Contract Act, 1872
The oldest and widely referred Act of the Indian Business Acts, this Act
helps people to bind and maintain legally enforceable relations and conduct
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business and non-business transactions. It basically focuses on an offer

and acceptance in the legal transactions. In case of breach of contract, the
party under damage may claim specific performance or damages and seek
injunction. The agency relationship between the principal and the agent is
also governed by this Act. It prescribes the manner of agency stipulation
and rights and duties of parties.
The Indian Sale of Goods Act, 1930
This act governs all the transactions of sale and purchase of a company. Its
importance is thus emphasized on the selling decisions of companies. It
defines ‘contract of sale’ as a ‘contract’, whereby a seller transfers or
agrees to transfer the property in goods to a buyer for a price. Here, the
term ‘property, means ‘goods’ and not the property of real estate, which is
commonly misunderstood by many. It divides the term of sale into
conditions and warranty. Condition is essential to the main purpose while
warranty is collateral to the main purpose. Breach of condition gives a right
of revoking the contract while warranty does not. Warranty entitles to only
damages. The Act proclaims the principle of caveat emptor which has
possibly made many people in the Indian business sales-oriented. It lays
down rules for the performances of the contract of sale.
The Contract of Partnership Act, 1932
Majority of the firms in India are partnership firms, which are controlled by
this Act, hence this is important Act in study of the Mercantile Law. The
law relating to partnership is contained in the Indian Partnership Act, 1932,
which came into force on 1st October, 1932. A contract of partnership is a
special contract. The general principles of the law of contract apply
wherever the points are not elaborated in the Partnership Act.. The Act
contains 74 sections and extends to the whole of India except the state of
Jammu and Kashmir. Section 4 of the Indian Partnership Act defines the
term ‘partnership’ as – “Partnership is the relation between persons who
have agreed to share the profits of a business carried on by all or any of
them acting for all”. Persons who have entered into a partnership with one
another are individually called as ‘partners’ and collectively as ‘a firm’ and
a name under which their business is carried on is called the ‘firm name.’
The Negotiable Instruments Act, 1881
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The term ‘negotiable instrument’ literally means “a document transferable

by delivery.” A negotiable instrument is a written contract with an evidence
for a right to receive money and it may be transferred by negotiation, i.e.,
either by delivery or by endorsement. In India, the law relating to
negotiable instruments is a part of Negotiable Instruments Act, 1881
which came into force 1st March, 1882. Section 13(1) of the Negotiable
Instrument Act states that, a Negotiable Instrument means a promissory
note, bill of exchange or cheque payable either to order or bearer. Whole of
India and all persons resident of India, whether foreigners or Indians are
covered under this Act. The provisions of this Act are not applicable to
Hundis and other native instruments. Special customs and local usages
govern instrument. When no such custom is established, this Act will
equally apply to Hundis.
The overall study of all the above mentioned Acts, along with some other
important acts as mentioned below is the major topic of legal aspects of
Supply Chain Management, hence the knowledge of all these Acts is
essential for persons working in the area of Supply Chain Management.
The other relevant Acts having direct bearing on internal trade, as well as
foreign trade are listed below in the chronological order :
The Stamp Act, 1889 ;

The Indian Registration Act,1908 ;
The Securities Contracts Regulation Act, 1956 ;
The Copyright Act, 1957 ;
The Patents Act, 1970 ;
The Securities Exchange Board of India Act, 1882 ;
The Environment Protection Act, 1986 ;
The Consumer Protection Act, 1986 ;
The Foreign Trade (Development and Regulation) Act, 1992 ;
The Arbitration and Conciliation Act, 1996 ;
The Foreign Exchange Management Act, 1999 ;
The Trademarks Act, 1999 ;
The Competition Act, 2002 ;
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1. List down the points of influence of customers on a particular trade in

business law.
2. Search from Govt. Websites. The Companies Act, 2013 (Latest Revised)
Published on 29th August, 2013.
3. If you are going to start a partnership business of export of garments to

Nepal, list down the required Acts to be followed to run the business.
2.7 SUMMARY
The terms ‘Mercantile Law’, ‘Commercial Law’, and ‘Business Law’ are
synonymous. The Mercantile Law and Commercial Law deal with mercantile
person in mercantile transactions. The objectives of mercantile and
commercial laws is to facilitate and regulate the business activities to
ensure equity and justice. The sources of mercantile law includes common
law of England, Statute Law, precedents and customs. The Companies Act,
1956 controls all the registered companies from their birth to death.
1. Give brief definition of ‘Business Law’.
2. Explain in detail the nature of ‘Business Law’.
3. Write down point by point the objectives of ‘Business Law’.
4. List down and elaborate the sources of ‘Business Law’.
5. Explain in details the different enactments coming under the scope of

‘Business Law’.
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1. A ‘business person’ is a person who –
a. Observes the business keenly

b. Approves the business as per law
c. Carries on commercial transaction of the business
d. Closes the business
2. Mercantile Law deals mainly with –
a. People of India
b. Commercial activities of a business
c. Religious activities
d. All of the above
3. The basic source of Indian Mercantile Law is –
a. English Mercantile Law

b. American Mercantile Law
c. Japanese Mercantile Law
d. All of the above
4. The capital issues of registered companies in India are regulated by –
a. The Mumbai Stock Exchange

b. Finance Minister of India
c. President of India
d. S.E.B.I.
5. The objectives of the ‘Business Law’ include –
a. Legal running of the business

b. Deal with Anti Competition Issues
c. Fulfill Social Objectives
d. All of the above
Answers : (1-c), (2-b), (3-a), (4-d), (5-d). 
! !22
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !23
LAWS OF AGENCY
Chapter 3
LAWS OF AGENCY
Objectives
At the end of the chapter, you will be able to understand the concept of
agency, know about the different categories of agents, ways and means of
creating agency, identify the difference between sub-agent and substituted
agent, identify situations where the agents will be held personally liable,
enlist and describe the duties and rights of agent and identify and explain
the situations when the agents can be terminated.
Structure:
3.1 Salient features and tests of Agency

3.2 Creation and Classifications of Agencies
3.3 Agency by Ratification
3.4 Authorities of an Agent
3.5 Rights, Duties and Liabilities of Agent
3.6 Agent and Principal
3.7 Misrepresentation and Fraud by Agents
3.8 Termination of Agency
3.10 Summary
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LAWS OF AGENCY
3.1 SALIENT FEATURES AND TESTS OF AGENCY
Definition : ‘Agency is a comprehensive word, which is used to describe

the relationship which arises where one person is appointed to act as the
representative to another.’ The act of representation may be to sign a
contract, approval of an action, conveyance of land, to exercise the
proprietary rights in case of the power of attorney, to collect the payment
and hand over the receipt or to finalise a discount structure in case of sale,
etc.
Rules - The Law of Agency is based on two general rules –
(a) The person who acts through an agency, is himself acting ; and
(b) Whatever is the act of a person, that may be act of another person
also (with certain exceptions)
Act – The Indian Contract Act, 1872 contains the Law of Agency in
Chapter X.
Concept –
Whenever any two parties create an agreement, which is express or

implied, the agency is created. The relationship of agency arises whenever
one person called agent has an authority to act on behalf of another called
principal. The concept of agency implies that one person brings another
person into a legal relationship. It is to be noted that the agent is not only
a connecting link between the principal and the third party, but he is acting
on behalf of the principal and has the implied or expressed powers for the
principal answerable to third party for his conduct, actions and decisions.
Contents of Agency Contract –
The main contents of an Agency Contract between the Agent and the
Principal are as follows –
• The appointment of the agent has to be made by the principal.
• The contract may be either documented or verbal and understood.
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LAWS OF AGENCY
• The principal should hand over or confer the authority on the agent to act
on his behalf for the specified period/region/products/services as may be
conferred on the agent.
• The authority conferred should be such that the principal is made

answerable to the third party for the decisions/actions of the agent.
• The object of the appointment must be to establish the relationship

between the principal and the third parties.
• The relationship of agency being based on confidence between the

principal and agent. There may or may not be any consideration
involved.
• The contract may specify the period of contract for which it is valid.
• The contract may mention about any sub-agents allowed or not allowed
in the deal.
• The contract may also mention the mode of communication between the
agent and principal and also the approvals of the principal beyond certain
limits as specified in contract.
Important Aspects of the Contract of Agency -
• Main object of employing an agency is to bring the principal into legal

relations with third person. This object is kept in mind in designing the
contract of agency.
• Every person who acts for another person is not an agent. He should be
authorized to do so. To be an agent, the person must be authorized to do
any act for another, or to represent another in dealings with third
persons, as specified in the section of the Act. The person for whom such
act is done, or who is so represented is called ‘The Principal’.
• The Indian Contracts Act specifies that any person may become an
agent. In other words, even a minor can be employed as agent and the
principal shall be bound by the acts of such an agent. But no person who
is not of the age of majority and of sound mind can become an agent so
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LAWS OF AGENCY
as to be responsible to the principal. Thus, if an agent is to be held liable

to the principal, he must be major and of sound mind.
• A person who is major and of sound mind can employ another person as
an agent. The Act states that a person who is of the age of majority and
is of sound mind can become principal. So, a minor cannot act as
principal.
• Consideration is the essential element for the validity of every contract.

However, the Act also mentions that ‘no consideration is necessary to
create an agency’. Thus, if a person ‘Mohan’ appoints a person ‘Gopal’ as
an agent, the affairs of ‘Mohan’ are placed in the hands of ‘Gopal’,
therefore, no further consideration in the form of remuneration need be
present.
• A contract of agency is based on ‘good faith’. The agent must disclose to

his principal every information coming to his knowledge which may
influence the principal in making of the contracts with third parties. Also,
the agent must not deal on his own account or must not settle adverse
title, nor should he use information obtained in the course of agency
against the interests of the principal.
Necessary and Sufficient Conditions to Determine an Agency –
To determine the existence of an agency, the answers to the following

questions are sought –
1. Whether the person has the capacity to bind the principal and make him
answerable to third parties.
2. Whether he can create legal relations between the principal and such
third party and thus, establish privities of contract between the principal
and the third party.
If answers to both of the above questions are affirmative, then there is

relationship of an agency.
In legal terms, every person who acts for another is not an agent. For
instance, a domestic servant rendering personal services, that person may
work in his master’s workshop or factory or field, aiding in the performance
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LAWS OF AGENCY
of his legal or contractual obligations to third parties, but he is not an

agent in such cases. It is only when he acts as a representative of the
other in business negotiations or in creation, modification or termination of
contractual obligations between the other and the third person, then he is
an agent. The fact that the parties have called their relationship as an
agency is not conclusive. The representative character and authority given
to the another person may broadly be said to be the important features of
an agent.
Now, let us distinguish between the Agent from a Contractor, a Bailee, a

Servant and a Trustee.
Differences between an Agent and a Contractor -
• A person who undertakes to do something for another is called

independent contractor. A contractor merely undertakes to perform
certain specified work; whereas an agent is bound to follow the
instructions of the principal and is subject to his directions and control.
• An agency is a person employed to do any act for another or to represent

another in dealings with third persons. Thus, an agent can represent the
principal and bind him by entering into contracts with other persons
within the scope of his authority. An independent contractor cannot
represent the principal like an agent, nor can he bind the principal by
entering into a contract with other persons. The question of authority
does not arise at all; consequently, he is personally liable for all acts
done by him
Differences between an Agent and a Bailee -
• In case of a bailor and bailee, the relationship between them exists so

long as the bailee holds goods belonging to the bailor, whereas this is not
necessary for the existence of the agency relationship. Sometimes, the
bailee may become an agent when he is authorized to dispose of the
bailor’s property according to his directions. Similarly, in some cases the
agent may be in possession of the principal’s property and to that extent,
he may become a bailor.
• An agent is a representative with an authority to contract on behalf of his

principal, whereas the bailee does not have such power.
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LAWS OF AGENCY
Differences between an Agent and a Servant –
An agent is employed to act on behalf of the principal and to bring him into
legal relations with third parties. A servant does not have such authority.
• A principal has the right to direct what work the agent is to do, but an
employer has further right to direct how the work is to be done. So a
servant has to act under direct control and supervision of the employer
but the agency, though bound to follow instructions of the principal, is
not subject to direct control or supervision of his employer.
• A principal is liable only for the acts of his agent done within the scope of
authority and is not for those acts of the agent which are done outside
the scope of such authority. On the other hand, the employer is liable for
the wrongful acts of his servant, if such acts are committed in the course
of employment.
• An agent is usually paid commission on the basis of the work done by

him, whereas the servant is usually remunerated by way of salary or
wages. So a servant usually works for only one employer, but an agent
may work for several principals at the same time.
Difference between an Agent and a Trustee –
• Both, the agent and trustee, exercise their powers and authority in the
interest of other persons, however, a trustee exercise powers in his own
name and on his behalf. The agent, however, exercises merely the
delegated powers authorized to him by the principal.
• In the case of trustee, he manages a property which is vested to him,

while the agent is doing the same thing not his own property, but the
property of the principal.
• The agent makes a contract on behalf of his principal, thereby, creating

privities of contract between the principal and the third party, whereas
when the trustee does the same thing, the contract is for him and only
for him.
• An agent represents and acts for his principal but a trustee represents
and acts for the beneficiary.
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LAWS OF AGENCY
3.2 CREATION AND CLASSIFICATIONS OF AGENCIES
Creation: An agency may be appointed or formed in different ways. It is

not always expressed in writing. It may be created from the circumstances
and conduct of the parties. There are different ways of forming the same.
It can be by express agreement, or by implication of law, i.e., from conduct
of the parties or by necessity of the case. It may also be created by
ratification.
3.2.1. Agency by Express Agreement – A principal appoints an agent

either verbally or in writing to represent and act for him. When a person
gives power of attorney to another person, an express agency is created.
3.2.2. Agency by Implication – Agency can be formed by implication of

law. It can be inferred from the nature of business, from the circumstances
of the case, the conduct of principal or the course of dealing between the
two parties. Example – If person ‘A’ realizes rent from tenant ‘C’ and gives
it to the landlord ‘B’, the person ‘A’ acts as an agent for the landlord ‘B’.
Implied agency includes (a) Agency by estoppel, (b) Agency by holding out
(c) Agency by operation of law or (d) Agency by necessity.
(a) Agency by estoppel – In some cases where a principal knowingly

permits a person to act in a certain business in his name or on his
behalf, such a principal is estopped from denying the authority of
the supposed agent to bind him. 
 
Rule of estoppels - “When one person has by his declaration, act
or omission intentionally caused or permitted another person to
believe a thing to be true and to act upon such belief, neither he nor
his representative shall be allowed in any suit or proceeding
between himself and such person or his representative to deny the
truth of that thing.” 
 
Example – The shareholders and directors of a limited company
induced the people to believe that a certain firm was their
permanent agent and was authorized to raise money on their
behalf. The manager of that firm executed and signed hundis on
behalf of the company, it was held that the company was liable to
the holder of such hundis in due course, even though the agent’s
firm was not legally authorized to execute the instruments.
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LAWS OF AGENCY
(b) Agency by Holding-out – Where a person permits another to

pledge his credit for certain purposes for a longer period, he is
bound by the act of such person in pledging his credit for similar
purposes, though in some cases without the permission of his
master. This is the case of agency by ‘holding-out’. Similarly where a
husband holds out his wife as having his authority by words or
conduct and a third party advances money to the wife on the faith
of such conduct, the husband is liable for such debts. The difference
between agency by estoppel and agency by holding-out is that in
case of ‘estoppel’ the principal is passive, keeps quiet and allows
another person to give himself out as an agent. In case of ‘holding-
out’, the principal himself holds out to the world that somebody is
his agent.
(c) Agency by operation of Law – An agency can also arise by

operation of law. When a company is formed, its promoters act as
its agents by operation of law. A partner is the agent of the firm for
the business purpose, and his acts bind the firm. In this case, the
agency is implied by operation of law.
(d) Agency by Necessity – Sometimes the agency has to be implied

because of necessity in extraordinary circumstances. For Example –
if some perishable goods are sent by transport/rail and they are
held up in-between due to strike or any other extraordinary reason.
In this case the carrier of goods has to sell the perishable goods and
he becomes implied agent by necessity. However, before an agency
of necessity can be inferred, the following conditions should be
fulfilled :
(i) There should be absolute necessity for the creation of agency.
(ii) It should be very difficult and time-consuming to obtain

principal’s instructions.
(iii) The person acting as an agent should act in good faith in the
interest of parties concerned.
In the case of transporting perishable goods by railway, when the

consignment was in complete danger of becoming useless due to delay in
transit, and the Railway had to sell it at best affordable price, the sale was
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held valid because there was no time to get the principal’s instructions. In
such cases or in case of transport of animals and nobody coming to take
delivery of the same, the actions taken by the transporter may be declared
as valid, depending on the situation.
This principle is applicable when a person accepts or pays a bill of

exchange which has been dishonoured whether by non acceptance or no
payment, to save the honour of the drawer or any of the endorsers. The
person accepting or paying becomes the agent of necessity and he can
subsequently recover from the person whose honour he has saved.
Similarly, a person may become an agent of necessity when he incurs
expenses on medical aid to an injured person.
Agency of Husband and Wife
In the pursuit of Law of Agency, marriage plays an important role. There

exists a relationship of principal and agent between spouses so long as
they are staying together and so the wife has authority to pledge her
husband’s credit for the necessaries. The wife’s authority extends to
contract for things that are really necessary and suitable to the style in
which the husband chooses to live. The goods purchased by the wife must
fairly fall within the domestic department which is managed by her. The
authority of wife to bind her husband is to be exercised in a proper manner.
So, the following conditions are to be satisfied to establish the implied
authority of the wife to pledge her husband’s credit.
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(a) They are having a common domestic establishment and are living
together.
(b) The wife is controlling the domestic arrangements, and
(c) Husband is not paying any allowance to the wife to provide for the
necessities.
However, a husband can escape from the liability if he can prove that –
(a) The wife is already getting the necessities in sufficient quantities, or
(b) The wife was not authiorised to deal with the traders, and the traders
were informed expressly not to have any dealing with his wife, or
(c) The wife is regularly receiving allowance for purchasing of articles of

need.
If the wife is living apart because of the husband’s fault, she has a right to
pledge the credit of her husband for necessities. The husband cannot
escape the responsibility by asking the wife not to pledge his credit or even
by telling the traders not to supply her the necessities on credit. However
in such case, the wife should not be getting any regular maintenance
allowance by her husband.
In other case, when it is wife’s fault, i.e., the wife is living separately by
her own will without any justification, she is not an agent of her husband
and is debarred from pledging the credit of her husband.
A wife having custody of a child and legally separated from her husband,
has authority to pledge her husband’s credit for reasonable expenses of
providing for the child. If a married woman contract debts in connection
with her separate estate, independently of her husband, she will not be
considered to have acted as the agent of her husband, under any
circumstances.
Agency by Precedent and Subsequent Authority : Agency by Precedent

Authority is most ordinary method of creating agency, viz., by appointing
an agent either by words spoken or written as through power of attorney.
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3.3 AGENCY BY RATIFICATION
Subsequent adoption of an activity is called ratification. Soon after

ratification, the person who has done the activity becomes agent and that
person who has given ratification becomes the principal.
Types of Ratification :
Ratification is of two types. Namely;
Express Ratification and Implied Ratification.
The ratification where there is wording and expression is called express

ratification. For example: Without person A`s direction, person B has
purchased goods for the sake of A from person C. Thereafter, A has given
his support to B`s activity, it is called ratification and now A is principal and
B is the agent.
The ratification where there is no expression is called implied ratification.

Here the mode of behavior of the party indicates that support is given to
the activity concerned. For example: Person M has person N`s money
with him. Without person M`s direction person N has lent that amount to
person R. Thereafter, R pays interest directly to M and M has taken the
amount of interest. It indicates that M has given his support to N`s
activity.
Essentials of Valid Ratification:
The person, who is going to give ratification, must be in existence at the

time of activity. Let us consider pre-incorporation contracts made by
promoters. Company comes into existence on the date of incorporation.
Therefore company is not in existence at the time of pre-incorporation
contracts. If company gives ratification to pre-incorporation contracts, it is
not valid ratification. Hence to pre-incorporation contracts, promoters are
personally liable.
The person who is going to give ratification should have capacity to

contract, at the time of activity as well as at the time of ratification. In one
of the cases, the minor obtains loan from moneylender and executes a
deed. Before repayment of debt, he becomes a major and executes
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LAWS OF AGENCY
another bond. Court decides that the second bond also is not valid because
the person who has given ratification has no capacity to contract at the
time of activity, i.e., at the time of getting loan.
Ratification should be given within reasonable period after the activity. The
concept of reasonable period depends upon nature of the situation.
Ratification must be absolute. Ratification is to be given to the entire
activity. Partial ratification carries no validity. The fact of ratification must
be communicated to all parties in connection with the activity. Ratification
attains validity only when it is given with full knowledge of facts relating to
the activity.
The activity which is going to be ratified must be a lawful activity. For

example: for the sake of A, B has murdered C. If A gives his support to B`s
activity, it is not valid ratification. Also, the person who is going to give
ratification should have right to do such activities. For example: If company
gives ratification to implant a virus, the activity is not valid. Ratification
relates back to date of activity. Though ratification takes place after the
date of activity, it will be assumed that ratification is given on the date of
activity.
Ratification should not lead to breach of contract. In other words,

ratification should not be harmful to third party. For example: There is a
rental agreement between person A and person B according to which three
months notice is needed at the time of vacating house. On a give day,
person C, A`s son, has asked B to vacate the house on that day itself. A
has given his support to C`s activity. It is not valid ratification because it
leads to breach of rental agreement and at the same time it is harmful to
B. Ratification relates back to the date when the act was done by the
agent. So it is an authorization retrospectively. It is equivalent to previous
authority, or it is substitute for authorization.
Necessary Conditions to establish a Ratification –
The following conditions are necesary to establish a valid ratification –
1. Type of Act – The act which is done on behalf of the ratifier, can be
ratified. Also, he must ratify for the act which is done for him and not
for somebody else. So, the act done by a person on his own, cannot be
ratified.
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LAWS OF AGENCY
2. Competency – The person on whose behalf the act was done should
have contractual capacity at the time both when the act was done and
also when it was ratified. A person who is incompetent to authorize an
act cannot give it validity by ratifying it.
3. Existence of the Principal – Nobody as an agent can bind by a

contract to a principal who does not exist on the date of contract.  
 
So, a company cannot ratify a contract which was entered into by the
promoters on its behalf before its incorporation.
4. The Transaction – Before any act can be ratified, it must exist at the
date of ratification before the other party had withdrawn from it and
before the agreement has been terminated or discharged.
5. Acceptance of the Act – The principal must accept the act of the
agent completely.
6. Type of Ratification – Ratification may be expressed in words or in

writing and it can also be implied from the conduct of the person on
whose behalf the act was done.
7. Full Knowledge of the Facts – Valid ratification involves knowledge of

all material facts on the part of the ratifier. It is the actual knowledge
and not only opportunity for acquiring actual knowledge which is
essential for valid ratification.
8. Scope of Transaction – A contract must be fully ratified. Even if a

part is accepted, it is implied acceptance of the whole, e.g., If an agent
purchases without authority 50 pieces, it is not open to the principal to
ratify 30 of them, without approving the other 20 pieces.
9. Ratification of Acts – Every act may be ratified if it is not void in its

inception, as long as it is capable of being done by the principal himself.
10.Time of Ratification – Once a contract is made, the ratification must

be done in a reasonable time. When a time is expressly limited, a
ratification after the expired time will not serve.
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LAWS OF AGENCY
11.Legality of the Act – A contract which is illegal as per the prevailing

law,cannot be ratified. An act constituting a criminal offense is incapable
of ratification. However, a voidable contract can be ratified. Payment of
dividend by a company out of capital is void and cannot be ratified. Or a
forgery of signatures being a crime cannot be ratified.
12.Communication – There can be no valid ratification of an act unless it

is communicated to the other party. Ratifier cannot remain silent on his
intentions or acts of ratification.
13.Safety of a Third Person – When interests of third parties are likely to

be affected, the principle of ratification does not apply. Ratification
cannot relate back to the date of contract if third parties have in the
intervening time have acquired the rights.
14.Date of the Act of the Agent – Ratification has retrospective effect. It

relates back to the original date or making of the act or contract. It
places all the parties in exactly same position as they would have
occupied in the case of a precedent authority.
15.Ratification by Government – Acts done by public servant in the

name of the Government may be ratified by subsequent approval in the
same manner as private transaction.
3.4 AUTHORITIES OF AN AGENT
Since most of the time the person from supply Chain Management has to
negotiate and interact with the agents of the manufacturers/suppliers, the
knowledge about the authorities of an agent is a must for effective
management of supply chain.
The authority of an agent is never unlimited as the agent is a different

person and not the principal. The authorities of an agent are classified in
three parts, viz., (i) Actual and Real (ii) Apparent and (iii) Emergency.
Actual (Real) Authority – This can be either express or implied. It is said

to be Express when it is given verbally or in written form. It is called as
Implied when it is inferred from the circumstances of the case, and things
spoken and written on the ordinary course of dealing may be accounted as
circumstances of the case, e.g., renting of a shop through a broker.
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LAWS OF AGENCY
Extent of Authority – The example of such authority is appointing an

agent in another country for collection of debts from customers in that
country. Or doing some material purchases from suppliers from that
country. In such cases the agents in those countries may sometimes make
use of the extent of authority. An Agent having authority has to sometimes
do lawful things which are necessary for the purpose or usually done in the
course of conducting such business. This is called extent of authority of an
agent. It depends on nature of business. The things must be lawful and
necessary. Therefore an agent does not have unlimited authority or
discretionary powers. In this respect, the agents are further classified as
Special Agents and General Agents. The section says that if an Agent is
appointed to do a specific task, he can use his authority to do all necessary
and lawful things to achieve the purpose. So if he is appointed to sell a
property, he may describe the property, highlight its salient features, etc.,
to the proposed buyer. For a General Agent, he has been expressly
authorized and he may also do as to what is necessary for or is usually
done in carrying out such business.
If an Agent is carrying out a mercantile business, he should note the

following points regarding his authority –
1. The agent is not authorised to draw, endorse or accept bills of exchange

in the name of the firm.
2. He should receive the payment from customers in cash on behalf of his

principal unless it is a custom or usage of business.
3. An authority to borrow must be expressly given, except in case of

nature of business like banking, where such an authority is implied. The
power to draw or endorse the bill of exchange or promissory notes does
not include the power to borrow.
4. A general authority to transact business and receive and discharge

debts does not confer on agent the power of accepting or endorsing bills
of exchange so as to bind his principal. (Section 27 of the Negotiable
Instruments Act, 1881)
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LAWS OF AGENCY
Special Agents and Their Authorities :
The following are the various types of special agents, and their respective
authorities.
Factor – He is normally applied for sale and purchase activities. He has

authority to sell goods in his own name and to receive payments thereof in
his own name. He cannot delegate his authority to others, but he can offer
warranty of the goods, if it is normal to do in the trade.
Broker – The major difference is that a Broker cannot receive the

payments of the goods sold. He has authority to act under and in
accordance with the ‘rules and regulations of the market’ in which he deals.
He can also sell the goods in his own name and offer credit and receive
payment. He cannot delegate his authority.
Auctioneer – He is appointed as an agent only to act in case of auctions.

An Auctioneer has implied authority to contract on behalf of the seller as
well as the buyer as regards goods sold by auction. He cannot sell on credit
or accept any payment other than cash. He has authority to warrant the
goods sold or to give delivery thereof except on payment of the price.
Estate Agent – He has to act for a disclosed principal. He finds purchaser

or seller of property on behalf of his employer. He is entitled to his
commission when he brings about a contract between the principal and the
buyer. He has no implied authority to finalise the contract with the third
person nor can he receive the price of the property sold. He also cannot
delegate his authority.
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LAWS OF AGENCY
Apparent Authority
If the authority of an agent is understood as it appears to others, is known

as Apparent Authority, So, if the board of directors of a company appoint
one of their members as a Managing Director, they empower him not only
with implied authority but also with total authority to do all such things
that fall within the usual scope of that office. Other people dealing with him
in his capacity as a managing director are entitled to presume about these
implied and apparent authorities. Apparent authority sometimes exceeds
the actual authority. The contracts are binding on the principals. This type
of authority is most common in case of companies and firms.
Emergency Authority
This is used only in case of an emergency, e.g., if a person sells perishable

goods to second person through his agent, and instructs to send the
delivery to a city which is at a long distance, the agent may sell the goods
in the same city, if they will not bear the long journey. It is specifically
mentioned in the section that the agent can exercise this authority only for
protecting the principal from loss as if the loss is happening to the agent
himself. The act makes specific provisions for the effects when an agent
does any act exceeding his authority. (Ref. sections 227 and 228)
Effects of Agent’s Authority
Many a times, the agent appoints a sub-agent or substituted agent to

carry out the work of the principal in time. It should be ensured by the
agent and the principal that the actions are done as if the contract has
been entered by the principal in person. So the acts done by an agent are
enforceable against the principal. Similarly, the principal is entitled to sue
third persons from enforcement of contracts entered on his behalf by his
agent, provided the acts fall within the authority of agents. The study of
sub-agent and substituted agent, therefore, is necessary. Section 191
explains the concept, authorities, appointments and effects of sub-agents
and substituted agents.
Sub-agent – A sub-agent is a person employed by and acting under the

control of the original agent in the business of the agency. The relation
between the sub-agent and the agent is the same as that between the
agent and the principal. An agent who employs a sub-agent has the same
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LAWS OF AGENCY
duties and liabilities of a principal. Sub-agents act under the control of the
agent and the principal is not bound by his acts as there is no privity of
contract between sub-agent and the principal. The life of the sub-agency is
dependent on the period of the contract. As soon as the original contract is
over or cancelled, the sub-agency is automatically terminated.
Appointment of sub-agent and its effects – Generally, the agent

cannot recruit and delegate his authority to the sub agent without express
authority of the principal. The contract of agency is based on confidence
reposed by the principal in the agent. Due to the element of trust and
confidence, section 190 states that an agent cannot lawfully appoint a sub
agent to perform acts which he has expressly or impliedly undertaken to
perform personally. However, a few exceptions to this rule where an agent
can appoint a sub-agent, are to be considered.
(i) Where the agent has express authority to appoint a sub-agent.
(ii) Where it is necessary because of the agency.
(iii) Where the principal knows that the agent intends to appoint a sub-
agent.
(iv) Where the ordinary custom or usage of trade permits employment

of sub-agent.
(v) Where the act to be done is purely ministerial and does not require
any skill or confidence.
(vi) Where some unforeseen emergencies arise which render it

necessary to appoint sub-agent.
(vii) Where the authority of the agent to appoint a sub-agent can be

inferred from the conduct of the parties.
Effects of proper appointment of sub-agent –
(a) The principal is liable to third parties for the acts of sub-agent.
(b) The agent is responsible to the principal for the acts of sub-agent.
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LAWS OF AGENCY
(c) The sub-agent is not answerable to the principal except for willful
wrongs and frauds.
(d) Sub-agent can exercise right of lien over the property of principal, in
his possession, for debts and claims arising in the course of sub-
agency.
Effects of improper appointment of sub-agent –
(a) The principal is not represented by such sub-agent, hence he is not

answerable.
(b) The agent is responsible to the principal as well as to third parties

for sub-agent’s acts.
(c) The sub-agent is not responsible to the principal at all. He will be

answerable only to the agent.
(d) No right of lien over the property of principal, by the sub-agent.
Substituted Agent – A substituted agent is a person appointed by the

agent to act for the principal in the business of the agency with the
knowledge and consent of principal. Section 194 states that – “where an
agent holding an express or implied authority to name another person to
act for his principal, names another person accordingly, he is not a sub-
agent but a substituted agent for the principal.”
For example, if a principal appoints one bank as his agent for purchase of
certain goods/property, and that branch instructs another branch of the
same bank to do the activity, the latter bank becomes a substituted agent.
A substituted agent is deemed to be the agent of the principal and not his
sub-agent. A privity of contract is established between the principal and
the substituted agent. The agent is not concerned about the work of the
substitute. However, it is his responsibility in selection of a proper
substitute. If he fails in making a proper selection, he becomes liable for
damages to the principal for his negligence.
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LAWS OF AGENCY
Difference between sub-agent and substituted agent –
1. Though both are appointed by the agent, the agent delegates some of
his own duties to the sub-agent, however, not to the substituted agent.
2. A sub-agent does his work under the control of an agent but substituted
agent takes instructions from the principal.
3. Privity of contract exists between a substituted agent and principal, but

there is no such contract between sub-agent and principal.
4. The sub- agent is responsible to the agent alone, the substituted agent
is directly responsible to the principal.
5. The agent is responsible to the principal for the acts of his sub-agent,
but, after taking proper care in selection of a substituted agent, he is
not responsible to the principal for the acts of the substituted agent.
6. The agent’s duty towards the principal ends after appointment of a

proper substituted agent, but in case of a sub-agent, agents duty
continues till the contract is over.
3.5 RIGHTS, DUTIES AND LIABILITIES OF AGENT
3.5.1 Rights of Agents :
(i) Right of Retainer: Agent has right to deduct the amount which is due
to him by principal, from amount payable to principal.
(ii) Right of Stoppage in Transit: In case where agent is personally

liable, he has right to stop the goods in transit. The good may be
moving towards customer or principal.
(iii) Right to Claim Remuneration: As per the terms of agency contract,

agent has rights to claim remuneration.
(iv) Right of Indemnity: Principle of indemnity gets operated between

principal and agent where principal is implied indemnifier and agent is
implied indemnity holder. So agent can make principal answerable for
all types of losses.
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LAWS OF AGENCY
(v) Right of Lien: Agent can exercise right of lien but contract act has not
specified whether it is general lien or particular lien. Therefore the
nature of agent’s lien depends upon mutual understanding.
3.5.2 Duties of Agents :
(i) Agent should follow the instructions given by the principal.
(ii) If agent comes across any complicated situation, he has to

communicate that situation to principal and his advice is to be
obtained.
(iii) Agent should behave in his capacity as agent, he should not run the
transaction in his own name.
(iv) Agent should not make secret profits by utilizing reputation of the
principal.
(v) Agent should safeguard property of principal particularly upon

happening of events like death of principal, insolvency of principal, etc.
(vi) Agent should maintain proper accounting records of the transactions

done by him.
(vii) Agent has to remit amounts to principal properly.
(viii)Agent should not carry on delegation of his authority unless approved

by the principal.
(ix) Agent should not use agency information against principal – It is the
duty of the agent not to use information obtained in the course of
agency against the principal. If he does so, the principal can restrain
him from doing so by an injunction from the court.
(x) When an agency is terminated by the principal’s death or becoming

unsound mind, the agent is bound to take, on behalf of the
representatives of his late principal, all reasonable steps for the
protection and preservation of the interest entrusted to him.
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LAWS OF AGENCY
3.5.3 Liabilities of Agents :
Actually, the agent binds the over principal to his activities but there are
some situations where agent comes across personal liability. Those
situations are as follows;
(i) Terms of contract of agency may create personal liability to the agent.
(ii) The tradition which is in operation in that particular type of business

may also create personal liability to the agent.
(iii) If agent does not behave in his capacity as agent and thus runs the
transaction in his own way, personal liability arises.
(iv) When agent acts for foreign principal, agent is personally liable.
(v) Pretending agent is personally liable.
(vi) When agent acts for principal who has not come into existence, agent
is personally liable.
(vii) In case where principal cannot be sued, customer sues agent and thus,
agent is personally liable.
(viii)When agency is coupled with interest then also agent is personally

liable.
3.6 AGENTS AND PRINCIPAL
There are three types of relationship between an agent and a principal (1)
an agent contracts as agent for a named principal, or (2) an agent
contracts for a principal whose name he does not disclose, or (3) an agent
contracts in his own name but in reality for a principal whose existence he
does not disclose. Let us examine all these three types.
3.6.1 Agent acting for a named principal –
Where an act is done by an agent within the scope of his authority, his acts
are binding on the principal, provided (i) the act is lawful and (ii) it is
within the scope of agent’s authority. Thus, when the agent is authorized to
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LAWS OF AGENCY
receive payment on behalf of the principal, a payment to the agent

discharges the debtor from liability to the principal.
In a case where an agent has done more than what he is authorized to do,
and is separable, the principal is bound by that part which is within his
authority. If the agent does more than what he is authorized to do, and
such act cannot be separated from that which is within his authority, the
principal is not bound by the transaction. He is in such case entitled to
repudiate the whole transaction.
A notice given to agent is as effectual as that given to the principal. Thus,

the knowledge by manager of the bank is knowledge of the bank. Similarly,
knowledge of one partner of a firm is knowledge of all partners ob that
firm. The principal is bound to the notice given to the agent in course of
business. Knowledge of the agent is the knowledge of the principal.
However this rule will not apply if the agent had committed a fraud on the
principal. However, a principal is liable where he has induced a belief in the
contracting party that the act of the agent was within the scope of his
authority. The liability of the principal is not based on any real authority,
but is by estoppels, e.g., an owner of the house held out that the
auctioneer hand over the authority to sell the house. The auctioneer sold
the house to a third party for an amount less than the amount authorized
by the owner of the house. It was held that the purchaser is not affected
by the owner’s instruction to the auctioneer not to sell below a certain
price.
The principal is liable for the fraud of his agent acting within the scope of
his authority whether the fraud is committed for the benefit of the principal
or that of the agent. To conclude, where the existence of the principal is
disclosed, the principal is bound by the acts of the agent. The agent can
neither sue nor be sued upon a contract made by him on behalf of the
principal. Thus, contract made by the agent is contract of the principal.
3.6.2 Agent acting for unnamed principal –
Where an agent disclosed the fact, that he is an agent, but at the same
time does not disclose his principal’s name, the contract made by the agent
is binding on the principal. But the unnamed principal should be in
existence at the time of the contract. Where the agent signed a contract as
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LAWS OF AGENCY
a broker ‘to my principal’ but did not disclose the name of the principal, it
was held that broker was not personally liable.
3.6.3 Agent acting for an undisclosed principal –
Where the agent does not disclose the existence of his principal he is
personally liable for the contract. On such contracts, he can sue and be
sued in his own name because he is then in the eyes of law real contracting
party. But the agent’s right of action comes to an end with the intervention
of the undisclosed principal.
A principal though his existence was concealed at the time of the formation
of the contract, can intervene and require performance of the contract
from other party. This right of the undisclosed principal is protected by
section 231 of the Indian Contract Act. An undisclosed principal can sue on
a contract made in the name of another person with his authority.
3.7 MISREPRESENTATION AND FRAUD BY AGENTS
Frauds by agents is a serious thing which directly affects the interests and
reputation of the principal. Misrepresentation made or frauds committed by
agents acting in the course of their business for their principals, have the
same effect on agreements made by such agents as if such representations
or frauds had been made or committed by the principals. But
misrepresentations made, or frauds committed by agents in matters which
do not fall within their authority do not affect the principal.
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LAWS OF AGENCY
Torts of agents – Any tort committed by the agent while acting during the
regular course of business of his principal would make both the principal
and the agent jointly liable. For any tort committed by the agent outside
the scope of his authority, then the principal is liable.
A fraud or tort by an agent normally results into the termination of the

agent, So agent should be aware of the consequences and act accordingly
during his operations.
3.8 TERMINATION OF AGENCY
The principal may terminate the agency in the same manner as that of the
contract, i.e., by the operation of law or by the act of parties. In certain
cases, the agency is irrevocable, i.e., it cannot be terminated. The Indian
Contracts Act describes the various modes of termination of agency. It says
: “An agency is terminated by (i) the principal revoking his authority or (ii)
the agent renouncing the business of the agency, or (iii) the business of
the agency being completed, or (iv) the principal being adjudicated an
insolvent under the provisions of any act for the time being in force for the
relief as insolvent debtors.” However, the section is not comprehensive. It
does not mention all the modes by which an agency gets terminated. The
various ways of termination of agency fall under two heads, (i) acts of
parties, and (ii) operation of law.
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LAWS OF AGENCY
3.8.1 Termination of agency by the parties themselves –
The agency can be terminated at any time and at any stage by the mutual
agreement between the principal and the agent. By revocation of the
agent’s authority by the principal. An agency may be terminated by the
principal at any time by giving a notice to the agent. If an agent is
appointed to do a single act, the authority may be terminated at any time
before the act is actually begun. But if the act has begun, the authority can
only be terminated subject to any claim which the agent may have for
breach of contract. When the agency is a continuous one, notice of its
termination to the agent and also to the third parties is essential. It can
also be terminated by renunciation of business by the agent. After giving
reasonable notice to the principal, the agent may renounce the business of
agency. In case the contract of agency is entered into for a fixed period,
agent shall have to pay compensation to the principal for the earlier
renunciation of the business of agency.
3.8.2 Termination of agency by operation of law –
By the operation of Law, the termination can happen in various ways. (a)
By performance of the contract of agency – Where the agency is one for a
single transaction, the agency terminates when the transaction is
completed. For example, the agency for a sale of property ends when the
sale is completed and does not continue until payment of the price. Or (b)
By expiry of time – When the agent is appointed for a fixed period of time,
the agency comes to an end after expiry of that time even if the work is
not completed. It can also happen by (c) By death or insanity of the agent
or principal – When the agent or principal dies or becomes of unsound
mind the agency is terminated. When the termination takes place by death
or insanity of the principal, the agent must take, on behalf of the
representative of the principal, reasonable steps for the protection and
preservation of the interests entrusted to him.
Also, (d) By the insolvency of the principal or the agent results into
termination. The insolvency of the principal puts an end to the agency. The
end of agency due to the insolvency of the agent is decided on case-to-
case basis. (e) By the destruction of the subject matter of agency – In
cases where the subject matter of the agency has been destroyed, the
agency comes to an end, e.g., if the agency is created for sale of a horse,
and if the horse dies, the agency comes to an end.(f) By dissolution of a
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LAWS OF AGENCY
company – If a company has been incorporated by the agent or principal,

and if the company is dissolved, its powers given to principal or agent gets
terminated thereafter. (g) By the principal becoming an alien enemy –
When the war breaks out between two countries, and the principal and the
agent are from respective separate countries, the agency gets terminated.
Or by (h) By termination of sub-agents authority – In case of sub-agents,
the termination of an agent’s authority puts an end to the sub-agent’s
authority.
3.8.3 Effect of termination
For the agent and the principal, the termination of agency is effective only
when the agent comes to know about it. But for the third parties, the
termination of agency takes place when it is known to them. So, if the
principal terminates the agency by revocation of agent’s authority, the
agency comes to an end when agent receives the revocation notice. Still,
the agent can bind the principal toward the third party, if the third party
does not know about the termination. It implies that the principal also
should give a public notice regarding the fact of termination of agency so
the termination would be effective to the third party as well. Even in case
of death of a principal, the agency comes to end when agent receives
knowledge of the death of the principal.
3.8.4 Irrevocable agency
When an agency cannot be terminated by any means, it is called as

irrevocable agency. This may happen in the following cases -
(a) Where the agency is coupled with interest – An agency is said to be

coupled with an interest when the agency is created for the purpose of
securing some benefit over and above the agent’s remuneration. So,
when the agent has an interest in the authority granted to him or
when the agent has an interest in the subject matter with which he is
authorized to deal. Such an agency cannot be terminated to the
prejudice of such interest. Section 202 of the Indian Contracts Act
defines the law relating to such agency as follows – “where the agent
has himself an interest in the property which forms the subject matter
of the agency, the agency cannot, in the absence of the express
contract, be terminated to the prejudice of such interest.”
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LAWS OF AGENCY
(b) Where the agent has incurred a personal liability – When an agent has
incurred personal liability, the agency becomes irrevocable. The
principal is not permitted to withdraw, leaving the agent exposed to
risk or liability he has incurred.
(c) Where the agent has partly exercised the authority – Section 204 of
the Indian Contracts Act lays down that the principal cannot revoke the
authority given to his agent after the authority has partly exercised so
far as regards such as obligations that arise from acts already done in
the agency.”
• Assume that you are residing in U.K. as N.R.I. and you are appointing an
agent to sell you property at Pune. You want to appoint an agent at
Mumbai who will subsequently appoint a sub-agent at Pune. Write down
the agency terms and authorities you will be giving to the agent and the
period of agency.
• What authorities does the agent will pass on to his sub-agent in the
above case? Try to make a list with limitations of authority and time
frame.
• You want to enroll yourself as an estate agent from Delhi on the website
www.makaan.com. Find out from Google search the information to be
furnished.
3.10 SUMMARY
• A Principal is a person who employs another person to deal with third

parties.
• An Agent is a person employed by a person (principal) to represent him

for dealings with third parties.
• In a contract of agency, consideration is not always necessary.
• An agent is required to work in the limits of authority given to him by the

principal.
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LAWS OF AGENCY
• An agent can get his authority in express terms or by implication.
• The principal is responsible for the contracts entered by an agent with

the third parties, as if he himself has entered into the contract.
• Any loss or injury arising to the agent during the course of employment
has to be made good by the principal.
• It is the duty of the agent to work within the authority given to him by
the principal and follow the directions given to him, and also following
the laws of country.
• Misinterpretation or fraud committed by an agent, if falling in the

authority given to him, are supposed to be made by the principal.
However, if they do not fall in his authority, it does not affect the
principal.
• Termination of an agency can either be done by acts of the parties, or by

operation of law. The termination becomes effective only after it is known
to the agent.
1. Give definition of the term ‘agency’.
2. Define the terms ‘principal’, ‘agent’ and ‘agency’.
3. State the basic principles of agency.
4. Briefly name the different models by which an agency can be created.
5. Mention the different kinds of agents and state and how they can be
classified.
6. Write notes on (a) Agency by ratification and (b) Agency by estoppels.
7. State briefly the duties and rights of agent.
8. What do you understand by a ‘substituted agent’? How is he different

from a sub-agent?
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LAWS OF AGENCY
9. Discuss the liabilities of a principal when the agent exceeds his

authority.
10.List out the modes of termination of an agency by the act of the parties.
11.What do you understand by irrevocable agency? When does it becomes

irrevocable?
12.What is an agency coupled with interest? When can it be revoked?
13.Write short note on ‘Effects of termination of agency’.
14.What are the differences between Special power of attorney and

General power of attorney?
1. An Agent is a person appointed by –
a. Government
b. Customer
c. Principal
d. Sub-agent
2. A person working as an agent is different from -
a. A servant
b. Trustee
c. Bailee
d. All of the above
3. An agent should follow the instructions from –
a. The principal
b. The third party
c. The sub-agent
d. The opposition party of government
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LAWS OF AGENCY
4. An agency can be created by –
a. By express agreement
b. By implication of law
c. By ratification
d. All of the above
5. The substituted agent is a person appointed by –
a. The principal
b. The advocate
c. A third party
d. An agent
Answers : (1-c), (2-d), (3-a), (4-d), (5-d).
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LAWS OF AGENCY
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !55
ARBITRATION LAW
Chapter 4
ARBITRATION LAW
Objectives
At the end of the chapter, you will be able to define the Arbitration Law,
understand and check the general provisions regarding Domestic
Arbitration, know about the Modes of Arbitration, understand the
composition of Arbitration Tribunal and explain the Award and Conciliation.
Structure:
4.1 Arbitration Law

4.2 Domestic Arbitration
4.3 Types of Arbitration
4.4 Arbitration Tribunal
4.5 Award and Conciliation
4.7 Summary
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ARBITRATION LAW
4.1 ARBITRATION LAW
With respect to the latest international trends, the Government of India

has put into force the Arbitration and Conciliation Act, 1996 and repealed
the earlier enactments namely: The Arbitration (Protocol and Convention)
Act, 1937; The Arbitration Act, 1940; and The Foreign Award (Recognition
and Enforcement) Act, 1961.
The Indian Council of Arbitration recommends to all parties desirous of

making reference to arbitration by the Indian Council of Arbitration, the
use of the following arbitration clause in writing in their contracts:
"Any dispute or difference whatsoever arising between the parties out of or

relating to the construction, meaning, scope, operation or effect of this
contract or the validity or the breach thereof shall be settled by arbitration
in accordance with the Rules of Arbitration of the Indian Council of
Arbitration and the award made in pursuance thereof shall be binding on
the parties."
Definitions
i. These rules may be called the "Rules of Arbitration of the Indian Council
of Arbitration.”
ii. These rules shall apply where parties have agreed in writing that (a) a
dispute has arisen or (b) a dispute which may arise between them in
respect of defined legal relationship whether contractual or not, shall be
settled under the Rules of Arbitration.
In these rules, the following words have the following meanings:
i. "Arbitral Tribunal" means an arbitrator or arbitrators appointed for

determining a particular dispute or difference.
ii. "Arbitral Award" includes an interim award.
iii. "Committee" means the Arbitration Committee of the Council as

provided for hereinafter.
iv. "Council" means the Indian Council of Arbitration.
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ARBITRATION LAW
v. "Governing Body" means the Governing Body of the Council.
vi. "Guidelines" means the guidelines for arbitrators and the parties to
arbitration for expeditious conduct of the arbitration proceedings, given
in the Annexure to these Rules.
vii."International Commercial Arbitration" means an arbitration relating to

disputes arising out of legal relationships, whether contractual or not,
considered as commercial under the law in force in India and where at
least one of the parties is (a) an individual who is a national of, or
habitually resident in, any country other than India; or (b) a body
corporate which is incorporated in any country other than India; or (c) a
company or an association or a body of individuals whose central
management and control is exercised in any country other than India,
or (d) the Government of a foreign country.
viii."Party" means a party to an arbitration agreement. It shall include any

individual, firm, company, Government, Government organisation or
Government Undertaking.
ix. "Panel" means the Panel of Arbitrators maintained by the Council.
x. "Registrar" means the Registrar for the time being appointed by the
Committee.
xi. "Rules" means the Rules of Arbitration of the Council.
xii."Rules of Conciliation" means the Rules of Conciliation of the Council.
xiii.Fast Track Arbitration" means arbitration in accordance with Rule 44.
Objectives of Arbitration Act
The main objectives of the Arbitration Act are as under –
• To mainly cover international commercial arbitration and conciliation.
• To also cover domestic arbitration and conciliation.
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ARBITRATION LAW
• To make provision for arbitration procedure which is fair, efficient and

capable of meeting the needs of specific arbitration.
• To provide that the arbitral tribunal gives reasons for its arbitral award.
• To ensure that the arbitral tribunal remains within the limit of jurisdiction.
• To minimize the supervisory role of courts in the arbitral process.
• To observe that every final arbitral reward is enforced in the same

manner as if it were a decree of a court.
• To provide that a settlement agreement reached by the parties as a

result of conciliation proceedings will have the same status and effect as
an arbitral award.
• To provide that, for a purpose of foreign awards, every arbitral award

made in the country to which one of the two International Conventions
relating to foreign arbitral award to which India is a party applies, will be
treated as a foreign award.
4.2 DOMESTIC ARBITRATION
‘Arbitration Agreement’ means an agreement by the parties to submit to

arbitration all or certain disputes which have arisen or which may arise
between them in respect of a defined legal relationship, whether
contractual or not.
A person appointed to adjudicate the differences and disputes between the

parties is called an Arbitrator or Arbitral Tribunal, and the proceedings
before him are called Arbitration Proceedings. The decision of the arbitrator
is called Award.
Arbitration Agreement Necessities :
• It must be in writing
• It must have all the essential elements of a valid contract
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ARBITRATION LAW
• The agreement must be to refer a dispute, present or future, between

the parties to arbitration.
• An arbitration agreement may be in the form of an arbitration clause in a

contract or in the form of a separate agreement.
Initiation of Arbitration
(i) Any Party wishing to commence arbitration proceedings under these

rules (Claimant) shall give a notice of request for arbitration to the
Registrar of ICA and to the Respondent.
(ii) The notice of request (application) for arbitration to the Registrar shall
be accompanied by:-
a. the names and full addresses of the parties to the dispute.
b. statement of the claim and facts supporting the claim, points at

issue and relief or remedies sought with other details of the
claimant's case.
c. original or duly certified copies of the arbitration agreement, any

contract or agreement out of or in connection with which the
dispute has arisen and such other documents and information
relevant or relied upon.
d. The Arbitration shall be deemed to have commenced on the day

the application for arbitration, registration fee and statement of
claim are received in the office of the Council.
4.3 TYPES OF ARBITRATION
There are mainly two types of Arbitration
a. Arbitration without intervention of court.

b. Arbitration with the intervention of court.
In the type b), there are further two types namely –
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ARBITRATION LAW
i. Intervention where no suit is pending, and

ii. Intervention where a suit is pending.
Judicial Authority Powers
A judicial authority before which an action is brought in a manner which is

the subject of an arbitration agreement shall refer the parties to arbitration
if a party so applies. The party must apply before submitting its first
statement on the substance of the dispute.
The application must accompany the original arbitration agreement or a

duly certified copy thereof. Notwithstanding that an application has been
made and that the issue is pending before the judicial authority, an
arbitration may be commenced or continued and an arbitral award made.
The following conditions must be satisfied to admit the case for arbitration.
1. A valid agreement between the parties is a must.
2. The matter should be within the scope of the arbitration agreement.
3. The stay must be asked before submitting his first statement on the
substance of the dispute.
4. The application must be made to the judicial authority before which the
proceedings are pending.
5. The original arbitration agreement or by a duly certified copy thereof

should be attached with the application.
6. The judicial authority must be satisfied regarding the reason of

reference.
The most important provision is that the arbitration proceedings can

continue or proceed further despite the fact that one of the parties has
moved a petition before the court.
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ARBITRATION LAW
Submission of Disputes to Arbitration
a. Any dispute relating to any commercial matter including shipping, sale,

purchase, banking, insurance, building construction, engineering,
technical assistance, know-how, patents, trademarks, management
consultancy, commercial agency, or labour, arising between two or more
parties in India or a party or parties in India and a party or parties in a
foreign country or between foreign parties who agree or have agreed for
arbitration by the Council, or under the Rules of Arbitration of the
Council, shall be determined and settled in accordance with these Rules.
b. The Council shall also be competent to administer the conduct of

arbitration in any dispute or difference relating to a commercial
transaction between parties as mentioned in subclause (a) where they
have agreed to have their dispute arbitrated under any other Rules of
Arbitration and have agreed to have such arbitration administered by
the Council, wholly or in respect of some matters.
c. In case the parties have provided different procedure for appointment of

arbitrator or schedule of cost including the arbitrator's fee, the Council
shall not be bound to process the case unless both the parties agree to
follow the entire procedure of arbitration under Rules of Arbitration.
d. The Council shall be competent to function as Appointing Authority as

contemplated under the Arbitration Rules of the United Nations
Commission on International Trade Law (UNCITRAL).
Persons who can refer to Arbitration
1. Partner – Any partner can refer the matter to arbitration, even without
taking consent of other partners. The implied authority of a partner
does not empower him to submit dispute relating to the business of the
firm to arbitration.
2. Agent – An agent who is duly authorized may enter into an arbitration

agreement. Such an agent on reference may bind his principal.
3. Joint Hindu Family – The manager in a joint Hindu Family has powers
to refer to arbitration disputes relating to family property provided the
reference is for the benefit of the family.
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ARBITRATION LAW
4. Minor – As a minor is not competent to enter into a contract there

cannot be a valid submission to arbitration by him. A guardian can refer
a dispute to arbitration only with the permission of the court for the
benefit of a minor in good faith.
5. Official Assignee – The official assignee or receiver is given the power

to refer any dispute to arbitration and compromise all debts, claims and
liabilities on such terms as may be agreed upon.
Subject which can be referred to Arbitration
The matters which are purely criminal and give rise to no civil remedy
cannot be referred to arbitration. Similarly, matters of public right cannot
be decided by arbitration. However, all matters which form the subject of
civil litigation affecting private rights may be referred to arbitration. So, all
disputes between the parties relating to private rights of which the civil
court may take cognizance may be referred to arbitration.
The matters which can be referred for arbitration, include disputes relating
to breach of promise by marriage; Disputes regarding compliment, dignity,
trespass; Disputes concerning movable property; Disputes arising out of
breaches of contract; Questions of title to immovable property; Questions
of law or fact; Time barred claims; Questions as to whether judgment has
been properly obtained or not; Questions relating to the past or future
maintenance of a widow.
The matters which are prevented from referring for arbitration include
questions relating to genuineness of a will; Matters of criminal nature;
Cases relating to public nuisance; Matters of public interest; A claim for
custody of wife, petition for restitution of conjugal rights, divorce etc.;
Insolvency proceedings; Claims arising out of illegal transactions;
Questions relating to public charities and charitable trusts; Execution
proceedings; Proceedings relating to appointment of a guardian to a minor;
Questions relating to offences affecting public at large.
4.4 ARBITRATION TRIBUNAL
A Panel of Arbitrators shall be appointed by the Committee from amongst

persons who are qualified and possesses knowledge and experience in their
respective field of profession and arbitration law and procedure and are
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willing to serve as arbitrators generally or in specific fields and who are

from time to time recommended by the members of the Council or any
other person or organisation. All the members of the Panel will carry equal
status and parties will not have any right to challenge the appointment of
the arbitrator on the ground that its nominee arbitrator has higher status.
An arbitrator is a person selected by mutual consents of the parties to

settle the matters in controversy between them. A person appointed to
adjudicate the difference between two or more parties is called as an
arbitrator. An arbitrator is a tribunal chosen by the consent of the parties.
The person who is so appointed must also give his consent to act as an
arbitrator.
The Chairman of the Committee may include the name of any person in the
panel, in case it is required in any particular case. His continuance in the
Panel will be decided by the Committee. The Registrar shall prepare and
maintain an up-to-date Panel of Arbitrators together with adequate
information as to their qualifications and experience. Separate lists may be
kept and maintained of arbitrators included in the panel for disputes in
general and for each of the fields of international trade and/or business
transactions in which the governing body decides that the council will offer
arbitration facilities under the Rules.
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The parties to a dispute or the Registrar where he appoints the arbitrator

may choose any person from the panel with reference to any dispute. If
any party appoints a foreigner/person residing abroad, as arbitrator from
the panel, that party will have to meet the travel and stay expenses of the
person appointed as arbitrator at the venue of arbitration. The arbitral
tribunal may, however, make any order in regard thereto in the award. The
panel of Arbitrators shall be open to inspection by all.
The Registrar may delegate to any officer of the Council, Chambers of

Commerce or Trade Association at the premises of which the arbitration
proceedings are taking place, to discharge such of the functions and
administrative duties of the Registrar as are deemed proper and necessary
from time to time, with reference to a particular case or cases.
Number and Appointment of Arbitrators
The parties are free to determine the number of arbitrators provided that
such number shall not be an even number. If the parties fail to make the
determination the arbitral tribunal shall consist of a sole arbitrator. The
mode of appointment of the arbitrator and their number is left to the
agreement of the parties. The law envisages only odd number of the
arbitrators. Section 10 of the Act provides that there shall be only a sole
arbitrator, where the parties do not specify the number of arbitrators. A
person of any nationality may be an arbitrator, unless otherwise agreed by
the parties. The parties are free to agree on a procedure for appointing the
arbitrator or arbitrators.
Place of Arbitration
The parties are free to agree on the place of arbitration. Where parties
have not agreed on the place of arbitration the arbitral tribunal has to
determine the place of arbitration having regard to the circumstances of
the case, including the convenience of the parties. The arbitral tribunal
may, unless otherwise agreed by the parties, meet at any place it considers
appropriate for consultation among its members, for hearing witnesses,
experts or the parties, or for inspection of documents, goods or other
property.
Place of arbitration in an arbitration other than international commercial

arbitration, i.e., in domestic arbitration place does not pose any problem.
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ARBITRATION LAW
Parties may agree on the place of arbitration anywhere In India. But in

International commercial arbitrations, place of arbitration has legal
implications in terms of law applicable to arbitration.
The settlement of the dispute may be suggested and recommended by the

Arbitration Tribunal, in spite of an arbitration agreement being done. It
may also, with the agreement of the parties, use mediation, conciliation or
other procedures at any time during the arbitral proceedings to encourage
settlement. So, out of court settlements are possible and also encouraged
by the panel. The claimant should state the facts supporting his claim, the
points at issue and the relief or remedies sought and the respondent
should state his defense in respect of these particulars. The parties have
the freedom to agree on required elements of the statements, and for the
period of time for submission of those statements. The arbitral tribunal has
power to determine the period of time for submission of these statements
where parties have not agreed on the same. The parties may submit with
their statements all documents they consider to be relevant or may add a
reference to documents or other evidence they will submit. The parties
may agree to amend or supplement their statements during the course of
arbitral proceedings. The arbitral tribunal has exclusive discretion to
restrict supplementary claim and defenses having regard to the delay in
making it.
If, during arbitral proceedings, the parties settle the dispute, the arbitral
tribunal shall terminate the proceedings and if requested by the parties and
not objected to by the arbitral tribunal, record the settlement in the form of
an arbitral award on agreed terms.
An arbitral award on agreed terms shall be made in accordance with

section 31 and shall state that it is an arbitral award. An arbitral award on
agreed terms shall have the same status and effect as any other arbitral
award on the substance of the dispute.
Termination of Proceedings
The arbitral proceedings shall be terminated by the final arbitral award. It

may also be terminated by an order of the arbitral tribunal, if the claimant
withdraws his claim and the arbitral tribunal recognizes a legitimate
interest on his part in obtaining a final settlement of the dispute, or the
parties agree on the termination of the proceedings, or the arbitral tribunal
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ARBITRATION LAW
finds that the continuation of the proceedings has for any other reason
become unnecessary or impossible. The mandate of the arbitral tribunal
shall terminate the termination of the arbitral proceedings.
4.5 AWARD AND CONCILIATION
4.5.1 Award
Arbitral award is a final decision or judgment of the arbitral tribunal on all

matters referred to it. An award in order to be valid must be final, certain
and must decide all the matters referred to. An award by the arbitrator is
as binding in its nature as the judgment of a court.
There are two types of decisions to be made by the arbitral tribunal, i.e.,
decisions on the merit of the dispute and decision on the questions of
procedure. The former is to be made by the majority of members but the
latter can be decided by the presiding arbitrator, if authorized by the
parties and all members of the tribunal, in the absence of which, it can be
made by majority of members. The presiding arbitrator has not been given
any special powers and he acts like any other arbitrator. All arbitrators
have been given equal power irrespective of mode of appointment.
Award Essentials :
The essential things to offer an award of arbitration are listed below
1. An arbitration agreement, reference to arbitration and award are

required to be in writing. The arbitral award essentially should be on a
stamp paper and never verbal.
2. The award is to be signed by majority of the members of tribunal.

Reason is to be stated for absenteeism of any member’s.
3. The arbitrator must give reasons for the award unless specified in the
agreement.
4. The award should mention the date of making the award..
5. The arbitral tribunal shall state the place of arbitration in the award.
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ARBITRATION LAW
6. The award may include the decisions and directions of the arbitrator
regarding the cost of the arbitration.
7. The arbitral tribunal may include the sum for which the award is made,
interest up to the date of award. (Interest rate is to be considered as
18% simple interest)
8. After making the award, a signed copy should be delivered to each party
for their appropriate actions.
9. The arbitral tribunal may, at any time during the proceedings, make an
interim arbitral award on any matter and refer the same in the final
award.
An arbitral award shall be final and binding on the parties and persons
claiming under them respectively. The award made by the arbitrator shall
be final and binding on the parties itself and shall be decree without being
made a decree by the court.
4.5.2 Conciliation
Conciliation is optional at present in the Act. But if the parties agree to

resolve the disputes through Conciliation, they have to follow the
mandatory provisions contained in sections 61 to 81, which provide all the
procedures to follow the conciliation.
Conciliation is an informal process in which the conciliator (the third party)

tries to bring the disputants through an agreement. He does it
independently outside the court and can use mediation, conciliation or
other Alternative Dispute Resolution (ADR) procedure during the arbitral
proceedings to encourage settlement of disputes. It is done for lowering
tensions, improving communication, exploring potential solutions and
bringing about a negotiable settlement. The Act has added a new chapter
containing sections from 61 to 81 for conciliation. It is based on the
conciliation rules adapted by the UNCITRAL in 1980, which were primarily
conceived in the context of dispute resolution in international commercial
relations.
As far as possible, the conciliation is recommended instead of arbitration as

it is a faster process. The difference between Conciliation and Arbitration is
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ARBITRATION LAW
that the conciliation is a win-win situation while arbitration is win-loose

attitude. The Conciliator tries to bring the parties together, tells them to
solve the dispute through discussions while in arbitration, parties give their
own arguments. Also, the role of Conciliator is difficult than that of
Arbitrator. So the Conciliator should be a man of integrity, trust and
confidence and should try to resolve the dispute impartially.
Conciliation Proceedings
The party initiating conciliation shall send the other party a written
invitation to conciliate under this part, briefly identifying the subject of
dispute. The other party can accept or reject the invitation. Conciliation
proceedings shall begin when the other party accepts in writing the
conciliation. If the other party rejects, there will be no conciliation. The
reply period is normally 30 days. There shall be one conciliator unless the
parties agree for any other number. In such case, all the conciliators will
act jointly.
In the case of one conciliator, both the parties have to agree on the name
of the conciliator. In case of two conciliators, each party may appoint one
conciliator. In case of three conciliators, each party may appoint one
conciliator and have to agree on the third conciliator who will act as
presiding conciliator.
The Conciliator’s, on appointment, may request each party to submit a

written statement describing the nature of dispute and points of issue.
Each party shall send a copy of statement to other party also.
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ARBITRATION LAW
When the conciliator feels that there exists elements of settlement, he shall
formulate terms of a possible settlement and submit to both the parties for
observations. He will then reformulate the matter and again refer to the
parties. If the parties reach on a agreement for settlement, he may draw
up and sign a written final settlement agreement. When the parties sign
the settlement agreement, it shall be final and binding on the parties and
persons claiming under them. The conciliator shall authenticate the
settlement agreement and furnish a copy thereof to each of the parties.
1. List down the Section numbers if you are appointing an arbitrator for
disputes between a purchaser in India and a seller in India.
2. If you are working as a conciliator in the dispute case of a common

purchaser of a mobile phone and a supplier doing e-commerce
business, what steps will you take along with time frame to settle the
dispute within 90 days of application?
3. Try to search and study a typical international award of arbitration case,

from Google search.
4.7 SUMMARY
• An Arbitration covers international commercial arbitration and

conciliation, as also domestic arbitration and conciliation.
• Arbitration procedure should be fair, efficient and capable of meeting the

needs of the specific arbitration.
• Arbitral Tribunal gives valid reasons for its arbitral award, and remains in
the limits of jurisdiction.
• There must be a valid and subsisting agreement between the parties and
the matter of the suit filed should be within the scope of arbitration
agreement.
• The party asking for stay must apply so at the earliest opportunity.
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ARBITRATION LAW
• An Arbitration Agreement is required to be in writing. Similarly, a

reference to arbitration and award also are required to be made in
writing. The Arbitral Award is required to be made on Stamp paper of
prescribed value.
• The award is to be signed by the members of the Arbitration Tribunal.
• Unless otherwise mentioned, the agreement must give reasons for the
award. However, there are two exceptions where the award without
reasons is valid.
• A conciliator tries to bring the parties together so that they can discuss
their disputes and resolve. So there is no award from the conciliator,
however, in case of arbitrator, parties are required to give their own logic
and after hearing both the parties, arbitrator gives the award.
1. Mention in brief the objectives of Arbitration and Conciliation Act, 1966.
2. Define Arbitration Agreement and explain the essentials of the same.
3. Which matters can be referred to arbitration and which matters cannot

be referred to it? Give examples of each.
4. Describe the procedure for appointment of the arbitrators.
5. List down in details and with a format the essentials of an Arbitral

Award.
6. What is conciliation procedure? When and how is it initiated?
7. Discuss the requirement, status and effects of a settlement agreement.
8. Explain in brief the difference between Arbitration and Conciliation
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ARBITRATION LAW
1. Arbitration procedure is followed for –
a. Making a contract
b. Settlement of dispute
c. Collecting a final payment
d. Closing a business deal
2. Subject matter which cannot be referred to arbitration is –
a. Dispute regarding movable property

b. Breach of promise of marriage
c. Dispute regarding dignity
d. Matter of criminal nature
3. The number of arbitrator/s cannot be –
a. One
b. Three
c. An even number
d. All of the above
4. The essentials of the award are –
a. Date of the award

b. Signatures of all the members of the arbitration panel
c. Place of Arbitration
d. All of the above
5. Conciliator is a person/institution who is –
a. A third party
b. Member of the first party
c. Director of the second party
d. Chief Justice of India
Answers : (1-b), (2-d), (3-c), (4-d), (5-a).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !73
CONTRACTS IN SUPPLY CHAIN MANAGEMENT
Chapter 5
CONTRACTS IN SUPPLY CHAIN
MANAGEMENT
Objectives
At the end of the chapter, you will be able to understand about the
Mercantile Act, the commercial Act; about the offers and contracts; about
the communication regarding contracts; and about the Indian Contracts
Act,1872. You will also come to know about the discharge and performance
of the contracts; and about the validity and about the non-performance of
a contractor. Your knowledge about the validation of tenders and about the
liquidation and damages will be enhanced. Also you will come to know
about the bailment and pledge in detail after completing this chapter.
Structure:
5.1 The Indian Contract Act, 1872

5.2 Agreements, Offers and Acceptance
5.3 Consideration and Capacity
5.4 Mistakes, Misrepresentation and Fraud
5.5 Wagering Agreements and Quasi Contracts
5.6 Discharge, Performance and Breach of Contracts
5.7 Liquidated Damages and Penalty
5.8 Bailment and Pledge
5.9 Activities for Students
5.10 Summary
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5.1 THE INDIAN CONTRACT ACT, 1872
5.1.1 Preamble
The Law of Contract constitutes the most important branch of mercantile or

commercial law. It affects everybody, more so, trade, commerce and
industry. It may be said that the contract is the foundation of the civilized
world.
The law relating to contract is governed by the Indian Contract Act, 1872
(Act No. IX of 1872). The Preamble to the Act says that it is an Act "to
define and amend certain parts of the law relating to the contract". It
extends to the whole of India except the State of Jammu and Kashmir.
The Act mostly deals with the general principles and rules governing
contracts. The Act is divisible into two parts. The first part (sections 1-75)
deals with the general principles of the law of contract, and therefore
applies to all contracts irrespective of their nature. The second part
(sections 124-238) deals with certain special kinds of contracts, e.g.,
indemnity and guarantee, bailment, pledge, and agency.
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5.1.2 The Indian Contract Act, 1872
The law relating to contracts is codified in the form of Indian Contract Act,
1872. The purpose of the law of contract is establish definiteness in all the
business transactions.
The Act is divided into two main groups:
1. General principles of the Law of Contract (Sec. 1-75).

2. Specific kinds of contracts, viz.:
(a)Contracts of Indemnity and Guarantee (Sec. 124-147).

(b)Contracts of Bailment and Pledge (Sec. 148-181).
(c)Contracts of Agency (Sec. 182-238).
The term contract has been defined by various authors in the following
manner:
"A contract is an agreement creating and defining obligations between the

parties”.
-Salmond
"A contract is an agreement enforceable at law, made between two or

more persons, by which rights are acquired by one or more to acts or
forbearances on the part of the other or others".
-Anson
"Every agreement and promise enforceable at law is a contract".

- Sir Fredrick Pollock
These definitions resolve themselves into two distinct parts. First, there
must be an agreement. Secondly, such an agreement must be enforceable
by law. To be enforceable, an agreement must be coupled with an
obligation. A contract therefore, is a combination of the two elements: an
agreement and an obligation.
Essential Elements of a Valid Contract
Section 10 of the Indian Contract Act, 1872 provides that "all agreements
are contracts if they are made by the free consent of parties competent to
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contract, for a lawful consideration and with a lawful object, and are not
hereby expressly declared to be void”.
The essential elements of a valid contract are:
(i) An offer or proposal by one party and acceptance of that offer by

another party.
(ii) An intention to create legal relations or an intent to have legal

consequences.
(iii) The agreement is supported by lawful consideration.
(iv) The parties to contract are legally capable of contracting.
(v) Genuine consent between !he parties.
(vi) The object and consideration of the contract is legal and is not opposed
to public policy.
(vii) The terms of the contract are certain.
Therefore, to form a valid contract there must be (1) an agreement, (2)

based on the genuine consent of the parties, (3) supported by
consideration, (4) made for a lawful object, and (iv) between competent
parties.
5.2 AGREEMENTS, OFFERS AND ACCEPTANCE
5.2.1 Agreement
An agreement occurs when two minds meet upon a common purpose, i.e.,
they mean the same thing in the same sense at the same time. The
meeting of the minds is called consensus-ad-idem, i.e., consent to the
matter. Section 2(e) of the Indian Contract Act provides that "every
promise and every set of promises forming the consideration for each other
is an agreement.”
An obligation is the legal duty to do or abstain from doing what one has
promised to do or abstain from doing. A contractual obligation arises from
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a bargain between the parties to the agreement who are called the
promisor and the promisee. Section 2(b) says that when the person to
whom the proposal is made signifies his assent thereto, the proposal is
said to be accepted; and "a proposal when accepted becomes a promise."
In broad sense, therefore, a contract is an exchange of promises by two or
more persons, resulting in an obligation to do or abstain from doing a
particular act, where such obligation is recognised and enforced by law.
Where parties have made a binding contract, they have created rights and
obligations between themselves. The contractual rights and obligations are
correlative,
Types of Agreements
1. Social Agreements: They are of social types like attending marriage

function, parties, events, etc.
2. Legal (Valid) Agreement: It is the combination of an agreement and

following its legalities, like entering into marriage, parenting children,
etc.
3. Void Agreement: An agreement not enforceable by law is said to be

void.
4. Unenforceable Agreement: Such an agreement is valid in the eyes of

law, but cannot be encored in the courts.
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5. Illegal Agreement: As the name says, an illegal agreement is one which

is against the law.
6. Agreements to Agree in Future: This is sort of hypothetical agreement,
and can be called better as a contract instead of agreement.
Agreements which are not Contracts
Agreements in which the idea of bargain is absent and there is no intention

to create legal relations are not contracts. These are:
(a) Agreements relating to social matters: An agreement between two

persons to go together to the cinema, or for a walk, does not create a
legal obligation on their part to abide by it. Similarly, if I promise to
buy you a dinner and break that promise I do not expect to be liable to
legal penalties. There cannot be any offer and acceptance to
hospitality.
• To constitute a contract, the parties must intend to create legal

relationship.
• The law of contract is the law of those agreements which create

obligations and those obligations which have their source in agreement.
• Agreement is the genus of which contract. is the specie and, therefore,

all contracts are agreements but all agreements are not contracts.
5.2.2 Offer
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One of the early steps in the formation of a contract lies in arriving at an

agreement between the contracting parties by means of an offer and
acceptance. Thus, when one party (the offeror) makes a definite proposal
to another party (the offeree) and/ the offeree accepts it in its entirety and
without any qualification, there is a meeting of the minds of the parties,
and a contract comes into being, assuming that all other elements are also
present.
An Offer or a Proposal
An offer is a proposal by one person, whereby he expresses his willingness

to enter into a contractual obligation in return for a promise, act or
forbearance. Section 2(a) defines proposal or offer as "when one person
signifies to another his willingness to do or abstain from doing anything
with a view to obtaining the assent of that other to such act or abstinence,
he is said to make a proposal."
Revocation of Offer by the Offeror
An offer may be revoked by the offeror at any time before acceptance.
Like any offer, revocation must be communicated to the offeree, as it does

not take effect until it is actually communicated to the offeree. Before its
actual communication, the offeree, may accept the offer and create a
binding contract. The revocation must reach the offeree before he sends
out the acceptance.
An offer to keep open for a specified time(option) is not binding unless it is

supported by consideration.
Standing Offers
Where a person offers to another to supply specific goods, up to a stated

quantity or in any quantity which may be required, at a certain rate, during
a fixed period, he makes a standing offer. Thus, a tender to supply goods
as and when required, amounts to a standing offer.
A standing offer or a tender is of the nature of a continuing offer. An

acceptance of such an offer merely amounts to an intimation that the offer
will be considered to remain open during the period specified and that it
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will be accepted from time to time by placing order during the period
specified. Each successive order given, while the offer remains in force, is
an acceptance of the standing offer as to the quantity ordered, and creates
a separate contract. it does not bind either party unless and until such
orders are given.
5.2.3 Acceptance
A contract emerges from the acceptance of an offer. Acceptance is the act

of assenting by the offeree to an offer. Under Section 2(b) of the Contract
Act when a person to whom the proposal is made signifies his assent
thereto, the proposal is said to be accepted. A proposal, when accepted
becomes a promise.
Contracts over the Telephone
Contracts over the telephone are regarded the same in principle as those
negotiated by the parties in the actual presence of each other. In both
cases an oral offer is made and an oral acceptance is expected. It is
important that the acceptance must be audible, heard and understood by
the offeror. If during the conversation the telephone lines go, "dead" so
that the offeror does not hear the offeree's word of acceptance, there is no
contract at the moment. If the whole conversation is repeated and the
offeror hears and understands the words of acceptance, the contract is
complete.
5.2.4 Difference between Offer and Acceptance
1. Offer constitutes the first stage in the formation of a contract, whereas

acceptance constitutes the second stage in the formation of a contract.
2. An offer is made by the offer or to the offered. But an acceptance is

given by the offered to the offer, or
3. An offer is not held to be made until it is brought to the knowledge of

the offered (e.g., communicated to the offered). On the other hand, an
acceptance may, in certain circumstances, be made, though it has not
come to the knowledge of the offeror (i.e., though it is not
communicated to the offeror).
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5.2.5 Contract
Definition of Contract
According to Sec. 2 (h) of Indian Contract Act, 1872, ‘a contract is an

agreement enforceable by law’. An agreement may or may not follow all
lawful conditions. It may be a social agreement. Agreement is a very wide
term. But, contract is an agreement between two or more parties, and it is
abided by law.
A Contract in order to be enforceable by law. must have the following ten

essential elements:
1. There must be two or more persons or groups of persons to enter into a

contract.
2. There must be a legal proposal or offer with definite terms by one party
and a lawful acceptance of that proposal by the other party - thus,
resulting in an agreement.
3. There must be a legal relationship between the parties.
4. Consideration: The agreement must be supported by a real and definite

consideration.
5. The parties to the agreement must be capable of entering into a valid

contract, viz., age, sound mind, proper approval, etc.
6. It is essential to the creation of every contract that there must be a free

and genuine consent of the parties to the agreement.
7. The object of the agreement must be lawful, and it should never be

illegal or immoral.
8. The agreement should not be earlier declared as void.
9. The performance parameters should be clear and not impossible.
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10.When the agreements are done in writing, they must comply with the
necessary legal formalities as to writing, stamping, registration and
attestation.
11.Some of the contracts which must be in writing otherwise they will be

invalid are:
a. A promise to pay a time barred debt

b. An arbitration agreement
c. Lease agreement for a period of more than three years
d. Contracts of insurance
e. Negotiable instruments, e.g., bills of exchange, cheques, promissory
notes, etc.
f. Memorandum and Articles of Association of a company
g. Contracts relating to transfer of immovable property, and so on.
Some of the contracts which must be registered are -
(i) A promise made without consideration on account of natural love and

affection between the parties.
(ii) Documents of certain transactions which are compulsorily to be

registered under Sec. 17 of the Registration Act.
(iii) Contracts relating to transfer of immovable property under the Transfer

of Property Act, 1882,
(iv) Memorandum and Articles of Association, mortgages and charges

under the Companies Act, 1956 and so on.
According to the Indian Stamp Act, 1894, certain instruments are

chargeable with duty of stamp of the amount indicated in Schedule I of the
Act, e.g., Bills of Exchange, Promissory Note, Insurance Policy, Partition
Deed, Shares/Debenture Certificates, Pledge, Mortgage Deed, etc. If the
instrument is not duly stamped (i.e., unstamped or under-stamped or
improperly stamped) it shall not be admitted in evidence in a court of law.
All the above essential elements must exist together in a contract. An

agreement with all the above elements is a legal or valid agreement or
simply called a contract and therefore, enforceable. But if any one of the
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elements is missing, the contract is either voidable, void, illegal, or

unenforceable in the eyes of law.
Legal Relations
The second essential element of a valid contract is that there must be an

intention among the parties that the agreement should be attached by
legal consequences and create legal obligations. If there is no such
intention on the part of the parties, there is no contract between them.
Agreements of a social or domestic nature do not contemplate legal
relationship. As such they are not contracts.
A proposal or an offer is made with a view to obtain the assent to the other
party and when that other party expresses his willingness to the act or
abstinence proposed, he accepts the offer and a contract is made between
the two. But both offer and acceptance must be made with the intention of
creating legal relations between the parties. The test of intention is
objective. The Courts seek to give effect to the presumed intention of the
parties. Where necessary, the Court would look into the conduct of the
parties, for much can be inferred from the conduct. The Court is not
concerned with the mental intention of the parties, but rather with what a
reasonable man would say, was the intention of the parties, having regard
to all the circumstances of the case.
For example, if two persons agree to assist each other by rendering advice,
in the pursuit of virtue, science or art, it cannot be regarded as a contract.
In commercial and business agreements, the presumption is usually that
the parties intended to create legal relations. But this presumption is
rebuttable which means that it must be shown that the parties did not
intend to be legally bound.
5.3 CONSIDERATION AND CAPACITY
5.3.1 Consideration
Need for Consideration
Consideration is one of the essential elements of a valid contract. The

requirement of consideration stems from the policy of extending the arm of
the law to the enforcement of mutual promises of parties. A mere promise
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is not enforceable at law. For example, if A promises to make a gift of `

500 to B, and subsequently changes his mind, B cannot succeed against A
for breach of promise, as B has not given anything in return. It is only
when a promise is made for something in return from the promisee, that
such promise can be enforced by law against the promisor. This something
in return is the consideration for the promise.
Definition of Consideration
Sir Fredrick Pollock has defined consideration "as an act or forbearance of

one party, or the promise thereof is the price for which the promise of the
other is bought.”
It is "some right, interest, profit, or benefit accruing to one party or some

forbearance, detriment, loss or responsibility, given, suffered or undertaken
by the other." Section 2(d) of the Indian Contract Act, 1872 defines
consideration thus: "when at the desire of the promisor, the promisee or
any other person has done or abstained from doing, or does or abstains
from doing, or promises to do or to abstain from doing, something, such
act or abstinence or promise is called a consideration for the promise”.
The fundamental principle that consideration is essential in every contract,

is laid down by both the definitions but there are some important points of
difference in respect of the nature and extent of consideration and parties
to it under the two systems of law:
(a) Consideration at the desire of the promisor: Section 2(d) of the Act
begins with the statement that consideration must move at the desire
or request of the promisor. This means that whatever is done must
have been done at the desire of the promisor and not voluntarily or not
at the desire of a third party. If A rushes to B's help whose house is on
fire, there is no consideration but a voluntary act. But if A goes to B's
help at B's request, there is good consideration as B did not wish to do
the act gratuitously.
(b) Consideration may move from the promisee or any other person: In
English law, consideration must move from the promisee, so that a
stranger to the consideration cannot sue on the contract. A person
seeking to enforce a simple contract must prove in court that he
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himself has given the consideration in return for the promise he is

seeking to enforce.
In Indian law, however, consideration may move from the promisee or any
other person, so that a stranger to the consideration may maintain a suit.
Privity of Contract
(i) A stranger to a contract cannot sue both under the English and Indian
law for want of privity of contract. However, there is an exception to
the doctrine of privity of contract: Both the Indian law and the English
law recognize certain exceptions to the rule that a stranger to a
contract cannot sue on the contract. In the following cases, a person
who is not a party to a contract can enforce the contract:
(a) A beneficiary under an agreement to create a trust can sue upon

the agreement, though not a party to it, for the enforcement of the
trust so as to get the trust executed for his benefit.
(b) An assignee under an assignment made by the parties, or by the

operation of law (e.g., in case of death or insolvency), can sue upon
the contract for the enforcement of his rights, title and interest. But
a mere nominee (i.e., the person for whose benefit another has
insured his own life) cannot sue on the policy because the nominee
is not an assignee.
(ii) In cases of family arrangements or settlements between male

members of a Hindu family which provide for the maintenance or
expenses for marriages of female members, the latter though not
parties to the contract, possess an actual beneficial right which place
them in the position of beneficiaries under the contract, and can
therefore, sue.
(iii) In case of acknowledgement of liability, e.g., where A receives money

from B for paying to C, and admits to C the receipt of that amount,
then A constitutes himself as the agent of C.
(iv) Whenever the promisor is by his own conduct estopped from denying
his liability to perform the promise, the person who is not a party to
the contract can sue upon it to make the promisor liable.
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(v) In cases where a person makes a promise to an individual for the

benefit of third party and creates a charge on certain immovable
propertyforthe purpose, the third party can enforce the promise
"though, he is stranger to the contract.
Kinds of Consideration
Consideration may be:
(a) Executory or future, which means that it makes the form of promise to
be performed in the future, e.g., an engagement to marry someone; or
(b) Executed or present in which it is an act or forbearance made or

suffered for a promise. In other words, the act constituting
consideration is wholly or completely performed, e.g., if A pays today `
100 to a shopkeeper for goods which are promised to be supplied the
next day, A has executed his consideration but the shopkeeper is
giving executory consideration - a promise to be executed the
following day. If the price is paid by the buyer and the goods are
delivered by the seller at the same time, consideration is executed by
both the parties.
(c) Past which means a past act or forbearance, that is to say, an act
constituting consideration which took place and is complete (wholly
executed) before the promise is made.
According to English law, a consideration may be executory or executed

but never past. The English law is that past consideration is no
consideration. The Indian law recognizes all the above three kinds of
consideration.
Rules Governing Consideration
(a) Every simple contact must be supported by valuable consideration

otherwise it is formally void subject to some exceptions.
(b) Consideration may be an act of abstinence or promise.
(c) There must be mutuality, i.e., each party must do or agree to do

something. A gratuitous promise as in the case of subscription for
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charity, is not enforceable. For example, where A promises to

subscribe ` 5,000 for the repair of a temple, and then refuses to pay,
no action can be taken against him.
(d) Consideration must be real, and not vague, indefinite, or illusory, e.g.,
a son's promise to "stop being a nuisance" to his father, being vague,
is no consideration.
(e) Although consideration must have some value, it need not be

adequate, i.e., a full return for the promise. Section 25 (Exp. II)
clearly provides that "an agreement to which the consent of the
promisor is freely given is not void merely because the consideration is
inadequate." It is upon the parties to fix their own prices.
(f) Consideration must be lawful, e.g., it must not be some illegal act such
as paying someone to commit a crime. If the consideration is unlawful,
the agreement is void.
(g) Consideration must be something more than the promisee is already

bound to do for the promisor. Thus, an agreement to perform an
existing obligation made with the person to whom the obligation is
already owed, is not made for consideration. For example, if a seaman
deserts his ship so breaking his contract of service and is induced to
return to his duty by the promise for extra wages, he cannot later sue
for the extra wages since he has only done what he had already
contracted for.
When Consideration is not Necessary
The general rule is that an agreement made without consideration is void.

But section 25 of the Indian Contract Act lays down certain exceptions
which make a promise without consideration valid and binding. Thus, an
agreement without consideration is valid:
1. If it is expressed in writing and registered and is made out of natural

love and affection between parties standing in a near relation to each
other; or
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2. If it is made to compensate a person who has already done something

voluntarily for the promisor, or done something which the promisor was
legally compellable to do; or
3. If it is a promise in writing and signed by the person to be charged

therewith, or by his agent, to pay a debt barred by the law of limitation.
4. Besides, according to section 185, consideration is not required to

create an agency.
5. In the case of gift actually made, no consideration is necessary. There

need not be nearness of relation and even if it is, there need not be any
natural love and affection between them. .
The requirements in the above exceptions are noteworthy. The first one
requires written and registered promise. The second may be oral or in
writing and the third must be in writing.
Terms of Offer and Consideration
It follows from what has been explained in relation to offer, acceptance and
consideration that to be binding, an agreement must result in a contract.
That is to say, the parties must agree on the terms of their contract. They
must make their intentions clear in their contract. The Court will not
enforce a contract if the terms of which are uncertain. Thus, an agreement
to agree in the future (a contract to make a contract) will not constitute a
binding contract, e.g., a promise to pay an actress a salary to be "mutually
agreed between us" is not a contract since the salary is not yet agreed.
Similarly, where the terms of a final agreement are too vague, the contract
will fail for uncertainty. Hence, the terms must be definite or capable of
being made definite without further agreement of the parties.
The legal maxim, therefore, is "a contract to contract is not a contract". If

you agree "subject to contract" or "subject to agreement", the contract
does not come into existence, for there is no definite or unqualified
acceptance.
Thus, a contract is always based upon:
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(i) Agreement and acceptance of a definite offer;

(ii) An intent to create legal obligations; and
(iii) Consideration.
5.3.2 Capacity
The most important condition for the enforceability of an agreement is

that the concerned parties must be competent to enter into an agreement.
An agreement is valid and enforceable only if the parties to it are
competent enough to enter into contract. So, there must be capability of
the parties to enter into a valid contract. The term ‘capacity to contract’ is
defined in section 11 of the Indian Contract Act, which reads as under.
“Every person is competent to contract who is of the age of the majority

according to the law to which he is subject and who is of sound mind and
is not disqualified from contracting by any law to which he is subject”.
(i) Flaw in Capacity - Capacity and Persons
In law, persons are either natural or artificial. Natural persons are human
beings and artificial persons are corporations. Contractual capacity or
incapacity is an incident of personality.
The general rule is that all natural persons have full capacity to make
binding contracts. But the Indian Contract Act, 1872 admits an exception in
the case of:
a. minors,
b. lunatics, and
c. persons disqualified from contracting by any law to which they are
subject.
These persons are not competent to contract. Section 11 provides that

every "person is competent to contract who is of the age of majority
according to the law to which he is subject, and who is of sound mind, and
is not disqualified from contracting by any law to which he is subject. "A
valid agreement requires that both the parties should understand the legal
implications of their conduct. Thus, both must have a mature mind. The
legal yardstick to measure maturity, according to the law of contract is,
that both should be major and of sound mind and if not, the law would
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presume that the maturity of their mind has not reached to the extent of
visualising the pros and cons of their acts, hence, a bar on minors and
lunatics competency to contract.
The contractual capacity of a corporation depends on the manner in which

it was created.
Contract of a Minor
According to the Indian Majority Act, 1875, a minor is a person, male or

female, who has not completed the age of 18 years. In case a guardian has
been appointed to the minor or where the minor is under the guardianship
of the Court of Wards, the person continues to be a minor until he
completes his age of 21 years. According to the Indian Contract Act, no
person is competent to enter into a contract who is not of the age of
majority. Indian Courts have applied this decision to those cases where the
minor has incurred any liability or where the liabilities on both sides are
outstanding. In such cases, the minor is not liable. But if the minor has
carried out his part of the contract, then, the Courts have held, that he can
proceed against the other party. The rationale is to protect minor's interest.
According to the Transfer of Property Act, a minor cannot transfer property
but he can be a transferee (person accepting a transfer). This statutory
provision is an illustration of the above principle.
The following points must be kept in mind with respect to minor's contract:
a. A minor's contract is altogether void in law, and a minor cannot bind

himself by a contract. If the minor has obtained any benefit, such as
money on a mortgage, he cannot be asked to repay, nor can his
mortgaged property be made liable to pay.
b. Since the contract is void ab initio, it cannot be ratified by the minor on

attaining the age of majority.
c. Estoppel is an important principle of the law of evidence. To explain,

suppose X makes a statement to Y and intends that the latter should
believe and act upon it. Later on, X cannot deviate from this statement
and make a new one. In other words, X will be estopped from denying
his previous statement. But a minor can always plead minority and is
not estopped from doing so even where he had produced a loan or
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entered into some other contract by falsely representing that he was of

full age, when in reality he was a minor. 
 
But where the loan was obtained by fraudulent representation by the
minor or some property was sold by him and the transactions are set
aside as being void, the Court may direct the minor to restore the
property to the other party. 
 
For example, a minor fraudulently overstates his age and takes delivery
of a motor car after executing a promissory note in favour of the trader
for its price. The minor cannot be compelled to pay the amount to the
promissory note, but the Court on equitable grounds may order the
minor to return the car to the trader, if it is still with the minor. 
 
Thus, according to Section 33 of the Specific Relief Act, 1963 the Court
may, if the minor has received any benefit under the agreement from
the other party require him to restore, so far as may be such benefit to
the other party, to the extent to which he or his estate has been
benefited thereby.
d. A minor's estate is liable to pay a reasonable price for necessaries

supplied to him or to anyone whom the minor is bound to support
(section 68 of the Act). 
 
The necessaries supplied must be according to the position and status in
life of the minor and must be things which the minor actually needs.
The following have also been held as necessaries in India. 
 
Costs incurred in successfully defending a suit on behalf of a minor in
which his property was in jeopardy; costs incurred in defending him in a
prosecution; and money advanced to a Hindu minor to meet his
marriage expenses have been held to be necessaries.
e. An agreement by a minor being void, the Court will never direct specific
performance of the contract.
f. A minor can be an agent, but he cannot be a principal nor can he be a

partner. He can, however, be admitted to the benefits of a partnership.
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g. Since a minor is never personally liable, he cannot be adjudicated as an

insolvent.
h. An agreement by a parent or guardian entered into on behalf of the

minor is binding on him provided it is for his benefit or is for legal
necessity. For, the guardian of a minor, may enter into contract for
marriage on behalf of the minor, and such a contract would be good in
law and an action for its breach would lie, if the contract is for the
benefit of the minor, e.g., if the parties are of the community among
whom it is customary for parents to contract marriage for their children.
The contract of apprenticeship is also binding. However, it has been held
that an agreement for service, entered into by a father on behalf of his
daughter who is a minor, is not enforceable by law.
Agreement of a Lunatic
A person of unsound mind is a lunatic. That is to say for the purposes of

making contract, a person is of unsound mind if at the time when he
makes the contract, he is incapable of understanding it and of forming
rational judgment as to its effect upon his interests.
A person unsound mind cannot enter into a contract. A lunatic's agreement

is therefore, void. But if he makes a contract when he is of sound mind,
i.e., during lucid intervals, he will be bound by it.
A sane man who is delirious from fever, or who is so drunk that he cannot
understand the terms of a contract, or form a rational judgment as to its
effect on his interests cannot contract whilst such delirium or state of
drunkenness lasts. A person under the influence of hypnotism is
temporarily of unsound mind. Mental decay brought by old age or disease
also comes within the definition.
Agreement by persons of unsound mind are void. But for necessaries

supplied to a lunatic or to any member of his family, the lunatic's estate, if
any, will be liable. There is no personal liability incurred by the lunatic. If a
contract entered into by a lunatic or person of unsound mind is for his
benefit, it can be enforced (for the benefit) against the other party.
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Alien Enemies
A person who is not an Indian citizen is an alien. An alien may be either an

alien friend or a foreigner whose sovereign or State is at peace with India,
has usually contractual capacity of an Indian citizen. On the declaration of
war between his country and India he becomes an alien enemy. A contract
with an alien enemy becomes unenforceable on the outbreak of war.
For the purposes of civil rights, an Indian citizen of the subject of a neutral
state who is voluntarily resident in hostile territory or is carrying on
business there is an alien enemy. Trading with an alien enemy is
considered illegal, being against public policy.
Foreign Sovereigns and Ambassadors
Foreign sovereigns and accredited representatives of foreign states, i.e.,

Ambassadors, High Commissioners. enjoy a special privilege in that they
cannot be sued in Indian Courts, unless they voluntarily submit to the
jurisdiction of the Indian Courts. Foreign Sovereign Governments can enter
into contracts through agents residing in India. In such cases the agent
becomes personally responsible for the performance of 'the contracts.
Professional Persons
In England, barristers-at-law are prohibited by the etiquette of their

profession from suing for their fees. So also are the Fellow and Members of
the Royal College of Physicians and Surgeons. But they can sue and be
sued for all claims other than their professional fees. In India, there is no
such disability and a barrister, who is in the position of an advocate with
liberty both to act and plead, has a right to contract and to sue for his fees.
Corporations
A corporation is an artificial person created by law, e.g., a company

registered under the Companies Act, public bodies created by statute, such
as Municipal Corporation of Delhi. A corporation exists only in
contemplation of law and has no physical shape or form.
The Indian Contract Act does not speak about the capacity of a corporation
to enter into a contract. But if properly incorporated, it has a right to enter
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into a contract. It can sue and can be sued in its own name. There are
some contracts into which a corporation cannot enter without its seal, and
others not at all. A company, for instance, cannot contract to marry.
Further, its capacity and powers to contract are limited by its charter or
memorandum of association. Any contract beyond such power in ultra vires
and void.
Married Women
In India, there is no difference between a man and a woman regarding

contractual capacity. A woman married or single can enter into contracts in
the same ways as a man. She can deal with her property in any manner
she likes, provided, of course, she is a major and is of sound mind.
Under the English law, before the passing of the Law Reform (Married
Women) Act, 1935, a husband was responsible for his wife's contracts but
since 1935 this liability no longer arises unless the wife is acting as the
husband's agent. Now, therefore, even in England a married woman has
full contractual capacity, and can sue and be sued in her own name.
Consent
To make a contract valid not only the presence and consent of the other
party is necessary but this consent should be ‘free’ and ‘genuine’. Section
12 defines ‘consent’ as follows: Two or more persons are said to consent
when they agree upon the same thing in the same sense. If parties do not
consent, i.e., they do not understand the same thing in the same sense,
there can be no agreement, because consent is like the very roots of an
agreement. If there is no consent, the parties are not said to be ab idem,
i.e., of the same mind.
5.4 MISTAKES, MISREPRESENTATION AND FRAUD
Flaw in Consent
The basis of a contract is agreement, i.e., mutual consent. In other words,

the parties should mean the samething in the same sense and agree
voluntarily. It is when there is consent, that the parties are said to be
consensus ad idem, i.e., their minds have met. Not only consent is required
but it must be a free consent. Consent is not free when it has been caused
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by coercion, undue influence, misrepresentation, fraud or mistake. These

elements if present, may vitiate the contract.
When this consent is wanting, the contract may turn out to be void or
voidable according to the nature of the flaw in consent. Where there is no
consent, there can be no contract as in the case of mutual mistake. Where
there is consent, but it is not free, a contract is generally voidable at the
option of the party whose consent is not free. In the case of
misrepresentation, fraud, coercion, undue influence, the consent of one of
the parties is induced or caused by the supposed existence of a fact which
did not exist.
5.4.1 Mistake
The law believes that contracts are made to be performed. The whole
structure of business depends on this as the businessmen depend on the
validity of contracts. Accordingly, the law says that it will not aid anyone to
evade consequences on the plea that he was mistaken.
On the other hand, the law also realises that mistakes do occur, and that
these mistakes are so fundamental that there may be no contract at all. If
the law recognises mistake in contract, the mistake will render the contract
void.
Effect of Mistake
A mistake in the nature of miscalculation or error of judgement by one or

both the parties has no effect on the validity of the contract. For example,
if a person pays an excessive price for goods under a mistake as to their
true value, the contract is binding on him. Therefore, mistake must be
"vital operative mistake", i.e., it must be a mistake of fact which is
fundamental to contract.
To be operative so as to render the contract void, the mistake must be:
(a) of fact, and not of law or opinion;

(b) the fact must be essential to agreement, i.e., so fundamental as to
negate
(c) the agreement; and
(d) must be on the part of both the parties.
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Thus, where both the parties of an agreement are under a mistake as to a

matter of fact essential agreement, the agreement is void (Section 20).
Such a mistake prevents the formation of any contract at all and the Court
will declare it void. For example, A agrees to buy from B a certain horse. It
turns out that the horse was dead at the time of bargain though neither
party was aware of the fact. The agreement is void.
Mistake of Law and Mistake of Fact
Mistakes are of two kinds: (i) mistake of law, and (ii) mistake of fact. If
there is a mistake of law of the land, the contract is binding because
everyone is deemed to have knowledge of law of the land and ignorance of
law is no excuse.
But mistake of foreign law and mistake of private rights are treated as
mistakes of fact and are excusable. The law of a foreign country is to be
proved in Indian Courts as ordinary facts. So mistake of foreign law makes
the contract void. Similarly, if a contract is made in ignorance of private
right of a party, it would be void, e.g., where A buys property which
already belongs to him.
Mutual or Unilateral Mistake
Mistake must be mutual or bilateral, i.e., it must be on the part of both

parties. A unilateral mistake, i.e., mistake on the part of only one party, is
generally of no effect unless (i) it concerns some fundamental fact and (ii)
the other party is aware of the mistake. For this reason, error of judgment
on the part of one of the parties has no effect and the contract will be
valid.
Mutual or Common Mistake as to Subject Matter
A contract is void when the parties to it assume that a certain state of

things exist which does not actually exist or in their ignorance the contract
means one thing to one and another thing to the other, and they contract
subject to that assumption or under that ignorance. There is a mistake on
the part of both the parties. Such a mistake may relate to the existence of
the subject matter, its identity, quantity or quality.
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(a) Mistake as to existence of the subject matter: Where both parties

believe the subject matter of the contract to be in existence but in
fact, it is not in existence at the time of making the contract, there is
mistake and the contract is void.
(b) Mistake as to identity of the subject matter: Where the parties are not
in agreement to the identity of the subject matter, i.e., one means one
thing and the other means another thing, the contract is void; there is
no consensus ad idem.
(c) Mistake as to quantity of the subject matter: There may be a mistake

as to quantity or extent of the subject matter which will render the
contract void even if the mistake was caused by the negligence of a
third-party.
(d) Mistake as to quality of the subject matter or promise: Mistake as to

quality raises difficult questions. If the mistake is on the part of both
the parties the contract is void. But if the mistake is only on the part of
one party difficulty arises.
The general rule is that a party to a contract does not owe any duty to the
other party to disclose all the facts in his possession during negotiations.
Even if he knows that the other party is ignorant of or under some
misapprehension as to an important fact, he is under no obligation to
enlighten him. Each party must protect his own interests unaided. In
contract of sale of goods, this rule is summed up in the maxim caveat
emptor (Let the buyer beware.) The seller is under no duty to reveal the
defects of his goods to the buyer, subject to certain conditions.
Unilateral Mistake as to Nature of the Contract
The general rule is that a person who signs an instrument is bound by its
terms even if he has not read it. But a person who signs a document under
a fundamental mistake as to its nature (not merely as to its contents) may
have it voided provided the mistake was due to either
(a) the blindness, illiteracy or senility of the person signing, or

(b) a trick or fraudulent misrepresentation as to the nature of the
document.
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Unilateral Mistake as to the Identity of the Person Contracted With
It is a rule of law that if a person intends to contract with A, B cannot give

himself any right under it. Hence, when a contract is made in which
personalities of the contracting parties are or may be of importance, no
other person can interpose and adopt the contract. For example, where M
intends to contract only with A but enters into contract with B believing him
to be A, the contract is vitiated by mistake as there is no consensus ad
idem.
Mistake as to the identity of the person with whom the contract is made
will operate to nullify the contract only if:
(i) the identity is of material importance to the contract; and

(ii) the mistake is known to the other person, i.e., he knows that it is not
intended that he should become a party to the contract.
5.4.2 Misrepresentation
The term "misrepresentation" is ordinarily used to connote both "innocent

misrepresentation" and "dishonest misrepresentation". Misrepresentation
may therefore, be either (i) Innocent misrepresentation, or (ii) Willful
misrepresentation with intent to deceive and is called fraud.
Innocent Misrepresentation
If a person makes a representation believing what he says is true he

commits innocent misrepresentation. Thus, any false representation, which
is made with an honest belief in its truth is innocent. The effect of innocent
misrepresentation is that the party misled by it can void the contract, but
cannot sue for damages in the normal circumstances.
But in order to void a contract on the ground of misrepresentation, it is

necessary to prove that:
(i) there was a representation or assertion,
(ii) such assertion induced the party aggrieved to enter into the contract.
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(iii) the assertion related to a matter of fact (and not of law as ignorance of
law is no excuse).
(iv) the statement was not a mere opinion or hearsay, or commendation

(i.e., reasonable praise). For example an advertisement saying,
washes whiter “than the whitest”.
(v) the statement which has become or turned out to be untrue, was
made with an honest belief in its truth.
Damages for Innocent Misrepresentation
Generally, the injured party can only void the contract and cannot get
damages for innocent misrepresentation. But in the following cases,
damages are obtainable:
(i) From a promoter or director who makes innocent misrepresentation in

a company prospectus inviting the public to subscribe for the shares in
the company;
(ii) Against an agent who commits a breach of warranty of authority:
(iii) From a person who (at the Court's discretion) is estopped from
denying a statement he has made where he made a positive statement
intending that it should be relied upon and the innocent party did rely
upon it and thereby suffered damages;
(iv) Negligent representation made by one person to another between

whom a confidential relationship, like that of a solicitor and client
exists.
5.4.3 Willful Misrepresentation or Fraud
Fraud is an untrue statement made knowingly or without belief in its truth

or recklessly, carelessly, whether it be true or false with the intent to
deceive. The chief ingredients of a fraud are:
(i) a false representation or assertion;
(ii) of fact (and not a mere opinion),
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(iii) made with the intention that it should be acted upon,
(iv) the representation must have actually induced the other party to enter
into the contract and so deceived him,
(v) the party deceived must thereby be damnified, for there is no fraud
without damages, and
(vi) the statement must have been made either with the knowledge that it
was false or without belief in its truth or recklessly without caring
whether it was true or false.
It is immaterial whether the representation takes effect by false statement

or with concealment. The party defrauded can avoid the contract and also
claim damages.
Mere silence as to facts likely to affect the willingness of a person to enter

into a contract is not fraud, unless silence is in itself equivalent to speech,
or where it is the duty of the person keeping silent to speak as in the cases
of contracts uberrimae fidei (contracts requiring utmost good faith).
Contracts Uberrimae Fidei
There are contracts in which the law imposes a special clause to act with
the utmost good faith, i.e., to disclose all material information. Failure to
disclose such information will render the contract voidable at the option of
the other party.
Contracts uberrimae fidei are:
(a) Contract of insurance of all kinds: The assured must disclose to the
insurer all material facts and whatever he states must be correct and
truthful.
(b) Company prospectus: When a company invites the public to subscribe

for its shares, it is under statutory obligation to disclose truthfully the
various matters set out in the Companies Act. Any person responsible
for non-disclosure of any of these matters is liable to damages. Also,
the contract to buy shares is voidable where there is a material false
statement or non-disclosure in the prospectus.
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(c) Contract for the sale of land: The vendor is under a duty to the
purchaser to show good title.
(d) Contracts of family arrangements: When the members of a family

make agreements or arrangements for the settlement of family
property, each member of the family must make full disclosure of
every material fact within his knowledge.
(e) Contracts of marriage.
5.4.4 Difference between Fraud and Innocent Misrepresentation
1. Fraud implies an intent to deceive, which is lacking if it is innocent

misrepresentation.
2. In case of misrepresentation and fraudulent silence, the defendant can

take a good plea that the plaintiff had the means of discovering the
truth with ordinary diligence. This argument is not available if there is
fraud (Section 19 exception).
3. Misrepresentation may lead to avoidable of contract. In fraud, the

plaintiff can claim damages as well.
4. If there is fraud, it may lead to prosecution for an offence of cheating

under the Indian Penal Code.
Essentials of Fraud
1. Making a false suggestion as to a fact.

2. Active concealment of a fact.
3. A promise without intention to perform.
4. Any act fitted to deceive or representation of fact to deceive.
5. The representation or assertion must have been made with a knowledge
of its falsity or without belief in its truth.
6. Fraud by a party or his agent to the contract.
7. The party, subjected to fraud, suffered loss.
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Effects of Fraud
(i) A contract induced by fraud is voidable at the option of the party

whose consent was obtained by fraud.
(ii) The aggrieved party can sue for damages. Fraud is a civil wrong or
tort; hence, compensation is payable to the party affected.
(iii) In cases of fraudulent silence, the contract is not voidable if the party
whose consent was so caused that it had the means of discovering the
truth with ordinary diligence.
5.5 WAGERING AGREEMENTS AND QUASSI CONTRACTS
5.5.1 Legality of Object
One of the requisites of a valid contract is that the object should be lawful.
Section 10 of the Indian Contract Act, 1872, provides, "All agreements are
contracts if they are made by free consent of parties competent to contract
fur a lawful consideration and with a lawful object... " Therefore, it follows
that where the consideration or object for which an agreement is made is
unlawful, it is not a contract.
Section 23 of the Indian Contract Act, 1872 provides that the consideration
or object of an agreement is lawful unless it is
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(i) forbidden by law; or,
(ii) it is of such nature that if permitted it would defeat the provisions of

law; or is fraudulent; or
(iii) involves or implies injury to the person or property or another; or
(iv) the Court regards it as immoral or opposed to public policy.
In each of these cases the consideration or object of an agreement is said

to be unlawful. Every agreement of which the object or consideration is
unlawful is void.
Void and Illegal Contracts
A void contract is one which is result of legal effects altogether. An illegal

contract too has no legal effect as between the immediate parties to the
contract, but has the further effect of tainting the collateral contracts also
with illegality. For instance A borrows from B ` 1,000 for lending it to C a
minor. The contract between A and C is void, but B can nevertheless
recover the money from A, On the other hand, if A had borrowed ` 1,000
from B to buy a pistol to shoot C, the question whether B can recover the
money hinges on whether B was aware of the purpose for which money
was borrowed. If B had knowledge of the illegal purpose, he cannot
recover. Therefore, it may be said that all illegal agreements are void but
all void agreements are not necessarily illegal.
Consequence of Illegal Agreements
(i) an illegal agreement is entirely void;
(ii) no action can be brought by a party to an illegal agreement. From an

evil cause, no action arises;
(iii) money paid or property transferred under an illegal agreement cannot

be recovered. In cases of equal guilt, more powerful is the condition of
the defendant;
(iv) where an agreement consist of two parts, one part legal and other
illegal, and the legal parts is separable from the illegal one, then the
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Court will enforce the legal one. If the legal and the illegal parts cannot
be separated the whole agreement is illegal; and
(v) any agreement which is collateral to an illegal agreement is also

tainted with illegality and is treated as being illegal, event though it,
would have been lawful by itself..
Exception to General Rule of no Recovery of Money or Property
In the following cases, a party to an illegal agreement may sue to recover

money.
(a) Where the transfer is not in pari delicto (equally guilty) with the
defendant, i.e., the transferee. For example, where A is induced to
enter into an illegal agreement by the fraud of B, A may recover the
money paid if he did not now that the contract was illegal.
(b) If the plaintiff can frame a cause of action entirely dependent of the
contract.
(c) Where a substantial part of the illegal transaction was not been carried
out and the plaintiff is truly and genuinely repentant.
Immoral Agreements
An agreement is illegal if its object is immoral or where its consideration is

an act of sexual immorality, e.g., an agreement for future illicit
cohabitation, the agreement is illegal and so unenforceable. Similarly,
where the purpose of the agreement is the furtherance of sexual
immorality and both the parties know this, it is illegal.
The following agreement are void as being against public policy but they
are not illegal:
(a) Agreement in restrain of parental rights: An agreement by which

a party deprives himself of the custody of his child is void.
(b) Agreement in restraint of marriage: An agreement not to marry at

all or not to marry any particular person or class of persons is void as
it is in restraint of marriage.
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(c) Marriage or brokerage agreements: An agreement to procure

marriage for reward is void. Where a purohit (priest) was promised `
200 in consideration of procuring a wife for the defendant, the promise
was held void as opposed to public policy, and the purohit could not
recover the promise sum.
(d) Agreements in restraint of personal freedom are void: Where a

man agreed with his moneylender not to change his residence, or his
employment or to part with any of his property or to incur any
obligation on credit without the consent of the moneylender, it was
held that the agreement was void.
(e) Agreement in restraint of trade: An agreement in restraint of trade

is one which seeks to restrict a person from freely exercising his trade
or profession.
5.5.2 Wagering Agreements
The literal meaning of the word wager is "bet". Wagering agreements are
nothing but ordinary betting agreements. For example, A and B enter into
an agreement that if Indian Team wins the world cup one day cricket
match, A will pay B ` 100 and if it looses, B will pay ` 100 to A. This is a
wagering agreement and nothing can be recovered by winning party under
the agreement.
The essence of gaming and wagering is that one party is to win and the
other to lose upon a future event which at the time of the contract is of an
uncertain nature that is to say, if the event turns out one way A will lose;
but if it turns out the other way he will win.
Wagering Agreements Void
In India, except Mumbai, wagering agreements are void. In Mumbai,

wagering agreements have been declared illegal by the Avoiding Wagers
(Amendment) Act, 1865. Therefore, in Mumbai a wagering agreement
being illegal, is void not only between the immediate parties, but taints and
renders void all collateral agreements to it.
Thus, A bets with B and losses, applies to C for a loan, who pays B in
settlement of A's losses. C cannot recover from A because this is money
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paid "under" or "in respect of" a wagering transaction which is illegal in

Mumbai. But in respect of India such a transaction (i.e., betting) being only
void, C could recover from A. Of course, if A refused to pay B the amount
of the bet that he has lost, B can not sue A. Again, where an agent bets on
behalf of his principal and loses and pays over the money to the winner, he
cannot recover the money from his principal, if the transactions took place
in Mumbai, but elsewhere he can recover. But if the agent wins, he must
pay the winnings to the principal, as this money was received on behalf of
the principal.
Sometimes, commercial transactions assume the form of wagering

contracts. The sample test to find out whether a particular transaction is a
wager or a genuine commercial transaction is: "Where delivery of the
goods sold is intended to be given and taken, it is valid contract, but where
only the differences are intended to be paid, it will be a wagering contract
and unenforceable.
In a wagering contract there must be mutuality in the sense that the gain
of one party should be loss of the other on the happening of an uncertain
event which is the subject matter of the contract.
Void Agreements
The following types of agreements are void under Indian Contract Act:
(a) Agreement by or with a minor or a person of unsound mind or a

person disqualified to enter into a contract - Section 11;
(b) Agreement made under a mistake of fact, material to the agreement

on the part of the both the parties - Section 20.
(c) An agreement of which the consideration or object is unlawful -

Section 23.
(d) If any part of a single consideration for one or more objects, or anyone
or any part of anyone of several considerations for a single object, is
unlawful, the agreement is void - Section 24.
(e) An agreement made without consideration subject to three exceptions

provided to Section 25.
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(f) An agreement in restraint of marriage - Section 26.

(g) An agreement in restraint of trade - Section 27.
(h) An agreement in restraint of legal proceedings - Section 28.
(i) Agreements, the meaning of which is not certain, or capable of being
made certain - Section 29.
(j) Agreement by way of wager - Section 30.

(k) An agreement to enter into an agreement in the future.
(l) An agreement to do an act impossible in itself - Section 56
When contract becomes void
An agreement not enforceable by law is void ab initio - Section 2(g).
A contract which ceases to be enforceable by law becomes void when if

ceases to be enforceable - Section 20)
A contract becomes void when, by reason of some event which the

promisor could not prevent, the performance of the contract becomes
impossible, e.g., by destruction of the subject matter of the contract after
the formation of the contract.
A contract becomes void by reason of subsequent illegality. A in India

agrees to supply goods to B in Pakistan. After the formation of the contract
war breaks out between India and Pakistan and the supply of goods to
Pakistan is prohibited by legislation. The contract becomes void.
A contingent contract to do or not do to anything if an uncertain future

event happens becomes void if the event becomes impossible. Where a
contract is voidable at the option of the aggrieved party the contract
becomes void when the option is exercised by him.
Restitution
When a contract becomes void, it is not to be performed by either party.

But if any party has received any benefit under such a contract from the
other party he must restore it or make compensation for it to the other
party. A agrees to sell to B after 6 months a certain quantity of gold and
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receives Rs 500 as advance. Soon after the agreement, private sales of

gold are prohibited by law. The contract becomes void and A must return
the sum of ` 500 to B.
Restitution is also provided for by Section 65 where an agreement is

discovered to be void.
But there is no resolution where the parties are wholly incompetent to

contract, e.g., where one of the parties is a minor. The minor cannot be
asked to restore the benefit
Contingent Contract
As per Section 31, a contingent contract is a contract to do or not to do

something, if some event collateral to such contract, does or does not
happen. Contract of insurance and contracts of indemnity and guarantee
are popular instances of contingent contracts.
Rules regarding contingent contracts
The following rules are contained in Section 32-36:
(a) Contracts contingent upon the happening of a future uncertain event

cannot be enforced by law unless and until that event has happened. If
the event becomes impossible, the contract becomes void - Section
32.
(i) A makes a contract to buy 8's house if A survives C. This contract

cannot be enforced by law unless and until C dies in A’s lifetime.
(ii) A contracts to, pay B a sum of money when B marries C, C dies

without being married to B. The contract becomes void.
(b) Contracts contingent upon the non-happening of an uncertain future

event can be enforced when the happening of that event becomes
impossible and not before - Section 33. 
 
A contracts to pay B a certain sum of money if a certain ship does not
return. The ship is sunk. The contract can be enforced when the ship
sinks.
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(c) If a contract is contingent upon how a person will act at an unspecified

time, the event shall be considered to become impossible when such
person does anything which renders it impossible that he should so act
within any definite time or otherwise than under further conginencies -
Section 34.
(d) Contracts contingent on the happening of an event within a fixed time

become void if, at the expiration of the time, such event has not
happened, or if, before the time fixed, such event becomes impossible
- Section 35
(e) Contracts contingent upon the non-happening of an event within a

fixed time may be enforced by law when the time fixed has expired
and such event has not happened or before the time fixed has expired,
if it becomes certain that such event will not happen - Section 35
(f) Contingent agreements to do or not to do anything if an impossible

event happens, are void.
5.5.3 Quasi-contracts
Nature of Quasi-contracts
A valid contract must contain certain essential elements, such as offer and
acceptance, capacity to contract, consideration and free consent. But
sometimes the law implies a promise imposing obligations on one party
and conferring right in favour of the other even when there is no offer, no
acceptance, no consensus ad idem, and in fact, there is neither agreement
nor promise. Such cases are not contracts in the strict sense, but the Court
recognises them as relations resembling those of contracts and enforces
them as if they were contracts, hence the term quasi-contracts.
A quasi-contract rests on the equitable principle that a person shall not be

allowed to enrich himself unjustly at the expense of another. In truth, it is
not a contract at all. It is an obligation which the law creates, in the
absence of any agreement, when any person is in the possession of one
person's money, or its equivalent, under such circumstances that in equity
and good conscience he ought not to retain it, and which in justice and
fairness belongs to another. It is the duty and not agreement or intention
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which defines it. A very simple illustration is money paid under mistake.
Equity demands that such money must be paid back.
The following types of quasi-contracts have been dealt within the Indian
Contract Act-
(a) Necessaries supplied to person incapable of contracting or to anyone

whom he is illegally bound to support - Section 68.
(b) Suit for money had and received - Section 69 and 72.
(c) Quantum Meruit
(d) Obligations of a finder of goods - Section 71.
(e) Obligation of person enjoying benefit of a non-gratuitous act. Section

70
Necessaries
Contracts by minors and persons of unsound mind are void. However,

Section 68 provides that their estates are liable to reimburse the trader,
who supplies them with necessaries of life.
Suit for money had and received
The right to life a suit for the recovery of money may arise
(a) Where the plaintiff paid money to the defendant (i) under a mistake,
(ii) in pursuance of a contract the consideration for which has failed, or
(iii) under coercion, oppression, extortion or other such means. A
debtor may recover, from a creditor the amount of an over-payment
made to him by mistake. The mistake may be mistake of fact or a
mistake of law.
(b) Payment to third-party of money which another is bound to pay. For

example, where A's goods are wrongfully attached in order to realise
arrears of Government revenue due by B, and A pays the amount to
save his goods from being sold, he is entitled to recover the amount
from B.
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(c) Money obtained by defendant from third-parties. For example, where

an agent has obtained a secret commission or a fraudulent payment
from a third-party, the principle can recover the amount from the
agent.
Quantum Meruit
The expression "Quantum Meruit" literally means "as much as earned" or

reasonable remuneration. It is used where a person claims reasonable
remuneration for the services rendered by him when there was no express
promise to pay the definite remuneration, Thus, the law implies reasonable
compensation for the services rendered by a party if there are
circumstances showing that these are to be paid for.
The general rule is that where a party to a contract has not fully performed
what the contract demands as a condition of payment, he cannot sue for
payment for that which he has done. The contract has to be indivisible and
the payment can be demanded only on the completion of the contract.
But where one party who has performed part of his contract is prevented
by the other from completing it, he may sue on a quantum meruit, for the
value of what he has done.
The claim on a quantum meruit arises when one party abandons the
contract, or accepts the work done by another under a void contract.
The party in default may also sue on a "quantum meruit" for what he has
done if the contract is divisible and the other party has had the benefit of
the part which has been performed. But if the contract is not divisible, the
party at fault cannot claim the value of what he has done
Obligations of finder of lost goods
The liability of a finder of goods belonging to someone else is that of a

bailee. "This means that he must take as much care of the goods as a man
of ordinary prudence would take of his own goods of the same kind. So far
as the real owner of the goods is concerned, the finder is only a bailee and
must not appropriate the goods to his own use. If the owner is traced, he
must return the goods to him. The finder is entitled to get the reward that
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may have been offered by the owner and also any expenses he may have
incurred in protecting and preserving the property.
Obligation of a person enjoying benefit of non-gratuitous act
Section 70 of the Indian Contract Act provides that where a person lawfully
does something for another person or delivers anything to him without any
intention of doing so gratuitously and the other person accepts and enjoys
the benefit thereof, the latter must compensate the former or restore to
him the thing so delivered. For example, when one of the two joint tenants
pays the whole rent to the landlord, he is entitled to compensation from his
co-tenant, or if A, a tradesmen, leaves goods at B's house by mistake and
B treats the goods as his own, he is bound to pay A for them.
5.6 DISCHARGE,PERFORMANCE AND BREACH OF

CONTRACTS
A contract is said to be discharged or terminated when the rights and

obligations arising out of a contract are extinguished.
Contracts may be discharged or terminated by any of the following modes:
a. performance, i.e., by fulfilment of the duties undertaken by parties or,

by tender.
b. mutual consent or agreement.
c. lapse of time;
d. operation of law;
e. impossibility of performance; and
f. breach of contract.
Performance of Contracts
Section 37 of the Act provides that the parties to a contract must either
perform or offer to perform their respective promises, unless such
performance is dispensed with or excused under the provision of the Indian
Contract Act, or any other law. In case of death of the promisor before
performance, the representatives of the promisor is bound to perform the
promise unless a contrary intention appears from the contract.
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Tender of Performance
In cases of some contracts, it is sometimes sufficient if the promisor

performs his side of the contract. Then, if the performance is rejected, the
promisor is discharged from further liability and may sue for the breach of
contract if he so wishes. This is called discharge by tender.
To be valid, a tender must fulfil the following conditions
(a) it must be unconditional;
(b) if must be made at a proper time and place;
(c) it must be made under circumstances enabling the other party to

ascertain that the party by whom it is made is able and willing then
and there to do the whole of what he is bound, to do by his promise.
(d) if the tender relates to delivery of goods, the promisee must have a
reasonable opportunity of seeing that the thing offered is the thing
which the promisor is bound by his promise to deliver:
(e) tender made to one of several joint promisees has the same effect as a
tender to all of them:
Who can Demand Performance?
Generally speaking, a stranger to contract cannot sue and the person who
can demand performance is the party to whom the promise is made. But
an assignee of the rights and benefits under a contract may demand
performance by the promiser, in the same way as the assignor, (i.e the
promisee) could have demanded.
Effect of Refusal of Party to Perform Wholly
Section 39 provides that when a party to a contract has refused to perform

or disabled himself from performing his promise in its entirety the the
promisee may put an end to the contract unless he had signified by words
or conduct his acquiescence in its continuance.
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By whom Contract must be Performed
Under section 40 of the Act, if it appears from the nature of the case that it
was the intention of the parties to a contract that it should be performed
by the promisor himself such promise must be performed by the promisor
himself. In other cases the promisor or his representative may employ a
competent person to perform it.
Devolution of Joint Liabilities
Under section 42 of the Indian Contract Act, where. two or more persons
have made a joint promise then, unless a contrary intention appears from
the contract all such persons should perform the promise. If anyone of
them dies, his representatives jointly with the survivor or survivors should
perform. After the death of the last survivor, the representatives of all
jointly must fulfil the promise.
Under section 43 of the Indian Contract Act when two or more persons
made a joint promise, the promisee may, in the absence of an express
agreement to the contrary compel anyone or more of such joint promisors
to perform the whole of the promise. Each of two or more joint promisors
may compel every other joint promisor to contribute equally with himself
to the performance of the promise unless a contrary intention appears from
the contract. If anyone of two ore more promisors make default in such
contribution, the remaining join promisors should bear the loss arising from
such default in equal share.
Under section 44 of the Act, where two or more persons have made a joint
promise, a release of one of such joint promisor by the promisees does not
discharge the other joint promisor(s): neither does it free the joint
promisor so released from responsibility to the other joint promisor or joint
promisors.
If a promise is made to two or more persons, the promise is called joint

promise.
Assignment
The promisee may assign rights and benefits of contract and the assignee
will be entitled to demand performance by the promisor. But the
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assignment to be complete and effectual, must be made by an instrument

in writing.
An obligation or liability under a contract cannot be assigned. This is

technically called novation.
Discharge by Mutual Consent
A contract may be discharged by an agreement of all parties to the

contract, or by waiver or release by the partly entitled to perfrom.
The method stipulated under section 62 and 63 for discharging a contract

by mutual consent are:
Novation – When a new contract is substituted for existing contract either

between the same parties or between different parties, the consideration
mutually being the discharge of the old contract.
Alteration – Change in one or more of the material terms of a contract.
Rescission – By agreement between the parties at any time before it is

discharged by performance or in some other way.
Remission – Acceptance of a lesser sum than what was contracted for or

a lesser fulfilment of the promise made.
Waiver – Deliberate abandonment or giving up of a right which a party is

entitled to under a contract, where upon the other party to the contract is
released from his obligation.
Discharge by Lapse of Time
The Limitation Act, in certain circumstance, affords a good defence to suits

for breach of contract, and in fact terminates the contract by depriving the
party of his remedy to law. For example, where a debtor has failed to repay
the loan on the stipulated date the creditor must file the suit against him
within three years of the default. If the limitation period of three years
expires and he takes no action he will be barred from his remedy and the
other party is discharged of his liability to perform.
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Discharge by Operation of the Law
Discharge under this head may take place as follows:
(a) By merger: When the parties embody the inferior contract in a

superior contract.
(b) By the unauthorised alteration of items of a written document: Where

a party to a written contract makes any material alteration without
knowledge and consent of the other, the contract can be avoided by
the other party.
(c) By insolvency: The Insolvency Act provides for discharge of contracts

under particular circumstances. For example, where the Court passes
an order discharging the insolvent, this order exonerates or discharges
him from liabilities on all debts incurred previous to his adjudication.
Discharge by Impossibility or Frustration
A contract which is entered into to perform something that is clearly

impossible is void. For instance, A agrees with B to discover gold by magic.
The agreement is void by virtue of section 56 para 1 which lays down the
principle that an agreement to do an act impossible in itself is void.
Sometimes subsequent impossibility (i.e., where the impossibility

supervenes after the contract has been made) renders the performance of
a contract unlawful and stands discharged; as for example, where a
musician contracts to perform at a concert and becomes too ill to do so,
the contract becomes void. In this connection, para 2 of section 56
provides that a contract to do an act, which after the contract is made
becomes impossible or by reason of some event which the promisor could
not prevent unlawful becomes void when the act become impossible or
unlawful.
If the impossibility is the not obvious and the promisor alone knows of the
impossibility or illegally then existing or the promisor might have known as
such after using reasonable diligence, such promisor is bound to
compensate the promisee for any loss he may suffer through the non-
performance of the promise inspite of the agreement being void ab-initio
(section 56, para 3).
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Discharge by Supervening Impossibility
A contract will be discharged by subsequent or supervening impossibility in

any of the following ways:
(a) Where the subject matter of the contract is destroyed without the fault
of the parties, the contract is discharged.
(b) When a contract is entered into on the basis of the continued existence
of a certain state of affairs the contract is discharged if the state of
things changes or ceases to exist.
(c) Where the personal qualifications of a party is the basis of the

contract, the contract is discharged by the death or physical
disablement of that party.
Discharge by Supervening Illegality
A contract which is contrary to law at the time of its formation is void. But
if, after the making of the contract, owing to alteration of the law or the act
of some person armed with statutory authority the performance of the
contract becomes impossible, the contract is discharged. This is so because
the performance of the promise is prevented or prohibited by a subsequent
change in the law.
Cases in Which there is no Supervening Impossibility
In the following cases contracts are not discharged on the ground of

supervening impossibility
(a) Difficulty of performance: The mere fact that performance is more

difficult or expensive than the parties anticipated does not discharge
the duty to perform.
(b) Commercial impossibilities do not discharge the contract. A contract

does not become expectation of higher profits is not realised.
(c) Strikes, lockouts and civil disturbance like riots do not terminate
contracts unless there is a clause in the contract providing for non-
performance in such cases.
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Supervening Impossibility or illegality is known as "frustration" under

English Law.
Discharge by Breach
Where the promisor neither performs his contract nor does he tender
performance, or where the performance is defective, there is a breach of
contract. The breach of contract may be (i) actual or, (ii) anticipatory. The
actual breach may take place either at the time the performance is due, or
when actually performing the contract. The anticipatory breach, i.e., a
breach before the time for the performance has arrived. This may also take
place in two ways, by the promisor doing an act which makes the
performance of his promise impossible or by the promisor in some other
way showing his intention not to perform it
Anticipatory Breach of Contract
Breach of contract may occur, before the time for performance is due. This
may happen where one of the parties definitely renounces the contract and
shows his intention not to perform it or does some act which makes
performance impossible. The other party, on such a breach being
committed, has a right of action for damages.
He may either sue for breach of contract immediately after repudiation or

wait till the actual date when performance is due and then sue for breach.
If the promisee adopts the latter course, i.e., waits till the date when
performance is due he keeps the contract alive for the benefit of the
promisor as well as for his own. He remains liable under it and enables the
promisor not only to complete the contract in spite of previous repudiation,
but also to avail himself of any excuse for non-performance which may
have come into existence before the time fixed for performance.
Remedies For Breach
Where a contract is broken, the injured party has several courses of action
open to him. The appropriate remedy in any case Will depend upon the
subject-matter of the contract and the nature of the breach.
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I. Remedies for Breach of Contract
In case of breach of contract, the injured party may:
a. Rescind the contract and refuse further performance of the contract;

b. Sue for damages;
c. Sue for specific performance;
d. Sue for an injunction to restrain the breach of a negative term; and
e. Sue on quantum meruit
When a party to a contract has broken the contract, the other party may
treat the contract as rescinded and he is absolved from all his obligations
under the contract. Under section 65, when a party treats the contract as
rescinded, he makes himself liable to restore any benefits he has received
under the contract to the party from whom such benefits were received.
Under section 75 of the Indian Contract Act, if a person rightfully rescinds a
contract he is entitled to a compensation for any damage which he has
sustained through the non-fulfilment of the contract by the other party.
Section 64 deals with consequences of rescission ofcvoidable contracts,
i.e., where there is flaw in the consent of one party to the contract. Under
this section when a person at whose option a contract is voidable rescinds,
the other party thereto need not perform any promise therein contained in
which he is the promisor. The party rescinding a voidable contract shall, if
he has received any benefit there under, from another party to such
contract, restore such benefit so far as may be, to the person from whom it
was received.
II.Damages for Breach of Contract
Under section 73 of the Indian Contract Act, when a contract has been
broken, a party who suffers by such breach is entitled to receive, from the
party who has broken the contract, compensation for any loss or damage,
caused to him thereby, which naturally arose in the usual course of things
from such breach or which the parties knew, when they made the contract
to be likely to result from the breach of it. Such compensation is not to be
given for any remote and indirect loss or damage sustained by reason of
the breach.
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5.7 LIQUIDATED DAMAGES AND PENALTY
Liquidated Damages
Where the contracting parties agree in advance the amount payable in the
event of breach, the sum payable is called liquidated damages.
Unliquidated Damages
Where the amount of compensation claimed for a breach of contract is left

to be assessed by the Court, damages claimed are called unliquidated
damages.
Types of Unliquidated Damages
Those are of the following kinds:
(a)General or ordinary damages, (b) Special damages (c) Exemplary or

punitive damages, and (d) Nominal damages
Ordinary Damages
These are restricted to pecuniary compensation to put the injured party in

the position he would have been had the contract been performed. It is the
estimated amount of loss actually incurred. Thus, it applies only to the
proximate consequences of the breach of the contract and the remote
consequences are not generally regarded. For example, in a contract for
the sale of goods, the damages payable would be the difference between
the contract price and the price at which the goods are available on the
date of the breach.
Special Damages
Special damages are those resulting from a breach of contract under some
peculiar circumstances. If at the time of entering into the contract the
party has notice of special circumstances which makes special loss the
likely result of the breach in the ordinary course of things, then upon his-
breaking the contract and the special loss following this breach, he will be
required to make good the special loss. For example, A delivered goods to
the Railway Administration to be carried to a place where an exhibition was
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being held and told the goods clerk that if the goods did not reach the
destination on the stipulated date he would suffer a special loss. The goods
reached late. He was entitled to claim special damages
Exemplary Damages
These damages are awarded to punish the defendant and are not, as a
rule, granted in case of breach of contract. In two cases, however, the
court may award such damages, viz.,
(i) breach of promise to marry; and

(ii) wrongful dishonour of a customer's cheque by the banker.
In a breach of promise to marry, the amount of the damages will depend

upon the extent of injury to the party's feelings. In the banker's case, the
smaller the amount of the cheque dishonoured, larger will be damages as
the credit of the customer would be injured in a far greater measure, if a
cheque for a small amount is wrongfully dishonoured.
Nominal Damages
Nominal damages consist of a small token award, e.g., a rupee of even 25

paise, where there has been an infringement of contractual rights, but no
actual loss has been suffered. These damages are awarded to establish the
right to decree for breach of contract.
Liquidated Damages and Penalty
Where the contracting parties fix at the time of contract the amount of
damages that would be payable in case of breach, in English law, the
question may arise whether the term amounts to "liquidated damages" or a
"penalty"? The Courts in England usually give effect to liquidated damages,
but they always relieve against penalty.
The test of the two is that where the amount fixed is a genuine pre-
estimate of the loss in case of breach, it is liquidated damages and will be
allowed. If the amount fixed is without any regard to probable loss, but is
intended to frighten the party and to prevent him from committing breach,
it is a penalty and will not be allowed.
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In Indian law, there is no such difference between liquidated damages and

penalty, section 74 provides for “reasonable compensation" upto the
stipulated amount whether it is by way of liquidated damages or penalty.
Specific Performance
It means the actual carrying out by the parties of their contract, and in
proper cases the Court will insist upon the parties carrying out this
agreement. Where a party fails to perform the contract, the Court may, at
its discretion, order the defendant to carry out his undertaking according to
the terms of the contract. A decree for specific performance may be
granted in addition to or instead of damages.
Specific performance is usually granted in contracts connected with land,

e.g., purchase of a particular plot or house, or to take debentures in a
company. In case of a sale of goods, it will only be granted if the goods are
unique and cannot be purchased in the market, e.g., a particular race
horse, or one of special value to the party suing by reason of personal or
family association, e.g., an heirloom.
Specific performance will not be ordered:
(a) where monetary compensation is an adequate remedy;
(b) where the Court cannot supervise the execution of the contract, e.g., a
building contract;
(c) where the contract is for personal service; and
(d) where one of the parties is a minor.
Injunction
An injunction, is an order of a Court restraining a person from doing a

particular act. It is a mode of securing the specific performance of a
negative term of the contract, (i.e., where he is doing something which he
promises not to do), the Court may in its discretion issue an order to the
defendant restraining him from doing what he promised not to do.
Injunction may be prohibitory or mandatory. In prohibitory it is the order of
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the Court restraining the commission of a wrongful act whereas in

mandatory, it restrains continuance of wrongful commission.
5.8 BAILMENT AND PLEDGE
5.8.1 Bailment
A bailment is a transaction whereby one person delivers goods to another

person for some purpose, upon a contract that they are, when the purpose
is accomplished to be returned or otherwise disposed of according to the
directions of the person delivering them (Section 148).
The person who delivers the goods is called the Bailor and the person to
whom they are delivered is called the Bailee. The transaction, is called a
Bailment (Section 148).
Bailment is a ‘voluntary delivery of goods for a temporary purpose 'on the

understanding that they are to be returned in the same of altered form.
The ownership of the goods remains with the bailor, the bailee getting only
the possession. Delivery of goods may be actual or constructive, e.g.,
where the key of a godown is handed over to another person, it amounts
to delivery of goods in the godown.
Gratuitous Bailment
A gratuitous bailment is one in which neither the bailor nor the bailee is
entitled to any remuneration. Such a bailment may be for the exclusive
benefit of the bailor, e.g., when A leaves his dog with a neighbour to be
looked after in A's absence on holiday. It may again to be for exclusive
benefit of the bailee, e.g., where you lend your book to a friend or yours
for a week. In neither case any charge is made.
A gratuitous bailment terminates by the death of either the bailor or the

bailee (Section 162).
Under section 159 the lender of a thing for use may at any time require its
return if the loan was gratuitous, even though he lent it for a specified time
or purpose. But if on the faith of such loan made for a specified time or
purpose, the borrower has acted in such a manner that the return of the
thing lent before the time agreed upon would cause him loss exceeding the
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benefit actually derived by him from the loan, the lender must, if he
compels the return, indemnify the borrower the amount in which the loss
so occasioned exceeds the benefit so derived.
Bailment for Reward
This is for the mutual benefit of both the bailor the bailee. For example, A
lets out a motor-car for hire to B. A is the bailor and receives the hire
charges and B is the bailee and gets the use of the car. Where, A hands
over his goods to B, a carrier for carriage at a price. A is the bailor who
enjoys the benefit of carriage and B is the bailee who receives a
remuneration for carrying the goods.
Duties of Bailee
The bailee owes the following duties in respect of the goods bailed to him:
(a) The bailee must take as much care of the goods bailed to him as a
man of ordinary prudence would take under similar circumstances of
his own goods of the same bulk, quality and value as the goods bailed
(Section 151). If he takes this much care he will not be liable for any
loss, destruction, or deterioration of the goods bailed (Section 152).
The degree of care required from the bailee is the same whether the
bailment is for reward or gratuitous. Of course, the bailee may agree
to take special care of the goods, e.g., he may agree to keep the
property safe from all perils and answers for accidents or thefts. But
even such a bailee will not be liable for loss happening by an act of
God or by public enemies.
(b) The bailee is under a duty not to use the goods in an unauthorised
manner or for unauthorised purpose (Section 153). If he does so, the
bailor can terminate the bailment, and claim damages for any loss or
damage caused by the unauthorised used (Section 154).
(c) He must keep the goods bailed to him separate from his own goods
(Sections 155-157). If the bailee without the consent of the bailor,
mixes the goods of the bailor with his own goods, the bailor and the
bailee shall have an interest, in production to their respective shares,
in the mixture thus produced. If the bailee without the consent of the
bailor, mixes the goods of the bailor with his own goods, and the goods
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can be separated or divided, the property in the goods remains in the

parties respectively; but the bailee is bound to bear the expenses of
separation, and any damages arising from the mixture. If the bailee
without the consent of the bailor mixes, the goods of the bailor with
his own goods, in such a manner that it is impossible to separate the
goods bailed from the other goods and deliver them back, the bailor is
entitled to be compensated by the bailee for the loss of goods.
(d) He must not set up an adverse title to the goods.
(e) It is the duty of the bailee to return the goods without demand at the
time fixed or when the purpose is accomplished (Section 160). If he
fails to return them, he shall be liable for any loss, destruction or
deterioration of the goods even without negligence on his part (Section
161)
(f) In the absence of any contract to the contrary, the baliee must return
to the bailor any increase, accretion, or profits which have accrued
from the goods bailed; for example, when A leaves a cow in the
custody of B to be taken care of and the cow gets a calf, B is bound is
deliver the cow as well as the calf to A.
Duties of bailor
The bailor has the following duties:
(a) The bailor must disclose all the known faults in the goods; and if he
fails to do what, he will be liable for any damage resulting directly from
the faults (Section 150). For example, A delivers to B a carrier, some
explosive in a case, but does not warn B. The case is handled without
extraordinary care necessary for such articles and it explodes. A is
liable for all the resulting damage to men and other goods. 
 
In the case of bailment for hire, a still greater responsibility is placed
on the bailor. He will be liable even if he did not know of the defects
(Section 150). A hires a carriage of B. The carriage is unsafe though B
does not know this. A is injured. B is responsible to A for the injury.
(b) It is the duty of the bailor to pay any extraordinary expenses incurred
by the bailee. For example, if a horse is lent for a journey, the expense
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of feeding the house would, of course, subject to any special

agreement be borne by the bailee. If however the horse becomes ill
and expenses have been incurred on its treatment, the bailor shall
have to pay these expenses (Section 158).
(c) The bailor is bound to indemnify the bailee for any cost or costs which
the bailee may incur because of the defective title of the bailor of the
goods bailed.(Section 164).
Bailee's Particular Lien (Section 170)
Where the goods are bailed for a particular purpose and the bailee in due
performance of bailment, extends his skill and labour, he has in the
absence of an agreement of the contrary a lien on the goods, i.e., the
bailee can retain the goods until his charges in respect of labour and skill
used on the goods are paid by the bailor. A gives a piece of cloth to B, a
tailor, for making it into a suit, B promises to have the suit ready for
delivery within a fortnight, B has the suit ready for delivery. He has a right
to retain the suit until he is paid his dues. The section expresses the
common law principle that if a man has an article delivered to him on the
improvement of which he has to bestow trouble and expenses, he has a
right to detain it until his demand is met.
The right of lien arises only where labour and skill have been used so as to
confer an additional value on the article.
Particular and General Lien
Liens are of two kinds: Particular lien and General lien. A particular lien is
one which is available only against that property of which the skill and
labour have been exercised. A bailee's lien is a particular lien.
A general lien is a right to detain any property belonging to the other and
is in possession of the person trying to exercise the lien in respect of any
payment lawfully due to him.
Thus, a general lien is the right retain the property of another for a general
balance of accounts but a particular lien is a right to retain only for a
charge on account of labour employed or expenses bestowed upon the
identical property detained.
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The right of general lien is expressly given by section 171 of the Indian
Contract Act to bankers, factors, wharfingers, attorneys of High Court and
policy-brokers, provided there is no agreement to the contrary.
Termination of bailment
Where the bailee wrongfully uses or disposes of the goods bailed, the bailor
may determine the bailment (Section 153).
As soon as the period of bailment expires or the object of the bailment has.
been achieved, the bailment comes to an end, and the bailee must return
the goods to the bailor (Section 160). Bailment is terminated when the
subject matter of bailment is destroyed or by reason of change in its
nature, becomes incapable of use for the purpose of bailment.
A gratuitous bailment can be terminated by the bailor at any time, even

before the agreed time, subject to the limitation that where termination
before the agreed period causes loss in excess of benefit, the bailor must
compensate the bailee (Section 159).
A gratuitous bailment terminates by the death of either the bailor or the

bailee (Section 162).
Finder of Lost Goods
The position of a finder of lost goods is exactly that of a bailee. The rights
of a finder are that he can sue the owner for any reward that might have
been offered, and may retain the goods until he receives the reward and
may sue for the reward. But where the owner has offered no reward, the
finder has only a particular lien and can detain the goods until he receives
compensation for the troubles and expenses incurred in preserving the
property for finding out the true owner. But he cannot file a suit for the
recovery of the compensation [Section 168].
Thus, as against the true owner, the finder of goods in a public or quasi
public place is only a bailee; he keeps the article in trust for the real owner.
As against everyone else, the property in the goods vests in the finder on
his taking possession of it
The finder has a right to sell the property
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(a) where the owner cannot with reasonable diligence be found, or
(b) when found, he refuses to pay the lawful charges of the finder and (i)
if the thing is in danger of perishing or losing greater part of its value,
or (ii) when the lawful charges of the finder for the preservation of
goods and the finding out of the owner amounts to two-thirds of the
value of the thing (Section 169).
Carrier as Bailee
A common carrier undertakes to carry goods of all persons who are willing
to pay his usual or reasonable rates. He further undertakes to carry them
safely, and make good all loses, unless they are caused by act of God or
public enemies. Carriers by land, including railways, and carriers by inland
navigation, are common carriers. Carriers by Sea for hire are not common
carriers and they can limit their liability. Railways in India are now common
carriers.
Innkeeper: The liability of a innkeeper is governed by sections 151 and 152

of the Contract Act and is that of an ordinary bailee with regard to the
property of the guests..
C stayed in a room in a hotel: The innkeeper knew that the room was in an
insecure condition. While C was dining in the dining room, some articles
were stolen from his room. It was held that the innkeeper was liable as he
should have taken reasonable steps to rectify the in-secure condition of the
rooms.
5.8.2 Pledge
Pledge or pawn is a contract whereby an article is deposited with a lender

of 'money or promisee as security’ for the repayment of a loan or
performance of a promise. The bailor or depositor is called the "Pawnor"
and the bailee or depositee the "Pawnee" (Section 172). Since pledge is a
branch of bailment, the pawnee is bound to take reasonable care of the
goods pledged with him. Any kind of goods, valuables, documents or
securities may be pledged. The Government securities, e.g., promissory
notes must, however, be pledged by endorsement and delivery.
The following are the essential ingredients of a pledge:'
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(i) The property pledged should be delivered to the pawnee.

(ii) Delivery should be in pursuance of contract.
(iii) Delivery should be for the purpose of security.
(iv) Delivery should be upon a condition to return.
Rights of the Pawnee
No property in goods pawned passes to the pawnee, but the pawnee gets a
"special property to retain possession even against the true owner until the
payment of the debt, interest on the debt, and any other expense incurred
in respect of the possession or for preservation of the goods" (Section
173). The pawnee must return the goods to the pawnor on the tender of all
that is due to him. The pawnee cannot confer a good title upon a bona fide
purchaser for value.
Should the pawnor make a default in payment of the debt or performance

of the promise, at the stipulated time, the pawnee may
(i) file a suit for the recovery of the amount due to him while retaining the
goods pledged as collateral security; or
(ii) sue for the sale of the goods and the realisation of money due to him;
or
(iii) himself sell the goods pawned, after giving reasonable notice to the
pawnor, sue for the deficiency, if any, after the sale.
If the sale is made in execution of a decree, the pawnee may buy the
goods at the sale. But he cannot sell them to himself in a sale made by
himself under (iii) above. If after sale of the goods, there is surplus, the
pawnee must pay it to the pawnor (Section 176).
Rights of Pawnor
On default by pawnor to repay on the stipulated date, the pawnee may sell
the goods after giving reasonable notice to the pawnor. If the pawnee
makes an unauthorised sale without giving notice to the pawnor, the
pawnor has the following rights
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(i) to file a suit for redemption of goods by depositing the money treating
the sale as if it had never taken place; or
(ii) to ask for damages on the ground of conversion.
Pledge by Non-owners
Ordinarily, the owner of the goods would pledge them to secure a loan but
the law permits under certain circumstances a pledge by a person who is
not the owner but is in possession of the goods. Thus, a valid pledge may
be created by the following non-owners.
(a) A mercantile agent: Who with the consent of the owner, in possession
of goods or documents of title to goods may, in the ordinary course of
his business as mercantile agent, pledge the goods, such a pledge will
bind the owner (Section 178).
(b) Seller or buyer in possession after sale: A seller, left in possession of

goods sold, is no more the owner, but pledge by him will be valid,
provided the pawnee acted in good faith and had no notice of the sale
of goods to the buyer (Section 30 of The Sale of Goods Act 1930).
(c) Pledge having limited interest: When the pawnor is not the owner of
the goods but has a limited interest in the goods which he pawns, e.g.,
he is a mortgagee or he has a lien with respect of these goods, the
pledge will be valid to the extent of such interest.
(d) Pledge. by co-owner: One of the joint-owners in sole possession of

goods, with consent of the others can make a valid pledge
(e) Pledge by person in possession under a voidable contract.- A person

may obtain possession under a contract which is voidable at the option
of the lawful owner on the ground of misrepresentation, fraud, etc. The
person in possession may pledge the goods before the contract is
avoided by the other party.(Section 178A)
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1. Search on Google ‘Amendments in Indian Contract Act,1872’ and note

down the amendments done in section 28 of the Act.
2. Identify the offer, acceptance and invitation to offer of the activity of a

person withdrawing cash from ATM of a Nationalised Bank.
3. The book you have borrowed from a public library is lost. Write down in
sequence the actions you will take in this situation.
5.10 SUMMARY
• Only after acceptance of an offer, an agreement is created.
• Agreements with considerations are called contracts.
• The suffering party is awarded damages in the case where the party to a
contract does not meet its obligations.
• An offer must be firm, unambiguous and clear.
• In a tender, the persons submitting tenders offer and the person inviting
tenders accepts or rejects it.
• Acceptance is to be communicated to a person making the offer.
• Agreements without consideration are not enforceable.
• If the consent is caused by mistake of both the parties then the

agreement is void.
• Void agreements are those which are taken not to have come in
existence at all. These are not enforceable.
• Quasi-contracts create certain relations resembling those created by

contract and are enforceable.
• Offer to perform is called tender of performance.
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• A contract is discharged by new agreement or by operation of law.
• Supervening impossibility or frustration also discharges a contract.
• The amounts provided to compensate the damages in case of breach of a

contract is called liquidated damages.
• Normally, the mental suffering due to breach of contract is not awarded

by the courts.
• A ‘bailment’ is the delivery of goods by one person to another for some

purpose, upon a contract that they shall, when the purpose is
accomplished, be returned or otherwise disposed of according to the
direction of the person delivering them.
• The person delivering the goods is called the ‘bailor’ and the person to
whom they are delivered is called ‘bailee’.
• Lien means right to retain possession of goods until some debt or claim is
settled. A lien may be a ‘particular lien’ or a ‘general lien’.
1. Give brief definition of ‘Agreement’ and of ‘Contract’.
2. Write short notes on (i) Valid Contract, (ii) Void Contract, (iii) Illegal
Contract, (iv) Unilateral Contract, and (v) Bilateral Contract
3. Define an offer and state essentials of a valid offer.
4. State the similarities and differences between an offer and an invitation

to offer.
5. When the offer is complete and when can it be revoked?
6. Define acceptance and state the legal rules governing valid acceptance.
7. What are the effects of mistakes on contract?
8. What are the major heads of a public policy?
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9. Define ‘quasi contracts’.
10.What is ‘discharge of a contract’? State the different ways in which it

can be discharged.
11.What is ‘performance of a contract’? What is ‘breach of contract’?
12.Give the definition of bailment and write its characteristic features.
13.Discuss the various types of bailment.
14.Discuss the rights and duties of bailor and bailee.
15.Define a pledge and discuss the rights of pledgee and pledgor.
16.State the differences between Mortgage and Pledge.
17.State the circumstances in which the contract of bailment stands

terminated.
18.Distinguish between Bailment and Sale.
1. Agreements with considerations are called as –
a. Documents
b. Files
c. Contracts
d. Amendments
2. The amounts provided to compensate the damages in case of breach of

a contract is called ____.
a. Compensation
b. Liquidated damages
c. Penalty
d. All of the above
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3. In cases of Contracts and Agreements, the Indian Contract Act of

______ is referred in India.
a. 1872
b. 1956
c. 1947
d. 1950
4. In case of a contract, change in one or more terms of a contract is

known as –
a. Novation
b. Rescission
c. Alteration
d. Remission
5. In case of bailment, the person delivering the goods is called as –
a. Courier
b. Carrier
c. Bailee
d. Bailor
Answers : (1-c), (2-b), (3-a), (4-c), (5-d).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !136
CONTRACTS OF INDEMNITY AND GUARANTEE
Chapter 6
CONTRACTS OF INDEMNITY AND
GUARANTEE
Objectives
After completing the chapter, you will be able to understand the definition
and details of contract of indemnity, meaning and detailing of contract of
guarantee, and the differences between continued and specific guarantee.
You will also understand the rights and liabilities of surety, creditor and
main debtor, and the difference between contract of indemnity and contract
of guarantee.
Structure:
6.1 Contract of Indemnity

6.2 Essentials of Contract of Indemnity
6.3 Contract of Guarantee
6.4 Essentials of Contract of Guarantee
6.5 Types of Guarantee
6.6 Right of Surety
6.7 Discharge of Surety
6.8 Distinction Between Indemnity and Guarantee
6.9 Activities
6.10 Summary
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6.1 CONTRACT OF INDEMNITY
A contract of indemnity is a contract by which one party promises to save

the other party from loss caused to him by the conduct of the promisor
himself, or by the conduct of any other person (Section 124). For example,
A contracts to indemnify B against the consequence of any proceedings
which C may take against B in respect of a certain sum of 10,000 rupees.
This is a contract of indemnity. The contract of indemnity may be express
or implied, and the later may be inferred from the circumstances of a
particular case, e.g., an act done by A at the request of B. If A incurs any
expenses, he can recover the same from B.
The person who promises to indemnify or make good the loss is called the
indemnifier and the person whose loss is made good is called the
indemnified or the indemnity holder. A contract of insurance: is an example
of a contract of indemnity according to English Law. In consideration of
premium the insurer promises to make good and loss suffered by the
assured account of the destruction by fire of his property insured against
fire.
Under the Indian Contract Act, the contract of indemnity is restricted to

such cases only where the loss, promised to be reimbursed, is caused by
the conduct of the promisor or of any other person. The loss caused by
events or accidents which do not depend on the conduct of any person, it
seems, cannot be, sought to be reimbursed under a contract of indemnity,
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6.2 ESSENTIALS OF CONTRACT OF INDEMNITY
The following conditions are necessary for a contract of Indemnity -
(a) The number of parties should be two - Indemnifier and Indemnified.
(b) The contract of Indemnity has to follow all the rules of contract.
(c) The Contract of Indemnity may be express or implied.
(d) If and only if the indemnity holder suffers the loss against which the
indemnity holder was promised to be protected, can enforce the
contract.
(e) For compensation of the claim, consideration is essential in case of

Indemnity contract.
(f) Commencement of indemnifier’s liability has to be established.
Therefore, ‘to indemnify does not only mean to reimburse in respect of

money paid, but to save from loss in respect of liability against which the
indemnity has been given, if it be held that payment is the condition,
precedent to recovery, the contract may be of little value to the person to
be indemnified who may be unable to meet the claim in the first instance.’
If the indemnified had incurred a liability and that liability is absolute, he is
entitled to call upon the indemnifier to save him from that liability and pay
it off.
Rights of Indemnity Holder
Under Section 125, the promisee, in a contract of indemnity, acting within

the scope of his authority, is entitled to recover from the promisor the
following -
1. all damages which he may be compelled to pay in any suit in respect

of any matter to which the promise to indemnity applies;
2. all costs which he may be compelled to pay in any such suit if, in
bringing or defending it, he did not contravene the orders of the
promisor, and acted as if it would have been prudent for him to act in
! !139
the absence of any contract of indemnity, or if the promisor authorised

him to bring or defend the suit; and
3. all sums which he may have paid under the terms of any compromise
of any such suit, if the compromise was not contrary to the orders of
the promisor, and was one which it would have been prudent for the
promisee to make in the absence of any contract of indemnity, or if the
promisor authorised him to compromise the suit.
6.3 CONTRACT OF GUARANTEE
A contract of guarantee is a contract to perform the promise, or discharge

the liability of a third person in case of default. The person who gives the
guarantee is called the Surety, the person for whom the guarantee is given
is called the Principal Debtor; and the person to whom the guarantee is
given is called the Creditor (Section 126). A guarantee may be either oral
or written, although in the English law, it must be in writing.
Illustration
M advances a loan of ` 15,000 to N and X promises to M that if N does not

repay the loan, X will do so. This is a contract of guarantee. Here N is the
principal debtor, M is the creditor and X is the surety or guarantor.
Like a contract of indemnity, a guarantee must also satisfy all the essential
elements of a valid contract. There is, however, a special feature with
! !140
regard to consideration in a contract of guarantee. The consideration

received by the principal debtor is sufficient for surety. Section 127
provides that anything done or any promise made for the benefit of the
principal debtor may be a sufficient consideration to the surety for giving
the guarantee.
Illustration
N requests M to sell and deliver to him goods on credit. M agrees to do so,

provided X will guarantee the payment of the price of the goods. X
promises to guarantee the payment in consideration of M's promise to
deliver the goods. This is sufficient consideration for X's promise.
6.4 CONTRACT OF GUARANTEE – ESSENTIALS
The following conditions are necessary for a Contract of Guarantee -
a. Agreement between Three Parties – Every contract of guarantee

includes three agreements between (i) The creditor and the principal
debtor, (ii) The surety and the creditor, and (iii) the surety and the
principal debtor. These three parties are necessary to form a Contract of
Guarantee. The guarantee or surety is the most essential person of the
contract.
b. Contract type – The contract may be in writing or oral. Also, the

conditions of party’s competency, free consent, consideration, etc.,
should be passed in order to make the contract legal in the eyes of
law. Again, it should be seen that the consideration should not be a
benefit to the surety himself. It may be a benefit to the principal debtor.
The lawful consideration must also be there to make the contract valid.
c. Secondary Liability – If debtor requests the obligation, it is contract of

guarantee. And if it is undertaken without request of the debtor, it is
contract of indemnity. It should be clearly understood that in case of a
contract of guarantee, the primary liability is always with the principle
debtor.
d. Existing Liability – It is not necessary that the principal contract must

be in existence at the time the contract of guarantee is made, the
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original contract by which the principal debtor undertakes to repay the

money to the creditor may be about to come into existence.
e. Consideration – The Contract of Guarantee follows all rules of a valid

contract. The things done for the benefits of the principal debtor is
considered as ‘consideration’ of the guarantee to make the contract
valid. The legal intention confirmed by the promisee at the promisor’s
request is sufficient to establish the element of consideration.
f. Competency – All of the parties, i.e. the principle debtor, surety and
the creditor must be competent to make a contract. In some cases,
however, the surety is liable, though the principal debtor is not liable.
So, the original contract is void as is the case of a contract with a minor,
the surety is liable not only as surety, but also as a principal debtor. A
person of unsound mind can not give a valid guarantee.
g. Consent – Generally a contract of guarantee is not a contract of the

utmost good faith. Mere non-disclosure will not affect the contract of
surety, unless there is an intentional concealment. When the guarantee
is taken for good behavior of an employee, the employer must disclose
any misconduct of the principal debtor in his office of which he is aware.
Normally, concurrence of all parties must be there for a valid contract of
guarantee
h. The Promise to Pay must be Conditional – There must be a

conditional promise to be liable on the default of the principal debtor.
The liability of the surety should arise only when the principal debtor
makes a default. Any liability, which is incurred independently of the
default of the principal debtor, is out of scope of guarantee.
6.5 TYPES OF GUARANTEE
A contract of guarantee may be for an existing debt, or for a future debt. It

may be a specific guarantee, or it may be continuing guarantee. A specific
guarantee is given for a single debt and comes to an end when the debt
guaranteed has been paid.
Apart from the above types, a few more types of guarantee can be
considered – viz. part guarantee, absolute guarantee, conditional
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guarantee, limited guarantee, unlimited guarantee, etc. Of all these types,

continuing guarantee is most widely in use.
Continuing Guarantee – As per section 129, a continuing guarantee is one

which extends to a series of transactions.
Illustration: It is a continuing guarantee where M, in consideration of N's

discounting, at M's request, bills of exchange of X, guarantees to N for 12
months, the due payment of all such bills to the extent of ` 50,000, or M
becomes answerable to X for N's purchases from X for 6 months to the
extent of ` 50,000.
Revocation of Continuing Guarantee
A continuing guarantee is revoked in the following circumstances:
(a) By notice of revocation by the surety (Section 130) : The notice

operates to revoke the surety's liability as regards future transactions.
He continues to be liable for transactions entered into prior to the
notice.
(b) By the death of the surety: The death of the surety operates, in the
absence of contract, as a revocation of a continuing guarantee, so far
as regards future transactions (Section 131). But for all the
transactions made before his death, the surety's estate will be liable.
6.6 RIGHTS OF SURETY
A surety has certain rights against the creditor, (Section 141) the principal
debtor (Sections 140 and 145) and the co-securities (Sections 146 and
147) these are as under -
(a) Surety's rights against the creditor: Under section 141 a surety is
entitled to the benefit of every security which the creditor has against
the principal debtor at the time when the contract of surety is entered
into whether the surety knows of the existence of such security or not;
and, if the creditor losses or, without the consent of the surety parts
with such security, the surety is discharged to the extent of the value
of the security.
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(b) Rights against the principal debtor: After discharging the debt, the
surety steps into the shoes of the creditor or is subrogated to all the
rights of the creditor against the principal debtor. He can then sue the
principal debtor for the amount paid by him to the creditor on the
debtor's default; he becomes a creditor of the principal debtor for what
he has paid. 
 
In some circumstances, the surety may get certain rights even before
payment. The surety has remedies against the principal debtor before
payment and after payment. The surety can compel the debtor, after
debt has become due to exonerate him from his liability by paying the
debt.
(c) Surety's rights against co-sureties: When a surety has paid more than
his share of debt to the creditor, he has a right of contribution from the
co-securities who are equally bound to pay with him. A, B and C are
sureties to D for the sum of ` 30,000 lent to E who makes default in
payment. A, B and C are liable, as between themselves to pay `
10,000 each. If anyone of them has to pay more than ` 10,000 he can
claim contribution from the other two to reduce his payment to only `
10,000. If one of them becomes insolvent, the other two shall have to
contribute the unpaid amount equally.
Rights of Creditor :
a. Demand due payment – Even though the debt is time barred against
the principal debtor, or the principal debtor has been adjudged as
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bankrupt or the principal debtor’s contract has become void, if the

liability of the surety arises, the creditor is entitled to demand payment
from the surety. He can file a suit against the surety without suing the
principal debtor, even if the principal debtor is solvent. The liability of
the surety is immediate and not to be deferred until the creditor has
exhausted his remedies against the principal debtor.
b. Proceed against surety before resorting to debtor – A creditor can

directly proceed against the surety before resorting to the securities
deposited by the principal debtor, although the liability of the surety
becomes primary one along with the principal debtor.
c. Claim for legal expenses – A creditor can claim the cost of fruitless legal
suit against the principal debtor sued at the request of the surety. The
creditor has the right of general lien either on the balance of the
surety’s account or on surety’es securities in his possession.
d. Provide against the official receiver in case of surety’s insolvency – If

the surety becomes insolvent, the creditor has the right to recover the
dues from the estate of the insolvent party.
e. Proceed against any one surety in the case of co-sureties – In case of

co-sureties, the creditor will be at liberty to proceed against any one of
the sureties for the whole debt.
f. Concurrent Remedy – A creditor can also pursue his remedy

concurrently against both the principal debtor and the surety, and obtain
a decree against both in the same suit.
6.7 DISCHARGE OF SURETY
A surety may be discharged from liability under the following

circumstances:
a. By notice of revocation in case of a continuing guarantee as regards

future transaction. (Section 130.)
b. By the death of the surety as regards future transactions, in a

continuing guarantee in the absence of a contract to the contrary
(Section 131).
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c. Any variation in the terms of the contract between the creditor and the
principal debtor, without the consent of the surety, discharges the
surety as regards all transactions taking place after the variation
(Section 133).
d. A surety will be discharged if the creditor releases the principal debtor,

or acts or makes on omission which results' in the discharge of the
principal debtor (Section 134). But where the creditor fails to sue the
principal debtor within the limitation period, the surety is not
discharged.
e. Where the creditor, without the consent of the surety, makes an

arrangement with the principal debtor for composition, or promises it
give him time or not to sue him, the surety will be discharged (Section
135).
f. If the creditor does any act which is against the rights of the surety, or
omits to do an act which his duty to surety requires him to do, and the
eventual remedy of the surety himself against the principal debtor is
hereby impaired,the surety is discharged (Section 139).
g. If the creditor loses or parts with any security which at the time of the
contract the debtor had given in favour of the creditor, the surety is
discharged to the extent of the value of the security, unless the surety
consented to the release of such security by creditor in favour of the
debtor. It is immaterial whether the surety was or is aware of such
security or not (Section 141).
Illustrations
1. X guarantees to Y to the extent of ` 10,000 that C shall pay all the bills
that B shall draw upon him. B draws upon C, C accepts the bill. A gives
notice of revocation, C dishonours the bill at maturity. A is liable upon
his guarantee (Section 130).
2. A becomes surety to C for B's conduct as a manager in C's bank.

Afterwards B and C contracts without A's consent that B's salary shall be
raised and that he shall become liable for one-fourth of the losses on
overdrafts. B allows a customer to overdraw and the bank loses a sum
of money. A is discharged from his suretyship by the variance made
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without his consent, and is not liable to make good this loss (Section
133).
3. C contracts to lend B ` 5,000 on 1st March, A guarantees repayment. C

pays the money to B on 1 st of January. A is discharged from his
liability. A is discharged from his liability, as the contract has been
varied in as much as C might sue B for the money before 1 st of March,
(Section 133).
4. X contracts with B to build a house for a fixed price within a stipulated

time, Y supplying the necessary timber. Z guarantees X's performance.
Y omits to supply the timber. Z is discharged from liability (Section
134).
5. B contracts to build a ship for C for a given sum, to be paid by

instalments as the work reaches certain stages. A becomes surety to C
for B's due performance of the contract, without the knowledge of A, C
prepays to B the last two instalments. A is discharged by this
prepayment (Section 139).
Extent of Surety's liability
The liability of the surety is co-extensive with that of the principal debtor
unless the contract otherwise provides (Section 128). A creditor is not
found to proceed against the principal debtor. He can sue the surety
without suing the principal debtor. As soon as the debtor has made default
in payment of the debt, the surety is immediately liable. But until default
the creditor cannot call upon the surety to pay. In this sense, the nature of
the surety's liability is secondary.
Illustration
A guarantees to B the payment of a bill exchange by C, the acceptor. The

bill is dishonoured by C. A is liable not only for the amount of the bill but
also for any interest and charges which may have become due on it.
Section 128 only explains the quantum of a surety's obligation when terms
of the contract do not limit it. Conversely, it doesn't follow that the surety
can never be liable when the principal debtor cannot be held liable. Thus, a
surety is not discharged from liability by the mere fact that the contract
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between the principal debtor and creditor was voidable at the option of the
former, and was avoided by the former. Where the agreement between the
principal debtor and creditor is void as for example in the case of minority
of principal debtor, the surety is liable as a principal debtor; for in such
cases the contract of the so-called surety is not collateral, but a principal
contract.
6.8 DISTINCTION BETWEEN INDEMNITY AND GUARANTEE
A contract of indemnity differs from a contract of guarantee in the following

ways:
a. In a contract of indemnity, there are only two parties: the indemnifier

and the indemnified. In a contract of guarantee, these are three parties;
the surety, the principal debtor and the creditor.
b. In a contract of indemnity, the liability of the indemnifier is primary. In a

contract of guarantee, the liability of the surety is secondary. The surety
is liable only if the principal debtor makes a default, the primary liability
being that of the principal debtor.
c. The indemnifier need not necessarily act at the request of the debtor;
the surety gives guarantee only at the request of the principal debtor.
d. In the case of a guarantee there is an existing debt or duty, the

performance of which is guaranteed by the surety, whereas in the case
of indemnity the possibility of any loss happening is the only
contingency against which the indemnifier undertakes to indemnify.
e. The surety, on payment of the debt when the principal debtor has failed
to pay is entitled to proceed against the principal debtor in his own
right, but the indemnifier cannot sue third-parties in his own name,
unless there is an assignment. He must sue in the name of the
indemnified.
Your friend had sent you your 2 wheeler vehicle through Railway carriage
from Delhi to Pune, which has to be cleared on production of receipt sent
by him to you through courier. However, you have lost the receipt and the
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two-wheeler is to be retrieved urgently. Prepare a draft of the Indemnity

Bond required, mentioning all the essentials of the Contract of Indemnity.
6.11 SUMMARY
• Indemnity is an undertaking to compensate a person from the losses

from the conduct of any other person.
• A contract of indemnity is a contract and therefore is subject to all the

rules of a contract.
• A contract of indemnity comes into force only when the promisee suffers
a loss.
• A contract of guarantee is applicable where a person stands surety for

payment of a loan advanced to another person. The person who is
guaranteeing is called as surety.
• A contract of guarantee does not necessarily need a consideration.
• The liability of surety is co-extensive with the debtor, unless provided/

mentioned otherwise. The creditor can move against either in the default
of payment.
• If the principal debtor is released, the surety is also released, whatever

may be the reason.
• There are two parties in case of indemnity, while there are three parties
in case of a guarantee.
• The risk in case of indemnity is contingent, while that in case of

guarantee it is absolute.
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1. List the essentials and legal rules for a valid contract of indemnity.
2. State the different rights of the indemnity holder when he is sued.
3. Define a contract of indemnity.
4. Write down the definition of a contract of guarantee and mention its

essentials.
5. What are the legal necessities for a valid contract of guarantee?
6. If the principal debtor is a minor, what is the position of the surety?
7. What are the various types of guarantee?
8. Define a continuing guarantee and state how it can be revoked?
9. Explain how the surety is a favored debtor in case of a guarantee.
10.Write short note on ‘Performance Guarantee’
11.Distinguish between a contract of indemnity and a contract of

guarantee.
1. The number of parties to make a contract of indemnity are –
a. Three
b. Four
c. Two
d. Any number
2. To compensate the indemnity holder’s claim in case of an indemnity,

_______ is essential.
a. Pleading of the indemnifier

b. Consideration
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c. Stamped and signed contract

d. Faith of the indemnifier
3. The guarantee in which a series of transactions are guaranteed is known

as -
a. Specific guarantee
b. Conditional guarantee
c. Continuing guarantee
d. All of the above
4. In case of guarantee, the person who gives the guarantee is known as –
a. Surety
b. Creditor
c. Principal debtor
d. Indemnifier
5. The person to whom the guarantee is given is called as -
a. The debtor
b. The guarantor
c. The surety
d. The creditor
Answers : (1-c), (2-b), (3-c), (4-a), (5-d).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !152
SALE OF GOODS AND CONTRACTS
Chapter 7
Objectives
After completion of this chapter, you will be able to know in detail about
the characteristics of a contract of sale and agreement to sell; about the
express and implied conditions and warranties in a contract of sale; about
the rules of delivery of goods; about the transfer of property possession of
risk; about the rights and duties of a buyer and a seller in a contract of
sale; and the rights of the unpaid seller against the goods sold and against
the buyer.
Structure:
7.1 The Sale of Goods Act,1930
7.2 Contract of Sale of Goods - Format
7.3 Terms, Conditions and Warranties
7.4 Implied Conditions of Contract
7.5 Performance of the Contract
7.6 Transfer of Property
7.7 Rights and Duties of Buyer
7.8 Rights of Unpaid Seller
7.9 Actions for Breach of Contract
7.10 F.O.R., F.O.R., C.& F. and C.I.F. Contracts
7.12 Summary
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7.1 THE SALE OF GOODS ACT, 1930
7.1.1 The Act
Section 4(1) of the Sale of Goods Act, 1930 defines “A contract of sale of
goods is a contract whereby the seller transfers of agrees to transfer the
property in goods to the buyer for a price”.
Title, extent and commencement
This Act may be called the Sale of Goods Act,1930.
It extends to the whole of India (except the State of Jammu and Kashmir).
It came into force on the 1st day of July, 1930.
Definitions In this Act, unless there is anything repugnant in the subject

of content—
‘buyer’ means a person who buys or agrees to buy goods,
‘delivery’ means voluntary transfer of possession from one person to

another.
Applications of provisions
The unrepealed provisions of the Indian Contract Act, 1872 save insofar as
they are inconsistent with the express provisions of this Act, shall continue
to apply to contracts for sale of goods.
7.1.2 Sale and agreement to sell
The ‘Sale’ and ‘Agreement to Sale’ differ in the following ways –
• A contract of sale of goods is a contract whereby the seller transfers or

agrees to transfer the property in goods to the buyer for a price. There
may be a contract of sale between one part-owner and another.
• A contract of sale may be absolute or conditional.
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• Where under a contract of sale the property in the goods in transferred

from the seller to the buyer, the contract is called a sale, but where the
transfer of the property in the goods is to take place at a future time or
subject to some condition thereafter to be fulfilled, the contract is called
an agreement to sell.
• An agreement to sell becomes a sale when the time elapses or the

conditions are fulfilled subject to which the property in the goods is to be
transferred.
7.1.3 Sale and Hire Purchase Agreement
The ‘Sale’ and ‘Hire-Purchase Agreement differs in the following terms –
• In a sale, the property in the goods is transferred from the seller to the
buyer immediately on the date of contract of sale. But in a hire purchase
agreement, the property in the goods passes from the seller to the hire
purchaser only when he pays the last installment.
• In a sale, if the buyer becomes insolvent, the seller cannot recover the
goods from the official assignee or official receiver. However, in a hire
purchase, the hire purchaser cannot pass any title even to a bona fide
purchaser.
• The tax in levied at the time of the contract of sale in case of a ‘sale’,
whereas in a ‘hire purchase’, sales tax is not levied till the hire purchase
ripens into a sale.
• A sale is a completed contract in which the ownership of the goods in

transferred from the seller to the buyer as soon as the contract is
entered into. But a transfer from the seller to the hire purchaser is
completed only when the last installment is paid.
• In a sale, the buyer cannot terminate the contract of sale and return the
goods at any time he likes. But, in a hire purchase, the hire purchaser
has an option to terminate the contract and return the goods at any time
he likes.
• In a sale, where the payment is made by the buyer in installments, the

installments paid by the buyer are regarded as part payments made by
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the buyer towards the price of the goods. But, in a hire purchase, if the
hire purchase is terminated, the installments already paid are just
regarded as hire charges.
• A sale is governed by the Sale of Goods Act, 1930. Whereas a hire

purchase is governed by the Hire Purchase Act, 1972.
7.1.4 Contract of Sale
1. A contract of sale is made by an offer to buy or sell goods for a price

and the acceptance of such offer. The contract may provide for the
immediate delivery of the goods or immediate payment of the price or
both, or for the delivery or payment by instalments, or that the delivery
or payment or both shall be postponed.
2. Subject to the provisions of any law for the time being in force, a
contract of sale may be made in writing or by word of mouth, or partly
in writing and partly by word of mouth or may be implied from the
conduct of the parties.
7.1.5 Existing or Future Goods
1. The goods which form the subject of a contract of sale may be either
existing goods, owned or possessed by the seller or future goods.
2. There may be a contract for the sale of goods the acquisition of which
by the seller depends upon a contingency which may or may not
happen.
3. Where by a contract of sale the seller purports to effect a present sale

of future goods, the contract operates as an agreement to sell the
goods.
7.1.6 Perishable Goods
(a) Goods perishing before making of contract 

 
Where there is a contract for the sale of specific goods, the contract is
void if the goods without the knowledge of the seller have, at the time
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when the contract was made, perished or become so damaged as no

longer able to answer to their description in the contract.
(b) Goods perishing before sale but after agreement to sell  

 
Where there is an agreement to sell specific goods, and subsequently,
the goods without any fault on the part of the seller or buyer perish or
become so damaged as no longer able to answer to their description in
the agreement before the risk passes to the buyer, the agreement is
thereby void.
7.1.7 Ascertainment of Price
1. The price in a contract of sale may be fixed by the contract or may be

left to be fixed in manner thereby agreed or may be determined by the
course of dealing between the parties.
2. Where the price is not determined in accordance with the foregoing

provisions, the buyer shall pay the seller a reasonable price. What is a
reasonable price is a question of fact dependent on the circumstances of
each particular case.
Agreement to sell at valuation
1. Where there is an agreement to sell goods on the terms that the price is
to be fixed by the valuation of a third party and such third party cannot
or does not make such valuation, the agreement is thereby void.
Provided that, if the goods or any part thereof have been delivered to,
and appropriated by, the buyer, he shall pay a reasonable price therefor.
2. Where such third party is prevented from making the valuation by the
fault of the seller or buyer, the party not in fault may maintain a suit for
damages against the party in fault.
7.1.8 Stipulations as to Time
Unless a different intention appears from the terms of the contract,

stipulations as to time of payment are not deemed to be of the essence of
a contract of sale.
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Whether any other stipulations as to time is of the essence of the contract

or not depends on the terms of the contract.
7.2 CONTRACT OF SALE OF GOODS - FORMAT
Following is a typical format for Contract of Sale of Goods or what is

normally called as Purchase Order in business transactions :
Contract for Sale of Goods
This Contract for Sale of Goods is made this __ day of _______, 20__ by
and between _________, a [STATE OF ORGANIZATION OR RESIDENCE]
[CORPORATION/PARTNERSHIP/SOLE PROPRIETORSHIP/RESIDENT], with
its principal place of business at [COMPLETE ADDRESS], (“Seller”) and
_ _ _ _ _ _ _ _ _ _ _ , a [ S TAT E O F O R G A N I Z AT I O N O R R E S I D E N C E ]
[CORPORATION/PARTNERSHIP/SOLE PROPRIETORSHIP/RESIDENT], with
its principal place of business at [COMPLETE ADDRESS] (Buyer) For the
purchase of Goods described below -
Qty. Item Description Price Total
1. Terms. This Contract shall begin on __________, 20__, and end upon
the last delivery, which shall be shipped, with or without requisition
for the balance of goods then unshipped, by___________, 20__,
unless the parties agree otherwise. However, if as of such date, Buyer
is in arrears on the account, Seller may then cancel this Contract and
sue for its damages, including lost profits, offsetting the deposit there
against, and further recover its cost of suit including attorney fees.
2. Delivery. Buyer will give Seller _____ days’ advance notice regarding
the quantity requested for delivery. Upon receipt of the request for
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delivery, Seller will arrange for delivery through a carrier chosen by

Seller, the costs of which shall be F.O.B.___________.
3. Risk Of Loss. The risk of loss from any casualty to the Goods,
regardless of the cause, will be the responsibility of the Seller until
the Goods have been received by the Buyer.
4. Acceptance. Buyer will have the right to inspect the goods upon
receipt, and within __ business days after delivery, Buyer must give
notice to Seller of any claim for damages on account of condition,
quality, or grade of the goods, and Buyer must specify the basis of
the claim in detail. Failure of Buyer to comply with these conditions
will constitute irrevocable acceptance of the goods by Buyer. All
notices between the parties must be in writing and delivered by
courier or by certified mail, return receipt requested.
5. Charges. Seller shall invoice Buyer upon and for each shipment.
Buyer shall pay all charges on terms of ___________________. Any
late payment shall bear a late charge of ___%. Overdue invoices
shall also bear interest at the rate of ___% per ______. If Seller
undertakes collection or enforcement efforts, Buyer shall be liable for
all costs thereof, including attorney fees. If Buyer is in arrears on any
invoice, Seller may, on notice to Buyer, apply the deposit thereto and
withhold further delivery until the deposit and all arrears are brought
current.
6. Deposit. Upon signing this Contract, Buyer shall pay Seller a deposit
of `_________ towards the total price as a precondition for Seller's
performance, which deposit is to be credited to the last shipment.
7. Warranty. Seller warrants that the goods sold hereunder are new and
free from substantive defects in workmanship and materials. Seller's
liability under the foregoing warranty is limited to replacement of
goods or repair of defects or refund of the purchase price at Seller's
sole option. No other warranty, express or implied, is made by Seller,
and none shall be imputed or presumed.
8. Taxes. All sales taxes, tariffs, and other governmental charges shall
be paid by Buyer and are Buyer's responsibility except as limited by
Law.
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9. Governing Law. This Contract shall be governed by the laws of the

State of _______. Any disputes hereunder will be heard in the
appropriate federal and state courts located in [STATE]., [NAME OF
COUNTRY].
10.Force Majeure. Seller may, without liability, delay performance or

cancel this Contract on account of force majeure events or other
circumstances beyond its control, including, but not limited to,
strikes, acts of God, political unrest, embargo, failure of source of
supply, or casualty.
11.Miscellaneous. This Contract contains the entire agreement between

the parties and supersedes and replaces all such prior agreements
with respect to matters expressly set forth herein. No modification
shall be made to this Contract except in writing and signed by both
parties. This Contract shall be binding upon the parties and their
respective heirs, executors, administrators, successors, assigns and
personal representatives.
Buyer Seller
Date : Date :
7.3 TERMS, CONDITIONS AND WARRANTIES
7.3.1 Conditions and Warranties :
1. A stipulation in a contract of sale with reference to goods which are the

subject thereof may be a condition or a warranty.
2. A condition is a stipulation essential to the main purpose of the contract,

the breach of which gives rise to right to treat the contract as
repudiated.
3. A warranty is a stipulation collateral to the main purpose of the contract,

the breach of which gives rise to a claim for damages but not to a right
to reject the goods and treat the contract as repudiated.
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4. Whether a stipulation in a contract of sale is condition or a warranty

depends in each case on the construction of the contract. A stipulation
may be a condition, though called a warranty in the contract.
7.3.2 When condition to be treated as warranty
1. Where a contract of sale is subject to any condition to the fulfilled by the

seller, the buyer may waive the condition or elect to treat the breach of
the condition as a breach of warranty and not as a ground for relating
the contract as repudiated.
2. Where a contract of sale is not severable and the buyer has accepted
the goods or part thereof, the breach of any condition to be fulfilled by
the seller can only be treated as a breach of warranty and not as a
ground for rejecting the goods and treating the contract as repudiated,
unless there is a term of the contract, express or implied, to that effect.
3. Nothing in this section shall affect the case of any condition or warranty
fulfilment of which is excused by law by reason of impossibility or
otherwise.
7.3.3 Implied undertaking
In a contract of sale, unless the circumstances of the contract are such as

to show a different intention there is
(a) an implied condition on the part of the seller that, in the case of a sale,
he has a right to sell the goods and that, in the case of an agreement
to sell, he will have a right to sell the goods at the time when the
property is to pass.
(b) an implied warranty that the buyer shall have and enjoy quiet
possession of the goods.
(c) an implied warranty that the goods shall be free from any charge or
encumbrance in favour of any third party not declared or known to the
buyer before or at the time when the contract is made.
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7.3.4 Implied condition as to quality or fitness
Subject to the provisions of this Act and of any other law for the time being
in force, there is no implied warranty or condition as to the quality or
fitness for any particular purpose of goods supplied under a contract of
sale, excepts as follows:-
1. Where the buyer, expressly or by implication, makes known to the seller

the particular purpose for which the goods are required, so as to show
that the buyer relies on the seller’s skill or judgement, and the goods
are of a description which it is in the course of the seller’s business to
supply (whether he is the manufacturer or producer or not), there is an
implied condition that the goods shall be reasonably fit for such
purpose. 
 
Provided that, in the case of a contract for the sale of a specified article
under its patent or other trade name, there is no implied conditions to
its fitness for any particular purpose.
2. Where goods are bought by description from a seller who deals in goods
of that description (whether he is the manufacturer or producer or not),
there is an implied condition that the goods shall be of merchantable
quality. 
 
Provided that, if the buyer has examined the goods, there shall be no
implied conditions as regards defects which such examination ought to
have revealed.
3. An implied warranty or condition as to quality or fitness for a particular

purpose may be annexed by the usage of trade.
4. An express warranty or conditions does not negative a warranty or

condition implied by this Act unless inconsistent therewith.
7.3.5 Sale by description
Where there is a contract for the sale of goods by description, there is an

implied condition that the goods shall correspond with the description, and,
if the sale is by sample as well as by description, it is not sufficient that the
bulk of the goods corresponds with the sample if the goods do not also
correspond with the description.
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7.3.6 Sale by sample
1. A contract of sale is a contract for sale by sample where there is a term

in the contract, express or implied, to that effect.
2. In the case of a contract for sale by sample there is an implied condition

-
(a) that the bulk shall corresponded with the sample in quality.
(b) that the buyer shall have a reasonable opportunity of comparing the
bulk with the sample.
(c) that the goods shall be free from any defect, rendering them un-
merchantable, which would not be apparent on reasonable
examination of the goods.
7.3.7 Sample Format for Terms and Conditions of Sale in a Typical

Contract of Sale :
SALE OF GOODS CONTRACT
Terms and Conditions of Sale
THIS IS A LEGAL DOCUMENT (“SALES CONTRACT”) BETWEEN YOU

(“BUYER”) AND ABC LTD. (“SELLER”). PLEASE READ THIS AGREEMENT
CAREFULLY. BY USING AND ACCESSING THE COMPANY WEB SITE YOU
INDICATE THAT YOU HAVE READ AND UNDERSTAND THIS AGREEMENT
AND AGREE TO BE BOUND BY THIS
AGREEMENT. IF YOU DO NOT ACCEPT THIS AGREEMENT, DO NOT ACCESS

AND USE THE COMPANY WEB SITE. PLEASE NOTE THAT THE TERMS AND
CONDITIONS MAY BE PERIODICALLY UPDATED AND MODIFIED, SO PLEASE
BE SURE TO RECHECK THEM. BY ACCESSING AND USING THE SITE, YOU
ACCEPT, WITHOUT LIMITATION OR QUALIFICATION, THE PRESENT TERMS
AND CONDITIONS. YOU ALSO AGREE TO SO ACCEPT FUTURE UPDATES
AND MODIFICATIONS OF THE TERMS AND CONDITIONS.
1. Payment Terms: Payment terms are net thirty (30) days from date of
invoice. If payment is not received by the due date, invoices are
considered past due. Past due payments will be subject to a service
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charge of one and one-half-percent (1 ½%) per month or the maximum

amount allowed by law, whichever is less. 
 
Visa, Mastercard, American Express, Discover, Money Orders, Certified
Checks, Company Checks and Personal Checks. 
 
All payments (checks) should be sent to: The Company Corporate
Address. 
 
Your name must be bank imprinted on the check with the correct
address and telephone number. Buyer agrees to pay a delay charge for
each returned check and all collection costs, including legal fees, if
applicable. 
 
If Buyer is delinquent in paying any amount owed to Seller by more
than ten (10) days, then without limiting any other rights and remedies
available to Seller under the law, in equity, or under the contract, Seller
may (i) suspend production, shipment and/or deliveries of any or all
products purchased by Buyer, or (ii) by notice to Buyer, treat such
delinquency as a repudiation by Buyer of the portion of the contract not
then fully performed, whereupon Seller may cancel all further deliveries
and any amounts unpaid hereunder shall immediately become due and
payable. If Seller retains a collection agency and/or attorney to collect
overdue amounts, all collection costs, including attorney's fees, shall be
payable by Buyer. Buyer hereby represents to Seller that Buyer is now
solvent and agrees that each acceptance of delivery of the Products sold
hereunder shall constitute reaffirmation of this representation at such
time.
2. Prices: All prices quoted are subject to change, without notice, at any
time prior to Seller’s acceptance of Buyer’s order, to such prices
prevailing at the time of acceptance.
3. Shipments: All shipments F.O.B. to company office and are exclusive of

all taxes, and freight charges, which shall be paid by the Buyer. Delivery
to carrier constitute delivery to Buyer.
4. Risk Of Loss: It is the Buyer’s responsibility to seek compensation from

the carrier for damaged or missing freight. Seller shall not be
responsible for any claims or damages resulting from a delay in delivery
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or failure to perform which results from: governmental regulations,

strike, lockouts, accident, fire, delays in manufacturing, transportation,
acts of God, or any other causes beyond the Seller’s control. In case of
partial or complete destruction of goods, Seller is excused unless
destruction is due to Seller’s own negligence.
5. Cancellation, Modification or Alteration of Sales 

 
Contract: Due to the short life of seasonal related goods, no returns
will be accepted beyond 14-days from the execution of this Sales
Contract. In no event shall any cancellation, modification, or alteration
of winter AND/OR spring/summer related goods be accepted beyond or
out of the proper time of the usual or pre-appointed time for the chosen
particular season.
6. Right of Inspection: Buyer shall have the right to inspect the goods on
arrival and, within 14 days after delivery. Any rights of Buyer with
respect to inspection shall be deferred until after payment of the
purchase price.
7. Returns of Goods: No cash refund will be issued. For return of goods

tendered under this Sales Contract to be effective, the Seller must
receive written notice of that return at its headquarters within 14 days
after delivery. Returns are allowed only if nonconformity is substantial
and noncurable. A “RETURN AUTHORIZATION” form obtained from
Seller must be accompanied by Invoice Number and description of all
defects of the goods on which the Buyer intends to rely. The failure of
Buyer to comply with these conditions shall constitute irrevocable
acceptance of the goods by Buyer and Buyer is barred from any remedy. 
 
All returns must be shipped back to Seller’s headquarters. All goods
returned must be clean, free of price tags, and packed neatly. Seller has
the right to refuse any returned goods or to credit the Buyer with the
lesser amount paid, if the goods are damaged through improper packing
or improper display methods at Buyer’s locations.
8. Evaluations Return Policy: A 15% restocking fee will be charged if

the goods are not rejected within the 14-days evaluation period.
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9. Warranty: Seller gives 14 days limited warranty unless otherwise

specified, from the date of delivery. The warranty will not apply to those
goods that are damaged due to misuse, abuse, negligence or
notification by any party other than Seller.
10.Assignability: This Sales Contract shall not be assignable by the Buyer

without the Seller's written consent.
11.Limitation of Damages: In no event shall Seller by liable for (i)

special, indirect, consequential, or punitive damages including but not
limited to labor costs incurred by the Buyer or (ii) any damages
whatsoever resulting from loss of use or profits arising out of or in
connection with the goods sold hereunder. In no event shall Seller’s
liability exceed the purchase price of the goods in question.
12.Waiver: No waiver of any claim or right arising under this Sales

Contract will be effective unless the waiver is in writing and signed by
the waiving party.
13.Entire Agreement: The parties intend this writing to be the final

expression of the terms of their agreement and further intend that this
writing be the complete and exclusive statement of all the terms of their
agreement.
14.Attorney Fee Provision: In any litigation, arbitration, or other

proceeding by which one party either seeks to enforce its rights under
this Sales Contract or seeks a declaration of any rights or obligations
under this Sales Contract, the prevailing party shall be awarded
reasonable attorney fees, together with any costs and expenses, to
resolve the dispute and to enforce the final judgment.
15.Choice of Law and Forum: This Agreement, and any dispute arising
from the relationship between the parties to this Agreement, shall be
governed by the State law. Any dispute that arises under or relates to
this Agreement shall be resolved in Superior Court.
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7.4 IMPLIED CONDITIONS OF CONTRACT
7.4.1 Implied Conditions
Implied conditions are the conditions which are implied by the law, though
not expressly written in a contract. These conditions are listed below:
1. In a contract of sale, there is an implied condition on the part of the

seller that the seller has a right to sell the goods, and in the case of an
agreement to sell, he will have a right to sell the goods at the time
when actual sale takes place.
2. If a contract for the sale of goods is by description, there is an implied

condition that the goods shall correspond with the description.
3. If the Sale has been done by sample, there is an implied condition that
the bulk shall correspond with the sample in quality, the buyer shall
have an opportunity of comparing the bulk with the sample, and the
goods shall be free from any defect which may not be apparent on
reasonable examination of the sample.
4. In the case of a contract for the sale of a patented good, the implied
condition as to its fitness for any particular purpose. Because the buyer
is not relying on the skill and judgment of the seller but relies on the
goods reputation of the trade name.
5. If the goods are purchased for personal use, they must be reasonably
fit for the purpose for which they are generally used.
6. In the case of eatables and provisions, in addition to the condition of the

merchantable quality, there is an added obligation on the part of the
seller that the goods shall be free from any dirt, insects and it should be
reasonably fresh.
7. An implied warranty or condition as to quality or fitness a particular

purpose may be annexed by custom or usage of trade. If a well
recognized usage exists, it may be taken for granted instead of
expressing its intention of use.
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7.4.2 Implied Warranties
The following are the warranties which are implied in every contract of the
sale of goods.
1. There is an important implied warranty in every contract of sale of

goods that the buyer shall have and enjoy quiet and peaceful possession
of the goods. This is specifically mentioned in case of contract of sale of
a property.
2. Also, it is important to note that there is an implied warranty that the

goods shall be free from any charge or encumbrance, in favor of any
third party other than the buyer of the contract, before or at the time
when the contract was made.
3. In case, the goods sold which are inherently dangerous or they are
likely to be dangerous to the buyer, the seller must warn the buyer
about the probable danger. If there is a breach of his warranty, the
seller will be liable in damages. E.g. Statutory warning on cigarettes and
liquor.
7.5 PERFORMANCE OF CONTRACT
For achieving smooth and trouble free performance of a contract of sale,

the following points should be known to the buyer as well as the seller :
7.5.1. Duties of Seller and Buyer
It is the duty of the seller to deliver the goods and of the buyer to accept
and pay for them, in accordance with the terms of the contract of sale.
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Payment and delivery are concurrent conditions: Unless otherwise

agreed, delivery of the goods and payment of the price are concurrent
conditions, that is to say, the seller shall be ready and willing to give
possession of the goods to the buyer in exchange for the price, and the
buyer shall be ready and willing to pay the price in exchange for
possession of the goods.
7.5.2 Delivery
Delivery of goods sold may be made by doing anything which the parties
agree shall be treated as delivery or which has the effect of putting the
goods in the possession of the buyer or of any person authorised to hold
them on his behalf.
Effect of part delivery- A delivery of part of goods, in progress of the

delivery of the whole has the same effect, for the purpose of passing the
property in such goods, as a delivery of the whole, but a delivery of part of
the gods, with an intention of severing it from the whole, does not operate
as a delivery of the remainder.
Buyer to apply for delivery- Apart from any express contract, the seller
of goods is not bound to deliver them until the buyer applies for delivery.
Rules regarding delivery
1. Whether it is for the buyer to take possession of the goods or for the
seller to send them to the buyer is a question depending in each case on
the contract, express or implied, between the parties. Apart from any
such contract, goods sold are to be delivered at the place at which they
are the time of the sale, and goods agreed to be sold are to be delivered
at the place at which they are at the time of the agreement to sell, if
not then in existence, at the place at which they are manufactured or
produced.
2. Where under the contract of sale the seller is bound to send the goods
to the buyer, but no time for sending them is fixed, the seller is bound
to send them within a reasonable time.
3. Where the goods at the time of sale are in the possession of a third
person, there is no delivery by seller to buyer unless and until such third
! !169
person acknowledges to the buyer that he holds the goods on his behalf.
Provided that nothing in this section shall affect the operation of the
issue or transfer of any document of title to goods.
4. Demand or tender of delivery may be treated as ineffectual unless made

at a reasonable hour. What is a reasonable hour is a question of fact.
5. Unless otherwise agreed, the expense of and incidental to putting the

goods into a deliverable state shall be borne by the seller.
Delivery of wrong quantity.-
1. Where the seller delivers to the buyer a quantity of good less than he
contracted to sell, the buyer may reject them, but if the buyer accepts
the goods so delivered he shall pay for them at the contract rate.
2. Where the seller delivers to the buyer a quantity of goods larger than he
contracted to sell the buyer may accept the goods included in the
contact and reject the rest, or he may reject the whole. If the buyer
accepts the whole of the goods so delivered, he shall pay for them at
the contract rate.
3. Where the seller delivers to the buyer the goods he contracted to sell,
mixed with goods of a different description not included in the contract.,
the buyer may accept the goods which are in accordance with the
contract and reject the rest, or may reject the whole.
4. The provisions of this section are subject to any usage of trade, special
agreement or course of dealing between the parties.
Installment deliveries
1. Unless otherwise agreed, the buyer of goods is not bound to accept

delivery thereof by installments.
2. Where there is a contract for the sale of goods to be delivered by stated

installments which are to be separately paid for, and the seller makes no
delivery or defective delivery in respect of one or more installments, or
the buyer neglects or refuses to take delivery of or pay for one or more
installments, it is a question in each cased depending on the terms of
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the contract and the circumstances of the case, whether the breach of
contract is a repudiation of the whole contract, or whether it is a
severable breach giving rise to a claim for compensation, but not a right
to treat the whole contract as repudiated.
Delivery to carrier or wharfinger
1. Where, in pursuance of a contract of sale, the seller is authorised or

required to send the goods to he buyer, delivery of the goods to a
carrier, whether named by the buyer or not, for the purpose of
transmission to the buyer, or delivery of the goods to a wharfinger for
safe custody, is prima facie deemed to be a delivery of the goods to the
buyer.
2. Unless otherwise authorised by the buyer, the seller shall makes such
contract with the carrier or wharfinger on behalf of the buyer as may be
reasonable having regard to the nature of the goods and the other
circumstances of the case. If the seller omits so to do, and the goods
are lost or damaged in course of transit or whilst in the custody of the
wharfinger, the buyer may decline to treat the delivery to the carrier or
wharfinger as a delivery to himself, or may hold the seller responsible
for damages.
3. Unless otherwise agreed, where goods are sent by the seller to the
buyer by a route involving sea transit, in circumstances in which it is
usual to insure, the seller shall give such notice to the buyer as may
enable him to insure them during their sea transit and if the seller fails
to do so, the goods shall be deemed to be at his risk during such sea
transit.
Risk where goods are delivered at distant place. Where the seller of
goods agrees to deliver them at his own risk at place other than that where
they are when sold, the buyer shall, nevertheless, unless otherwise agreed,
take any risk of deterioration in the goods necessarily incident to the
course of transit.
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7.6 TRANSFER OF PROPERTY
The transfer of property has to be considered in three ways. (a) the

transfer of property of the goods, (b) the delivery of the goods
(possession) and (c) the passing of the guarantee and warrantee to take
care of the risk.
7.6.1 Transfer of Ownership/Property
To understand the transfer of ownership of the property, we should

understand the journey of the goods and possession of the goods in each
stage of journey. The seller sends the goods to the buyer, and the goods
belong to the buyer in all sense at the time when he pays to the seller for
the goods, and seller receives the payment in total of the goods supplied.
So unless otherwise agreed, risk follows ownership whether delivery has
been made or not and whether price has been paid or not. Thus the risk of
loss as a rule lies on the owner. But if delivery has been delayed through
the fault of either the buyer or the seller, the goods are at the risk of the
party at fault.
7.6.2 Transfer of Property
In case of the Specific Goods (Sections 20 to 22), The rules relating to

transfer of property are –
Passing of property at the time of contract: Where there is an unconditional

contract for the sale of specific goods in a deliverable state, the property in
the goods passes to the buyer when the contract is made. Deliverable state
means such a state that the buyer would under the contract be bound to
take delivery of them.
However, if the Goods are not in a deliverable state, i.e., the seller has to
do something to the goods to put them into a deliverable state, the
property does not pass until such thing is done and the buyer has notice of
it.
Another case is where there is a contract for the sale of specific goods in a
deliverable state, but the seller is bound to weigh, measure, test or do
some other act or thing with reference to the goods for the purpose of
! !172
ascertaining the price, the property does not pass until such act or thing is
done and the buyer has notice thereof (Sec. 22).
Or, where there is contract for the sale of unascertained goods, the
property in the goods does not pass to the buyer until goods are
ascertained (Sec. 18). Till goods are ascertained, there is merely an
agreement to sell.
7.6.3 Delivery to Carrier
A seller is deemed to have unconditionally appropriated the goods to the

contract where he delivers them to buyer or to a carrier or other bailee for
the purpose of transmission to the buyer, and does not reserve the right of
disposal. The delivery to the carrier may be absolutely for the buyer or
seller.
(a) The ownership passes from the seller to the buyer whenever the bill of
lading or railway receipt is made out in the name of the buyer and is
sent to him,
(b) If the bill of lading or railway receipt is taken in the seller’s or his
agent’s name and is sent to the agent of the seller to be delivered to
the buyer on the fulfillment of certain conditions, the seller is deemed
to have reserved the right of disposal of the goods. In such a case the
ownership does not pass to the buyer until the necessary conditions
are fulfilled and the documents of title are delivered to the buyer.
(c) Where goods are delivered to the buyer on approval or ‘on sale or
return’ or other similar term, the property therein passes to the buyer:
i. When he signifies his approval or acceptance to the seller:
ii. When he does any other act adopting the transaction. If the seller
delivers the goods to the buyer ‘on sale or return’ on the terms
that the goods were to remain his property until settled or paid for,
the property would not pass to the buyer until these terms are
complied with.
iii. If he does not signify his approval or acceptance to the seller, but
retain the goods without giving notice of rejection, beyond the
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time fixed for the return of the goods, or if no time has been fixed,
beyond a reasonable time.
7.6.7 Transfer of Title
The general rules as to transfer of title is that only the owner of goods can
transfer a goods title. i.e., in normal conditions, the transfer of title is
deemed to take place along with the transfer of goods to the buyer, unless
otherwise specifically mentioned in the contract.
7.7 RIGHTS AND DUTIES OF THE BUYER
7.7.1 Rights of the Buyer
(a) Examination of the goods.
1. Where goods are delivered to the buyer which he has not previously
examined, he is not deemed to have accepted them unless and until
he has a reasonable opportunity of examining them for the purpose
of ascertaining whether they are in conformity with the contract.
2. Unless otherwise agreed, when the seller tenders delivery of goods to

the buyer, he is bound on request, to afford the buyer a reasonable
opportunity of examining the goods for the purpose of ascertaining
whether they are in conformity with the contract,
(b) Return of rejected goods. Unless otherwise agreed, where goods

are delivered to the buyer and he refuses to accept them, having the
right so to do, he is not bound to return them to the seller, but it is
sufficient that he intimates the seller his refusal to accept them.
(c) Refusing to take the delivery of goods. When the seller is ready
and willing to deliver the goods and requests the buyer to take
delivery, and the buyer does not within a reasonable time after such
request take delivery of the goods, he is liable to the seller for any loss
occasioned by his neglect or refusal to take delivery and also for a
reasonable charge for the care and custody of the goods. Provided that
nothing in this section shall affect the rights of the seller where the
neglect or refusal of the buyer to take delivery amounts to a
repudiation of the contract.
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7.7.2 Duties of the Buyer
(a) To apply for delivery at appropriate time as per the contract.

(b) To make payment as per the contract terms and to take delivery of the
goods.
(c) To accept part delivery, if demanded, and pay for it.

(d) To intimate the seller when he rejects the goods.
(e) To pay the damages/late delivery charges in case of non-acceptance.
(f) To examine the goods delivered.
(g) To accept the goods when delivered.
(h) To reject the delivery, but to pay for losses for the care and custody of
the goods.
7.8 RIGHTS OF UNPAID-SELLER
"Unpaid seller" is defined as —
1. The seller of goods is deemed to be an "unpaid seller" within the

meaning of this Act —
(a) When the whole of the price has not been paid or tendered.
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(b) When a bill of exchange or other negotiable instrument has been

received as conditional payment, and the conditions on which it was
received has not been fulfilled by reason of the dishonour of the
instrument or otherwise.
2. In this Chapter, the term "seller" includes any person who is in the
position of a seller, as, for instance, an agent of the seller to whom the
bill of lading has been endorsed, or a consignor or agent who has
himself paid, or is directly responsible for, the price.
Rights of the Unpaid seller –
1. Subject to the provisions of this Act and of any law for the for the time
being in force, notwithstanding that the property in the goods may have
passed to the buyer, the unpaid seller of goods, as such, has by
implication of law.
(a) a lien on the goods for the period while he is in possession of them,
(b) in case of the insolvency of the buyer a right of stopping the goods
in transit after he has parted with the possession of them.
(c) a right of re-sale as limited by this Act.
2. Where the property in goods has not passed to the buyer, the unpaid
seller has, in addition to his other remedies, a right of withholding
delivery similar to and co-extensive with his rights of lien and stoppage
in transit where the property has passed to the buyer.
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Seller’s lien
1. Subject to the provisions of this Act, the unpaid seller of goods who is in
possession of them is entitled to retain possession of them until
payment or tender of the price in the following cases namely:
(a) where the goods have been sold without any stipulations as to
credit.
(b) where the goods have been sold on credit, but the term of credit
has expired.
(c) where the buyer becomes insolvent.
2. The seller may exercise his right of lien notwithstanding that he is in

possession of the goods as agent or bailee for the buyer.
Part delivery. Where an unpaid seller has made part delivery of the
goods, he may exercise his right of lien on the remainder, unless such part
delivery has been made under such circumstances as to show an
agreement to waive the lien.
Termination of lien
1. The unpaid seller of goods loses his lien thereon –
(a) when he delivers the goods to a carrier or other bailee for the
purpose of transmission to the buyer without reserving the right of
disposal of the goods.
(b) when the buyer or his agent lawfully obtains possession of the
goods,
(c) by waiver thereof.
2. The unpaid seller of goods, having a lien thereon, not lose his lien by
reason only that he has obtained a decree for the price of the goods.
Right of stoppage in transit. Subject to the provisions of this Act, when

the buyer of goods becomes insolvent, the unpaid seller who has parted
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with the possession of the goods has the right of stopping them in transit,
that is to say, he may resume possession of the goods as long as they are
in the course of transit, and may retain them until payment or tender of
the price.
Duration of transit
(1) Goods are deemed to be in course of transit from the time when they
are delivered to a carrier or other bailee for the purpose of
transmission to the buyer, until the buyer or his agent in that behalf
takes delivery of them from such carrier or other bailee.
(2) If the buyer or his agent in that behalf obtains delivery of the goods
before their arrival at the appointed destination, the transit is at an
end.
(3) If, after the arrival of the goods at the appointed destination, the
carrier or other bailee acknowledges to the buyer or his agent that he
holds the goods on his behalf and continues in possession of them as
bailee for the buyer or his agent, the transit is at an end and it is
immaterial that a further destination for the goods may have been
indicated by the buyer.
(4) If the goods are rejected by the buyer and the carrier or other bailee
continues in possession of them, the transit is not deemed to be at an
end, even if the seller has refused to receive them back.
(5) When goods are delivered to a ship chartered by the buyer, it is a

question depending on the circumstances of the particular case,
whether they are in the possession of the master of a carrier or as
agent of the buyer.
(6) Where the carrier or other bailee wrongfully refuses to deliver the
goods to the buyer or his agent in that behalf, the transit is deemed to
be at an end.
(7) Where part delivery of the goods has been made to the buyer or his
agent in that behalf, the remainder of the goods may be stopped in
transit, unless such part delivery has been given in such circumstances
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as to show an agreement to give up possession of the whole of the

goods.
How stoppage in transit is effected
1. The unpaid seller may exercise his right to stoppage in transit either by
taking actual possession of the goods, or by giving notice of his claim to
the carrier or other bailee in whose possession the goods are. Such
notice may be given either to the person in actual possession of the
goods or to his principal. In the latter case the notice, to be effectual,
shall be given at such time and in such circumstances, that the
principal, by the exercise of reasonable diligence, may communicate it
to his servant or agent in time to prevent a delivery to the buyer.
2. Whether notice of stoppage in transit is given by the seller to the carrier

or other bailee in possession of the goods, he shall re-deliver the goods
to, or according to the directions of the seller. The expenses of such re-
delivery shall be borne by the seller.
Effect to sub-sale or pledge by buyer
1. Subject to the provisions of this Act, the unpaid seller’s right of lien or
stoppage in transit is not affected by any sale or other disposition of the
gods which the buyer may have made, unless the seller has assented
thereto. 
 
Provided that where a document of title to goods has been issued or
lawfully transferred to any person as buyer or owner of the goods, and
that person transfers the document to a person who takes the document
in good faith and for consideration, then, if such last mentioned transfer
was by way of sale, the unpaid seller’s right of lien of stoppage in transit
is defeated, and, if such last mentioned transfer was by way of pledge
or other disposition for value, the unpaid seller’s right of lien or
stoppage in transit can only be exercised subject to the rights of the
transferee.
2. Where the transfer is by way of pledge, the unpaid seller may require
the pledge to have the amount secured by the pledge satisfied in the
first instance, as far as possible, out of any other goods or securities of
the buyer in the hands of the pledge and available against the buyer.
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Sale not generally rescinded by lien or stoppage in transit.-
1. Subject to the provisions of this section, a contract of sale is not

rescinded by the mere exercise by an unpaid seller of his right of lien or
stoppage in transit.
2. Where the goods are of a perishable nature, or where the unpaid seller
who has exercised his right of lien or stoppage in transit gives notices to
the buyer of his intentions to re-sell, the unpaid seller may, if the buyer
does not within a reasonable time pay or tender the price, re-sell the
goods within a reasonable time and recover from the original buyer
damages for any loss occasioned by his breach of contract, but the
buyer shall not be entitled to any profit which may occur on the re-sale.
If such notices is not given, the unpaid seller shall not be entitled to
recover such damages and the buyer shall be entitled to the profit, if
any, on the re-sale.
3. Where an unpaid seller who has exercised his right of lien or stoppage in
transit re-sells the goods, the buyer acquires a good title thereto as
against the original buyer, notwithstanding that no notice of the re-sale
has been given to the original buyer.
4. Where the seller expressly reserves a right of re-sale in case the buyer
should make default, and on, the buyer making default, re-sells the
goods, the original contract of sale is thereby rescinded, but without
prejudice to any claim which the seller may have for damages.
7.9 ACTIONS FOR BREACH OF CONTRACT
Suit for price
1. Where under a contract of sale the property in the goods has passed to
the buyer and the buyer wrongfully neglects or refuses to pay for the
goods according to the terms of the contract, the seller may sue him for
the price of the goods.
2. Where under a contract of sale the price is payable on a day certain

irrespective of delivery and the buyer wrongfully neglects or refuses to
pay such price, the seller may sue him for the price although the
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property in the goods has not passed and the goods have not been
appropriated to the contract.
Damages for non-acceptance
Where the buyer wrongfully neglects or refuses to accept and pay for the
goods, the seller may sue him for damages for non-acceptance.
Damages for non-delivery
Where the seller wrongfully neglects or refuses to deliver the goods to the
buyer, the buyer may sue the seller for damages for non-delivery.
Specific performance
Subject to the provisions of Chapter II of the Specific Relief Act, 1877, in

any suit for breach of contract to deliver specific or ascertained goods, the
Court may, if it thinks fit, one the application of the plaintiff, by its decree
direct that the contract shall be performed specifically, without giving the
defendant the option of retaining the goods on payment of damages. The
decree may be unconditional, or upon such terms and conditions as to
damages, payment of the price or otherwise, as the Court may deem just,
and the application of the plaintiff may be made at any time before the
decree.
Remedy for breach of warranty –
1. Where there is a breach of warranty by the seller, or where the buyer

elects or is compelled to treat any breach of a condition on the part of
the seller as a breach of warranty, the buyer is not by reason only of
such breach of warranty entitled to reject the goods; but he may –
(a) Set up against the seller the breach of warranty in diminution or

extinction of the price; or
(b) Sue the seller for damages for breach of warranty.
2. The fact that a buyer has set up a breach of warranty in diminution or

extinction of the price does not prevent him from suing for the same
breach of warranty if he has suffered further damage.
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Repudiation of contract before due date
Where either party to a contract of sale repudiates the contract before the
date of delivery, the other may either treat the contracts as subsisting and
wait till the date of delivery, or he may treat the contract as rescinded and
sue for damages for the breach.
Interest by way of damages and special damages
1. Nothing in this Act shall affect the right of the seller or the buyer to
recover interest or special damages in any case whereby law interest or
special damages may be recoverable, or to recover the money paid
where the consideration for the payment of it has failed.
2. In the absence of a contract to the contrary, the Court may award

interest at such rate a it think fit one the amount of the price –
(a) to the seller in a suit by him for the amount of the price from the
date of the tender of the goods or from the date on which the price
was payable.
(b) to the buyer in a suit by him for the refund of the price in a case of
a breach of the contract on the part of the seller from the date on
which the payment was made.
7.10 F.O.B., F.O.R. , C.& F., AND C.I.F. CONTRACTS
Global trade has increased in the past two decades. Accordingly, the
international commerce, which involves transportation of goods from far
away countries, is largely dependent on Sea carriage. So the questions of
ownership and risk have arisen quite often. As passing of property is
dependent on the terms of contract. Parties to such contracts have evolved
definite models for carriage of goods, such as F.O.B., F.O.R., C.I.F., and C.
& F. etc. each of which have internationally accepted meaning assigned for
them
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7.10.1 F.O.B. and F.O.R. Contracts:
F.O.B. means “free on board”. The buyer must name the ship upon which
the goods are to be delivered and the seller must put them safely on
board, pay the charge of doing so and for buyer’s protection give
possession of them to the ship only upon the terms of reasonable Bill of
Lading. The presumption with F.O.B. contract is that it is the duty of buyer
to obtain export license. The goods are then at the risk of the buyer. The
buyer is responsible for the freight. In case the seller does not reserve the
right of disposal, the property in the goods passes to the buyer.
F.O.R. stands for ‘Free on Rail’. Where the seller agrees to sell the goods
on F.O.R. basis, he is required to bear all expenses prior to the putting of
the goods on rail. As soon as the goods are put on rail the responsibility of
the seller ceases and the risk as well as property lies with the buyer. In
India, the F.O.R. contracts do not imply an undertaking on behalf of the
seller to procure wagons.
Responsibilities of the Seller - Seller’s liability is to place the goods free on

rail at the place of delivery. Once that is done, the risk belongs to the
buyer.
For the delivery of goods through sea routes, C & F or C I F types of

contracts are normally used in International contracts.
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7.10.2 C & F Contracts:
In a C & F contract, the insurance is paid by the buyer. In such a contract

the buyer undertakes to insure the goods upon receipt of particulars of
shipment while the goods are in transit. This contract is for all practical
purposes an F.O.B. contract. The time of passing of property to the buyer is
the time of shipment. From that instant, the buyer becomes owner of the
property and hence he insures them.
7.10.3 C.I.F. Contracts:
‘C.I.F.’ stands for ‘cost, insurance and freight’. Such a contract is a contract
for the sale of goods at a price which includes the cost of goods, insurance
and freight charges. Thus, in such contracts, the charges of insurance
during transit and the freight charges are paid by the buyer. Where the
buyer orders the goods from a seller, residing abroad, under a C.I.F.
contract, the seller will insure the goods and deliver them to a shipping
company for transmission to the buyer; the insurance policy on the goods
and the bill of lading to be delivered to the buyer along with the invoice of
the goods. It may be noted that in C.I.F contract, the seller responsible for
the following duties:
1. To load the sold goods safely on the ship named by the buyer.
2. To meet the expenses of loading the goods.
3. To enter into contract with the shipping company or ship owners for
the transportation of goods and obtain a bill of lading.
4. To deliver the bill of lading to the buyer
7.10.4 Passing of Property in C.I.F. Contract:
In a C.I.F. contract property in the goods passes to the buyer as soon as

the documents are delivered to him. So the buyer’s rights are protected
and the vendor’s duty is extended. The buyer cannot refuse the document
and ask for actual goods. Similarly, the vendor cannot withhold the
document and tender goods. In other words, a C.I.F. contract is a symbolic
transfer by transfer of documents alone, rather than physical delivery of
goods. So this type of contract is widely followed.
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The contractual liability of the seller ceases on the performance of the

above duties and the delivery of goods to the buyer is complete as far as
the seller is concerned. Therefore, the buyer is bound to pay the price of
the goods when the shipping documents are presented to him even if the
goods have been lost by that time. It is also the buyer’s duty to name a
ship upon which the goods are to be delivered: if he fails to name a ship,
he is guilty of breach of contract, and the seller can file a suit against him
for the recovery of the damages.
7.11 ACTIVITIES FOR STUDENTS
1. You are working with a mineral water plant in your district. Find out and
list down the implied terms and conditions applicable to the plant. If
necessary, search from the State/ Government website.
2. You are a supplier of dry fruits to 3 star restaurants in your city. You
remain as unpaid seller from one of your customers in the month of
March. List down the options open to you to take action against your
customer where your due amount is blocked.
7.12 SUMMARY
• Condition is the essential part of a contract.

• Warranty is the subsidery part of the contract.
• No one can sell a thing which he/she does not own.
• Goods sold should correspond with the description.
• A product sold by its general name should be fit for the basic purpose for
which it is used. This is called as the product being of merchantable
quality.
• In the case of a sale by sample, bulk should correspond with the sample
and the goods must be of merchantable quality.
• In general, the risk passes with ownership.
• Parties can provide for passing of right in property in express or implied
terms. Ownership passes as agreed by the parties.
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• For ownership to pass, goods must be specific. It is immaterial whether

the price has been paid or not.
• If specific goods are not ready for delivery when a contract is made,
ownership will pass only if the seller puts it in a deliverable state and
informs the buyer of it.
• Ownership in goods cannot pass till the goods are ascertained.
1. Give description of the term ‘Contract of Sale’.
2. Write short notes on (a) Goods (b) Price (c) Document of title to goods.
3. Write down the necessary and sufficient formalities of contract of sale.
4. Define the term ‘condition’ and explain the implied conditions in a

contract of sale.
5. Define ‘warranty’ as related to contract of sale with examples of implied

warranties.
6. Write the differences between (a) Sale and Hire Purchase (b) Condition
and Warranty.
7. What is a Performance of a contract of sale?
8. What is meant by ‘Delivery of Goods’ in relation with contract of sale?
9. What are the rights and duties of a buyer in a contract of sale?
10.Write short notes on (a) C.I.F. Contract (b) F.O.B. Contract
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1. The two parties to a ‘Contract of Sale’ are –
a. Government and Approved supplier

b. Service Provider and User
c. Buyer and Seller
d. All of the above
2. If the sale happens at a future date in case of a contract of sale, the

contract is called as ______.
a. Valid Contract
b. Agreement to Sale
c. Registered Sale
d. Invalid Contract
3. The example of ‘Document of Title of Goods’ can be______.
a. Bill of Lading
b. Railway Receipt
c. Delivery Order
d. All of the above
4. In the C.I.F. Contracts, ‘C.I.F’. stands for______.
a. Cost, Insurance, Freight

b. Commercial, International, Freight
c. Cost, India, Foreign
d. Commerce, Indian, Freight
5. In case of F.O.R. contracts, the term ‘F.O.R.’ means -
a. Future On Reliable
b. Free On Rumor
c. Free On Return
d. Free On Rail
Answers : (1-c), (2-b), (3-d), (4-a), (5-d).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
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CARRIAGE CONTRACTS
Chapter 8
CARRIAGE CONTRACTS
Objectives
After completing the chapter, you will be able to understand (a) the
carriage of goods by land by road or by rail and their classification of
goods; (b) the carriage by air and the documentation required for the
same; (c) the carriage by sea and its rules and regulations; (d) charter
party and bill of lading; and (e) duties, liabilities and rights of carriage of
goods; (f) Common carrier and private carrier.
Structure:
8.1 Contracts of Carriage - Definition and Types

8.2 Carriage of Goods by Land – Road
8.3 Railways – Common Carrier
8.4 Classification of Goods
8.5 Air Carriage
8.6 Documents of Air Carriage
8.7 Sea Carriage
8.8 Contract of Affreightment
8.9 Responsibilities, Liabilities and Rights of Carrier by Sea
8.11 Summary
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8.1 CONTRACTS OF CARRIAGE - DEFINITION AND TYPES
In the commercial activities of any country, the need for carrying goods
from one place to another cannot be overemphasised. Also, goods are to
be moved from one country to another. For these purposes, a contract of
carriage is to be entered into. The persons, organisations or associations
which carry goods are known as carriers. Goods may be carried by land
(including inland waterways), sea or air. Accordingly, the law relating to
carrying of goods is contained in the following acts :
Land (a) The Carriers Act, 1865.

(b) The Railways Act, 1890.
Sea (a) The (Indian) Bills of Lading Act, 1856.
(b) The Carriage of Goods by Sea Act, 1925.
(c) The Merchant Shipping Act, 1958.
(d) The Marine Insurance Act, 1963.
Air (a) The Carriage by Air Act, 1972.
8.1.1 Definition of a Contract of Carriage
A contract of carriage of goods is a contract of bailment for reward.

However, the contract of bailment is modified by the different statutes
mentioned above in the case of carriage of goods by land,
8.1.2 Classification of Carriers
Generally speaking, carriers are classified into (i) common carriers, (ii)
private carriers and (iii) gratuitous carriers.
Common Carriers
The Carriers Act, 1865 defines a common carrier as any individual, firm or
company (other than the government, who or which transports goods as a
business, for money, from place to place, over land or inland waterways,
for all persons (consignors) without any discrimination between them. A
carrier must carry goods of the consignor for hire and not free of charge in
order to be called a common carrier. Further, he must be engaged in the
business of carrying goods for others for money from one place to another.
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A person who carries goods occasionally or free of charge is not a common

carrier. Furthermore he is bound to carry goods for all persons without any
discrimination provided:
i. The freight chargeable by him is paid to him.

ii. There is accommodation on his conveyance, and
iii. There is nothing objectionable or illegal about the carrying of goods
of a particular consigner.
If, in spite of the above conditions being satisfied, a carrier reserves to

himself the right to accept or reject an offer, he is not a common carrier. It
is worth noting that the Carriers Act, 1865 covers only common carriers of
goods and not passengers.
Private Carriers
A private carrier is one who does not transport goods from one place to
another regularly; he may engage in some casual jobs of carrying goods
for certain selected persons between certain terminals. In fact, he carries
his own goods and that’s why he is known as a private carrier and not a
common carrier. Also, he does not make a general offer to carry goods for
anyone from one place to another for hire. However, he may enter into a
contract with someone to carry goods on the terms agreed upon between
them. In such a situation, it is a contract of bailment. Therefore, such
transactions are not covered by the Common Carriers Act,1865.
Gratuitous Carrier
When a person carries goods of another free of charge, he is a gratuitous

carrier. Similarly, a person may give lift in his transport to another person
voluntarily without any compensation. Thus, a gratuitous carrier may carry
not only goods but persons also free of charge.
Responsibility of Common Carrier and Bailee:
We know that a bailee is responsible only when the goods entrusted to him
are lost or damaged due to his fault or negligence. But the responsibility of
a common carrier is more onerous; he is to deliver the goods safely.
Therefore, in the case of a common carrier, it is immaterial whether the
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loss or damage to the goods is due to his or someone else’s negligence.

The distinction between a common carrier and a public carrier is -
(i) A common carrier publicly undertakes to carry from place to place the
goods of any person who chooses to employ him. A private carrier
does not carry regularly from place to place but is an occasional
carrier.
(ii) A common carrier is bound to carry the goods of any person provided
certain conditions are satisfied. A private carrier is free to accept or
reject the goods for carriage.
(iii) The liabilities of a common carrier are determined by the Common

Carriers Act, 1865. A private carrier’s liability is not determined by the
Common Carriers Act, 1865. He is liable as a bailee as given in the
Indian Contract Act, 1872.
8.2 CARRIAGE OF GOODS BY LAND – ROAD
As mentioned above, the following two statutes govern the carriage of

goods by land:
(i) The Carriers Act, 1865.

(ii)The Railways Act, 1989.
The Carriers Act, 1865. This Act defines the term “common carrier” and
provides for his rights, duties and liabilities. As regards matters not
covered by this Act, the rules of English Common Law will apply.
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Rights of a Common Carrier.
The rights of a common carrier, as specified in the Act, are:
(i) He is entitled to the settled remuneration and in case no

remuneration was settled, to a reasonable remuneration.
(ii) He has a right to refuse to carry goods under certain circumstances (as
enumerated under the duties of a common carrier).
(iii) He has a lien on the goods for his remuneration. He can refuse to
deliver them until his charges are paid.
(iv) If the consignee refuses to take delivery of the goods, when tendered,
the common carrier has a right, to deal with the goods as he thinks
reasonable and prudent under the circumstances.
(v) He has a right to recover reasonable expenses incurred by him as a

result of the consignee’s refusal to take delivery. After giving notice to
the consignee, the common carrier may even sell perishable goods.
(vi) He can recover damages from the consignor if the goods are
dangerous or are loosely packed and the carrier suffers injury
therefrom.
(vii) He can limit his liability subject to the provisions of the Carriers Act.
Duties of a Common Carrier.
The duties of a common Carrier are:
1. A common carrier is bound to carry goods of all persons who choose to

employ him. He can, however, refuse to carry goods under the following
circumstances:
(a) if there is no accommodation in the carriage;
(b) if the person employing him is not willing to pay reasonable charges
for the carriage of goods;
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(c) if the goods are such which he is not accustomed to carry;
(d) if the goods are to be carried over a route which is not his regular
route;
(e) if the goods are-dangerous and as such subjecting him to

extraordinary risk;
(f) if the consignor refuses to disclose the nature of the goods to be

carried; and
(g) if the goods are not properly packed.
If a carrier refuses to carry the goods of a person for any reason other
than those mentioned above, he may be held liable for damages.
2. He must carry the goods over the usual and customary route and take
all reasonable precautions for their safe carriage. He must not deviate
from the usual route unless rendered necessary by exceptional
circumstances.
3. He must deliver the goods at the agreed time and if no time had been
fixed, within a reasonable time.
4. By Common Law, he is an insurer of the goods in the sense that he

warrants to carry the goods safely and securely.
Liabilities of a Common Carrier :
The liability of a common carrier of goods is laid down in the Carriers

Act, 1865. For this purpose, the Act has classified the goods into two
categories:
(i) Scheduled goods and

(ii) non-scheduled goods.
The scheduled goods are those which are enumerated in a Schedule to the
Act. They are valuable articles like gold, silver, precious stones and pearls,
bills and hundis, currency and bank notes, glass, china silk, articles of
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ivory, time pieces, musical and scientific instruments, etc. All other goods
are non-scheduled.
For scheduled articles exceeding ` 100 in value, the carrier is liable for loss
and damage only:
(i) if the value and the description of the goods are disclosed by the
consignor to the carrier; or
(ii) if the loss or damage is due to a criminal act of the carrier, his agent or
servant.
The carrier can charge extra for carrying scheduled articles, but he cannot
limit his statutory liability by any special agreement.
As regards non-scheduled articles, a common carrier can limit his liability

by special agreement with the consignor. But even in this case he will be
liable under Section 8 of the Act (explained below).
In case of loss or damage, the claimant must notify the carrier within six
months of the date of knowledge of the loss or damage.
Post-Office is not a Common Carrier
The post office is not a common carrier. It is not an agent of the sender to
deliver a postal article to the addressee. It is really a branch of the Public
Service providing postal services subject to the provisions of Post Office
Act and the rules made thereunder. If a resident of India sends value-
payable article to an addressee in Nepal and the Nepal Government,
though realised the value of the article, did not pay to the Government of
India. Here, the Government of India is not liable, as per the Act.
8.3 RAILWAYS - COMMON CARRIERS
Carriage by rail in India is governed under Indian Railways Act, 1889, and
subsequently, amended in the years 1961, 1971,1975 and 1999.
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CARRIAGE CONTRACTS
Some of the more important provisions contained in the Act are

summarised below:
1. Maintenance of rate books, etc., for carriage of goods (Section 61).

Every railway administration shall maintain, at each station and to such
other places where goods are received for carriage, the rate books or
other documents which shall contain the rate authorised for the carriage
of goods from one station to another and make them available for the
reference of any person during all reasonable hours without payment of
any fee.
2. Provision of rate risks (Section 63). Where any goods are entrusted to a
railway administration for carriage, such carriage shall, except where
owner’s risk rate is applicable in respect of such goods, be at railway
risk rate. 
 
Any goods, for which owner’s risk rate and railway risk rate are in force,
may be entrusted for carriage at either of the rates and if no rate is
opted, the goods shall be deemed to have been entrusted at owner’s
risk rate.
3. Forwarding note (Section 64). Every person entrusting any goods to a

railway administration for carriage shall execute a forwarding note in
such form as may be specified by the Central Government. 
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The consignor shall be responsible for the correctness of the particulars

furnished by him in the forwarding note. He shall indemnify the railway
administration against any damage suffered by it for reason of the
incorrectness or incompleteness of the particulars in the forwarding
note.
4. Railway receipt (Section 65). A railway administration shall issue a

railway receipt in such form as may be specified by the Central
Government:
(a) in a case where the goods are to be loaded by a person entrusting

such goods, on the completion of such loading; or
(b) in any other case, on the acceptance of the goods by it.
A railway receipt shall be prima facie evidence of the weight and the
number of packages stated therein.
5. Carriage of dangerous or offensive goods (Section 67). No person shall

take with him on a railway or require a railway administration to carry
such dangerous or offensive goods, unless (i) he gives a notice in
writing of their dangerous or offensive nature to the railway servant
authorised in this behalf; and (ii) he distinctly marks on the outside of
the package containing such goods of their dangerous or offensive
nature.
6. Liability of railway administration for wrong delivery (Section 80). Where

a railway administration delivers the consignment to the person who
produces the railway receipt, it shall not be responsible for any wrong
delivery on the ground that such person is not entitled thereto or that
endorsement on the railway receipt is forged or otherwise defective
Responsibility of a Railway Administration as a Carrier of Goods. Sections

93 to 112 of the Railways Act, 1989 contain provisions on this subject.
These provisions are summarised below.
1. General responsibility of a railway administration as carrier of goods

(Section 93). A railway administration shall be responsible for the loss,
destruction, damage or deterioration in transit, or non-delivery of any
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CARRIAGE CONTRACTS
consignment (goods entrusted to a railway administration for carriage),

arising from any cause except the following, namely:
i) an act of God;
ii) an act of war;
iii) an act of public enemies;
iv) arrest, restraint or seizure under legal process;
v) orders of restrictions imposed by the Central Government or a

State Government or by an officer or authority subordinate to the
Central Government or a State Government authorised by it in
this behalf;
vi) act of omission or negligence of the consignor or consignee

endorsee or the agent or servant of the consignor or the
consignee or the endorsee;
vii) natural deterioration or wastage in bulk or weight due to inherent

defect, quality or vice of the goods;
viii) latent defects;
ix) fire, explosion or any unforeseen risks.
Liability of a common carrier vis-a-vis the liability of a railway

administration. The liability of a railway administration is the same as
that of a common carrier. In other words, even where any loss,
destruction, damage, deterioration or non-delivery is proved to have
arisen from anyone or more of the aforesaid nine cases, a railway
administration shall not be relieved of its responsibility unless it further
proves that it had used reasonable foresight and care in the carriage of
the good. Railway administration, like a common carrier, is bound to
carry the goods of every person who is willing to pay the freight and
comply with other requirements.
2. Delay or retention in transit (Section 95). A railway administration shall

be responsible for the loss, destruction, damage or deterioration of any
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consignment proved by the owner to have been caused by the delay or

detention in their carriage. The railway administration can, however,
avoid liability if it proves that the delay or detention arose for reasons
beyond its control or without negligence or misconduct on its part or on
the part of any of its employees.
3. Owner’s risk rate or railway risk rate (Section 97). A consignment may
be carried by a railway administration either at owner’s risk rate or
railway risk rate. Owner’s risk rate is a special reduced rate whereas
railway risk rate is an ordinary tariff rate. Owner’s risk rate is lower than
the railway risk rate for the simple reason that the goods in this case
are carried at the owner’s risk. In case of owner’s risk rate, the railway
administration is not responsible unless it is proved that any loss,
destruction, damage or deterioration or non-delivery of goods arose
from negligence or misconduct on the part of the railway administration
or its employees.
4. Liability for damage to goods in defective condition or defectively

packed (Section 98). Goods tendered to a railway administration to be
carried by railway may be (a) in a defective condition or (b) defectively
packed. As a result of these, goods are liable to damage, deterioration,
leakage or wastage. If the fact of such condition or defective or
improper packing has been recorded by the sender or his agent in the
forwarding note, the railway administration is not responsible for any
damage, deterioration, leakage or wastage unless negligence or
misconduct on the part of the railway administration or of its employees
is proved.
5. Liability after termination of transit (Section 99). Whether the goods are
carried at owner’s risk rate or railway risk rate, the liability of the
railway administration for any loss of goods within a period of seven
days after the termination of transit is that of a bailee under Sections
151, 152 and 161 of the Indian Contract Act, 1872. But where the
goods are carried at owner’s risk rate the railway administration is not
liable for such loss, destruction, damage, deterioration or non-delivery
of goods except on proof of negligence or misconduct on the part of the
railway administration or any of its employees. 
 
After seven days from the date of termination of transit the railway
administration is not liable in any case for any loss of such goods.
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Notwithstanding this provision, the railway administration is not

responsible after the termination of transit for the loss, destruction,
damage, deterioration or non-delivery of articles of perishable goods,
animals, explosives and other dangerous goods.
6. Responsibility as carrier of luggage (Section 100). A railway

administration shall not be responsible for the loss, destruction,
damage, deterioration or non-delivery of any luggage unless a railway
servant has booked the luggage and given a receipt therefor. Also it is to
be proved that the loss, etc., was due to the negligence or misconduct
on the part of the railway administration or on the part of any of its
employees. 
 
In the case of luggage which is carried by the passenger in his own
charge, the railway administration shall not be responsible for the loss,
etc., unless it is proved that the loss, etc., was due to the negligence or
misconduct on the part of the railway administration or on the part of
any of its employees.
7. Responsibility as a carrier of animals (Section 101). A railway

administration shall not be responsible for any loss or destruction of, or
injuries to, any animal carried by railway arising from fright or
restiveness of the animal or from overloading of wagons by the
consignor.
8. Exoneration from liability in certain cases (Section 102). A railway

administration shall not be responsible for the loss, destruction, damage
or deterioration or non delivery of any consignment (i) when such loss,
etc., is due to the fact that a materially false description of the
consignment is given; or,(ii) where a fraud has been practised by the
consignor or the endorsee, or by an agent of the consignor, consignee or
the endorsee; or (iii) where it is proved by the railway administration to
have been caused by, or to have arisen from –
(a) improper loading or unloading by the consignor, or the consignee or

the endorsee, or by an agent of the consignor, consignee or the
endorsee;
(b) riot, civil commotion, strike, lock-out, stoppage or restraint of

labour from whatever cause arising whether partial or general; or
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(iv) for any indirect or consequential loss or damage or for loss of

particular market.
8.4 CLASSIFICATION OF GOODS
The Act classifies goods to be transported by Railway as (i) articles which

are carried at owners risk rates, (ii) perishable goods, (iii) articles which
are of special value and insured) (iv) defectively packed goods, and (v)
explosives or dangerous goods.
As per the Railways Act, Railway administration is not liable for any
damages in the following cases-
• an act of God,
• an act of war,
• act of public enemies,
• arrest, restraint or seizure of under legal process,
• legal restriction by State or Central Govt,
• act or negligence or omission by consignor or his agent or servant,
• natural deterioration due to inherent defect,
• latent defects, and
• fire explosion or any unforeseen risk.
Owner’s Risk and Railway’s Risk
If the goods are carried by the railways as the common carrier, it may
agree to transport the goods either at owners risk or at railways risk. The
tariff rate of carrying the goods at owners risk would be comparatively
lower as the railway administration will not bear any kind of risk. In such a
situation railways are liable when the loss is due to negligence on the part
of servants of the railways or misconduct of the employee; misconduct
would be viewed more seriously as it is worse than negligence.
If the goods are transported at normal rates where in the railway

administration would agree to indemnify the loss is called as railway risk
rate. It is not liable when it proves that the loss was not due to negligence
or not due to willful misconduct of staff or employees.
Losses because of delay or detention in transit: As per Sec. 76 of the

Act a railway administration would be liable for any loss damage or
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destruction or deterioration in the condition of the goods or animals due to

delay in transit or detention in transit. As per Sec. 76A of the Act, when
even there is a deviation in the route regarding transit than the usual
customary route railways would not be held responsible for any breach of
contract provided the deviation is due to the operational reasons.
Losses due to wrong delivery: As per Sec. 76B of the Act, Railway
administration will not be held liable for any act of wrong delivery to a
person, done in good faith without any negligence on the part of railways.
Railway administration will not be held responsible for any defective or
forged endorsements.
As per the provisions of Sec. 78 of the Act, the Railway administration is

not liable to pay damages which may be incidental or consequential in
nature. It is also not responsible or any loss or damage, in the following
cases-
(a) when the consignor has given false description of the goods sent.
(b) where fraud is practised by the consignor or the consignee or an agent

of the consignor or consignee.
(c) animals or goods due to improper loading or unloading by the

consignor or consignee or an agent.
(d) riot, civil commotion, strike, lockout, stoppage or restraint of labour

form whatever cause general or partial.
(e) for any indirect or direct consequence loss or damage or for loss of
particular market.
With regard to the passenger's death due to negligence on the part of

railway employees, compensation payable should not exceed ` one lakh.
But if it is contributory negligence no compensation is payable.
Losses in case of articles of special value: With regards to goods or

articles of special value like gold, silver, coins, etc., mentioned in the
Second Schedule of the Act, Sec. 77(B) would operate as the value of the
goods will have to be declared and it should be the true value. The person
claiming for damage need not give the reason for delay, damage,
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destruction of the goods. Railway administration is responsible to pay

damages only when a notice is served on them as per Sec. 78(b). The
claim may be forwarded to the originating station authorities from where
the animal or goods started their journey to the station where the loss or
damage has taken place.
Time to Claim: The application will have to be filed within six months from
the date of delivery of the goods or animals by the railway. The claim
should be in writing by providing all the relevant facts supporting the claim
of the claimant.
Right of Railways: The Act gives certain privileges to the railway

administration. Bye-laws may be framed regarding the mode of carriage of
goods and passengers. No person is allowed to carry dangerous or
offensive goods. Violation of the provision of the Railways Act and of the
bye-laws are punishable by the court .
Notice of Claim: In case of loss, destruction, damage, deterioration or

non-delivery of animals or goods, there-must be notice in writing within six
months of the date of delivery. The claim must be submitted to the railway
administration (a) to whom goods were delivered for carriage, or (b) to the
station (destination) lies or the loss, destruction, damage or deterioration
occurs.
Disposal of non-claimed goods: The Indian Railways Act was amended

in 1976 providing that essential goods booked to certain notified stations
must be removed within seven days from the termination of transit.
'Essential goods' means food stuffs, sugar, etc. 'Station' means certain
prescribed stations. If the goods are not removed within seven days, the
goods are to be confiscated and to be sold by public action. The sale is to
be notified in local newspapers or any other prescribed manner. The goods
may be sold to cooperatives.
8.5 AIR CARRIAGE
The Carriage by Air Act, 1972 governs the carriage of goods by air. The
provisions of this Act apply to domestic flights in the same manner, as they
are applicable to international flights carrying cargo.
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The documents of carriage are now simplified and the liability of the air
carrier has been substantially increased. The Act is applicable to whole of
India. Also, India being a signatory to the Warsaw convention of 1929, it is
named as High Contracting Party as per international rules and regulations.
As per the International Act, all International Carriages are regarded as a
single operation and all the High Contracting Parties are equally responsible
for the shipments.
8.6 DOCUMENTS OF AIR CARRIAGE
The various documents relating to carriage by air are briefly described

hereunder.
8.6.1 Passenger Ticket
The Passenger Ticket issued by a carrier must show the following –
I. the place and date of issue,

II. the place of departure and destination,
III. the agreed stopping place,
IV. the name and address of the carrier, and
V. the statement that the carriage is subject to the liabilities
mentioned therein.
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(I) The absence or loss of passenger ticket does not affect the validity of
the contract of carriage, but if the carrier accepts a passenger without a
ticket, he cannot enjoy the benefit of limiting his liability.
8.6.2 Baggage Check
For the carriage of baggage, the baggage check, made out in duplicate
must contain the following particulars:
1. The place and date of issue

2. Places of departure and destination,
3. Name and address of the carrier or carriers,
4. The number of passenger tickets,
5. A statement that the baggage will be delivered to the bearer of baggage
check,
6. The number and weight of the package,

7. The amount of the value declared in accordance with Rule 22 (2), and
8. A statement that the carriage is subject to rules relating to liability
stated therein.
If the baggage check does not contain the particulars set out in (4), (6)
and (8) above, the carrier shall not be entitled to the benefit of rules
limiting liability.
8.6.3 Air Way Bill
This is a document handed over by the consignor to the carrier along with
the goods. The Air Way Bill is prepared in triplicate, the first copy being for
the carrier, the second which must accompany the goods, is for the
consignee and the third is to be retained by the consignor, after the carrier
has signed it in token of acceptance of goods.
The Air Way Bill must contain the specified particulars for the correctness
of which the consignor is responsible and he will be liable for all damages
suffered due to the incompleteness of the particulars.
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The Air Way Bill is the prima facie evidence of the conclusion of contract of
carriage, of the receipt of goods as well s the statement relating to the
weight, dimensions, packing of the goods and the number of package. 
 
8.6.4 Limitation of Carrier's Liability
In India the liability of internal or domestic carriers (e.g., Indian Airlines)

for passengers and their baggage has been fixed as follows:
1. In the case of passengers 2,50,000/- francs* per passenger;
2. For registered baggage and cargo 250* francs per kilogram, and
3. For articles in the charge of the passenger himself 5000* francs per
passenger.
*As per international regulations and for the purpose of ascertaining

liability the prevailing exchange rate is used by courts.
A carrier cannot reduce his liability but may undertake a higher liability by
a special agreement. In the case of damage, the person entitled to delivery
must complain to the career forthwith after discover of damage and at the
latest within 3 days from the date of receipt of luggage. In case of delay in
delivery of goods the complaint must be lodged within 14 days from the
date on which the goods have been actually delivered.
8.6.5 Delivery Time:
The parties are at liberty to enter into a contract fixing a time within which
the delivery is to be made by the carrier. In the absence of such contract,
the goods are to be delivered within a reasonable time. The carrier is liable
for damage occasioned by delay in the carriage by air of passengers,
luggage or cargo. The carrier is not liable to pay damage if it proves that -
(i) carrier and their agents had taken necessary measure to avoid
damages;
(ii) or it was impossible for them to take such measures;
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(iii) there was contributory negligence on the part of the injured persons.
In this case the court may in accordance with the provisions of its
own law exonerate the carrier wholly or partly from liability.
Following are the time limits within which the complaints must be made
(a) Damage to baggage within 7 days of receipt

(b) Damage of cargo within 14 days of receipt
(c) Delay in delivery within 21 days of the date of actual delivery.
8.7 SEA CARRIAGE
Goods transported by sea are governed by the Carriage of Goods by Sea

Act, 1925 and the (Indian) Bills of Lading Act, 1856. Besides, the Merchant
Shipping Act, 1958 and the Marine Insurance Act, 1963 are also applicable.
Here, we shall confine our discussion to the first two of the above
mentioned Act.
A contract of carriage of goods by sea is called a contract of affreightment

and the consideration for carriage is called the freight. A contact of
affreightment may take the form of a Charter Party where an entire ship is
hired, or a Bill of Lading, where the goods are to be carried in a general
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ship which can be used for this purpose by any person. In both these
contracts, the ship owner as the carrier undertakes the responsibility of
carrying the goods of the consignor safely and securely to the destination.
In a contract for carriage of goods by sea, the following conditions are

implied:
1. Seaworthiness - This means that the ship is reasonably fit to encounter

the 'perils of the sea'. This is an absolute undertaking warranted by the
shipowner. Seaworthiness is a relative term meaning that the ship is fit
to undertake the particular voyage and to carry the particular cargo.
2. Commencement of Voyage - The ship shall be ready to load the cargo

and commence the voyage agreed on the date without undue delay and
shall also complete the voyage with all reasonable dispatch.
3. Non-deviation of Voyage - It means that if the ship does not carry out
the voyage by the prescribed or usual route in the customary manner,
the contract becomes void from the beginning of the voyage, no matter
when and where the deviation from the usual route took place.
4. Dangerous Goods not to be Shipped - If the shipper ships dangerous

goods and if on account of this, the charterer suffers any damage, he
can recover the same from the shipper.
Charter Party
A charter party is a contract providing for a hiring of a whole ship. Its

terms may amount to a leasing of the ship, when the master and the crew
of the ship become the servants of the charterer. A charter party may be
for a particular period, or for a particular voyage. In the former case it is
called a time charter party and in the latter case, a voyage charter party
has no specific form; the form varies from trade to trade depending on the
customs of the trade.
Bill of Lading
A bill of lading is issued when goods are delivered for carriage to a general
ship, which offers to carry them. The position of the owner of a general
ship is that of a common carrier. A bill of lading may be used even when a
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ship is chartered. A bill of lading acknowledges the receipt of goods, is a

document of title to the goods and is also a contract of carriage of goods.
A bill of lading, as a document of title to the goods, can be transferred to

another person by endorsement and delivery. This characteristic of a bill of
lading resembles that of a negotiable instrument, but in the strict legal and
technical sense it is not a negotiable instrument. It may be said that it is
negotiable only in the popular sense.
Bill of Lading - Contents
The contents of the a bill of lading under the Indian Carriage of Goods by
Sea Act, 1925 are :
1. The name of the ship,
2. The port of shipment and port of delivery
3. The name of shipper and the person to whom delivery is to be made.
4. Loading marks for the identification of the goods, number of packages

or quantity or weight, statement regarding the conditions of the goods.
5. Excepted perils clause
6. Amount of freight.
7. An express statement that the bill of lading is subject to the rules laid
down in the Act.
8. The bill of lading should be signed by the master of the ship, and should
be stamped.
Bill of Lading - Types
The types of bills of lading are :
(a) Clean bill of lading

(b) Qualified, foul, or dirty bill of lading
(c) Thorough bill of lading
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(d) Received bill of lading

(e) On board bill of lading
Delivery of Goods
The prime duty and obligation of a carrier by sea is to deliver the goods to
the holder of the bill of lading, provided proper payment of freight has
been made. Bill of lading is commonly drawn in a set of three copies, one
of which is sent to the consignee, the second is for the ship's master and
the consignor retains the third.
Shipowner's Lien
In the event of non-payment of freight and other charges, the shipowner

has a right of lien on the cargo. He is thus entitled to retain the goods in
his possession until the dues are paid. His lien exists independently of any
express agreement in this regards, but ceases upon the delivery of goods.
8.8 CONTRACT OF AFFREIGHTMENT
A contract of affreightment is defined as a contract by which the owner of

the ship undertakes to carry goods of other party called as consignor by
water, or to furnish a ship for the purpose of carrying the goods to the
destination in return for a payment of freight.
Contract of affreightments are contracts of charter parties including the

bills of lading. However, charter party and bills of lading are not the same.
Where the charter party is ‘the’ contract in essence, bills of lading is
considered to be the document evidencing that particular contract.
There are distinct differences between the charter party and the bills of
lading.
A charter party is used for full shipload of goods, whereas a bill of lading is
used for less than full shipload. The services used are also different like a
‘tramp service’ for charter party and ‘liner service’ for Bill of Lading. For
charter party common law applies, but Bill of Lading is governed by
international rules like the ‘Hague-Visby Rules’. Charter party is the
contract for carriage of goods which governs the commercial relationship
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between the charterer and the ship owner and the Bill of Lading is issued
under that contract as per the terms of the contract.
Some of the Implied Conditions of the Contract of Affreightment are – (a)

Seaworthiness of the ship; (b) Fitness for commencement of voyage and
cover the distance of the destination in a reasonable time ; (c) Non-
Deviation from the specified route; and (d) Shipper not supposed to ship
dangerous goods.
8.9 RESPONSIBILITIES, LIABILITIES AND RIGHTS OF

CARRIER BY SEA
8.9.1 Responsibilities
Following are the responsibilities of the carrier for every contract of

carriage of goods by sea, as per the Carriage of Goods by Sea Act, 1925.
1. The carrier, i.e., the ship-owner shall be bound, before and at the
beginning of the voyage, to exercise due diligence to: (a) make the ship
seaworthy, (b) properly make, equip and supply the ship, and (c) make
the holds, refrigerating and cool chambers, and all other parts of the
ship in which goods arc carried, fit and safe for their reception, carriage
and preservation.
2. The carrier must properly and carefully load, handle, stow, carry, keep
care for and discharge the goods carried.
3. After receiving the goods into his charge, the carrier or the master or
agent of the carrier must, on demand of the shipper, issue to the
shipper a bill of lading containing the prescribed particulars.
8.9.2 Liabilities
The Act specifies the following liabilities
Liability for loss or damage arising or resulting front his negligence, fault
or failure in the duties and obligations provided in the Act, and not
otherwise. He is not an insurer of goods carried by the ship. Separate
marine insurance policy is required to be taken for sea perils.
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If the goods of inflammable, explosive or dangerous nature, that may

become a danger to the ship or cargo, are shipped with knowledge and
consent of the ship owner, they may be landed at any place or destroyed or
rendered innocuous by the carrier without liability on the part of the carrier
except to general average, if any. Also, the carrier shall be discharged from
all liability for loss or damage unless suit is brought within one year after
delivery of the goods or the date when the goods should have been
delivered.
8.9.3 Rights
A carrier of goods by sea has the following rights:
1. Right to claim freight - A carrier of goods by sea is entitled to claim

from the shipper the freight agreed upon.
2. Right of lien - In the event of nonpayment of freight and other

charges incurred upon the goods in his possession, a carrier of goods by
sea has been on those goods until the freight and other charges are
paid by the shipper.
3. Right to claim damages for breach of contract - A carrier of goods

by sea can claim damages from the shipper of goods for breach of any
of the terms of contract of carriage.
4. Right to repudiate the contract - When there is a breach of contract

by the shipper, and if the breach comes to the knowledge of the carrier
before the commencement of the voyage, the carrier can repudiate the
contract of carriage, and can also claim damages for the breach.
1. You are exporting a consignment of cashew nuts from Mumbai to

London. Make a list of documents required to send the goods by a) Sea
through a common carrier and b) By air. Search from Google if required.
2. You had ordered a consignment from Jaipur to Pune containing delicate

glass items to be transported by Railway. There is a breakage of 40%
items during transit. Search from Government/Railway websites under
which Act you can claim the damages from the Railways.
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8.11 SUMMARY
• The act of carrying the goods from one place to another place would
resemble a bailment as the bailor (owner) would handover the goods to
the bailee (carrier) for specific 'purpose' in the form of transporting
goods for which he would be remunerated. Here the relation is that of a
principal and an agent.
• A carrier of goods is either a Common Carrier or Private Carrier. Some of

these can carry goods and passengers, or only passengers or only goods.
• The Carriage by Air Act, 1972 lays down that certain documents are to
be issued when goods and passengers are carried by air.
• Under the Act of 1972, the carrier of goods has a right to request the
consignor to make out and hand over to him a document called an air
way bill.
• A contract of affreightment is defined as a contract by which a ship

owner undertakes to carry goods of another called as shipper or
consignor by water, or to furnish a ship for the purpose of carrying the
goods to the destination in return for a price called freight. A shipper can
engage the entire ship to carry his goods from one destination to
another, then such agreement is called as Charter Party.
1. Explain in details a common carrier.
2. Who is a private carrier? Explain.
3. What is a contract of carriage?
4. What do you mean by a common carrier? State the essential features of

a common carrier?
5. Write notes on : (a) Common Carrier, (b) Private Carrier, (c) Gratuitous
Carrier.
6. Explain (a) Forwarding Note (b) Railway Receipt.
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7. What does the term "International Carriage" mean?
8. When passengers and goods arc carried by air, what document are
issued?
9. What particulars must a passenger ticket issued by an air carrier

contain?
10.What is an air consignment note?
11.What are the documents of carriage by air?
12.What is a contract of afreightment?
13.What is a bill of lading?
14.What is the difference between a bill of lading and a charter party?
15.What is a 'clear' and a 'dirty' bill of lading?
16.What is a mate's receipt?
17.Define a contract of afreightment.
1. The term ‘common carrier’ is applied to carrier of _______ by land and

inland waters.
a. Passengers
b. Money
c. Goods
d. Documents
2. In India, post office service is considered as ____________
a. Common Carrier
b. Private carrier
c. Inland carrier
d. Branch of Public Service
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3. Railways are considered as ___________.
a. Private carriers
b. Common carriers
c. Inland carriers
d. Risky carriers
4. The contract of carriage by sea is known as –
a. Contract of affreightment
b. Sea way bill
c. Luggage ticket
d. Baggage check list
5. The document issued for carriage of goods by air is known as -
a. The check-in receipt

b. The goods sales memo
c. The goods quality check list
d. The air way bill
Answers : (1-c), (2-d), (3-b), (4-a), (5-d).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !216
NEGOTIABLE INSTRUMENTS ACT
Chapter 9
Objectives
After completing this chapter, you will be able to understand the meaning
and features of negotiable instruments and explain its definition. You will
also understand the meaning and features of bill of exchange, and identify
its different modes. You will understand various types of negotiable
instruments and their uses. Regarding the cheques, you will come to know
its essentials, crossing and endorsement on cheques and the risks involved
in its collection and payments. The legal consequences of wrongful
dishonour of a cheque will be understood, and the difference between bank
draft and a cheque will be known. Lastly, the various ways of discharge of
negotiable instruments will be understood by you.
Structure:
9.1 Negotiable Instruments – Introduction and History.

9.2 Negotiable Instruments and Non-negotiable Instruments.
9.3 Definitions of Terms Used.
9.4 Negotiations
9.5 Maturity of Negotiable Instruments
9.6 Promissory Note and Bill of Exchange
9.7 Presentment, Honour and Dishonour of N.I.
9.8 Hundi, Cheques and Demand Drafts
9.10 Summary
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9.1 NEGOTIABLE INSTRUMENTS – INTRODUCTION AND

HISTORY
The Negotiable Instruments Act is an Act to define and Law relating to

Promissory Notes, Bills of Exchange and cheques. For the Act to define and
amend the law relating to promissory notes, bills of exchange and
cheques.It is hereby enacted as follows:
This Act may be called the Negotiable Instruments Act, 1881. The local
extent, Saving of usage relating to hundis, etc., extends to the whole of
India, but nothing herein contained affects the Indian Paper Currency Act,
1871, section 2, or affects any local usage relating to any instrument in an
oriental language; Provided that such usages may be excluded by any
words in the body of the instrument, which indicate and intented that the
legal relations of the parties thereto shall be governed by this Act; and it
shall come into force on the first day of March, 1882.
The Act has been extended to Goa, Daman, and Diu by Regulation 12 of
1962, sec. 3 and Sch. 1 (w.e.f. 1-12-1965) and to Dadra and Nagar Haveli
by Regulation 6 of 1963, sec. 5 and Sch. 1 (w.e.f. 1-11-1956).
9.1.1 Introduction
In India, there is reason to believe that instrument to exchange were in

use from early times and we find that papers representing money were
introduced into the country by one of the Mohammedan sovereigns of Delhi
in the early part of the fourtheenth century. The word ‘hundi’, a generic
term used to denote instruments of exchange in vernacular is derived from
the Sanskrit root ‘hund’ meaning ‘to collect’ and well expresses the
purpose to which instruments were utilised in their origin. With the advent
of British rule in India commercial activities increased to a great extent.
The growing demands for money could not be met be mere supply of
coins; and the instrument of credit took the function of money which they
represented.
Before the enactment of the Negotiable Instruments Act, 1881, the law of
negotiable instruments as prevalent in England was applied by the Courts
in India when any question relating to such instruments arose between
Europeans. When then parties were Hindus or Mohammedans, their
personal law was applied. Though neither the law books of Hindus nor
! !218
those of Mohammedans contain any reference to negotiable instruments as

such, the customs prevailing among the merchants of the respective
community were recognised by the courts and applied to the transactions
among them. During the course of time, there had developed in the
country a strong body of usage relating to hundis, which even the
Legislature could not without hardship to Indian bankers and merchants
ignore. In fact, the Legislature felt the strength of such local usages and
though fit to exempt them from the operation of the Act with a proviso that
such usage may be excluded altogether by appropriate words. In the
absence of any such customary law, the principles derived from English law
were applied to the Indians as rules of equity justice and good conscience.
9.1.2 History
The history of the present Act is a long one. The Act was originally drafted
in 1866 by the India Law Commission and introduced in December, 1867 in
the Council and it was referred to a Select Committee. Objections were
raised by the mercantile community to the numerous deviations from the
English Law which it contained. The Bill had to be redrafted in 1877. After
the lapse of a sufficient period for criticism by the Local Governments, the
High Courts and the chambers of commerce, the Bill was revised by a
Select Committee. In spite of this, the Bill could not reach the final stage.
In 1880 by the Order of the Secretary of State, the Bill had to be referred
to a new Law Commission. On the recommendation of the new Law
Commission the Bill was re-drafted and again it was sent to a Select
Committee which adopted most of the additions recommended by the new
Law Commission. The draft thus, prepared for the fourth time was
introduced in the Council and was passed into law in 1881 being the
Negotiable Instruments Act, 1881 (26 of 1881)
9.2 NEGOTIABLE INSTRUMENTS AND NON-NEGOTIABLE

INSTRUMENTS
9.2.1 Examples of Negotiable Instruments
The various types of the Negotiable Instruments are : (i) Bills of Exchange,
(ii) Promissory Note, (iii) Cheque.(iv) Hundis (v) Share warrents, (vi)
Dividend warrants, (vii) Banker’s drafts, (viii) Circular notes, (ix) Bearer
debentures, (x) Railway receipts, (xi) Delivery orders.
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The list is subject to update and modifications and changes with the growth
of commerce.
Examples of non-negotiable instruments: (i) Money orders, (ii) Deposit

receipts, (iii) share certificates (iv) Postal orders, etc.
9.2.1 Necessities of the Negotiable Instruments
It is necessary that the following features are present in the Negotiable

Instruments :
(a)Easy transferability: Easy change of ownership; (b) Valid and complete

title; (c) Right to file suit by the transferee; (d) Notice of transfer; (e)
Presumption of consideration; (f) Easy Exchange; (g) Number of
transfers possible; (h) Rule of evidence.
9.2.3 Types of Negotiable Instruments and Their Features :
Promissory note
A “promissory note” is an instrument in writing (not being a bank-note or a

currency-note) containing an unconditional undertaking signed by the
maker, to pay a certain sum of money only to, or to the order of, a certain
person, or to the bearer of the instrument
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Bill of exchange
A “bill of exchange” is an instrument in writing containing an unconditional

order, signed by the maker, directing a certain person to pay a certain sum
of money only to, or to the order of, a certain person or to the bearer of
the instrument.
A promise or order to pay is not “conditional”, within the meaning of this

section and section 4, by reason of the time for payment of the amount or
any installment thereof, being expressed to be on the lapse of certain
period after the occurrence of a specified event which, according to the
ordinary expectation of mankind, is certain to happen, although the time of
its happening may be uncertain.
The sum payable may be “certain”, within the meaning of this section and
section 4, although it includes future indicated rate of change, or is
according to the course of exchange, or is according to the course of
exchange, and although the instrument provides that, on default of
payment of an installment, the balance unpaid shall become due. The
person to whom it is clear that the direction is given or that payment is to
be made may be a “certain person,” within the meaning of this section and
section 4, although he is misnamed or designated by description only
Cheque
A ”cheque” is a bill of exchange drawn on a specified banker and not

expressed to be payable otherwise than on demand and it includes the
electronic image of a truncated cheque and a cheque in the electronic
form.
(a)“A cheque in the electronic form” means a cheque which contains the
exact mirror image of a paper cheque, and is generated, written and
signed in a secure system ensuring the minimum safety standards
with the use of digital signature (with or without biometric signature)
and asymmetric crypto system;
(b)“A truncated cheque” means a cheque which is truncated during the

course of a clearing cycle, either by the clearing house or by the bank
whether paying or receiving payment, immediately on generation of
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an electronic image for transmission, substituting the further physical

movement of the cheque in writing.
The expression “clearing house” means the clearing house managed by the
Reserve Bank of India or a clearing house recognised as such by the
Reserve Bank of India.
Note - Substituted for section 6 Act No. 55 of 2002, sec. 2 for “A “cheque”
is a bill of exchange drawn on a specified banker and not expressed to be
payable otherwise than on demand” (w.e.f. 6-2-2003).
9.3 DEFINITIONS OF TERMS USED
Drawer, Drawee
The maker of a bill of exchange or Cheque is called the “drawer”; the

person thereby directed to pay is called the “drawee”.
“Drawee in case of need“: When the bill or in any endorsement thereon the
name of any person is given in addition to the drawee to be resorted to in
case of need, such person is called a “drawee in case of need”.
Acceptor
After the drawee of a bill has signed his assent upon the bill, or, if there are
more parts thereof than one, upon one of such part, and delivered the
same, or given notice of such signing to the holder or to some person on
his behalf, he is called the “acceptor”.
“Acceptor for honour”: When a bill of exchange has been noted or

protested for non-acceptance or for better security], and any person
accepts it supra protest for honour of the drawer or of any one of the
endorser, such person is called an “acceptor for honour”.
Payee
The person named in the instrument, to whom or to whose order the

money is by the instrument directed to be paid, is called the “payee”.
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Holder
The “holder” of a promissory note, bill of exchange or cheque means any

person entitled in his own name to the possession thereof and to receive or
recover the amount due thereon from the parties thereto.
Where the note, bill or cheque is lost or destroyed, its holder is the person
so entitled at the time of such loss or destruction.
Holder in due course
“Holder in due course” means any person who for consideration became
the possessor of a promissory note, bill of exchange or cheque if payable to
bearer, or the payee or indorse thereof, if payable to order before the
amount mentioned in it became payable, and without having sufficient
cause to believe that any defect existed in the title of the person from
whom he derived his title.
Payment in due course
“Payment in due course” means payment in accordance with the apparent

tenor of the instrument in good faith and without negligence to any person
in possession thereof under circumstances which do not afford a
reasonable ground for believing that he is not entitled to receive payment
of the amount therein mentioned.
Inland instrument
A promissory note, bill of exchange or cheque drawn or made in India and

made payable in, or drawn upon any person resident in, [Indian] shall be
deemed to be an inland instrument.
Foreign instrument
Any such instrument not so drawn, made or made payable shall be deemed
to be a foreign instrument.
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Negotiable instrument
1. A “negotiable instrument” means a promissory note, bill of exchange or

cheque payable either to order or to bearer.
Explanation (i).- A promissory note, bill of exchange or cheque is payable

to order which is expressed to be so payable to a particular person, and
does not contain words prohibiting transfer or indicating an intention that
it shall not be transferable.
Explanation (ii).- A promissory note, bill of exchange or cheque is

payable to bearer which is expressed to be so payable or on which the
only or last endorsements is an endorsement is an endorsement in
blank.
Explanation (iii) Where a promissory note, bill of exchange or cheque,

either originally or by endorsement, is expressed to be payable to the
order of a specified person, and not to him or his order, it is nevertheless
payable to him or his order at his option.
2. A negotiable instrument may be made payable to two or more payees

jointly, or it may be made payable in the alternative to one or two, or
one or some of several payees.
9.4 NEGOTIATIONS
When a promissory note, bill of exchange or cheque is transferred to any

person, so as to continue the person the holder thereof, the instrument is
said to be negotiated.
In case of bearer instruments, the negotiation can be made by simple

delivery of the instrument. In case of an order instrument, the negotiation
can be made only by endorsement on the instrument and its delivery. In
other words, a negotiable instrument payable to a particular person or his
order can be transferred by making an endorsement on it and then
delivering the same.
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Endorsement
When the marker or holder of an negotiable instrument signs the same,

otherwise than as such maker, for the purpose of negotiation, one the back
or face thereof or on a slip of paper annexed thereto, or so signs for the
same purpose a stamped paper intended to be completed as a negotiable
instrument, he is said to indorse the same, and is called the endorser.
Endorsement in blank and in full-endorsee
1. If the endorser signs his name only, the endorsement is said to be “in
blank”, and if he adds a direction to pay the amount mentioned in the
instrument to, or to the order of, a specified person, the endorsement is
said to be “in full”, and the person so specified is called the “endorsee”
of the instrument.
2. The provisions of this Act relating to a payee shall apply with the
necessary modifications to an endorsee.
Ambiguous instruments
Where an instrument may be construed either as a promissory note or bill

of exchange, the holder may at his election treat it as either and the
instrument shall be thenceforward treated accordingly.
Where amount is stated differently in figures and words
If the amount undertaken or ordered to be paid is stated differently in

figures and in words, the amount stated in words shall be the amount
undertaken or ordered to be paid.
Instruments payable on demand
A promissory note or bill of exchange, in which no time for payment is

specified, and, a cheque, are payable on demand.
Inchoate stamped instruments
Where one person signs and delivers to another a paper stamped in

accordance with the law relating to negotiable instruments then in force in
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India, and either wholly blank or having written thereon an incomplete

negotiable instrument, he thereby gives prima facie authority to the holder
thereof to make or complete, as then case may be, upon it a negotiable
instrument, instrument, for any amount specified therein and not
exceeding the amount covered by the stamp. The person so signing shall
be liable upon such instrument, in the capacity in which he signed the
same, to any holder in due course for such amount, provided that no
person other than a holder in due course shall recover from the person
delivering the instrument anything in excess of the amount intended by
him to be paid thereunder.
At sight, on presentment, after sight
In a promissory note or bill of exchange the expressions “at sight” and “on
presentment” means on demand. The expression “after sight” means, in a
promissory note, after presentment for sight, and, in a bill of exchange
after acceptance, or noting for non-acceptance, or nothing for non-
acceptance, or protest for non-acceptance.
9.5 MATURITY OF NEGOTIABLE INSTRUMENTS
The maturity of a promissory note or bill of exchange is the date at which it

falls due.
Days of grace – Every promissory note or bill of exchange which is not

expressed to be payable on demand, at sight or on presentment is at
maturity on the third day after the day on which it is expressed to be
payable.
Calculating maturity of bill or note payable so many months after date or

sight
In calculating the date at which a promissory note or bill of exchange,

made payable at stated number of months after date or after sight, or after
a certain event, is at maturity, the period stated shall be held to terminate
on the day of the month, which corresponds with the day on which the
instrument is dated, or presented for acceptance or sight, or noted for non-
acceptance, or protested for non-acceptance, or the event happens or,
where the instrument is a bill of exchange made payable at a stated
number of months after sight and has been accepted for honour, with the
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day on which it was so accepted. If the month in which the period would
terminate has no corresponding day, the period shall be held to terminate
on the last day of such month.
Illustrations
a. A negotiable instrument dated 29th January, 1878, is made payable at

one month after date. The instrument is at maturity on the third day
after the 28th February, 1878.
b. A negotiable instrument, dated 30th August, 1878, is made payable

three months after date. The instrument is at maturity on the 3rd
December, 1878.
c. A promissory note or bill of exchange, dated 31st August, 1878, is made

payable three months after date. The instrument is at maturity on the
3rd December, 1878.
Calculating maturity of bill or note payable so many days after date

of sight
In calculating the date at which a promissory note or bill of exchange made

payable a certain number of days after date of sight or after a certain
event is at maturity, the day of the date, or of presentment for acceptance
or sight, or of protest for non-acceptance, or on which the event happens,
shall be excluded.
9.6 PROMISSORY NOTE AND BILL OF EXCHANGE
9.6.1 Promissory Note
Section 4 of the N.I Act defines; A promissory note is an instrument in

writing containing an unconditional undertaking signed by the maker, to
pay a certain sum of money to, or the order of a certain person or to the
bearer of the instrument. The parties to promissory note include the
promissory, drawer or maker, the payee, promise or the holder, and the
endorser.
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9.6.2 Requirements of a Promissory Note
The following are the requirements of a promissory note :
(a) The Promissory Note must be in writing: Only verbal promise or oral
undertaking are not entertained in a promissory note. (b) The promissory
note must contain an express promise or clear undertaking to pay. It
cannot be implied or inferred. (c) It should clearly mention the
requirements of the receipt of money. (d) A promise to pay contained in
the note must be unconditional. If the promise to pay is coupled with a
condition it is not a promissory note. (e) The instrument should show on
the fact of it as to who exactly is liable to pay. The name of the promissory
or maker should be written clearly and ascertainable on seeing the
document. (f) The person who promises to pay must sign the instrument
even though it might have been written by the promissory himself. (g) The
amount undertaken to be paid must be definite or certain and not vague.
That is, it must not be capable of contingent additions or deletions or
subtractions.
Also, the promissory note should contain a promise to pay money and
money only, i.e., legal tender money. In India, one rupee and above
denominations are unlimited legal tender and fifty paisa coin is limited legal
tender, up to ten rupees and all other subsidiary coins are up to one rupee
only. The promise cannot be extended to payments in the form of goods,
shares, bonds, foreign exchange, etc.
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Thirdly, the money must be payable to definite person or according to his

order. The payee may be ascertained by name or by designation. But it
cannot be made payable either to bearer or to the maker himself. It may
be payable on demand or after certain definite period of time.
Lastly, a promissory note should, necessarily, bear sufficient stamp as

required by the Indian Stamp Act, 1889.; It should be dated, and the rate
of interest per annum must be clearly mentioned.
9.6.3 Bill of Exchange

According to section 5 of the N.I. Act, a Bill of Exchange is an instrument in
writing containing an unconditional order, signed by the maker, directing a
certain person to pay a certain sum of money only to, or to the order of, a
certain person or to the bearer of the instrument.
There are usually three parties to a bill of exchange. The maker of a bill of
exchange is called the drawer (creditor). The person who is directed to pay
is called the drawer (debtor): the person who is entitled to receive the
money is called the payee; when the payee gets the possession of the bill,
he is called the holder. It is the holder’s duty to present the bill for
acceptance to the drawer. The drawer signifies his acceptance by signing
on the bill. After such a signature, the drawer becomes the acceptor. It is
not, however, necessary that three separate persons should answer to the
description of drawer, drawer and payee. Sometimes, the drawer and the
payee may be one and the same person in which case the drawer directs
the drawer to make payment of the sum specified in the bill to himself.
Besides the above parties to a bill of exchange, there may be the endorser,
the endorsee, drawer in case of need, acceptor for Honor, etc.
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Acceptance of a bill of exchange
A bill of exchange should be accepted by the drawer before payment can

be claimed. When the drawer of a bill signifies his assent to the drawer by
signing his name across the face of the bill with or without the word
“Accepted”, it is called the acceptance of the bill, Then the drawer becomes
the “acceptor” of the bill. An acceptance is complete when it is given in
writing on the bill, signed by the drawer or his agent and it is delivered to
the holder.
Conditions for valid acceptance of a bill of exchange
The following conditions should be fulfilled for acceptance of the Bill of

Exchange –
(a) The acceptance must be in writing. (b) It must be signed by the

drawer, even bare signature is sufficient to suggest his acceptance. The
word “accepted” may or may not be there, but signature is a must. (c)
Acceptance must be completed by delivery of the bill to the holder or
giving notice of acceptance to him or his agent. (d) A bill can only by
accepted by the drawer or all or some of the several drawers, or by a
drawer in case of need or by any other acceptor for honor. (e) An
acceptance must be absolute and unconditional.
Payment on bill of exchange
A bill of exchange may be payable on demand or at a specified date or

after a specified period of time. If no time of payment is mentioned, the
instrument is payable on demand. The maturity of a bill of exchange is the
date at which it falls due. A Grace period of three days may be allocated to
take care of scheduled or unscheduled holidays. A cheque or a promissory
note or bill payable at sight or demand is not entitled to days of grace.
9.7 PRESENTMENT, HONOuR AND DISHONOuR OF

NEGOTIABLE INSTRUMENTS
9.7.1 Presentment
Presentment for acceptance
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A bill of exchange payable after sight must, if no time or place is specified

therein for presentment, be presented to the draweee thereof for
acceptance, if he can, after reasonable search, be found, by a person
entitled to demand acceptance, within a reasonable time after it is drawn,
and in business hours on a business day, in default of such presentment,
on party thereto is liable thereon to the person making such default. If the
drawee cannot, after reasonable search, be found, the bill is dishonoured.
If the bill is directed to the drawee at a particular place, it must be

presented at that place, and if after the due date for presentment he
cannot, after reasonable search, be found thereon, the bill is dishonoured.
Presentment of promissory note for sight
A promissory note, payable at a certain period after sight must be

presented to the maker thereof for sight (if he can after reasonable search
be found) by a person entitled to demand payment, within a reasonable
time after it is made and in business hours on a business day. In default of
such presentment, no party thereto is liable thereon to the person making
such default.
Drawee’s time for deliberation
The holder must, if so required by the drawee of a bill of exchange

presented to him for acceptance, allow the drawee fortyeight hours
(exclusive of public holidays ) to consider whether he will accept it.
Presentment for payment
Promissory notes, bill of exchange and cheques must be presented for

payment to the maker, acceptor or drawee thereof respectively, by or on
behalf or the holder as hereinafter provided. In default of such
presentment, the other parties thereto are not liable thereon to such
holder.
Notwithstanding anything contained in section 6, where an electronic

image of a truncated cheque is presented for payment, the drawee bank is
entitled to demand any further information regarding the truncated cheque
from the bank holding the truncated cheque in case of any reasonable
suspicion about the genuineness of the apparent tenor of instrument, and
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if the suspicion is that of any fraud, forgery, tampering or destruction of

the instrument, it is entitled to further demand the presentment of the
truncated cheque itself for verification – Provided that the truncated
cheque so demanded by the drawee bank shall be retained by it, if the
payment is made accordingly.
Honours for presentment
Presentment for payment must be made during the usual hours of business
and, if at a banker’s, within banking hours.
Presentment for payment of instrument payable after date or sight
A promissory note or bill of exchange, made payable at a specified period

after date or sight thereof, must be presented for payment at maturity.
Presentment for payment of promissory note payable by

instalments
A promissory note payable by instalments must be presented for payment

on the third day after the date fixed for payment of each instalment; and
non-payment on such presentment has the same effect as non-payment of
a note at maturity.
Presentment for payment of instrument payable at specified place

and not elsewhere
A promissory note, bill of exchange or cheque made, drawn or accepted

payable at a specified place and not elsewhere must, in order to charge
any party thereto, be presented for payment at that place.
Instrument payable at specified place
A promissory note or bill of exchange made, drawn or accepted payable at

a specified place must, in order to charge the maker or drawer thereof, be
presented at the place.
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Presentment where no exclusive place specified
A promissory note or bill of exchange, not made payable as mentioned in

section 68 and 69, must be presented for payment at the place of business
(if any), or at the usual residence, of the maker, drawee or acceptor
thereof, as the case may be.
Presentment when maker, etc., has no known place of business or

residence
If the maker, drawee or acceptor of a negotiable instrument has no known

place of business or fixed residence, and no place is specified in the
instrument for presentment for acceptance or payment such presentment
may be made to him in person wherever he can be found.
Presentment of cheque to charge drawer
A cheque must, in order to charge the drawer, be presented at the bank

upon which it is drawn before the relation between the drawer and his
banker has been altered to the prejudice of the drawer.
Presentment of cheque to charge any other person
A cheque must, in order to charge any person except the drawer, be

presented within a reasonable time after delivery thereof by such person.
Presentment of instrument payable on demand
Subject to the provisions of section 31, a negotiable instrument payable on

demand must be presented for payment within a reasonable time after it is
received by the holder.
Presentment by or to agent, representative of deceased, or

assignee of insolvent.
Presentment for acceptance or payment may be made to the duly

authorized agent of the drawee, maker or acceptor, as the case may be, or,
where the drawee, maker or acceptor has died, to his legal representative,
or, where he has been declared an insolvent, to his assignee.
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Excuse for delay in presentment for acceptance or payment
Delay in presentment for acceptance of payment is excused if the delay is

caused by circumstances beyond the control of the holder, and not
imputable to his default, misconduct or negligence. When the cause of the
delay ceases to operate, presentment must be made within a reasonable
time.
When presentment unnecessary
No presentment for payment is necessary, and the instrument is

dishonoured at the due date for presentment, in any of the following
cases:-
(a) if the maker, drawee or acceptor intentionally prevents the

presentment of the instrument, or if the instrument being payable at
his place of business, he closes such place on a business day during
the usual business hours, or if the instrument being payable at some
other specified place, neither he nor any person authorized to pay it
attends at such place during the usual business hours, or if the
instrument not being payable at any specified place, he cannot after
due search be found;
(b) as against any party sought to be charged therewith, if he has

engaged to pay notwithstanding non-presentment ;
(c) as against any party if, after maturity, with knowledge that the
instrument has not been presented – he makes a part payment on
account of the amount due on the instrument, or promises to pay the
amount due therein whole or in part, or otherwise waives his right to
take advantage of any default in presentment for payment;
(d) as against the drawer, if the drawer could not suffer damage from the
want of such presentment.
Liability of banker for negligently dealing with bill presented for

payment
When a bill of exchange, accepted payable at a specified bank, has been

duly presented there for payment and dishonoured, if the banker so
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negligently or improperly keeps, deals with or delivers back such bill as to

cause loss to the holder, he must compensate the holder for such loss.
9.7.2 Honouring the Instrument by Payment
To whom payment should be made
Subject to the provisions of section 82, clause (c), payment of the amount
due on a promissory note, bill of exchange or cheque must, in order to
discharge the maker or acceptor, be made to the holder of the instrument.
Interest when rate specified
When interest at a specified rate is expressly made payable on a

promissory note or bill of exchange, interest shall be calculated at the rate
specified, on the amount of the principal money due thereon, from the date
of the instrument, until tender or realization of such amount, or until such
date after the institution of a suit to recover such amount as the Court
directs.
Interest when no rate specified
When no rate of interest is specified in the instrument, interest on the

amount due thereon shall, notwithstanding any agreement relating to
interest between any parties to the instrument, be calculated at the rate of
eighteen per cent per annum, from the date at which the same ought to
have been paid by the party charged, until tender or realization of the
amount due thereon, or until such date after the institution of a suit to
recover such amount as the Court directs.
Explanation- When the party charged is the endorser of an instrument

dishonoured by non-payment, he his liable to pay interest only from the
time he receives notice of the dishonour.
Delivery of instrument on payment or indemnity in case of loss
Any person liable to pay, and called upon by the holder thereof to pay, the
amount due on a promissory note, but of exchange or cheque is before
payment entitled to have it shown, is on payment entitled to have it
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delivered up to him, or, if the instrument is lost or cannot be produced, to

be indemnified against any further claim thereon against him.
Where the cheque is an electronic image of a truncated cheque, even after

the payment the banker who received the payment shall be entitled to
retain the truncated cheque.
A certificate issued on the foot of the printout of the electronic image of a

truncated cheque by the banker who paid the instrument, shall be prima
facie proof of such payment.
9.7.3 Discharge From Liability
The maker, acceptor or indorser respectively of a negotiable instrument is

discharged from liability thereon-
(a) By cancellation – to a holder thereof who cancels such acceptor’s or

endorser’s name with intent to discharge him, and to all parties
claiming under such holder;
(b) By release – to a holder thereof who otherwise discharges such maker,

acceptor or endorser, and to all parties deriving title under such holder
after notice of such discharge;
(c) By payment to all parties thereto, if the instrument is payable to

bearer, or has been indorsed in blank, and such maker, acceptor or
endorser makes payment in due course of the amount due thereon.
Discharge by allowing drawee more than forty-eight hours to

accept
If the holder of a bill of exchange allows the drawee more than forty-eight
hours, exclusive of public holidays, to consider whether he will accept the
same, all previous parties not consenting to such allowance are thereby
discharged from liability to such holder.
When cheque is not duly presented and drawer is damaged thereby
1. Where a cheque is not presented for payment within a reasonable time

of its issue, and the drawer or person on whose account it is drawn had
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the right, at the time when presentment ought to have been made, as
between himself and the banker, to have the cheque paid and suffers
actual damage through the delay, he is discharged to the extent of such
damage, that is to say, to the extent to which such drawer or person is
a creditor of the banker to a large amount than he would have been if
such cheque had been paid.
2. In determining what is a reasonable time, regard shall be had to the

nature of the instrument, the usage of trade and of bankers, and the
facts of the particular case.
3. The holder of the cheque as to which such drawer or person is so

discharged shall be a creditor, in lieu of such drawer or person, of such
banker to the extent of such discharge and entitled to recover the
amount from him.
Illustrations
(a) A draws a cheque for ` 1,000, and, when the cheque ought to be
presented, has funds at the bank to meet it. The bank fails before the
cheque is presented. The drawer is discharged, but the holder can
prove against the bank for the amount of the cheque.
(b) A draws a cheque at Pune on a bank in Calcutta. The bank fails before
the cheque could be presented in ordinary course. A is not discharged,
for he has not suffered actual damage through any delay in presenting
the cheque.
Cheque payable to order
Where a cheque payable to order purports to be endorsed by or on behalf

of he payee, the drawee is discharged by payment in due course.
Where a cheque is originally expressed to be payable to the bearer, the

drawee is discharged by payment in due course to the bearer thereof,
notwithstanding any endorsement whether in full or in blank appearing
thereon, and notwithstanding that any such endorsement purports to
restrict or exclude further negotiation.
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Drafts drawn by one branch of a bank on another payable to order
Where any draft, that is an order to pay money, drawn by one office of a
bank upon another office of the same bank for a sum of money payable to
order on demand, purports to be endorsed by or behalf of the payee, the
bank is discharged by payment in due course.
Parties not consenting discharged by qualified or limited

acceptance
If the holder of a bill of exchange acquiesces in qualified acceptance, or

one limited to part of the sum mentioned in the bill, or which substituted a
different place or time for payment or which, where the drawees are not
partners, is not signed by all the drawees, all previous parties whose
consent is not obtained to such acceptance are discharged as against the
holder and those claiming under him, unless on notice given by the holder
they assent to such acceptance.
Explanation- An acceptance is qualified
(a) where it is conditional, declaring the payment to be dependent or the

happening of an event therein stated;
(b) where it undertakes the payment of part only of the sum ordered to be
paid;
(c) where, no place of payment being specified on the order, it undertakes

the payment at a specified place, and not otherwise or elsewhere, or
where a place of payment being specified in the order, it undertakes
the payment at some other place and not otherwise or elsewhere;
(d) where it undertakes the payment at a time other than that at which
under the order or would be legally due.
Affect of material alteration.
Any material alteration of a negotiable instrument renders the same void

as against anyone who is a party thereto at the time of making such
alteration and does not consent thereto, unless it was made in order to
carry out the common intention of the original parties;
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Alteration by endorsee: Any such alteration, if made by an endorsee,

discharges his endorser from all liability to him in respect of the
consideration thereof.
Acceptor or endorser bound notwithstanding previous alteration
An acceptor or endorser of a negotiable instrument is bound by the

acceptance or endorsement notwithstanding any previous alteration of the
instrument.
Payment of instrument on which alteration is not apparent
Where a promissory note, bill of exchange or cheque has been materially

altered but does not appear to have been so altered, or where a cheque is
presented for payment which does not at the time of presentation appear
to be crossed or to have had a crossing which has been obliterated,
payment thereof by a person or banker liable to pay and paying the same
according to the apparent tenor thereof at the time of payment and
otherwise in due course, shall discharge such a person or banker from all
liability thereon, and such payment shall not be questioned by reasons of
the instrument having been altered, or the cheque crossed.
Where the cheque is an electronic image of a truncated cheque, any

difference in apparent tenor of such electronic image and the truncated
cheque shall be a material alteration and it shall be the duty of the bank or
the clearing house, as the case may be, to ensure the exactness of the
apparent tenor of electronic image of the truncated cheque while
truncating and transmitting the image.
Any bank or a clearing house which receives a transmitted electronic image

of a truncated cheque, shall verify from the party who transmitted the
image to it, that the image so transmitted to it and received by it, is
exactly the same.
Extinguishments of rights of action on bill in acceptor’s hands
If a bill of exchange which has been negotiated is, at or after maturity, held
by the acceptor in his own right, all rights of action thereon are
extinguished.
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9.7.4 Dishonor of Negotiable Instruments
Dishonour by non-acceptance
A bill of exchange is said to be dishonoured by non-acceptance when the

drawee, or one of several drawee not being partners, makes default in
acceptance upon being duly required to accept the bill, or where
presentment is excused and the bill is not accepted. Where the drawee is
incompetent to contract, or the acceptance is qualified the bill may be
treated as dishonored.
Dishonours by non-payment
A promissory note, bill of exchange or cheque is said to be dishonoured by

non-payment when the maker of the note, acceptor of the bill or drawee of
the cheque makes default in payment upon being duly required to pay the
same.
By and to whom notice should be given
When a promissory note, bill of exchange or cheque is dishonoured by non-

payment, the holder thereof, or some party thereto who remains liable
thereon, must be given notice that the instrument has been so
dishonoured to all other parties whom the holder seeks to make severally
liable thereon, and to some one of several parties whom he seeks to make
jointly liable thereon.
Nothing in this section renders it necessary to give notice to the maker of

the dishonoured promissory note, or acceptor of the dishonoured bill of
exchange or cheque.
Mode in which notice may be given
Notice of dishonor may be given to a duly authorized agent of the person

to whom it is required to be given, or, where he has died, to his legal
representative, or, where he has been declared an insolvent, to his
assignee, maybe oral or written, may, if written, be sent by post, and may
be in any form, but it must inform the party to whom it is given, either in
express terms or by reasonable intendment that the instrument has been
dishonored, and in what way, and that he will be held liable thereon, and it
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must be given within a reasonable time after dishonour, at the place of

business or in case such party has no place of business at the residence of
the party for whom it is intended.
If the notice is duly directed and sent by post and miscarries, such
miscarriage does not render the notice invalid.
Party receiving must transmit notice of dishonour
Any party receiving notice of dishonour must in order to render any prior
party liable to himself, give notice of dishonour to such party within a
reasonable time, unless such party otherwise receives due notice as
provided by section 93.
Agent for presentment
When the instrument is deposited with an agent for presentment, the

agent is entitled to the same time to give notice to his principal as if he
were the holder giving notice of dishonour, and the principal is entitled to a
further like period to give notice of dishonour.
When party to whom notice given is dead
When the party to whom notice of dishonour is dispatched is dead, but the
party dispatching the notice is ignorant of his death, the notice is sufficient.
When notice of dishonour is unnecessary
Notice of dishonour is necessary -
(a) when it is dispensed with by the party entitled thereto.
(b) in order to charge the drawer, when he has countermanded payment.
(c) when the party charged could not suffer damage for want of notice.
(d) when the party entitled to notice cannot after due search be found, or
the party bound to give notice is, for any other reason, unable without
any fault of his own to give it.
! !241
(e) to charge the drawers, when the acceptors is also a drawer.
(f) in the case of a promissory note which is not negotiable.
(g) when the party entitled to notice, knowing the facts, promise
unconditionally to pay the amount due on the instrument.
9.8 HUNDIS, CHEQUES AND DEMAND DRAFTS
9.8.1 Hundis
The word ‘hundi’, a generic term used to denote instruments of exchange

in vernacular is derived from the Sanskrit root ‘hund’ meaning ‘to collect’
and well expresses the purpose to which instruments were utilised in their
origin. With the advent of British rule in India commercial activities
increased to a great extent. The growing demands for money could not be
met be mere supply of coins; and the instrument of credit took the function
of money which they represented.
During the course of time there had developed in the country a strong
body of usage relating to hundis, which even the Legislature could
not without hardship to Indian bankers and merchants ignore. In fact,
the Legislature felt the strength of such local usages and though fit to
exempt them from the operation of the Act with a provison that such
usage may be excluded altogether by appropriate words. The Negotiable
Instruments Act does not apply to Hundis. Hundis are governed by the
custom and usages of the locality in which they are intended to be used. In
case, there is no customary rule known as to a certain point, the court can
apply the rules of the Negotiable Instruments Act. It is also open to the
parties to exclude expressly the applicability of any custom relating to
hundis by agreement and include the provisions of the Negotiable
Instruments Act.
9.8.2 Cheques
Crossing of cheques
Where a cheque bears across its face an addition of the words “and
company” or any abbreviation thereof, between two parallel transverse
lines, or of two parallel transverse lines simply, either with or without the
! !242
words “not negotiable”. That addition shall be deemed a crossing, and the
cheque shall be deemed to be crossed generally.
Cheque crossed specially
Where a cheque bears across its face an addition of the name of a banker,
either with or without the words “not negotiable”, that addition shall be
deemed a crossing, and the cheque shall be deemed to be crossed
specially, and to be crossed to that banker.
Crossing after issue
Where a cheque is uncrossed, the holder may cross it generally or

specially.
Where a cheque is crossed generally, the holder may cross it specially.
Where a cheque is crossed generally or specially, the holder may add the
words “not negotiable”.
Where a cheque is crossed specially, the banker to whom it is crossed may

again cross it specially to another banker, his agent, for collection.
Payment of cheque crossed generally
Where a cheque is crossed generally, the banker on whom it is drawn shall

not pay it otherwise than to a banker. Payment of cheque crossed specially
– Where a cheque is crossed specially, the banker on whom it is drawn
shall not pay it otherwise than to the banker to whom it is crossed, or his
agent for collection.
Payment of cheque crossed generally or specially more than once
Where a cheque is crossed specially to more than one banker, except when
crossed to an agent for the purpose of collection, the banker on whom it is
drawn shall refuse payment thereof.
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Payment in due course of crossed cheque
Where the banker on whom a crossed cheque is drawn has paid the same
in due course, the banker paying the cheque, and (in case such cheque has
come to the hands of the payee) the drawer thereof, shall respectively be
entitled to the same rights, and be placed in the same position in all
respects, as they would respectively be entitled to and placed in if the
amount of the cheque had been paid to and received by the true owner
thereof.
Payment of cheque crossed specially more than once
Any banker paying a cheque crossed generally otherwise than to a banker

or a cheque crossed specially otherwise than to the banker to whom the
same is crossed, or his agent for collection, being a banker, shall be liable
to the true owner of the cheque for any loss he may sustain owing to the
cheque having been so paid.
Cheque bearing “not negotiable”
A person taking a cheque crossed generally or specially, bearing in either

case the words “not negotiable”, shall not have and shall not be capable of
giving, a better title to the cheque than that which the person from whom
he took it had.
Payment of bearer cheques
An instrument may be made payable to (i) bearer, or (ii) a specified person

or his order. An instrument is payable to bearer which is expressed to be so
payable on which is expressed thus “Pay to Manoj Shinde or bearer”. It is
also payable to bearer when the only or last endorsement on it is endorse.
Where a cheque is originally expressed by the drawer himself to be payable
to the bearer, the paying banker is fully protected if he makes the payment
to the bearer or even if there is any forged or restrictive endorsement on
the cheque. But the payment must be made in due course. Hence, the
rule, ‘once a bearer cheque always a bearer cheque’. In other words, the
original character of the cheque is not altered so far as the paying banker
is concerned, provided the payment is made in due course.
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An instrument is payable to order, (1) when it is payable to the order of a

specified person or (2) when it is payable to a specified person or his order
or, (3) when it is payable to a specified person without the addition of the
words “or his order” and does not contain words prohibiting transfer or
indicating an intention that it should not be transferable. When an
instrument, either originally or by endorsement, is made payable to the
order of a specified person and not to him or his order, it is payable to his
order, at his option.
Non-liability of banker receiving payment of cheque
A banker who has in good faith and without negligence received payment
for a customer of a cheque crossed generally or specially to himself shall
not, in case the title to the cheque proves defective, incur any liability to
the true owner of the cheque by reason only of having received such
payment.
New Format of a Cheque
The Amendment Act 2002 has substituted new definition for Section 6. It
provides that a ‘cheque’ is a bill of exchange drawn on a specified banker
! !245
and not expressed to be payable otherwise than on demand and it includes

the electronic image of truncated cheque and a cheque in the electronic
from.
‘A cheque in the electronic form’ means a cheque which contains the exact
mirror image of a paper cheque, and is generated, written and signed in a
secure system ensuring the minimum safety standards with the use of
digital signature (with or without biometric signature) and asymmetric
crypto system.
‘A truncated cheque’ means a cheque which is truncated during the course

of a clearing cycle, either by the clearing house or by the bank whether
paying or receiving payment, immediately on generation of an electronic
image for transmission, substituting the further physical movement of the
cheque in writing.
Amendment in the Act of 2002
The Negotiable Instruments Act, 1881 was amended by the Banking, Public
Financial Institutions and Negotiable Instruments Laws (Amendment) Act,
1988 wherein a new Chapter XVII was incorporated for penalties in case of
dishonour of cheques due fo insufficiency of funds in the account of the
drawer of the cheque. These provisions were incorporated with a view to
encourage the culture of use of cheques and enhancing the credibility of
the instrument. The existing provisions in the Negotiable Instruments Act,
1881, namely, sections 138 to 142 in Chapter XVII have been found
deficient in dealing with dishonour of cheques, Not only the punishment
provided in the Act has proved to be inadequate, the procedure prescribed
for the Courts to deal with such matters has been found to be
cumbersome. The Courts are unable to dispose of such cases expeditiously
in a time bound manner in view of the procedure contained in the Act-
(Para 1)
Keeping in view the recommendations of the Standing Committee on

Finance and other representations, it has been decided to bring out, inter
alia, the following amendments in the Negotiable Instruments, Act, 1881,
namely:-
(i) to increase the punishment as prescribed under the Act from one year
to two years;
! !246
(ii)to increase the period for issue of notice by the payee to the drawer
from 15 days to 30 days.
Dishonour of cheque for insufficiency of funds in the accounts
Where any cheque drawn by a person on an account maintained by him

with a banker for payment of any amount of money to another person from
out of that account for the discharge, in whole or in part, of any debt or
other liability, is returned by the bank unpaid, either because of the
amount of money standing to the credit of that account is insufficient to
honour the cheque or that it exceeds the amount arranged to be paid from
that account by an agreement made with that bank, such person shall be
deemed to have committed an offence and shall without prejudice to any
other provisions of this Act, be punished with imprisonment for “a term
which may extend to two years”, or with fine which may extend to twice
the amount of the cheque, or with both:
Provided that nothing contained in this section shall apply unless-
(a) The cheque has been presented to the bank within a period of six
months from the date on which it is drawn or within the period of its
validity, whichever is earlier.
(b) The payee or the holder induce course of the cheque, as the case may
be, makes a demand for the payment of the said amount of money by
giving a notice, in writing, to the drawer, of the cheque, within 30 days
of the receipt of information by him from the bank regarding the
return of the cheques as unpaid, and
(c) The drawer of such cheque fails to make the payment of the said
amount of money to the payee or, as the case may be, to the holder in
due course of the cheque, within fifteen days of the receipt of the said
notice.
Paying banker and statutory protection
The banker on whom the cheque is drawn, viz., the drawer or otherwise
known as the paying banker has a contractual duty to pay money to the
right person according to the customer’s mandate. If he pays, by mistake,
to a wrong person he would be committing actual breach of his duty
! !247
towards his customers. The Negotiable Instruments Act gives legal

protection to a paying banker, provided the payment is a payment in due
course (payment according to an established custom and practice of
bankers in the country).
Cheque return memo
In order to render the drawer of dishonoured cheque liable for prosecution

a statutory notice demanding payment of the value of dishonoured cheque
within 15 days of receipt of notice should be given by the payee. Such a
notice should be given within 15 days of receipt of intimation from the
Bank that the said cheque is dishonoured. Such an intimation is called as
“Cheque Return Memo”.
Check bouncing
If banker dishonours a cheque without proper reasoning, he becomes liable

to compensate the customer for any loss or damage caused to the
customer by such dishonour. When a cheque is dishonoured, the payee or
the holder may have a right or action against the drawer, but not against
the banker, even if the dishonour was not justified.
Penal action for dishonour of the cheque :

Under section 138 of the Negotiable Instruments Act, introduced by the
(Amendment) Act 66 of 1988, has inserted a new chapter XVII in the
Negotiable Instruments Act in the year 1988. The Amendment came into
force w.e.f., April, 1989; a drawer of a cheque is liable to penalties in case
of dishonor of the cheque for insufficiency of funds in the account. If a
person issues a cheque in payment of any debt or liability and it is
dishonoured for lack of funds or if it exceeds the arrangement with the
bank, he or she will be deemed to have committed an offence and will be
punished with imprisonment for a term which may extend to one year, or
with fine which may go upto twice the amount of the cheque or both.
9.8.3 Demand Draft

The demand draft, or the bank draft is kind of bill of exchange drawn by
one office of a bank upon another office of the same bank. It is similar to a
cheque. It is an order to pay money. It cannot be made payable to bearer
on demand. Its payment cannot usually be stopped or countermanded. The
! !248
drawer who pays the draft is discharged by payment in due course as long
as it purports to be endorsed by or on behalf of the payee
To avail legal protection under the section, the paying banker should fulfill
two conditions: (i) the payment must have been a payment in due course,
and (ii) the draft must have been endorsed by or on behalf of the payee. If
the banker pays a demand draft being an irregular endorsement, he would
have acted negligently and the payment is not a payment in due course.
Format of demand draft
Normally, the following format is followed by most of the banks in India.
1. Consider you are a banker, and one of your customers has deposited a
cheque in his account with your bank, and the cheque has been
returned because of shortage of funds. Write a short letter to your
customer.
2. You are a businessman at Pune and you want to collect certain amount
from your customer from Delhi. Send him an email explaining the
procedure of drawing a demand draft from any nationalized bank for the
due amount.
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9.10 SUMMARY
• A negotiable instrument is prepared by a person/company and

presented for a payment.
• A promissory note is an instrument which gives undertaking in writing to

pay a certain amount to a person on his demand.
• A bill of exchange is an instrument in writing, directing a person to pay a

certain amount of money to a person or the bearer of the instrument.
• The act of transferring a negotiable instrument from person to person by

suitable endorsements is called negotiation.
• The person who draws up a cheque is called the drawer of the

instrument.
• When a cheque is presented, and when there are sufficient funds in the
drawer’s amount, the bank must pass the cheque under all normal
circumstances.
• If a bank dishonours a cheque without reason, it has to compensate the

drawer.
• The bouncing of a cheque is not an offence, if a person has been given a

cheque towards the settlement of the liability.
1. What is a negotiable instrument? How did it originate?
2. Write down the differences between a bill of exchange and a promissory

note.
3. Who is ‘payer for honour’? State the essential conditions for valid
payment for honour.
4. What is a protest? What are the contents of a protest?
5. What is a cheque? What are its requisites?
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6. Why is the ‘crossing’ of a cheque done? What are the different types of
crossings?
7. What are the rights of ‘holder’ of a negotiable instrument?
8. State the legal effects of ‘material alteration’ and ‘forgery’.
9. What are the conditions under which the bank can refuse the payment
of a cheque?
10.Distinguish between ‘General crossing’ and ‘Special crossing’.
11.Distinguish between ‘Cheque’ and ‘Bill of exchange’.
1. A negotiable instrument is a _________ contract.
a. Promissed
b. Oral
c. Written
d. Written or Verbal
2. The maker of a negotiable instrument is called as a _________ .
a. Writer
b. Drawer
c. Receiver
d. Holder
3. The person to whom the sum stated in the instrument is payable is -
a. Drawee
b. Banker
c. Payee
d. Customer
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4. The promissory note must be_________ .
a. in writing
b. promised
c. preserved forever
d. known to all banks
5. The stamping as per Indian Stamp Act is a must to be done on

a_________ .
a. Cheque
b. Demand Draft
c. Hundi
d. Promissory note
Answers : (1-c), (2-b), (3-c), (4-a), (5-d).
! !252
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture - Part 1
Video Lecture - Part 2 
! !253
THE ACT OF ENVIRONMENTAL PROTECTION
Chapter 10
THE ACT OF ENVIRONMENTAL
PROTECTION
Objectives
After completing the chapter, you will be able to understand about

environment protection and prevention; know about the objectives,
definitions, functions of central and state boards of pollution control;
understand the AIR(Prevention and Control of Pollution) Act; Examine the
powers and functions of the central and state board, prevention and control
of air pollution and air laboratory; Define the powers of the central
government under the Act, know more about the Environmental
laboratories, offences and penalties, and understand the environment
protection Act.
Structure:
10.1 The Water (Prevention and Control of Pollution) Act, 1974

10.2 Definitions
10.3 Central Board and State Boards
10.4 Functions of Central and State Boards
10.5 Penalties for Water Pollution
10.6 The AIR (Prevention and Control of Pollution) Act, 1981
10.7 Central and State Boards – Functions
10.8 Prevention and Control of Air Pollution and Penalties
10.9 Air Laboratory
10.10 The Environment Protection Act, 1986
10.11 Powers of Central Government under the Act
10.12 Rules to Regulate Environmental Pollution
10.13 Environmental Laboratories
10.14 Offences and Penalties under Environmental Protection Act
10.16 Summary
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10.1 THE WATER (PREVENTION AND CONTROL OF

POLLUTION) ACT, 1974
The Act was formed by Parliament in the Twenty-fifth Year of the Republic
of India as follows :-
1. This Act may be called the Water (Prevention and Control of Pollution)
Act, 1974.
2. It applies in the first instance to the whole of the States of Assam, Bihar,
Gujarat, Haryana, Himachal Pradesh, Jammu and Kashmir, Karnataka,
Kerala, Madhya Pradesh, Rajasthan, Tripura and West Bengal and the
Union territories; and it shall apply to such other State which adopts
this Act by resolution passed in that behalf under clause (1) of Article
252 of the Constitution.
3. It shall come into force, at once in the State of Assam, Bihar, Gujarat,
Haryana, Himachal Pradesh, Jammu and Kashmir, Karnataka, Kerala,
Madhya Pradesh, Rajasthan, Tripura and West Bengal and in the Union
territories, and in any other State which adopts this Act under clause (1)
of Article 252 of the Constitution on the date of such adoption and any
reference in this Act to the commencement of this Act shall, in relation
to any State or Union territory mean the date on which this Act comes
into force in such State or Union territory.
An Act to provide for the prevention and control of water pollution and the
maintaining or restoring of wholesomeness of water, for the establishment,
with a view to carrying out the purposes aforesaid, of Boards for the
prevention and control of water pollution, for conferring on and assigning
to such Boards powers and functions relating thereto and for matters
connected therewith.
An Act to provide for the prevention and control of water pollution and the
maintaining or restoring of wholesomeness of water, for the establishment,
with a view to carrying out the purposes aforesaid, of Boards for the
prevention and control of water pollution, for conferring on and assigning
to such Boards powers and functions relating thereto and for matters
connected therewith.
! !255
It was also decided that the Parliament has no power to make laws for the
States with respect to any of the matters aforesaid except as provided in
Articles 249 and 250 of the Constitution;
10.2 DEFINITIONS
In this Act, unless the context otherwise requires,—
(a) “Board” means the Central Board or a State Board;
(b) “Central Board” means the Central Pollution Control Board constituted
under section 3;
(c) “member” means a member of a Board and includes the chairman

thereof;
(d) “occupier”, in relation to any factory or premises, means the person

who has control over the affairs of the factory or the premises, and
includes, in relation to any substance, the person in possession of the
substance; 
 
(d-a) “outlet” includes any conduit pipe or channel, open or closed,
! !256
carrying sewage or trade effluent or any other holding arrangement

which causes, or is likely to cause, pollution;
(e) “pollution” means such contamination of water or such alteration of the

physical, chemical or biological properties of water or such discharge of
any sewage or trade effluent or of any other liquid, gaseous or solid
substance into water (whether directly or indirectly) as may, or is likely
to, create a nuisance or render such water harmful or injurious to
public health or safety, or to domestic, commercial, industrial,
agricultural or other legitimate uses, or to the life and health of
animals or plants or of aquatic organisms;
(f) “prescribed” means prescribed by rules made under this Act by the
Central Government or, as the case may be, the State Government;
(g) “sewage effluent” means effluent from any sewerage system or

sewage disposal works and includes sullage from open drains; 
 
(g-a) “sewer” means any conduit pipe or channel, open or closed,
carrying sewage or trade effluent;
(h) “State Board” means a State Pollution Control Board constituted under
section 4;
(i) “State Government” in relation to a Union territory means the

Administrator thereof appointed under article 239 of the Constitution;
(j) “stream” includes—
i. river;
ii. water course (whether flowing or for the time being dry);
iii. inland water (whether natural or artificial);
iv. sub-terranean waters;
v. sea or tidal waters to such extent or, as the case may be, to such
point as the State Government may, by notification in the Official
Gazette, specify in this behalf;
(k) “trade effluent” includes any liquid, gaseous or solid substance which is
discharged from any premises used for carrying on any 5 [industry,
! !257
operation or process, or treatment and disposal system], other than

domestic sewage.
10.3 CENTRAL BOARD AND STATE BOARDS
10.3.1 Constitution – Central Board
1. The Central Government shall, with effect from such date (being a date
not later than six months of the commencement of this Act in the States
of Assam, Bihar, Gujarat, Haryana, Himachal Pradesh, Jammu and
Kashmir, Karnataka, Kerala, Madhya Pradesh, Rajasthan, Tripura and
West Bengal and in the Union territories) as it may, by notification in the
Official Gazette, appoint, constitute a Central Board to be called
the Central Pollution Control Board to exercise the powers conferred on
and perform the functions assigned to that Board under this Act.
2. The Central Board shall consist of the following members, namely:—
(a) a full-time chairman, being a person having special knowledge or

practical experience in respect of matters relating to environmental
protection or a person having knowledge and experience in
administering institutions dealing with the matters aforesaid, to be
nominated by the Central Government;
(b) such number of officials, not exceeding five, to be nominated by the

Central Government to represent that Government;
(c) such number of persons, not exceeding five to be nominated by the

Central Government, from amongst the members of the State
Boards, of whom not exceeding two shall be from those referred to
in clause (c) of subsection (2) of section 4;
(d) such number of non-officials, not exceeding three, to be nominated

by the Central Government, to represent the interests of
agriculture, fishery or industry or trade or any other interest which,
in the opinion of the Central Government, ought to be represented;
(e) two persons to represent the companies or corporations owned,

controlled or managed by the Central Government, to be nominated
by that Government;
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(f) a full-time member-secretary, possessing qualifications, knowledge

and experience of scientific, engineering or management aspects of
pollution control, to be appointed by the Central Government.
3. The Central Board shall be a body corporate with the name aforesaid
having perpetual succession and a common seal with power, subject to
the provisions of this Act, to acquire, hold and dispose of property and
to contract, and may, by the aforesaid name, sue or be sued.
10.3.2 Constitution - State Boards
1. The State Government shall, with effect from such date as it may, by
notification in the Official Gazette, appoint, constitute a State Pollution
Control Board , under such name as may be specified in the notification,
to exercise the powers conferred on and perform the functions assigned
to that Board under this Act.
2. A State Board shall consist of the following members, namely:—
(a) A chairman, being a person having special knowledge or practical

experience in respect of the matters relating to environmental
protection] or a person having knowledge and experience in
administering institutions dealing with the matters aforesaid, to be
nominated by the State Government: 
 
Provided that the chairman may be either whole-time or part-time
as the State Government may think fit;
(b) such number of officials, not exceeding five, to be nominated by the

State Government to represent that Government;
(c) such number of persons, not exceeding five, to be nominated by the

State Government from amongst the members of the local
authorities functioning within the State;
(d) such number of non-officials, not exceeding three, to be nominated

by the State Government to represent the interests of agriculture,
fishery or industry or trade or any other interest which, in the
opinion of the State Government, ought to be represented;
! !259

controlled or managed by the State Government, to be nominated
by that Government;
(f) a full-time member-secretary, possessing qualifications, knowledge

pollution control, to be appointed by the State Government.
3. Every State Board shall be a body corporate with the name specified by
the State Government in the notification under subsection (1), having
perpetual succession and a common seal with power, subject to the
provisions of this Act, to acquire, hold and dispose of property and to
contract, and may, by the said name, sue or be sued.
4. Notwithstanding anything contained in this section, no State Board shall

be constituted for a Union territory and in relation to a Union territory,
the Central Board shall exercise the powers and perform the functions of
a State Board for that Union territory:
Provided that in relation to any Union territory the Central Board may
delegate all or any of its powers and functions under this subsection to
such person or body of persons as the Central Government may specify.
10.4 FUNCTIONS OF CENTRAL AND STATE BOARDS
10.4.1 Functions of Central Board
1. Subject to the provisions of this Act, the main function of the Central
Board shall be to promote cleanliness of streams and wells in different
areas of the States.
2. In particular and without prejudice to the generality of the foregoing

function, the Central Board may perform all or any of the following
functions, namely:—
(a) advise the Central Government on any matter concerning the

prevention and control of water pollution;
(b) coordinate the activities of the State Boards and resolve disputes
among them;
! !260
(c) provide technical assistance and guidance to the State Boards, carry
out and sponsor investigations and research relating to problems of
water pollution and prevention, control or abatement of water
pollution;
(d) plan and organise the training of persons engaged or to be engaged

in programmes for the prevention, control or abatement of water
pollution on such terms and conditions as the Central Board may
specify;
(e) organise through mass media a comprehensive programme

regarding the prevention and control of water pollution; 
 
(e-a) perform such of the functions of any State Board as may be
specified in an order made under subsection (2) of section 18;
(f) collect, compile and publish technical and statistical data relating to
water pollution and the measures devised for its effective
prevention and control and prepare manuals, codes or guides
relating to treatment and disposal of sewage and trade effluents and
disseminate information connected therewith;
(g) lay down, modify or annul, in consultation with the State

Government concerned, the standards for a stream or well: 
 
Provided that different standards may be laid down for the same
stream or well or for different streams or wells, having regard to the
quality of water, flow characteristics of the stream or well and the
nature of the use of the water in such stream or well or streams or
wells;
(h) plan and cause to be executed a nation-wide programme for the

prevention, control or abatement of water pollution;
(i) perform such other functions as may be prescribed.
3. The Board may establish or recognize a laboratory or laboratories to

enable the Board to perform its functions under this section efficiently,
including the analysis of samples of water from any stream or will or of
samples of any sewage or trade effluents.
! !261
NOTE : The main functions of the Central Board shall be to promote

cleanliness of streams and wells in different areas of the States. It may
perform all or any of the functions mentioned in clauses (a) to (i) of
subsection (2), and it may establish or recognise a laboratory or
laboratories for the purpose mentioned in subsection (3).
10.4.2 Functions of State Board
1. Subject to the provisions of this Act, the functions of a State Board shall
be—
(a) to plan a comprehensive program for the prevention, control or

abatement of pollution of streams and wells in the State and to
secure the execution thereof;
(b) to advise the State Government on any matter concerning the

prevention, control or abatement of water pollution;
(c) to collect and disseminate information relating to water pollution

and the prevention, control or abatement thereof;
(d) to encourage, conduct and participate investigations and research

relating to problems of water pollution and prevention, control or
abatement of water pollution;
(e) to collaborate with the Central Board in organizing the training of

persons engaged or to be engaged in programs relating to
prevention, control or abatement of water pollution and to organise
mass education programs relating thereto;
(f) to inspect sewage or trade effluents, works and plants for the
treatment of sewage and trade effluents and to review plans,
specifications or other data relating to plants set up for the
treatment of water, works for the purification thereof and the
system for the disposal of sewage or trade effluents or in connection
with the grant of any consent as required by this Act;
(g) to lay down, modify or annul effluent standards for the sewage and
trade effluents and for the quality of receiving waters (not being
! !262
water in an inter-State stream) resulting from the discharge of

effluents and to classify waters of the State;
(h) to evolve economical and reliable methods of treatment of sewage

and trade effluents, having regard to the peculiar conditions of soils,
climate and water resources of different regions and more especially
the prevailing flow characteristics of water in streams and wells
which render it impossible to attain even the minimum degree of
dilution;
(i) to evolve methods of utilisation of sewage and suitable trade

effluents in agriculture;
(j) to evolve efficient methods of disposal of sewage and trade effluents

on land, as are necessary on account of the predominant conditions
of scant stream flows that do not provide for major part of the year
the minimum degree of dilution;
(k) to lay down standards of treatment of sewage and trade effluents to

be discharged into any particular stream taking into account the
minimum fair weather dilution available in that stream and the
tolerance limits of pollution permissible in the water of the stream,
after the discharge of such effluents;
(l) to make, vary or revoke any order—
i) for the prevention, control or abatement of discharges of waste

into streams or wells;
ii) requiring any person concerned to construct new systems for the
disposal of sewage and trade effluents or to modify, alter or
extend any such existing system or to adopt such remedial
measures as are necessary to prevent, control or abate water
pollution;
(m) to lay down effluent standards to be complied with by persons while

causing discharge of sewage or sullage or both and to lay down,
modify or annul effluent standards for the sewage and trade
effluents;
! !263
(n) to advise the State Government with respect to the location of any
industry the carrying on of which is likely to pollute a stream or
well;
(o) to perform such other functions as may be prescribed or as may,

from time to time, be entrusted to it by the Central Board or the
State Government.
2. The Board may establish or recognise a laboratory or laboratories to

enable the Board to perform its functions under this section efficiently,
including the analysis of samples of water from any stream or well or of
samples of any sewage or trade effluents.
10.4.3 Powers of Central and State Boards
1. In the performance of its functions under this Act—
(a) the Central Board shall be bound by such directions in writing as the
Central Government may give to it; and
(b) every State Board shall be bound by such directions in writing as

the Central Board or the State Government may give to it: 
 
Provided that where a direction given by the State Government is
inconsistent with the direction given by the Central Board, the
matter shall be referred to the Central Government for its decision.
2. Where the Central Government is of the opinion that any State Board
has defaulted in complying with any directions given by the Central
Board under subsection (1) and as a result of such default a grave
emergency has arisen and it is necessary or expedient so to do in the
public interest, it may, by order, direct the Central Board to perform any
of the functions of the State Board in relation to such area for such
period and for such purposes, as may be specified in the order.
3. Where the Central Board performs any of the functions of the State
Board in pursuance of a direction under subsection (2), the expenses, if
any, incurred by the Central Board with respect to the performance of
such functions may, if the State Board is empowered to recover such
expenses, be recovered by the Central Board with interest (at such
! !264
reasonable rate as the Central Government may, by order, fix) from the
date when a demand for such expenses is made until it is paid from the
person or persons concerned as arrears of land revenue or of public
demand.
4. For the removal of doubts, it is hereby declared that any directions to

perform the functions of any State Board given under subsection (2) in
respect of any area would not preclude the State Board from performing
such functions in any other area in the State or any of its other
functions in that area.
NOTE - In the performance of its functions (i) the Central Board shall be
bound by directions of the Central Government; (ii) a State Board shall be
bound by directions of the State Government, subject to certain
contingencies mentioned as below -
1. Notwithstanding anything contained in this Act, if the State

Government, after consultation with, or on the recommendation of, the
State Board, is of opinion that the provisions of this Act need not apply
to entire State, it may, by notification in the Official Gazette, restrict the
application of this Act to such area or areas as may be declared therein
as water pollution, prevention and control area or areas and thereupon
the provisions of this Act shall apply only to such area or areas.
2. Each water pollution, prevention and control area may be declared

either by reference to a map or by reference to the line of any
watershed or the boundary of any district or partly by one method and
partly by another.
3. The State Government may, by notification in the Official Gazette,—
(a) alter any water pollution, prevention and control area whether by
way of extension or reduction; or
(b) define a new water pollution, prevention and control area in which
may be merged one or more water pollution, prevention and control
areas, or any part or parts thereof.
4. If the State Government is of the opinion that the provisions of this Act
need not apply to the entire State, it may restrict the application of this
! !265
Act to such area or areas as may be declared as water pollution,

prevention and control area or areas. The State Government is also
empowered to alter any area or define a new area.
Power to obtain information -
1. For the purpose of enabling a State Board to perform the functions

conferred on it by or under this Act, the State Board or any officer
empowered by it in that behalf, may make surveys of any area and
gauge and keep records of the flow or volume and other characteristics
of any stream or well in such area, and may take steps for the
measurement and recording of the rainfall in such area or any part
thereof and for the installation and maintenance for those purposes of
gauges or other apparatus and works connected therewith, and carry
out stream surveys and may take such other steps as may be necessary
in order to obtain any information required for the purposes aforesaid.
2. A State Board may give directions requiring any person who in its
opinion is abstracting water from any such stream or well in the area in
quantities which are substantial in relation to the flow or volume of that
stream or well or is discharging sewage or trade effluent into any such
stream or well, to give such information as to the abstraction or the
discharge at such times and in such form as may be specified in the
directions.
3. Without prejudice to the provisions of subsection (2), a State Board

may, with a view to preventing or controlling pollution of water, give
directions requiring any person in charge of any establishment where
any industry, operation or process, or treatment and disposal system is
carried on, to furnish to it information regarding the construction,
installation or operation of such establishment or of any disposal system
or of any extension or addition thereto in such establishment and such
other particulars as may be prescribed.
Power to take samples of effluents -
1. A State Board or any officer empowered by it in this behalf shall have

power to take for the purpose of analysis samples of water from any
stream or well or samples of any sewage or trade effluent which is
! !266
passing from any plant or vessel or from or over any place into any such
stream or well.
2. The result of any analysis of a sample of any sewage or trade effluent

taken under sub-section (1) shall not be admissible in evidence in any
legal proceeding unless the provisions of subsections (3), (4) and (5)
are complied with.
3. Subject to the provisions of subsections (4) and (5), when a sample

(composite or otherwise as may be warranted by the process used) of
any sewage or trade effluent is taken for analysis under subsection (1),
the person taking the sample shall—
(a) serve on the person in charge of, or having control over, the plant or
vessel or in occupation of the place (which person is hereinafter
referred to as the occupier) or any agent of such occupier, a notice,
then and there in such form as may be prescribed of his intention to
have it so analysed;
(b) in the presence of the occupier or his agent, divide the sample into
two parts;
(c) cause each part to be placed in a container which shall be marked

and sealed and shall also be signed both by the person taking the
sample and the occupier or his agent;
(d) send one container forthwith, -
i) in a case where such sample is taken from any area situated in a

Union territory, to the laboratory established or recognised by
the Central Board under section 16; and
ii) in any other case, to the laboratory established or recognised by

the State Board under section 17;
(e) on the request of the occupier or his agent, send the second
container,—
! !267
i) in a case where such sample is taken from any area situated in

a Union territory, to the laboratory established or specified
under subsection (1) of section 51; and
ii) in any other case, to the laboratory established or specified

under subsection (1) of section 52.
4. When a sample of any sewage or trade affluent is taken for analysis

under subsection (1) and the person taking the sample serves on the
occupier or his agent, a notice under clause (a) of subsection (3) and
the occupier or his agent wilfully absents himself, then,—
(a) the sample so taken shall be placed in a container which shall be

marked and sealed and shall also be signed by the person taking
the sample and the same shall be sent forthwith by such person for
analysis to the laboratory referred to in subclause (i) or subclause
(ii), as the case may be, of clause (e) of subsection (3) and such
person shall inform the Government analyst appointed under
subsection (1) or sub-section (2), as the case may be, of section
53, in writing about the wilful absence of the occupier or his agent;
and
(b) the cost incurred in getting such sample analysed shall be payable
by the occupier or his agent and in case of default of such payment,
the same shall be recoverable from the occupier or his agent, as the
case may be, as an arrear of land revenue or of public demand: 
 
Provided that no such recovery shall be made unless the occupier
or, as the case may be, his agent has been given a reasonable
opportunity of being heard in the matter.
5. When a sample of any sewage or trade effluent is taken for analysis

under subsection (1) and the person taking the sample serves on the
occupier or his agent a notice under clause (a) of subsection (3) and the
occupier or his agent who is present at the time of taking the sample
does not make a request for dividing the sample into two parts as
provided in clause (b) of subsection (3), then, the sample so taken shall
be placed in a container which shall be marked and sealed and shall also
be signed by the person taking the sample and the same shall be sent
forthwith by such person for analysis to the laboratory referred to in
! !268
subclause (i) or subclause (ii), as the case may be, of clause (d) of
subsection (3).
Admissibility of sample
The sample must be lifted in accordance with the provisions of section 21

of the Act when only its analysis could be admissible in evidence; Delhi
Bottling Co. Pvt. Ltd. v. C.P.C. Board, AIR 1986.
Power of entry and inspection
1. Subject to the provisions of this section, any person empowered by a

State Board in this behalf shall have a right at any time to enter, with
such assistance as he considers necessary, any place -
(a) for the purpose of performing any of the functions of the Board
entrusted to him;
(b) for the purpose of determining whether and if so in what manner,

any such functions are to be performed or whether any provisions of
this Act or the rules made there under or any notice, order, direction
or authorisation served, made, given, or granted under this Act is
being or has been complied with;
(c) for the purpose of examining any plant, record, register, document
or any other material object or for conducting a search of any place
in which he has reason to believe that an offence under this Act or
the rules made thereunder has been or is being or is about to be
committed and for seizing any such plant, record, register,
document or other material object, if he has reason to believe that
it may furnish evidence of the commission of an offence punishable
under this Act or the rules made thereunder: 
 
Provided that the right to enter under this subsection for the
inspection of a well shall be exercised only at reasonable hours in a
case where such well is situated in any premises used for residential
purposes and the water thereof is used exclusively for domestic
purposes.
! !269
2. The provisions of the Code of Criminal Procedure, 1973 (2 of 1974), or,

in relation to the State of Jammu and Kashmir, the provisions of any
corresponding law in force in that State, shall, so far as may be, apply
to any search or seizure under this section as they apply to any search
or seizure made under the authority of a warrant issued under section
94 of the said Code, or, as the case may be, under the corresponding
provisions of the said law.
10.5 CONTROL OF WATER POLLUTION
Provision regarding existing sewage or effluent discharge
Where immediately before the commencement of this Act any person was
discharging any sewage or trade effluent into a stream or well or sewer or
on land, the provisions of section 25 shall, so far as may be, apply in
relation to such person as they apply in relation to the person referred to in
that section subject to the modification that the application for consent to
be made under sub-section (2) of that section shall be made on or before
such date as may be specified by the State Government by notification in
this behalf in the Official Gazette.
! !270
Emergency measures in case of pollution of stream or well
1. Where it appears to the State Board that any poisonous, noxious or

polluting matter is present in any stream or well or on land by reason of
the discharge of such matter in such stream or well or on such land or
has entered into that stream or well due to any accident or other
unforeseen act or event, and if the Board is of opinion that it is
necessary or expedient to take immediate action, it may for reasons to
be recorded in writing, carry out such operations, as it may consider
necessary for all or any of the following purposes, that is to say,
(a) removing that matter from the stream or well or on land and
disposing it of in such manner as the Board considers appropriate;
(b) remedying or mitigating any pollution caused by its presence in the

stream or well;
(c) issuing orders immediately restraining or prohibiting the person

concerned from discharging any poisonous, noxious or polluting
matter into the stream or well or on land] or from making insanitary
use of the stream or well.
2. The power conferred by subsection (1) does not include the power to
construct any works other than works of a temporary character which
are removed on or before the completion of the operations.
10.5 PENALTIES FOR WATER POLLUTION
10.5.1 Penalty for Certain Acts -
1. Whoever—
(a) destroys, pulls down, removes, injures or defaces any pillar, post or
stake fixed in the ground or any notice or other matter put up,
inscribed or placed, by or under the authority of the Board, or
(b) obstructs any person acting under the orders or directions of the
Board from exercising his powers and performing his functions
under this Act, or
! !271
(c) damages any works or property belonging to the Board, or
(d) fails to furnish to any officer or other employee of the Board any
information required by him for the purpose of this Act, or
(e) fails to intimate the occurrence of any accident or other unforeseen

act or event under section 31 to the Board and other authorities or
agencies as required by that section, or
(f) in giving any information which he is required to give under this Act,
knowingly or wilfully makes a statement which is false in any
material particular, or
(g) for the purpose of obtaining any consent under section 25 or section
26, knowingly or wilfully makes a statement which is false in any
material particular, shall be punishable with imprisonment for a
term which may extend to three months or with fine which may
extend to ten thousand rupees or with both.
2. Where for the grant of a consent in pursuance of the provisions of

section 25 or section 26 the use of meter or gauge or other measure or
monitoring device is required and such device is used for the purposes
of those provisions, any person who knowingly or wilfully alters or
interferes with that device so as to prevent it from monitoring or
measuring correctly shall be punishable with imprisonment for a term
which may extend to three months or with fine which may extend to
ten thousand rupees or with both.
10.5.2 Penalty for contravention of provisions of section 24
Whoever contravenes the provisions of section 24 shall be punishable with

imprisonment for a term which shall not be less than one year and six
months but which may extend to six years and with fine.
10.5.3 Penalty for contravention of section 25 or section 26
Whoever contravenes the provisions of section 25 or section 26 shall be

punishable with imprisonment for a term which shall not be less than 1[one
year and six months] but which may extend to six years and with fine.
! !272
10.5.4 Enhanced penalty after previous conviction
If any person who has been convicted of any offence under section 24 or
section 25 or section 26 is again found guilty of an offence involving a
contravention of the same provision, he shall, on the second and on every
subsequent conviction, be punishable with imprisonment for a term which
shall not be less than two years but which may extend to seven years and
with fine:
Provided that for the purpose of this section no cognizance shall be taken
of any conviction made more than two years before the commission of the
offence which is being punished.
10.5.5 Penalty for contravention of certain provisions of the Act
Whoever contravenes any of the provisions of this Act or fails to comply

with any order or direction given under this Act, for which no penalty has
been elsewhere provided in this Act, shall be punishable with imprisonment
which may extend to three months or with fine which may extend to ten
thousand rupees or with both, and in the case of a continuing
contravention or failure, with an additional fine which may extend to five
thousand rupees for every day during which such contravention or failure
continues after conviction for the first such contravention or failure.
10.5.6 Publication of names of offenders
If any person convicted of an offence under this Act commits a like offence
afterwards it shall be lawful for the court before which the second or
subsequent conviction takes place to cause the offender’s name and place
of residence, the offence and the penalty imposed to be published at the
offender’s expense in such newspapers or in such other manner as the
court may direct and the expenses of such publication shall be deemed to
be part of the cost attending the conviction and shall be recoverable in the
same manner as a fine.
10.5.7 Offences by companies
1. Where an offence under this Act has been committed by a company,

every person who at the time the offence was committed was in charge
of, and was responsible to the company for the conduct of, the business
! !273
of the company, as well as the company, shall be deemed to be guilty of

the offence and shall be liable to be proceeded against and punished
accordingly: 
 
Provided that nothing contained in this subsection shall render any such
person liable to any punishment provided in this Act if he proves that
the offence was committed without his knowledge or that he exercised
all due diligence to prevent the commission of such offence.
2. Notwithstanding anything contained in subsection (1), where an offence

under this Act has been committed by a company and it is proved that
the offence has been committed with the consent or connivance of, or is
attributable to any neglect on the part of, any director, manager,
secretary or other officer of the company, such director, manager,
secretary or other officer shall also be deemed to be guilty of that
offence and shall be liable to be proceeded against and punished
accordingly. 
 
Explanation.—For the purposes of this section,—
(a) “company” means any body corporate, and includes a firm or other
association of individuals; and
(b) “director” in relation to a firm means a partner in the firm.
10.5.8 Offences by Government Departments
Where an offence under this Act has been committed by any Department
of Government, the Head of the Department shall be deemed to be guilty
of the offence and shall be liable to be proceeded against and punished
accordingly:
Provided that nothing contained in this section shall render such Head of
the Department liable to any punishment if he proves that the offence was
committed without his knowledge or that he exercised all due diligence to
prevent the commission of such offence.
! !274
10.5.9 Cognizance of offences
1. No court shall take cognizance of any offence under this Act except on a
complaint made by -
(a) a Board or any officer authorised in this behalf by it; or
(b) any person who has given notice of not less than sixty days, in the
manner prescribed, of the alleged offence and of his intention to
make a complaint, to the Board or officer authorised as aforesaid,
and no court inferior to that of a Metropolitan Magistrate or a
Judicial Magistrate of the first class shall try any offence punishable
under this Act.
2. Where a complaint has been made under clause (b) of subsection (1),
the Board shall, on demand by such person, make available the relevant
reports in its possession to that person: 
 
Provided that the Board may refuse to make any such report available
to such person if the same is, in its opinion, against the public interest.
3. Notwithstanding anything contained in section 29 of the Code of

Criminal Procedure, 1973 it shall be lawful for any Judicial Magistrate of
the first class or for any Metropolitan Magistrate to pass a sentence of
imprisonment for a term exceeding two years or of fine exceeding two
thousand rupees on any person convicted of an offence punishable
under this Act.
! !275
10.6 THE AIR (PREVENTION AND CONTROL OF

POLLUTION) ACT, 1981
Of all the threats of recent times to the mankind and to the whole world,
‘Pollution’ is considered as the most serious threat. Pollution is presence of
unwanted matter in unwanted quantity at the unwanted place. Out of the
day to day serious pollutions, environmental pollution by air and noise are
increasing day by day and must be controlled by all to avoid future serious
threats. Therefore, it is necessary to ensure that there is sufficient check
against pollution of the air.
Environmental protection has received pointed attention of the planners,

especially after the Bhopal gas tragedy in late 1984. The Government has
identified certain categories of industries as highly polluting in nature and
has stipulated a condition to the effect that the Letters of Intent issued to
these industries would not be converted into Industrial License unless
adequate pollution control measures have been undertaken by them. For
the purpose of the preservation of the quality of air and control of air
pollution, the Central Government enacted the Air (Prevention and Control
of Pollution) Act, in 1981.
! !276
10.6.1 The Act and Definitions -
1. This Act may be called the Air (Prevention and Control of Pollution) Act,
1981.
2. It extends to the whole of India.
3. It shall come into force on such date 1 as the Central Government may,
by notification in the Official Gazette, appoint.
Definitions -
(a) “air pollution” means any solid, liquid or gaseous substance including
noise present in the atmosphere in such concentration as may be or
tend to be injurious to human beings or other living creatures or plants
or property or environment;
(b) “air pollution” means the presence in the atmosphere of any air
pollutant;
(c) “approved appliance” means any equipment or gadget used for the
burning of any combustible material or for generating or consuming
any fume, gas or particulate matter and approved by the State Board
for the purposes of this Act;
(d) “approved fuel” means any fuel approved by the State Board for the
purposes of this Act;
(e) “automobile” means any vehicle powered either by internal combustion

engine or by any method of generating power to drive such vehicle by
burning fuel;
(f) “Board” means the Central Board or a State Board;
(g) “Central Board” means the Central Pollution Control Board constituted
under Section 3 of the Water (Prevention and Control of Pollution) Act,
1974 (6 of 1974);
(h) “Chimney” includes any structure with an opening or outlet from or

through which any air pollutant may be emitted;
! !277
(i) “Control equipment” means any apparatus, device, equipment or

system to control the quality and manner of emission of any air
pollutant and includes any device used for securing the efficient
operation of any industrial plant;
(j) “Emission” means any solid or liquid or gaseous substance coming out
of any chimney, duct or flue or any other outlet;
(k) “Industrial plant” means any plant used for any industrial or trade
purposes and emitting any air pollutant into the atmosphere;
(l) “Member” means a member of the Central Board or a State Board, as

the case may be, and includes the Chairman thereof;
(m) “Occupier”, in relation to any factory or premises, means the person

who has control over the affairs of the factory or the premises, and
includes, in relation to any substance, the person in possession of the
substance;
(n) “Prescribed” means prescribed by rules made under this Act by the
Central Government or, as the case may be, the State Government;
(o) “State Board” means, -
i. In relation to a State in which the Water (Prevention and Control of

Pollution) Act, 1974 (6 of 1974), is in force and the State
Government has constituted for that State Pollution Control Board
under section 4 of that Act, the said State Board; and
ii. In relation to any other State, the State Board for the Prevention and
Control of Air Pollution constituted by the State Government under
section 5 of this Act.
10.7 CENTRAL AND STATE BOARDS – FUNCTIONS AND

POWERS
10.7.1 Central Pollution Control Board
The Central Pollution Control Board constituted under section 3 of the

Water (Prevention and Control of Pollution) Act, 1974 (6 of 1974), shall,
! !278
without prejudice to the exercise and performance of its powers and

functions under that Act, exercise the powers and perform the functions of
the Central Pollution Control Board for the prevention and control of air
pollution under this Act.
Central Board for the prevention and control of Air pollution.—The Central
Board for the Prevention and control of Water Pollution constituted under
section 3 of the Water (Prevention and Control Pollution) Act, 1974, shall,
without prejudice to the exercise and performance of its powers and
functions under that Act, exercise the powers and perform the functions of
the Central Board for the Prevention and Control of Air Pollution under this
Act.
State Boards for the Prevention and Control of Water Pollution to be State
Boards for the Prevention and Control of Air Pollution.—In any State in
which the Water (Prevention and Control of Pollution) Act, 1974, is in force
and the State Government has constituted for that State a State Board for
the Prevention and Control of Water Pollution under section 4 of that Act,
such State Board shall be deemed to be the State Board for the Prevention
and Control of Air Pollution constituted under section 5 of this Act and
accordingly that State Board for the Prevention and Control of Water
Pollution shall, without prejudice to the exercise and performance of its
powers and functions under that Act, exercise the powers and perform the
functions of the State Board for the Prevention and Control of Air Pollution
under this Act.
10.7.2 Functions Of Central Board
1. Subject to the provisions of this Act, and without prejudice to the

performance of its functions under the Water (Prevention and Control of
Pollution) Act, 1974 (6 of 1974), the main functions of the Central Board
shall be to improve the quality of air and to prevent, control or abate air
pollution in the country.
2. In particular and without prejudice to the generality of the foregoing

functions, Central Board may -
(a) Advise the Central Government on any matter concerning the

improvement of the quality of air and the prevention, control or
abatement of air pollution;
! !279
(b) Plan and cause to be executed a nationwide program for the

prevention, control or abatement of air pollution;
(c) Coordinate the activities of the State Boards and resolve disputes
among them;
(d) Provide technical assistance and guidance to the State Boards, carry
out and sponsor investigations and research relating to problems of
air-pollution and prevention, control or abatement of air pollution; 
 
(d-a) Perform such of the functions of any State Board as may be
specified in an order made under subsection (2) of Section 18;
(e) Plan and organise the training of persons engaged or to be engaged

in programs for the prevention, control or abatement of air pollution
on such terms and conditions as the Central Board may specify;
(f) Organise through mass media a comprehensive program regarding

the prevention, control or abatement of air pollution;
(g) Collect, compile and publish technical and statistical data relating to
air pollution and the measures devised for its effective prevention,
control or abatement and prepare manuals, codes or guides relating
to prevention, control or abatement of air pollution;
(h) Lay down standards for the quality of air;
(i) Collect and disseminate information is respect of matters relating to

air pollution;
(j) Perform such other functions as may be prescribed.
3. The Central Board may establish or recognise a laboratory or

laboratories to enable the Central Board to perform its functions under
this section efficiently.
4. The Central Board may -
(a) Delegate any of its functions under this Act generally or specially to
any of the committees appointed by it;
! !280
(b) Do such other things and perform such other acts as it may think
necessary for the proper discharge of its functions and generally for
the purpose of carrying into effect the purposes of this Act.
10.7.3 State Pollution Control Board
In any State in which the Water (Prevention and Control of Pollution) Act,
1974, is in force and the State Government has constituted for that State a
State Pollution Control Board under section 4 of that Act such State Board
shall be deemed to be the State Board for the Prevention and Control of Air
Pollution constituted under Section 5 of this Act, and accordingly that State
Pollution Control Board shall, without prejudice to the exercise and
performance of its powers and functions under that Act, exercise the
powers and perform the functions of the State Board for the prevention
and control of air pollution under this Act.
10.7.4 Constitution of State Boards
1. In any State in which the Water (Prevention and Control of Pollution)

Act, 1974 (6 of 1974), is not in force, or that Act is in force but the
State Government has not constituted a 1State Pollution Control Board
under that Act, the State Government shall, with effect from such date
as it may, by notification in the Official Gazette, appoint, constitute a
State Board for the Prevention and Control of Air Pollution under such
name as may be specified in the notification, to exercise the powers
conferred on, and perform the functions assigned to, that Board under
this Act.
2. A State Board constituted under this Act shall consist of the following
members, namely :-
(a) a Chairman, being a person having special knowledge or practical

experience in respect of matters relating to environmental
protection, to be nominated by the State Government : 
 
Provided that the Chairman may be either whole-time or part-time
as the State Government may think fit;
! !281
(b) such number of officials, not exceeding five, as the State

Government may think fit, to be nominated by the State
Government to represent that Government;
(c) such number of persons, not exceeding five, as the State

Government from amongst the members of the local authorities
functioning within the State;
(d) such number of non-official, not exceeding three, as the State

Government to represent the interests of agriculture, fishery or
industry or trade or labour or any other interest which, in the
opinion of that Government, ought to be represented;

controlled or managed by the State Government, to be nominated
by that Government;
(f) a full-time member-secretary having such qualifications, knowledge

pollution control as may be prescribed, to be appointed by the State
Government : 
 
Provided that the State Government shall ensure that not less than
two of the members are persons having special knowledge or
practical experience in respect of matters relating to the
improvement of the quality of air or the prevention, control or
abatement of air pollution.
3. Every State Board constituted under this Act shall be a body corporate
with the name specified by the State Government in the notification
issued under subsection (1), having perpetual succession and a common
seal with power, subject to the provisions of this Act, to acquire and
dispose of property and to contract, and may by the said name sue or
be sued.
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10.7.5 Functions Of State Boards
1. Subject to the provisions of this Act, and without prejudice to the

performance of its functions, if any, under the Water (Prevention and
Control of Pollution) Act, 1974 (6 of 1974), the functions of a State
Board shall be -
(a) To plan a comprehensive programme for the prevention, control or

abatement of air pollution and to secure the execution thereof;
(b) To advise the State Government on any matter concerning the

prevention, control or abatement of air pollution;
(c) To collect and disseminate information relating to air pollution;
(d) To collaborate with the Central Board in organising the training of

persons engaged or to be engaged in programs relating to
prevention, control or abatement of air pollution and to organise
mass-education program relating thereto;
(e) To inspect, at all reasonable times, any control equipment, industrial

plant or manufacturing process and to give, by order, such
directions to such persons as it may consider necessary to take
steps for the prevention, control or abatement of air pollution;
(f) To inspect air pollution control areas at such intervals as it may

think necessary, assess the qualify of air therein and take steps for
the prevention, control or abatement of air pollution in such areas;
(g) To lay down, in consultation with the Central Board and having
regard to the standards for the quality of air laid down by the
Central Board, standards for emission of air pollutants into the
atmosphere from industrial plants and automobiles or for the
discharge of any air pollutant into the atmosphere from any other
source whatsoever not being a ship or an aircraft : 
 
Provided that different standards for emission may be laid down
under this clause for different industrial plants having regard to the
quantity and composition of emission of air pollutants into the
atmosphere from such industrial plants;
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(h) To advise the State Government with respect to the suitability of

any premises or location for carrying on any industry which is likely
to cause air pollution;
(i) To perform such other functions as may be prescribed or as may,

from time to time, be entrusted to it by the Central Board or the
State Government;
(j) To do such other things and to perform such other acts as its may
think necessary for the proper discharge of its functions and
generally for the purpose of carrying into effect the purposes of this
Act.
2. A State Board may establish or recognise a laboratory or laboratories to

enable the State Board to perform its functions under this Section
efficiently.
10.8 PREVENTION AND CONTROL OF AIR POLLUTION AND

PENALTIES
10.8.1 Power To Give Directions
1. In the performance of its functions under this Act -
(a) the Central Board shall be bound by such directions in writing as the
Central Government may give to it; and
(b) every State Board shall be bound by such directions in writing as

the Central Board or the State Government may give to it : 
 
Provided that where a direction given by the State Government is
inconsistent with the direction given by the Central Board, the
matter shall be referred to the Central Government for its decision.
2. Where the Central Government is of the opinion that any State Board
has defaulted in complying with any directions given by the Central
Board under subsection (1) and as a result of such default a grave
emergency has arisen and it is necessary or expedient so to do in the
public interest, it may, by order, direct the Central Board to perform any
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of the functions of the State Board in relation to such area, for such
period and for such purposes, as may be specified in the order.
3. Where the Central Board performs any of the functions of the State
Board in pursuance of a direction under sub-section (2), the expresses,
if any, incurred by the Central Board with respect to the performance of
such functions may, if the State Board is empowered to recover such
expenses, be recovered by the Central Board with interest (at such
reasonable rate as the Central Government may, by order, fix) from the
date when a demand for such expenses is made until it is paid from the
person or persons concerned as arrears of land revenue or of public
demand.
4. For the removal of doubts, it is hereby declared that any direction to

perform the functions of any State Board given under subsection (2) in
respect of any area would not preclude the State Board from performing
such functions in any other area in the State or any of its other
functions in that area.
10.8.2 Power To Declare Air Pollution Control Areas
1. The State Government may, after consultation with the State Board, by
notification in the Official Gazette, declare in such manner as may be
prescribed, any area or areas within the State as air pollution control
area or areas for the purposes of this Act.
notification in the Official Gazette, -
(a) alter any air pollution control area whether by way of extension or
reduction;
(b) declare a new air pollution control area in which may be merged one
or more existing air pollution control areas or any part or parts
thereof.
3. If the State Government, after consultation with the State Board, is of

opinion that the use of any fuel, other than an approved fuel, in any air
pollution control area or part thereof, may cause or is likely to cause air
pollution, it may by notification in the Official Gazette, prohibit the use
! !285
of such fuel in such area or part thereof with effect from such date
(being not less than three months from the date of publication of the
notification) as may be specified in the notification.
notification in the Official Gazette, direct that with effect from such date
as may be specified therein, no appliance, other than an approved
appliance, shall be used in the premises situated in an air pollution
control area ; Provided that different dates may be specified for
different parts of an air pollution control area or for the use of different
appliances.
5. If the State Government, after consultation with the State Board, is of

opinion that the burning of any material (not being fuel) in any air
pollution control area or part thereof may cause or is likely to cause air
pollution, it may, by notification in the Official Gazette, prohibit the
burning of such material in such area or part thereof.
10.8.3 Power to give Instructions
With a view to ensuring that the standards for emission of air pollutants
from automobiles laid down by the State Board under clause (g) of
subsection (1) of section 17 are compiled with, the State Government
shall, in consultation with the State Board, give such instructions as may
be deemed necessary to the concerned authority in charge of registration
of motor vehicles under the Motor Vehicles Act, 1939 (4 of 1939), and such
authority shall, notwithstanding anything contained in that Act or the rules
made there under be found to comply with such instructions.
10.8.4 Power of Board to Make Application to Court
1. Where it is apprehended by a Board that emission of any air pollutant,

in excess of the standards laid down by the State Board under clause
(g) of subsection (1) of section 17, is likely to occur by reason of any
person operating an industrial plant or otherwise in any air pollution
control area, the Board may make an application to a court, not inferior
to that of a Metropolitan Magistrate or a Judicial Magistrate of the first
class for restraining such person from emitting such air pollutant.
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2. On receipt of the application under subsection (1), the court may make
such order as it deems fit.
3. Where under subsection (2), the court makes an order restraining any
person from discharging or causing or permitting to be discharged the
emission of any air pollutant, it may, in that order, -
(a) Direct such person to desist from taking such action as is likely to
cause emission;
(b) Authorise the Board, if the direction under clause (a) is not complied
with by the person to whom such direction is issued, to implement
the direction in such manner as may be specified by the court.
4. All expenses incurred by the Board in implementing the directions of the

court under clause (b) of subsection (3) shall be recoverable from the
person concerned as arrears of land revenue or of public demand.
10.8.5 Power Of Entry And Inspection
1. Subject to the provisions of this section, any person empowered by a

State Board in this behalf shall have a right to enter, at all reasonable
times with such assistance as he considers necessary, any place -
(a) for the purpose of performing any of the functions of the State
Board entrusted to him;
(b) for the purpose of determining whether and if so in what manner,

or authorisation served, made, given or granted under this Act is
(c) for the purpose of examining and testing any control equipment,
industrial plant, record, register, document or any other material
object or for conducting a search of any place in which he has
reason to believe that an offence under this Act or the rules made
there under has been or is about to be committed and for seizing
any such control equipment, industrial plant, record, register,
document or other material object if he has reasons to believe that
! !287
it may furnish evidence of the commission of an offence punishable

under this Act or the rules made thereunder.
2. Every person of operating any control equipment or any industrial plant,

in an air pollution control area shall be bound to render all assistance to
the person empowered by the State Board under sub-section (1) for
carrying out the functions under that subsection and if he fails to do so
without any reasonable cause or excuse, he shall be guilty of an offence
under this Act.
3. If any person willfully delays or obstructs any person empowered by the

State Board under subsection (1) in the discharge of his duties, he shall
be guilty of an offence under this Act.

in relation to the State of Jammu and Kashmir, or any area in which that
Code is not in force, the provisions of any corresponding law in force in
that State or area, shall, so far as may be, apply to any search or
seizure under this section as they apply to any search or seizure made
under the authority of a warrant issued under section 94 of the said
Code or, as the case may be, under the corresponding provisions of the
said law.
10.8.6 Power To Obtain Information
For the purposes of carrying out the functions entrusted to it, the State
Board or any officer empowered by it in that behalf may call for any
information (including information regarding the types of air pollutants
emitted into the atmosphere and the level of the emission of such air
pollutants) from the occupier or any other person carrying on any industry
or operating any control equipment or industrial plant and for the purpose
of verifying the correctness of such information, the State Board or such
officer shall have the right to inspect the premises where such industry,
control equipment or industrial plant is being carried on or operated.
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10.8.7 Power to take Samples of Air or Emission
1. A State Board or any officer empowered by it in this behalf shall have

power to take, for the purpose of analysis, samples of air or emission
from any chimney, flue or duct or any other outlet in such manner as
may be prescribed.
2. The result of any analysis of a sample of emission taken under

subsection (1) shall be admissible in evidence in any legal proceeding
unless the provisions of subsections (3) and (4) are complied with.
3. Subject to the provisions of sub-section (4), when a sample of emission

is taken for analysis under subsection (1), the person taking the sample
shall -
(a) Serve on the occupier or his agent, a notice, then and there, in such
form as may be prescribed, of his intention to have it so analyzed;
(b) In the presence of the occupier or his agent, collect a sample of

emission for analysis;
(c) Cause the sample to be placed in a container or containers which

shall be marked and sealed and shall also be singed both by the
person taking the sample and the occupier or his agent;
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(d) Send, without delay, the container or containers to the laboratory

established or recognised by the State Board under section 17 or, if
a request in that behalf is made by the occupier or his agent when
the notice is served on him under clause (a), to the laboratory
established or specified under subsection (1) of section 28.
4. When a sample of emission is taken for analysis under sub-section (1)

and the person taking the sample serves on the occupier or his agent, a
notice under clause (a) of sub-section (3), then -
(a) In a case where the occupier or his agent willfully absents himself,
the person taking the sample shall collect the sample of emission
for analysis to be placed in a container or containers which shall be
marked and sealed and shall also be signed by the person taking
the sample, and
(b) In a case where the occupier or his agent is present at the time of
taking the sample but refuses to sign the marked and sealed
container or containers of the sample of emission as required under
clause (c) of subsection (3), the marked and sealed container or
containers shall be signed by the person taking the sample, and the
container or containers shall be sent without delay by the person
taking the sample for analysis to the laboratory established or
specified under subsection (1) of section 28.
10.8.8 Central Board to Exercise The Powers of a State Board in the

Union Territories
No State Board shall be constituted for a Union territory and in relation to a

union territory, the Central Board shall exercise the powers and perform
the functions of a State Board under this Act for that Union Territory;
Provided that in relation to any Union territory the Central Board may
delegate all or any of its powers and functions under this section to such
person or body of persons as the Central Government may specify.
10.8.9 Penalties
Failure To Comply With The Provisions
! !290
1. Whoever fails to comply with the provisions of section 21 or section 22

or directions issued under Section 31-A, shall, in respect of each such
failure, be punishable with imprisonment for a term which shall not be
less than one year and six months but which may extend to six years
and with fine, and in case the failure continues, with an additional fine
which may extend to five thousand rupees for every day during which
such failure continues after the conviction for the first such failure.
2. If the failure referred to in subsection (1) continues beyond a period of

one year after the date of conviction, the offender shall be punishable
with imprisonment for a term which shall not be less than two years but
which may extend to seven years and with fine.
Penalties for Certain Acts
Whoever -
(a) Destroys, pulls down, removes, injures or defaces any pillar, post or
stake fixed in the ground or any notice or other matter put up,
inscribed or placed, by or under the authority of the Board, or
(b) Obstructs any person acting under the orders or directions of the
Board from exercising his powers and performing his functions under
this Act, or
(c) Damages any works or property belonging to the Board, or
(d) Fails to furnish to the Board or any officer or other employee of the
Board any information required by the Board or such officer or other
employee for the purpose of this Act, or
(e) Fails to intimate the occurrence of the emission of air pollutants into
the atmosphere in excess of the standards laid down by the State
Board or the apprehension of such occurrence, to the State Board and
other prescribed authorities or agencies as required under subsection
(1) of Section 23, or
(f) In giving any information which he is required to give under this Act,
makes a statement which is false in any material particular, or
! !291
(g) For the purpose of obtaining any consent under section 21, makes a
statement which is false in any material particular. 
 
Shall be punishable with imprisonment for a term which may extend to
three months or with fine which may extend to Ten Thousand rupees
or with both.
Penalty for Contravention of Certain Provisions of the Act
Whoever contravenes any of the provisions of this Act or any order or

direction issued there under, for which no penalty has been elsewhere
provided in this Act, shall be punishable with imprisonment for a term
which may extend to three months or with fine which may extend to ten
thousand rupees or with both, and in the case of continuing contravention,
with an additional fine which may extend to five thousand rupees for every
day during which such contravention continues after conviction for the first
such contravention.
Offences by Companies
1. Where an offence under this Act has been committed by a company,

every person who, at the time the offence was committed, was directly
in charge of, and was responsible to, the company for the conduct of the
business of the company, as well as the company, shall be deemed to be
guilty of the offence and shall be liable to be proceeded against and
punished accordingly : 
 
Provided that nothing contained in this subsection shall render any such
person liable to any punishment provided in this Act, if he proves that
the offence was committed without his knowledge or that he exercised
all due diligence to prevent the commission of such offence.

attributable to any neglect on the part of any director, manager,
secretary or other officer shall be deemed to be guilty of that offence
and shall be liable to be proceeded against and published accordingly. 
! !292
 
Explanation : For the purposes of this section, -
(a) “Company” means any body corporate, and includes a firm or other
association of individuals; and
(b) “Director”, in relation to a firm, means a partner in the firm.
Offences by Government Departments
1. Where an offence under this Act has been committed by any

Department of Government, the Head of the Department shall be
deemed to be guilty of the offence shall be liable to be proceeded
against and punished accordingly : 
 
the Department liable to any punishment if he proves that the offence
was committed without his knowledge or that he exercised all due
diligence to prevent the commission of such offence.

under this Act has been committed by a Department of Government and
it is proved that the offence has been committed with the consent or
connivance of, or is attributable to any neglect on the part of, any
officer, other than the Head of the Department, such officer shall also be
deemed to be guilty of that offence and shall be liable to be proceeded
against and punished accordingly. 
 
No suit, prosecution or other legal proceeding shall lie against the
Government or any officer of the Government or any member or any
officer or other employee of the Board in respect of anything which is
done or intended to be done in good faith in pursuance of this Act or the
rules made there under.
Cognizance Of Offences
1. No Court shall take cognizance of any offence under this Act except on a
complaint made by -
(a) A Board or any officer authorised in this behalf by it; or
! !293
(b) Any person who has given notice of not less than sixty days, in
the manner prescribed, of the alleged offence and of his intention
to make a complaint to the Board or officer authorised as
aforesaid and no court inferior to that of a Metropolitan
Magistrate or a Judicial Magistrate of the first class shall try any
offence punishable under this Act.
2. Were a complaint has been made under clause (b) of sub-section (1),
the Board shall, on demand by such person, make available the relevant
reports in its possession to that person : 
 
Provided that the Board may refuse to make any such report available
to such person if the same is, in its opinion, against the public interest.
10.9 AIR LABORATORY
State Air Laboratory
1. The State Government may, by notification in the Official Gazette, -
(a) Establish one or more State Air Laboratories; or
(b) Specify one or more laboratories or institutes as State Air

Laboratories to carry out the functions entrusted to the State Air
Laboratory under this Act.
2. The State Government may, after consultation with the State Board,
make rules prescribing -
(a) The functions of the State Air Laboratory;
(b) The procedure for the submission to the said Laboratory of samples
of air or emission for analysis or tests, the form of the Laboratory’s
report thereon and the fees payable in respect of such report;
(c) Such other matters as may be necessary or expedient to enable

that Laboratory to carry out its functions.
! !294
Analysts
1. The State Government may, by notification in the Official Gazette,

appoint such persons as it thinks fit and having the prescribed
qualifications to be Government analysts for the purpose of analysis of
samples of air or emission sent for analysis to any laboratory
established or specified under subsection (1) of section 28.
2. Without prejudice to the provisions of section 14, the State Board may,
by notification in the Official Gazette, and with the approval of the State
Government, appoint such persons as it thinks fit and having the
prescribed qualifications to be Board analysts for the purpose of analysis
of samples of air or emission set for analysis to any laboratory
established or recognised under section 17.
Report Of Analysts
Any document purporting to be a report signed by a Government analyst

or, as the case may be, a State Board analyst may be used as evidence of
the facts stated therein in any proceeding under this Act.
Appeals
1. Any person aggrieved by an order made by the State Board under this
Act may, within thirty days from the date on which the order is
communicated to him, prefer an appeal to such authority (hereinafter
referred to as the Appellate Authority) as the State Government may
think fit to constitute : 
 
Provided that the Appellate Authority may entertain the appeal after the
expiry of the said period of thirty days if such authority is satisfied that
the appellant was prevented by sufficient cause from filling the appeal in
time.
2. The Appellate Authority shall consist of a single person or three persons

as the State Government may think fit to be appointed by the State
Government.
3. The form and the manner in which an appeal may be preferred under
sub-section (1), the fees payable for such appeal and the procedure to
! !295
be followed by the Appellate Authority shall be such as may be

prescribed.
4. On receipt of an appeal preferred under subsection (1), the Appellate

Authority shall, after giving the appellant and the State Board an
opportunity of being heard, dispose of the appeal as expeditiously as
possible.
10.10 THE ENVIRONMENT PROTECTION ACT, 1986
Environmental protection is the topmost need of every country in the

current era. Earlier it was neglected mostly by the developing countries,
but the environmental disasters like the Bhopal Gas Tragedy has forced
India to bring it on topmost agenda. Environment consists of water, air,
land including forests and surrounding atmosphere also. So, in the year
1986, the Environmental protection Act was formed and put into immediate
practice, to take care of all aspects of environmental protection. The basics
of the act and its scope in India was formulated as -
(1) This Act may be called the Environment (Protection) Act, 1986.
(2) It extends to the whole of India.
To make the act most powerful, it was decided that every rule made under
this Act shall be laid, as soon as may be after it is made, before each
House of Parliament, while it is in session, for a total period of thirty days
which may be comprised in one session or in two or more successive
sessions, and if, before the expiry of the session immediately following the
session or the successive sessions aforesaid, both Houses agree in making
any modification in the rule; however, that any such modification or
annulment shall be without prejudice to the validity of anything previously
done under that rule.
Definitions
In this Act, unless the context otherwise requires, –
(a) “environment” includes water, air and land and the inter-relationship
which exists among and between water, air and land, and human
beings, other living creatures, plants, micro-organism and property;
! !296
(b) “environmental pollutant” means any solid, liquid or gaseous

substance present in such concentration as may be, or tend to be,
injurious to environment;
(c) “environmental pollution” means the presence in the environment of

any environmental pollutant;
(d) “handling”, in relation to any substance, means the manufacture,

processing, treatment, package, storage, transportation, use,
collection, destruction, conversion, offering for sale, transfer or the like
of such substance;
(e) “hazardous substance” means any substance or preparation which, by

reason of its chemical or physico-chemical properties or handling, is
liable to cause harm to human beings, other living creatures, plants,
microorganism, property or the environment;
(f) “occupier”, in relation to any factory or premises, means a person who

has control over the affairs of the factory or the premises and includes
in relation to any substance, the person in possession of the
substance;
(g) “prescribed” means prescribed by rules made under this Act.
10.11 POWER OF CENTRAL GOVERNMENT UNDER THE

ACT
1. Subject to the provisions of this Act, the Central Government shall have
the power to take all such measures as it deems necessary or expedient
for the purpose of protecting and improving the quality of the
environment and preventing, controlling and abating environmental
pollution.
2. In particular, and without prejudice to the generality of the provisions of

subsection (1), such measures may include measures with respect to all
or any of the following matters, namely :
(i) co-ordination of actions by the State Governments, officers and

other authorities -
! !297
a) under this Act, or the rules made there under; or
b) under any other law for the time being in force which is relatable
to the objects of this Act;
(ii) planning and execution of a nation-wide program for the prevention,

control and abatement of environmental pollution;
(iii) laying down standards for the quality of environment in its various
aspects;
(iv) laying down standards for emission or discharge of environmental

pollutants from various sources whatsoever : 
 
Provided that different standards for emission or discharge may be
laid down under this clause from different sources having regard to
the quality or composition of the emission or discharge of
environmental pollutants from such sources;
(v) restriction of areas in which any industries, operations or processes,

or class of industries, operations or processes shall not be carried
out or shall be carried out subject to certain safeguards;
(vi) laying down procedures and safeguards for the prevention of

accidents which may cause environmental pollution and remedial
measures for such accidents;
(vii) laying down procedures and safeguards for the handling of

hazardous substances;
(viii)examination of such manufacturing processes, materials and

substances as are likely to cause environmental pollution;
(ix) carrying out and sponsoring investigations and research relating to

problems of environmental pollution;
(x) inspection of any premises, plant, equipment, machinery,

manufacturing or other processes, materials or substances and
giving, by order, of such directions to such authorities, officers or
! !298
persons as it may consider necessary to take steps for the

prevention, control and abatement of environmental pollution;
(xi) establishment or recognition of environmental laboratories and

institutes to carry out the functions entrusted to such environmental
laboratories and institutes under this Act;
(xii) collection and dissemination of information in respect of matters

relating to environmental pollution;
(xiii)preparation of manuals, codes or guides relating to the prevention,

control and abatement of environmental pollution;
(xiv)such other matters as the Central Government deems necessary or

expedient for the purpose of securing the effective implementation
of the provisions of this Act.
3. The Central Government may, if it considers it necessary or expedient

so to do for the purposes of this Act, by order, published in the Official
Gazette, constitute an authority or authorities by such name or names
as may be specified in the order for the purpose of exercising and
performing such of the powers and functions (including the power to
issue directions under section 5) of the Central Government under this
Act and for taking measures with respect to such of the matters referred
to in subsection (2) as may be mentioned in the order and subject to
the supervision and control of the Central Government and the
provisions of such order, such authority or authorities may exercise the
powers or perform the functions or take the measures so mentioned in
the order as if such authority or authorities had been empowered by this
Act to exercise those powers or perform those functions or take such
measures.
The Authority shall exercise the following powers and functions:—
I. to exercise powers under section 5 of the said Act for issuing directions
and for taking measures with respect to matters referred to in clauses
(ix), (xi), (xii) and (xiii) of sub-section (2) of section 3 of the Act;
II. to direct the agencies (government/local bodies/non-governmental) for

the following:
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(a) to standardise method(s) for water quality monitoring and to ensure

quality of data generation for utilization thereof;
(b) to take measures so as to ensure proper treatment of wastewater

with a view to restoring the water quality of the river/water bodies
to meet the designated-best-uses;
(c) to take up research and development activities in the area of water

quality management;
(d) to promote recycling/re-use of treated sewage/trade effluent for

irrigation in development of agriculture;
(e) to draw action plans for quality improvement in water bodies, and
monitor and review/assess implementation of the schemes
launched/to be launched to that effect;
(f) to draw schemes(s) for imposition of restriction in water abstraction

and discharge of treated sewage/trade effluent on land, rivers and
other water bodies with a view to mitigating crisis of water quality;
(g) to maintain minimum discharge for sustenance of aequactic life

forms in riverine system;
(h) to promote rain water harvesting;
(i) to utilize self-assimilation capacities at the critical river stretches to

minimise cost of effluent treatment;
(j) to provide information to pollution control authorities to facilitate

allocation of waste load;
(k) to review the status of quality of national water resources (both

surface water and groundwater) and identify “Hot Spots” for taking
necessary actions for improvement in water quality;
(l) to interact with the authorities/committees constituted or to be

constituted under the provisions of the said Act for matters relating
to management of water resources;
! !300
(m) to constitute/set-up State level Water Quality Review Committees

(WQRC) to coordinate the work to be assigned to such committees;
and
(n) to deal with any environmental issue concerning surface and

groundwater quality which may be referred to it by the Central
Government or the State Government relating to the respective
areas, for maintenance and/or restoration of quality to sustain
designated-best-uses.
3. The Authority shall exercise the powers under section 19 of the said Act.
4. The Authority may appoint domain experts for facilitating the work
assigned to it.
5. The Ministry of Water Resources shall create a cell to assist the

Authority to carry out the assigned functions.
6. The Authority shall furnish report about its activity at least once in three
months to the Ministry of Environment and Forests.
10.12 RULES TO REGULATE ENVIRONMENTAL POLLUTION.
1. The Central Government may, by notification in the Official Gazette,

make rules in respect of all or any of the matters referred to in section
3.
2. In particular, and without prejudice to the generality of the foregoing

power, such rules may provide for all or any of the following matters,
namely :-
(a) the standards of quality of air, water or soil for various areas and
purposes;
(b) the maximum allowable limits of concentration of various

environmental pollutants (including noise) for different areas;
(c) the procedures and safeguards for the handling of hazardous

substances;
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(d) the prohibition and restrictions on the handling of hazardous

substances in different areas;
(e) the prohibition and restrictions on the location of industries and the
carrying on of processes and operations in different areas;
(f) the procedures and safeguards for the prevention of accidents which
may cause environmental pollution and for providing for remedial
measures for such accidents.
No person carrying on any industry, operation or process shall discharge or

emit or permit to be discharged or emitted any environmental pollutant in
excess of such standards as may be prescribed.
No person shall handle or cause to be handled any hazardous substance

except in accordance with such procedure and after complying with such
safeguards as may be prescribed.
Sustainable development
(i) To ensure sustainable development is one of the goals of

Environmental Protection Act, 1986, and this is quiet necessary to
guarantee ’right to life’ under Article 21. If the Act is not armed with
the powers to ensure sustainable development, it will become a barren
shell. In other words, sustainable development is one of the means to
achieve the object and purpose of the Act as well as the protection of
’life’ under Article 21.
(ii) It is necessary that green areas and the parks in all the towns and
cities of Rajasthan are maintained to protect environment and ecology,
but it is seen they are allowed to be encroached upon due to
commercial and other pressures. They are converted from green areas
to commercial areas and residential areas. Concrete jungles are
swallowing green areas. That trend needs to be halted to protect and
preserve ecology.
(iii) The harmonisation of the two namely, the issue of ecology and
developmental project cannot but be termed to be the order of the day
and the need of the hour
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(iv) There is need for creating general awareness towards the hazardous
effects of noise pollution. Similar awareness need to be created in
Police and Civil administration as well. Not only the use of
loudspeakers and playing of hi-fi amplifier systems has to be
regulated, even the playing of high sound instruments which create
noise beyond tolerable limit need to be regulated.
It has been held that to ensure the attainment of the constitutional goal of
the protection and improvement of the natural wealth and environment
and of the safeguarding of the forests, lakes, rivers and wildlife and to
protect the people inhabiting the vulnerable areas from the hazardous
consequences of the arbitrary exercise of granting mining leases and of
indiscriminate operation of the mines on the strength of such leases
without property, the court will be left with effectively by issuing
appropriate writs, orders and directions including the direction as to the
closure of the mines the operation whereof is proving to be hazardous and
the total prohibition of the grant or renewal of mining leases till the
Government evolves a long-term plan based on a scientific study with a
view to regulating the exploitation of the minerals in the State without
detriments to the environment, ecology, the natural wealth and resources
and the local population.
Furnishing of Information to Authorities
1. Where the discharge of any environmental pollutant in excess of the

prescribed standards occurs or is apprehended to occur due to any
accident or other unforeseen act or event, the person responsible for
such discharge and the person in charge of the place at which such
discharge occurs, or is apprehended to occur shall be bound to prevent
or mitigate the environmental pollution caused as a result of such
discharge and shall also forthwith -
(a) intimate the fact of such occurrence or apprehension of such

occurrence; and
(b) be bound, if called upon, to render all assistance, to such authorities

or agencies as may be prescribed.
2. On receipt of information with respect to the fact or apprehension of any

occurrence of the nature referred to in subsection (1), whether through
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intimation under that sub-section or otherwise, the authorities or

agencies referred to in subsection (1) shall, as early as practicable,
cause such remedial measures to be taken as are necessary to prevent
or mitigate the environmental pollution.
3. The expenses, if any, incurred by any authority or agency with respect

to the remedial measures referred to in subsection (2), together with
interest (at such reasonable rate as the Government may, by order, fix)
from the date when a demand for the expenses is made until it is paid
may be recovered by such authority or agency from the person
concerned as arrears of land revenue or of public demand.
Power of Entry and Inspection
1. Subject to the provisions of this section, any person empowered by the

Central Government in this behalf shall have a right to enter, at all
reasonable times with such assistance as he considers necessary, any
place -
(a) for the purpose of performing any of the functions of the Central
Government entrusted to him;
(b) for the purpose of determining whether and if so in what manner

or authorisation served, made, given or granted under this Act is
(c) for the purpose of examining and testing any equipment, industrial
plant, record, register, document or any other material object or for
conducting a search of any building in which he has reason to
believe that an offence under this Act or the rules made there under
has been or is being or is about to be committed and for seizing any
such equipment, industrial plant, record, register, document or
other material object if he has reasons to believe that it may furnish
evidence of the commission of an offence punishable under this Act
or the rules made there under or that such seizure is necessary to
prevent or mitigate environmental pollution.
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2. Every person carrying on any industry, operation or process or handling

any hazardous substance shall be bound to render all assistance to the
person empowered by the Central Government under subsection (1) for
carrying out the functions under that sub-section and if he fails to do so
without any reasonable cause or excuse, he shall be guilty of an offence
under this Act.
3. If any person willfully delays or obstructs any person empowered by the

Central Government under subsection (1) in the performance of his
functions, he shall be guilty of an offence under this Act.

in relation to the State of Jammu and Kashmir, or any area in which that
Code is not in force, the provisions of any corresponding law in force in
that State or area shall, so far as may be, apply to any search or seizure
under this section as they apply to any search or seizure made under
the authority of a warrant issued under section 94 of the said Code or,
as the case may be, under the corresponding provisions of the said law.
Inspection of factory premises - It is open to the authority empowerd by

the Central Government, to inspect the premises of the factory, call for
documents from the parties or any other body or authority or from the
State Government or Union Government and to examine witnesses, if
needed.
10.13 ENVIRONMENTAL LABORATORIES
(1) The Central Government may, by notification in the Official Gazette, -
(a) establish one or more environmental laboratories;
(b) recognise one or more laboratories or institutes as environmental

laboratories to carry out the functions entrusted to an
environmental laboratory under this Act.
(2) The Central Government may, by notification in the Official Gazette,

make rules specifying -
(a) the functions of the environmental laboratory;
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(b) the procedure for the submission to the said laboratory of samples
of air, water, soil or other substance for analysis or tests, the form
of the laboratory report thereon the fees payable for such report;
(c) such other matters as may be necessary or expedient to enable that

laboratory to carry out its functions.
Government Analysts
The Central Government may, by notification in the Official Gazette,

appoint or recognise such persons as it thinks fit and having the prescribed
qualifications to be Government Analysts for the purpose of analysis of
sample of air, water, soil or other substance sent for analysis to any
environmental laboratory established or recognised under subsection (1) of
section 12.
Power to take Sample
1. The Central Government or any officer empowered by it in this behalf,

shall have power to take, for the purpose of analysis, samples of air,
water, soil or other substance from any factory, premises or other place
in such manner as may be prescribed.
2. The result of any analysis of a sample taken under subsection (1) shall
not be admissible in evidence in any legal proceeding unless the
provisions of subsections (3) and (4) are complied with.
3. Subject to the provisions of subsection (4), the person taking the

sample under sub-section (1) shall -
(a) serve on the occupier or his agent or person in charge of the place,
a notice, then and there, in such form as may be prescribed, of his
intention to have it so analysed;
(b) in the presence of the occupier or his agent or person, collect a

sample for analysis;
(c) cause the sample to be placed in a container or containers which

shall be marked and sealed and shall also be signed both by the
person taking the sample and the occupier or his agent or person;
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(d) send without delay, the container or the containers to the laboratory
established or recognised by the Central Government under section
12.
4. When a sample is taken for analysis under subsection (1) and the
person taking the sample serves on the occupier or his agent or person,
a notice under clause (a) of sub-section (3), then, -
(a) in a case where the occupier, his agent or person willfully absents
himself, the person taking the sample shall collect the sample for analysis
to be placed in a container or containers which shall be marked and sealed
and shall also be signed by the person taking the sample, and (b) in a case
where the occupier or his agent or person present at the time of taking the
sample refuses to sign the marked and sealed container or containers of
the sample as required under clause (c) of subsection (3), the marked and
sealed container or containers shall be signed by the person taking the
samples, and the container or containers shall be sent without delay by the
person taking the sample for analysis to the laboratory established or
recognised under section 12 and such person shall inform the Government
Analyst appointed or recognised under section 13 in writing, about the
willful absence of the occupier or his agent or person, or, as the case may
be, his refusal to sign the container or containers.
Reports Of Government Analysts
Any document purporting to be a report signed by a Government analyst

may be used as evidence of the facts stated therein in any proceeding
under this Act.
1 0 . 1 4 O F F E N C E S A N D P E N A LT I E S UNDER
ENVIRONMENTAL PROTECTION ACT
10.14.1 Penalty For Contravention Of The Provisions Of The Act
1. Whoever fails to comply with or contravenes any of the provisions of

this Act, or the rules made or orders or directions issued there under,
shall, in respect of each such failure or contravention, be punishable
with imprisonment for a term which may extend to five years or with
fine which may extend to one lakh rupees, or with both, and in case the
failure or contravention continues, with additional fine which may
extend to five thousand rupees for every day during which such failure
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or contravention continues after the conviction for the first such failure
or contravention.
2. If the failure or contravention referred to in sub-section (1) continues

beyond a period of one year after the date of conviction, the offender
shall be punishable with imprisonment for a term which may extend to
seven years.
10.14.2 Information, Reports or Returns
The Central Government may, in relation to its functions under this Act,
from time to time, require any person, officer, State Government or other
authority to furnish to it or any prescribed authority or officer any reports,
returns, statistics, accounts and other information and such person, officer,
State Government or other authority shall be bound to do so.
No Civil Court shall have jurisdiction to entertain any suit or proceeding in

respect of anything done, action taken or order or direction issued by the
Central Government or any authority or officer in pursuance of any power
conferred by or in relation to its or his functions under this Act.
All the members of the authority, constituted, if any, under section 3 and
all officers and other employees of such authority when acting or
purporting to act in pursuance of any provisions of this Act, or the rules
made, or orders or directions issued there under, shall be deemed to be
public servants within the meaning of section 21 of the Indian Penal Code.
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10.14.3 Effect of Other Laws
1. Subject to the provisions of subsection (2), the provisions of this Act

and the rules or orders made therein shall have effect notwithstanding
anything inconsistent therewith contained in any enactment other than
this Act.
2. Where any act or omission constitutes an offence punishable under this

Act and also under any other Act then the offender found guilty of such
offence shall be liable to be punished under the other Act and not under
this Act.
10.14.4 Power to Make Rules
1. The Central Government may, by notification in the Official Gazette,

make rules for carrying out the purposes of this Act.
2. In particular, and without prejudice to the generality of the foregoing

power, such rules may provide for all or any of the following matters,
namely :
(a) the standards in excess of which environmental pollutants shall not

be discharged or emitted under section 7;
(b) the procedure in accordance with and the safeguards in compliance

with which hazardous substances shall be handled or caused to be
handled under section 8;
(c) the authorities or agencies to which intimation of the fact of

occurrence or apprehension of occurrence of the discharge of any
environmental pollutant in excess of the prescribed standards shall
be given and to whom all assistance shall be bound to be rendered
under sub-section (1) of section 9;
(d) the manner in which samples of air, water, soil or other substance
for the purpose of analysis shall be taken under subsection (1) of
section 11;
(e) the form in which notice of intention to have a sample analysed

shall be served under clause (a) of subsection (3) of section 11;
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(f) the functions of the environmental laboratories, the procedure for

the submission to such laboratories of samples of air, water, soil and
other substances for analysis or test; the form of laboratory report;
the fees payable for such report and other matters to enable such
laboratories to carry out their functions under subsection (2) of
section 12;
(g) the qualifications of Government Analyst, appointed or recognised

for the purpose of analysis of samples of air, water, soil or other
substances under section 13;
(h) the manner in which notice of the offence and of the intention to
make a complaint to the Central Government shall be given under
clause (b) of section 19;
(i) the authority or officer to whom any reports, returns, statistics,

accounts and other information shall be furnished under section 20;
(j) any other matter which is required to be, or may be, prescribed.
10.14.5 Offences by Companies
1. Where any offence under this Act has been committed by a company,
every person who, at the time the offence was committed, was directly
in charge of, and was responsible to, the company for the conduct of the
business of the company, as well as the company, shall be deemed to be
guilty of the offence and shall be liable to be proceeded against and
punished accordingly : 
 
Provided that nothing contained in this sub-section shall render any
such person liable to any punishment provide in this Act, if he proves
that the offence was committed without his knowledge or that he
exercised all due diligence to prevent the commission of such offence.

attributable to any neglect on the part of, any director, manager,
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secretary or other officer shall also deemed to be guilty of that offence

and shall be liable to be proceeded against and punished accordingly.
NOTE : For the purposes of this section - (a) “company” means any body
corporate and includes a firm or other association of individuals; (b)
“director”, in relation to a firm, means a partner in the firm.
10.14.6 Offences by Government Departments
1. Where an offence under this Act has been committed by the

Department of Government, the Head of the Department shall be
deemed to be guilty of the offence and shall be liable to be proceeded
against and punished accordingly : 
 
the Department liable to any punishment if he proves that the offence
was committed without his knowledge or that he exercised all due
diligence to prevent the commission of such offence.

under this Act has been committed by a Department of Government and
it is proved that the offence has been committed with the consent or
connivance of, or is attributable to any neglect on the part of, any
officer, other than the Head of the Department, such officer shall also be
deemed to be guilty of that offence and shall be liable to be proceeded
against and punished accordingly.
10.14.7 Protection of Action Taken in Good Faith
No suit, prosecution or other legal proceeding shall lie against the

Government or any officer or other employee of the Government or any
authority constituted under this Act or any member, officer or other
employee of such authority in respect of anything which is done or
intended to be done in good faith in pursuance of this Act or the rules
made or orders or directions issued there under.
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10.14.8 Cognizance of Offences
No Court shall take cognizance of any offence under this Act except on a
complaint made by -
(a) The Central Government or any authority or officer authorised in this

behalf by that Government; or
(b) Any person who has given notice of not less than sixty days, in the
manner prescribed, of the alleged offence and of his intention to make
a complaint, to the Central Government or the authority or officer
authorised as aforesaid.
1. Search on Google the details of the Bhopal Tragedy of Union Carbide,

and list down the details of safety measures neglected by the company.
2. Search on Internet the allowable limits of air pollution in India, and find
out the average air pollutions in Metro Cities of India in the year 2014.
3. Find out the details of water pollution in major rivers of India in the year
2014.
4. Search the pollution control norms to be followed by companies in India

who wish to start a factory in SEZ.
10.16 SUMMARY
• State Water and Air Pollution Control Board and Central Water and Air
Pollution Control Board are the Government bodies which are doing work
in pollution control.
• The Water (Prevention and Control of Pollution) Act,1974; The Air

(Prevention and Control of Pollution) Act, 1981, are the basic laws to
control pollution in water and air respectively, in India.
• Environment Protection Act, 1986 is the fatherly law for environment

protection. It gives wide powers to the Central government to make rules
for the protection of environment from pollution.
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• The Environment (Protection) Rules, 1986 also provide the standards for
automobile exhaust and specifies standards for the manufacture of
automobiles.
• The Central Board and the State Boards have their respective specified
powers to effectively control the pollution in India.
• Violation of the Act and rules will offer the offender penalty, including
imprisonment.
1. Write short note on the Water (Prevention and Control of Pollution) Act,
1974.
2. Explain the role of Water Pollution Control Act,1974 in controlling the

water pollution.
3. How is the panel of the Central Board of the Water (Prevention and
Control of Pollution) Act, 1974 constituted?
4. List down the functions of Central Board to control the water pollution.
5. What are the functions of a State Board in controlling the water

pollution.
6. For the new outlets or new discharges, what are the restrictions for
pollution control?
7. What are the powers of Board in sampling?
8. What are the provisions of penalty for certain acts done under the Air
Pollution Control Act?
9. List down the aims and objects of the Air (Prevention and Control of
Pollution) Act, 1981.
10.Name the authority which controls air pollution and explain its
functions.
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11.What are the powers of State Board in controlling air pollution?
12.What are the provisions of the Air (Prevention and Control of Pollution)
Act, 1981 as regards prevention and control of air pollution?
13.What are the functions of a State Air Laboratory?
14.Write a note on the need and objectives of the Environment Protection

Act, 1986.
15.What are the general powers of the Government under the Environment
Protection Act, 1986?
16.Write a short notes on :
a) Environmental audit;
b) Environment laboratory.
17.Write a note on penalties and offences under the Environment

Protection Act, 1986.
1. The consent for new outlets and discharges for sewage of a factory is to
be obtained from_________ .
a. Local Municipal Board

b. State Board
c. District Board
d. Central Board
2. The Bhopal tragedy of 1984 happened due to pollution of _________ .
a. Water
b. Steam
c. Chemical
d. Air
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3. On the matter of improvement of quality of air, the Central Board should

advise the_________ .
a. World Bank Chairman

b. President of India
c. Central Government
d. All of the above
4. The samples of air or emissions are to be sublitted for tests and analysis
to the_________ .
a. Factors Inspector
b. Excise Inspector
c. Labor Commissioner Office
d. Air Laboratory
5. The term ‘Environment’ includes_________ .
a. Water
b. Air
c. Land
d. All of the above
Answers : (1-b), (2-d), (3-c), (4-d), (5-d).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
! !316
DETAILS OF CENTRAL EXCISE TARIFF
Chapter 11
Objectives
After completing this chapter, you will be able to know the (a) details of
central excise law, its origin, scope and conditions of levying excise duty
and its valuation.; (b) the types of clearance of goods; (c) understand the
Central Sales Tax Act,1956; (d) The concept, objectives, advantages and
drawbacks of the VAT or Value Added Tax; and (e) The details of customs
duty.
Structure:
11.1 Central Excise Law

11.2 Central Excise Duty – Definitions and Conditions
11.3 Valuation of Goods to Charge Excise Duty
11.4 Goods Clearance
11.5 Sales Tax Act
11.6 Dealers Registration
11.7 Inter State Sales Tax
11.8 Determination of Turnover
11.9 Levy and Collection of Tax and Penalties
11.10 VAT – Concept and Advantages
11.11 VAT – Procedure and Penalties
11.12 The Customs Act,1962
11.13 Customs Duty – Assessment
11.14 Customs Duty Drawback
11.15 Offenses and Penalty
11.17 Summary
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11.1 CENTRAL EXCISE LAW
Central Excise Duty is the most important duty which collects major portion
of revenue for the Government. Hence the government has given utmost
importance to the Central Excise Law in order to have effective control on
the revenue.
Central Excise Law as a whole consists of many Rules, Laws and Acts
imposed from time to time. The major of them are -
1. Central Excise Rules 1944.
2. Central Excise (No.2) Rules, 2001 which were replaced by Central Excise
Rules, 2002.
3. The Cenvat Credit Rules 2001 which were replaced by Cenvat Credit
Rules, 2002.
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4. Central Excise (Appeal) Rules, 2001.
5. The Central Excise (Settlement of Cases) Rules, 2001
6. The Central Excise (Removal of Goods at Concessional Rate of Duty)

Rules 2001.
Other Related Acts
1. Central Excise Tariff Act, 1985

2. Central Excise Valuation, 2000
3. Central Excise Laws (Amendment and Validation) Act, 1982
4. Consumer Welfare Fund Rules, 1992
5. Provisional Collection of Taxes Act, 1931
6. Economic Offences Act, 1974.
7. Standard Weights and Measures Act, 1976
We will study the major Acts and Laws from the above to understand the
structure and importance.
11.1.1 Central Excise Tariff Act – 1985.
This is an Act to provide for tariff for Central Duties of Excise.
1. This Act may be called the Central Excise Tariff Act,1985.

3. It shall come into force on such date as the Central Government may,
Duties specified in the First Schedule and the Second Schedule to be

levied. - The rates at which duties of excise shall be levied under the
Central Excise Act, 1944 (1 of 1944) are specified in the First Schedule
and the Second Schedule.
11.1.2 Emergency power of Central Government to increase duty of

excise.
1. Where, in respect of any goods, the Central Government is satisfied that

the duty leviable thereon under section 3 of the Central Excise Act, 1944
(1 of 1944) should be increased and that circumstances exist which
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render it necessary to take immediate action, the Central Government

may, by notification in the Official Gazette, direct an amendment of the
First Schedule and the Second Schedule to be made so as to substitute
for the rate of duty specified in the First Schedule and the Second
Schedule in respect of such goods, -
(a) in a case where the rate of duty as specified in the First Schedule
and the Second Schedule as in force immediately before the issue of
such notification is nil, a rate of duty not exceeding fifty per cent ad
valorem expressed in any form or method;
(b) in any other case, a rate of duty which shall not be more than twice
the rate of duty specified in respect of such goods in the First
Schedule and the Second Schedule as in force immediately before
the issue of the said notification.  
 
Provided that the Central Government shall not issue any
notification under this sub-section for substituting the rate of duty in
respect of any goods as specified by an earlier notification issued
under this sub-section by that Government before such earlier
notification has been approved with or without modifications under
subsection (2).
2. Every notification under subsection (1) shall be laid before each House
of Parliament, if it is sitting, as soon as may be after the issue of the
notification, and, if it is not sitting, within seven days of its re-assembly,
and the Central Government shall seek the approval of Parliament to the
notification by a resolution moved within a period of fifteen days
beginning with the day on which the notification is so laid before the
House of the People and if Parliament makes any modification in the
notification or directs that the notification should cease to have effect,
the notification shall thereafter have effect only in such modified form or
be of no effect, as the case may be, but without prejudice to the validity
of anything previously done thereunder.
3. For the removal of doubts, it is hereby declared that any notification

issued under sub-section (1), including any such notification approved
or modified under sub-section (2), may be rescinded by the Central
Government at any time by notification in the Official Gazette.
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Power of Central Government to amend First and Second Schedules. —
1. Where the Central Government is satisfied that it is necessary so to do

in the public interest, it may, be notification in the Official Gazette,
amend the First Schedule and the Second Schedule: 
 
Provided that such amendment shall not alter or affect in any manner
the rates specified in the First Schedule and the Second Schedule in
respect of goods at which duties of excise shall be leviable on the goods
under the Central Excise Act, 1944 (1 of 1944).
2. Every notification issued under subsection (1) shall be laid, as soon as

may be after it is issued, before each House of Parliament, while it is in
session, for a total period of thirty days which may be comprised in one
session or in two or more successive sessions, and if, before the expiry
of the session immediately following the session or the successive
sessions aforesaid, both Houses agree in making any modification in the
notification or both Houses agree that the notification should not be
issued, the notification shall thereafter have effect only in such
modified from or be of no effect, as the case may be; so, however, that
any such modification or annulment shall be without prejudice to the
validity of anything previously done under that notification. 
 
Central excise duties are levied and collected by the central excise
department. Though excise is a central subject, excise duty levy is not
the exclusive prerogative of the Central Government alone. Entry 84 of
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the Union List in the Seventh Schedule to the Constitution empowers

the Central Government to levy and administer duties of excise on
tobacco and other goods manufactured. 
 
Entry 51 of the State list empowers "any State to enact laws to levy
duties of excise on goods in the respective States and to levy counter
veiling duties at the same or lower rates on similar goods produced
elsewhere in India entering the State. 
 
Excise duty is first paid by the manufacturer and then passed on to the
ultimate consumer.
11.1.3 Types of Excise Duty
Excise Duty is of five types:
1. Basic Excise Duty (CENVAT)

2. Special Excise Duty (Auxilliary Duty)
3. Additional Excise Duty
4. Cess (Tax imposed for specific purpose)
5. National Calamity Contingent Duty. (Duty in the nature of surcharge)
11.1.4 Method of Charging Excise Duty
Excise Duty may be charged as a rate on:
1. The Value of goods' to be found by applying various provisions of the

Act or rules made thereunder.; Or
2. The tariff value' declared by the Tariff Act.
Excise Duty also can be levied at a specified rate on the unit, weight,
volume, length or area of goods. The first method of levy is known as Ad
valorem Duty and the latter is called Specific Duty.
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1 1 . 2 C E N T R A L E X C I S E D U T Y- D E F I N I T I O N S A N D
CONDITIONS
11.2.1 Definitions
(a) “adjudicating authority” means any authority competent to pass any

order or decision under this Act, but does not include the Central Board
of Excise and Customs constituted under the Central Boards of
Revenue Act, 1963 (54 of 1963) 
 
(aa) “Appellate Tribunal” means the Customs, Excise and Service Tax
Appellate Tribunal constituted under section 129 of the Customs Act,
1962 (52 of 1962); 
 
(aaa) “broker” or “commission agent” means a person who in the
ordinary course of business makes contracts for the sale or purchase
of excisable goods for others;
(b) “Central Excise Officer” means the Chief Commissioner of Central

Excise, Commissioner of Central Excise, Commissioner of Central
Excise (Appeals), Additional Commissioner of Central Excise, Joint
Commissioner of Central Excise, Deputy Commissioner of Central
Excise, Assistant Commissioner of Central Excise or any other officer of
the Central Excise Department, or any person (including an officer of
the State Government) invested by the Central Board of Excise and
Customs constituted under the Central Boards of Revenue Act, 1963
(54 of 1963) with any of the powers of a Central Excise Officer under
this Act;
(c) “curing” includes wilting, drying, fermenting and any process for
rendering an unmanufactured product fit for marketing or
manufacture;
(d) “excisable goods” means goods specified in the First Schedule and the
Second Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) as
being subject to a duty of excise and includes salt;
(e) “factory” means any premises, including the precincts thereof, wherein
or in any part of which excisable goods other than salt are
manufactured, or wherein or in any part of which any manufacturing
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process connected with the production of these goods is being carried

on or is ordinarily carried on; 
 
(ee) “fund” means the Consumer Welfare Fund established under
section 12C;
(f) “manufacture” includes any process —
(i) incidental or ancillary to the completion of a manufactured product;
(ii) which is specified in relation to any goods in the section or Chapter

notes of The First Schedule to the Central Excise Tariff Act, 1985 (5
of 1986) as amounting to manufacture; or
(iii) which in relation to the goods specified in the Third Schedule,

involves packing or repacking of such goods in a unit container or
labelling or re-labelling of containers including the declaration or
alteration of retail sale price on it or adoption of any other
treatment on the goods to render the product marketable to the
consumer; 
 
And the word “manufacture” shall be construed accordingly and
shall include not only a person who employs hired labour in the
production or manufacture of excisable goods, but also any person
who engages in their production or manufacture on his own
account; 
 
(ff) “National Tax Tribunal” means the National Tax Tribunal
established under section 3 of the National Tax Tribunal Act, 2005
(49 of 2005);
(g) “prescribed” means prescribed by rules made under this Act;
(h) “sale” and “purchase”, with their grammatical variations and cognate
expressions, mean any transfer of the possession of goods by one
person to another in the ordinary course of trade or business for cash
or deferred payment or other valuable consideration;
(i) “wholesale dealer” means a person who buys or sells excisable goods
wholesale for the purpose of trade or manufacture, and includes a
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broker or commission agent who, in addition to making contracts for

the sale or purchase of excisable goods for others, stocks such goods
belonging to others as an agent for the purpose of sale.
(j) For the purposes of the Act, “Goods” would refer to an article which
would ordinarily come to the market to be bought and sold.
The word “manufacture” means to bring into existence a new substance

and does not mean merely to produce some change in a substance. It is
true that etymological word “manufacture” properly construed would
doubtless cover the transformation but the question is whether that
transformation brings about fundamental change, a new substance is
brought into existence or a new different article having distinctive name,
character or use results from a particular process or a particular activity.
Where manufacture involves series of processes and if any one of such

processes is carried on with the aid of power, the case is taken out of the
purview of the notification;
11.2.2 Conditions
Section 3(1) of Central Excise Act Clause (a) has stated that:
"There shall be levied and collected in such manner as may be prescribed,

a duty of excise to be called the "Central Value Added Tax" on all excisable
goods, excluding goods produced or manufactured in special economic
zones, which are produced or manufactured in India as and at the rates,
set forth in the First Schedule to the Central Excise Tariff Act, 1985".
So, the basic conditions for levying excise duty could be listed as given
below:
1. There should be manufacture or production.
2. The result should be goods — which are movable and marketable.
3. The goods should appear in the first schedule to the Central Excise Tariff
Act.
4. The manufacture or production should take place in India.
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5. "Special Economic Zone" is not India for the purpose of Excise Duty.
6. Collection is as per the rules made under the Act.
Persons Liable to Pay Excise Duty
As per the Rule 2(c) of Central Excise Rules 2002, the following are liable
to pay excise duty:
1. Manufacturer/Producer
2. Private warehouse owner
3. Authorised agent of the above.
In rare cases, the purchaser is liable to pay duty. For example ‘mollasses'.
Excisable Goods
Excisable goods means goods specified in the First Schedule to the Central
Excise Tariff Act, 1985 as being subject to a duty of excise and includes
salt.
Non-excisable Goods
The Goods not mentioned in the Schedules to the Tariff Act and the Goods
though mentioned in the Schedules to the Tariff Act, but they are such that
they cannot be moved or marketed.
11.3 VALUATION OF GOODS TO CHARGE EXCISE DUTY
Valuation of excisable goods for purposes of charging of duty of excise.—
1. Where under this Act, the duty of excise is chargeable on any excisable
goods with reference to their value, then, on each removal of the goods,
such value shall—
(a) in a case where the goods are sold by the assessee, for delivery at
the time and place of the removal, the assessee and the buyer of
goods are not related and the price is the sole consideration for the
sale, be the transaction value;
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(b) in any other case, including the case where the goods are not sold,
be the value determined in such manner as may be prescribed. 
 
Explanation.—For the removal of doubts, it is hereby declared that
the price-cum-duty of the excisable goods sold by the assessee shall
be the price actually paid to him for the goods sold and the money
value of the additional consideration, if any, flowing directly or
indirectly from the buyer to the assessee in connection with the sale
of such goods, and such price-cum-duty, excluding sales tax and
other taxes, if any, actually paid, shall be deemed to include the
duty payable on such goods.
2. The provisions of this section shall not apply in respect of any excisable
goods for which a tariff value has been fixed under subsection (2) of
section 3.
3. For the purposes of this section,—
(a) “assessee” means the person who is liable to pay the duty of excise
under this Act and includes his agent;
(b) persons shall be deemed to be “related” if—
i) they are interconnected undertakings;
ii) they are relatives;
iii) amongst them the buyer is a relative and distributor of the

assessee, or a sub-distributor of such distributor; or
iv) they are so associated that they have interest, directly or

indirectly, in the business of each other.
Also, In this clause—
i) “interconnected undertakings” shall have the meaning assigned

to it in clause (g) of section 2 of the Monopolies and Restrictive
Trade Practices Act, 1969 (64 of 1969); and
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ii) “relative” shall have the meaning assigned to it in clause (41) of

section 2 of the Companies Act, 1956 (1 of 1956);
(c) “place of removal” means —
i) a factory or any other place or premises of production or

manufacture of the excisable goods;
ii) a warehouse or any other place on premises wherein the

excisable goods have been permitted to be deposited
without payment of duty;
iii) a depot, premises of a consignment agent or any other place or

premises from where the excisable goods are to be sold after
their clearance from the factory; from where such goods are
removed; 
 
(cc) “time of removal”, in respect of the excisable goods removed
from the place of removal referred to in subclause (iii) of clause
(c), shall be deemed to be the time at which such goods are
cleared from the factory;
(d) “transaction value” means the price actually paid or payable for the
goods, when sold, and includes in addition to the amount charged
as price, any amount that the buyer is liable to pay to, or on behalf
of, the assessee, by reason of, or in connection with the sale,
whether payable at the time of the sale or at any other time,
including, but not limited to, any amount charged for, or to make
provision for, advertising or publicity, marketing and selling
organization expenses, storage, outward handling, servicing,
warranty, commission or any other matter; but does not include the
amount of duty of excise, sales tax and other taxes, if any, actually
paid or actually payable on such goods.
Basis of Excise Duty
Under the Central Excise Act, excise duty is chargeable on the value of the
goods. The Value is the normal price, i.e., the price at which such goods
are ordinarily sold by the assessee to a buyer, where the buyer is not
related person and the price is the sole consideration for sale. Freight and
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insurance charges upto depot would be includible in assessable value for

purposes of excise.
Valuation of Excisable Goods with Reference to Retail Sale Price.
(1) The Central Government may, by notification in the Official Gazette,

specify any goods, in relation to which it is required, under the
provisions of the Standards of Weights and Measures Act, 1976 (60 of
1976) or the rules made there under or under any other law for the
time being in force, to declare on the package thereof the retail sale
price of such goods, to which the provisions of subsection (2) shall
apply.
(2) Where the goods specified under subsection (1) are excisable goods
and are chargeable to duty of excise with reference to value, then,
notwithstanding anything contained in section 4, such value shall be
deemed to be the retail sale price declared on such goods less such
amount of abatement, if any, from such retail sale price as the Central
Government may allow by notification in the Official Gazette.
(3) The Central Government may, for the purpose of allowing any
abatement under sub-section (2), take into account the amount of
duty of excise, sales tax and other taxes, if any, payable on such
goods.
(4) Where any goods specified under subsection (1) are excisable goods
and the manufacturer—
(a) removes such goods from the place of manufacture, without

declaring the retail sale price of such goods on the packages or
declares a retail sale price which is not the retail sale price as
required to be declared under the provisions of the Act, rules or
other law as referred to in subsection (1); or
(b) tampers with, obliterates or alters the retail sale price declared on
the package of such goods after their removal from the place of
manufacture, then, such goods shall be liable to confiscation and
the retail sale price of such goods shall be ascertained in the
prescribed manner and such price shall be deemed to be the retail
sale price for the purposes of this section.
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Explanation 1 — For the purposes of this section, “retail sale price”

means the maximum price at which the excisable goods in packaged form
may be sold to the ultimate consumer and includes all taxes, local or
otherwise, freight, transport charges, commission payable to dealers, and
all charges towards advertisement, delivery, packing, forwarding and the
like and the price is the sole consideration for such sale:
Provided that in case the provisions of the Act, rules or other law as
referred to in sub-section (1) require to declare on the package, the retail
sale price excluding any taxes, local or otherwise, the retail sale price shall
be construed accordingly.
Explanation 2 — For the purposes of this section,—
a) where on the package of any excisable goods more than one retail sale
price is declared, the maximum of such retail sale prices shall be
deemed to be the retail sale price;
b) where the retail sale price, declared on the package of any excisable
goods at the time of its clearance from the place of manufacture, is
altered to increase the retail sale price, such altered retail sale price
shall be deemed to be the retail sale price;
c) where different retail sale prices are declared on different packages for
the sale of any excisable goods in packaged form in different areas,
each such retail sale price shall be the retail sale price for the purposes
of valuation of the excisable goods intended to be sold in the area to
which the retail sale price relates.
Valuation of Goods with Reference to Maximum Retail Price (MRP)
MRP Valuation is adopted in case of notified commodities or goods. The

notification issued in this behalf indicates the extent of Abatement to be
allowed for arriving at the assessable value.
Notified goods are always covered by Standard Weights and Measures Act.
That is to say that they are sold in a "pre-packed condition". None can
know what is inside without opening the package. Therefore, the Standard
Weights and Measures Act forces the manufacturer/seller/packer to label
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the packages and provide the information about the contents and the
manufacturer.
Examples
1. Aerated waters - mineral water bottles or containers (45%)

2. Betel Nut Powder-Supari like (50%)
3. Chocolates (35%)
4. Ice creams (45%)
5. Biscuits (40%)
6. Toothpaste (35%)
The figures in brackets are prescribed by the Government in its Notification

- CE(NT) dated 01-03-02.
Power to Grant Exemption from Duty of Excise
1. If the Central Government is satisfied that it is necessary in the public

interest so to do, it may, by notification in the Official Gazette, exempt
generally either absolutely or subject to such conditions (to be fulfilled
before or after removal) as may be specified in the notification,
excisable goods of any specified description from the whole or any part
of the duty of excise leviable thereon: 
 
Provided that, unless specifically provided in such notification, no
exemption therein shall apply to excisable goods which are produced or
manufactured—
(i) in a free trade zone or a special economic zone and brought to any
other place in India; or
(ii) by a hundred per cent. export-oriented undertaking and brought to

any other place in India.
Explanation — In this provision, “free trade zone” ,“special economic

zone” and “hundred per cent. export-oriented undertaking” shall have
the same meanings as in Explanation 2 to subsection (1) of section 3.
(1A) For the removal of doubts, it is hereby declared that where an

exemption under sub-section (1) in respect of any excisable goods
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from the whole of the duty of excise leviable thereon has been granted
absolutely, the manufacturer of such excisable goods shall not pay the
duty of excise on such goods.
2. If the Central Government is satisfied that it is necessary in the public

interest so to do, it may, by special order in each case, exempt from
payment of duty of excise, under circumstances of an exceptional
nature to be stated in such order, any excisable goods on which duty of
excise is leviable. 
 
(2A) The Central Government may, if it considers it necessary or
expedient so to do for the purpose of clarifying the scope or applicability
of any notification issued under subsection (1) or order issued under
subsection (2) insert an explanation in such notification or order, as the
case may be, by notification in the Official Gazette at any time within
one year of issue of the notification under subsection (1) or order under
subsection (2), and every such explanation shall have effect as if it had
always been the part of the first such notification or order, as the case
may be.
11.4 GOODS CLEARANCE
Central excise duty is to be paid to government at a point of time when the

goods are actually "removed" from the place of manufacture. So, the
excise department has declared that the manufactured goods have to be
"removed on payment of duty" from the place of manufacture or
production. Hence in this case, the ‘Clearance’ means "removal of excisable
goods" from the factory (both dutiable and exempt goods)
There are three types of clearances of excisable goods. They are:
1. Clearance under physical control. – This procedure is used where an

excise officer is physically posted at the clearance gate and he certifies
to clear the goods on payment of duty.
2. Clearance under compound levy scheme. For cottage industry/marble

slabs or cotton fabrics, the excise duty is paid on the basis of specific
periods on productive capacity of the factory.
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3. Clearance under self removal procedure. Periodic/Intermittant checks

are done by the excise officers in this case to ensure proper compliance
of the regulations and payment of duties.
The Case of Small-scale Industries
Excise is a tax on manufacture, and thus, it should be payable by all. But

to consider the growth of small units. And also it is administratively
inconvenient and costly to collect revenue from numerous small units,
Small Scale Industries (SSI) units, with a turnover of less than ` 3 crores,
are eligible for concessions. Excluding some items like pan masala,
tobacco products, marble, watches, VCR and VCP ; which are excisable
without any concessions.
11.5 SALES TAX ACT AND DEFINITIONS
An Act to formulate principles for determining when a sale or purchase of

goods takes place in the course of inter-State trade or commerce or
outside a State or in the course of import into or export from India, to
provide for the levy, collection and distribution of taxes on sales of goods in
the course of inter-State trade or commerce and to declare certain goods
to be of special importance in inter-State trade or commerce and specify
the restrictions and conditions to which State laws imposing taxes on the
sale or purchase of such goods of special importance shall be subject.
1. This Act may be called the Central Sales Tax Act, 1956.
2. It extends to the whole of India
by notification in the Official Gazette, appoint, and different dates may
be appointed for different provisions of this Act.
Definitions
In this Act, unless the context otherwise requires, -
(a) “appropriate State” means -
i) in relation to a dealer who has one or more places of business

situated in the same State, that State;
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ii) in relation to a dealer who has places of business situated in

different States, every such State with respect to the place or places
of business situated within its territory;
(aa) “business” includes -
i) any trade, commerce or manufacture, or any adventure or concern

in the nature of trade, commerce or manufacture, whether or not
such trade, commerce, manufacture, adventure or concern is
carried on with a motive to make gain or profit and whether or not
any gain or profit accrues from such trade, commerce, manufacture,
adventure or concern; and
ii) any transaction in connection with or incidental or ancillary to, such

trade, commerce, manufacture, adventure or concern;
(ab) “crossing the customs frontiers of India” means crossing in the limits
of the area of a customs station in which imported goods or export goods
are ordinarily kept before clearance by customs authorities.
(b) “dealer” means any person who carries on (whether regularly or

otherwise) the business of buying, selling, supplying or distributing
goods, directly or indirectly, for cash or for deferred payment, or for
commission remuneration or other valuable consideration, and includes
-
i) a local authority, a body corporate, a company, any co-operative
society or other society, club, firm, Hindu undivided family or other
association of persons which carries on such business;
ii) a factor, broker, commission agent, delivery agent, or any other

mercantile agent, by whatever name called, and whether of the
same description as hereinbefore mentioned or not, who carries on
the business of buying, selling, supplying or distributing, goods
belonging to any principal whether disclosed or not; and
iii) an auctioneer who carries on the business of selling or auctioning

goods belonging to any principal, whether disclosed or not and
whether the offer of the intending purchaser is accepted by him or
by the principal or a nominee of the principal.
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iv) a Government which, whether or not in the course of business,

buys, sells, supplies or distributes, goods, directly or otherwise, for
cash or for deferred payment or for commission, remuneration or
other valuable consideration, shall except in relation to any sale,
supply or distribution of surplus, unserviceable or old stores or
materials or waste products or obsolete or discarded machinery or
parts or accessories thereof, be deemed to be a dealer for the
purposes of this Act;
(c) “declared goods” means goods declared under section 14 to be of

special importance in inter-State trade or commerce;
(d) “goods” includes all materials, articles, commodities and all other kinds
of movable property, but does not include newspapers actionable
claims, stocks, shares and securities.
(dd) “place of business” includes—
i) in any case where a dealer carries on business through an agent by

(whatever name called), the place of business of such agent;
ii) a warehouse, godown or other place where a dealer stores his

goods; and
iii) a place where a dealer keeps his books of account;
(e) “prescribed” means prescribed by rules made under this Act;
(f) “registered dealer” means a dealer who is registered under section 7;
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(g) “sale”, with its grammatical variations and cognate expressions, means
any transfer of property in goods by one person to another for cash or
deferred payment or for any other valuable consideration, and
includes,—
i) a transfer, otherwise than in pursuance of a contract, of property in

any goods for cash, deferred payment or other valuable
consideration;
ii) a transfer of property in goods (whether as goods or in some other

form) involved in the execution of a works contract;
iii) a delivery of goods on hire-purchase or any system of payment by

instalments;
iv) a transfer of the right to use any goods for any purpose (whether or
not for a specified period) for cash, deferred payment or other
valuable consideration;
v) a supply of goods by any unincorporated association or body of

persons to a member thereof for cash, deferred payment or other
valuable consideration;
vi) a supply, by way of or as part of any service or in any other manner

whatsoever, of goods, being food or any other article for human
consumption or any drink (whether or not intoxicating), where such
supply or service, is for cash, deferred payment or other valuable
consideration, but does not include a mortgage or hypothecation of
or a charge or pledge on goods;
(h) “sale price” means the amount payable to a dealer as consideration for
the sale of any goods, less any sum allowed as cash discount according
to the practice normally prevailing in the trade, but inclusive of any
sum charged for anything done by the dealer in respect of the goods at
the time of or before the delivery thereof other than the cost of freight
or delivery or the cost of installation in cases where such cost is
separately charged: 
 
Provided that in the case of a transfer of property in goods (whether as
goods or in some other form) involved in the execution of a works
! !336
contract, the sale price of such goods shall be determined in the

prescribed manner by making such deduction from the total
consideration for the works contract as may be prescribed and such
price shall be deemed to be the sale price for the purpose of this
clause;
(i) “sales tax law” means any law for the time being in force in any State
or part thereof which provides for the levy of taxes on the sale or
purchase of goods generally or on any specified goods expressly
mentioned in that behalf and includes value added tax law, and
“general sales tax law” means any law for the time being in force in
any State or part thereof which provides for the levy of tax on the sale
or purchase of goods generally and includes value added tax law;
(j) “turnover” used in relation to any dealer liable to tax under this Act
means the aggregate of the sale prices received and receivable by him
in respect of sales of any goods in the course of inter-State trade or
commerce made during any prescribed period and determined in
accordance with the provisions of this Act and the rules made
thereunder;
(ja) “works contract” means a contract for carrying out any work which
includes assembling, construction, building, altering, manufacturing,
processing, fabricating, erection, installation, fitting out, improvement,
repair or commissioning of any movable or immovable property;
(k) “year”, in relation to a dealer, means the year applicable in relation to

him under the general sales tax law of the appropriate State, and
where there is no such year applicable, the financial year.
Note – Electricity and Lottery Tickets are called as goods in terms of sales
tax.
Sale price
The definition of ‘sale price’ is in two parts. The first part says that ‘sale
price’ means the amount payable to a dealer as consideration for the sale
of any goods. The second part which is an inclusive clause, includes any
sum charged for anything done by the dealer in respect of the goods at the
time of or before the delivery thereof other than the cost of freight or
! !337
delivery or the cost of installation in case where such cost is separately

charged. Where the cost of freight is part of the price, it would fall within
the first part.
11.6 DEALERS REGISTRATION
(1) Every dealer liable to pay tax under this Act shall, within such time as
may be prescribed for the purpose, make an application for
registration under this Act to such authority in the appropriate State as
the Central Government may, by general or special order, specify, and
every such application shall contain such particulars as may be
prescribed.
(2) Any dealer liable to pay tax under the sales tax law of the appropriate
State, or where there is no such law in force in the appropriate State
or any part thereof, any dealer having a place of business in that State
or part, as the case may be, may, notwithstanding that he is not liable
to pay tax under this Act, apply for registration under this Act to the
authority referred to in subsection (1), and every such application shall
contain such particulars as may be prescribed.
(2A) Where it appears necessary to the authority to whom an application is

made under sub-section (1) or subsection (2) so to do for the proper
realisation of the tax payable under this Act or for the proper custody and
use of the forms referred to in clause (a) of the first proviso to sub-section
(2) of section 6 or subsection (1) of section 6Aor subsection (4) of section
8, he may, by an order in writing and for reasons to be recorded therein,
impose as a condition for the issue of a certificate of registration a
requirement that the dealer shall furnish in the prescribed manner and
within such time as may be specified in the order such security as may be
so specified, for all or any of the aforesaid purposes.
(3) If the authority to whom an application under subsection (1) or

subsection (2) is made is satisfied that the application is in conformity
with the provisions of this Act and the rules made thereunder and the
condition, if any, imposed under subsection (2A), has been complied
with he shall register the applicant and grant to him a certificate of
registration in the prescribed form which shall specify the class or
classes of goods for the purposes of subsection (1) of section 8.
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(3A) Where it appears necessary to the authority granting a certificate of

registration under this section so to do for the proper realisation of tax
payable under this Act or for the proper custody and use of the forms
referred to in subsection (3A), he may, at any time while such certificate is
in force, by an order in writing and for reasons to be recorded therein,
require the dealer, to whom the certificate has been granted, to furnish
within such time as may be specified in the order and in the prescribed
manner such security, or, if the dealer has already furnished any security in
pursuance of an order under this subsection or subsection (2A), such
additional security, as may be specified in the order, for all or any of the
aforesaid purposes.
(3B) No dealer shall be required to furnish any security and subsection

(2A) or any security or additional security under subsection (3A) unless he
has been given an opportunity of being heard.
(3BB) The amount of security which a dealer may be required to furnish

under sub-section (2A) or sub-section (3A) or the aggregate of the amount
of such security and the amount of additional security which he may be
required to furnish under subsection (3A), by the authority referred therein
shall not exceed -
(a) in the case of a dealer other than a dealer who has made an
application, or who has been registered in pursuance of an
application, under subsection (2), a sum equal to the tax payable
under this Act, in accordance with the estimate of such authority, on
the turnover of such dealer for the year in which such security or, as
the case may be, additional security is required to be furnished; and
(b) in the case of a dealer who has made an application, or who has
been registered in pursuance of an application, under subsection
(2), a sum equal to the tax leviable under this Act, in accordance
with the estimate of such authority on the sales to such dealer in
the course of inter-state trade or commerce in the year in which
such security or, as the case may be additional security is required
to be furnished, had such dealer been not registered under this Act.
(3C) Where the security furnished by a dealer under sub-section (2A) or

subsection (3A) is in the form of a surety bond and the surety becomes
insolvent or dies, the dealer shall, within thirty days of the occurrence of
! !339
any of the aforesaid events, inform the authority granting the certificate of
registration and shall within ninety days of such occurrence furnish a fresh
surety bond or furnish in the prescribed manner other security for the
amount of the bond.
(3D) The authority granting the certificate of registration may by order and
for good and sufficient cause forfeit the whole or any part of the security
furnished by a dealer, -
(a) for realising any amount of tax or penalty payable by the dealer;
(b) if the dealer is found to have misused any of the forms referred to
in subsection (2A) to have failed to keep them in proper custody:
Provided that no order shall be passed under this sub-section
without giving the dealer an opportunity of being heard.
(3E) Where by reason of an order under sub-section (3D), the security

furnished by any dealer is rendered insufficient, he shall make up the
deficiency is such manner and within such time as may be prescribed.
(3F) The authority issuing the forms referred to in subsection (2A) may
refuse to issue such forms to a dealer who has failed to comply with an
order under that subsection or subsection (3A), or with the provisions of
subsection (3C) or subsection (3E), until the dealer has complied with such
order or such provisions, as the case may be.
(3G) The authority granting a certificate of registration may, on application

by the dealer to whom it has been granted, order the refund of any amount
or part thereof deposited by the dealer by way of security under this
section, if it is not required for the purposes of this Act.
(3H) Any person aggrieved by an order passed under subsection (2A),

subsection (3A), subsection (3D) or subsection (3G) may, within thirty
days of the service of the order on him, but after furnishing the security,
prefer, in such form and manner as may be prescribed, an appeal against
such order to such authority (hereinafter this section referred to as the
“appellate authority”) as may be prescribed:
Provided that the appellate authority may, for sufficient cause, permit such
person to present the appeal -
! !340
(a) after the expiry of the said period of thirty days; or
(b) without furnishing the whole or any part of such security.
(3-I) The procedure to be followed in hearing any appeal under subsection

(3H), and the fees payable in respect of such appeals shall be such as may
be prescribed.
(3J) The order passed by the appellate authority in any appeal under
subsection (3H) shall be final.
(4) A certificate of registration granted under this section may—
(a) either on the application of the dealer to whom it has been granted
or, where no such application has been made, after due notice to
the dealer, be amended by the authority granting it if he is satisfied
that by reason of the registered dealer having changed the name,
place or nature of his business or the class or classes of goods in
which he carries on business or for any other reason the certificate
of registration granted to him requires to be amended; or
(b) be cancelled by the authority granting it where he is satisfied, after

due notice to the dealer to whom it has been granted, that he has
ceased to carry on business 8 or has ceased to exist or has failed
without sufficient cause, to comply with an order under subsection
(3A) or with the provisions of subsection (3C) or subsection (3E) or
has failed to pay any tax or penalty payable under this Act, or in the
case of a dealer registered under subsection (2) has ceased to be
liable to pay tax under the sales tax law of the appropriate State or
for any other sufficient reason.
(5) A registered dealer may apply in the prescribed manner not later than
six months before the end of a year to the authority which granted his
certificate of registration for the cancellation of such registration, and
the authority shall, unless the dealer is liable to pay tax under this Act,
cancel the registration accordingly, and where he does so, the
cancellation shall take effect from the end of the year.
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Registration Procedure
The application for registration should be made in Form A in accordance

with the CST Rules 1957 within 30 days from the date when dealer
becomes liable to CST. The application has to be signed by –
(a) Proprietor of business in the case of sole proprietorship firm.
(b) One of the partners in case of business owned by partnership firm.
(c) Karta or Manager in the case of HUF.
(d) Director or Principal Officer of company in the case of a company.
(e) Any officer authorised by the government in the case of government.
If a dealer has places of business in different States, he is required lo

obtain separate registration in each State. However, where the dealer has a
single place of business in the appropriate State, he is required to apply to
the prescribed authority of that State only to obtain registration. Where he
has more than one place of business within the same State, he is required
to obtain only one registration certificate incorporating additional places of
business.
When the assessing authority is satisfied that the application so made by

the dealer for registration, is in conformity with the provision of the CST
Act, the dealer will be granted a certificate in Form B and a copy of the
same will be issued for every additional place of business in that State.
While the original certificate of registration is required to be kept at the
principal place of business, copies of the certificate are required to be kept
at each additional place of business in the State.
The certificate of registration will be granted normally within a month from

the date of application. However, when the dealer has not been informed
about the registration within a month, the application is deemed to have
been accepted. When the certificate is granted, the dealer is expected to
verify the same and ensure that the certificate contains all the relevant
particulars. He can apply to the sales tax authority in case of omission, if
any, found on the certificate.
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Registration is effective from the date on which application for registration

is made, even if registration is granted subsequently. If registration is
made after Inter-State sale, the date of registration is the date of first
inter-state sales. In other words, the effective date of registration is the
date of application for registration or date of first inter-State sale
whichever is earlier.
Certificate of registration once issued is non-transferable. When the dealer

sells his business, the buyer has to apply for fresh registration. When there
is retirement, death or addition of a partner, then the registration
certificate has to be amended.
The sales tax authority can refuse registration after the dealer is given an
opportunity of being heard and the grounds for refusal should be recorded.
11.7 INTER-STATE SALES TAX
11.7.1 Inter-State Trade -
A sale or purchase of goods shall be deemed to take place in the course of

inter-State trade or commerce if the sale or purchase, -
(a) occasions the movement of goods from one State to another; or
(b) is effected by a transfer of documents of title to the goods during their

movement from one State to another.
Commodity tax laws deal with taxes on commodities. The tax on

commodities may be in the form of-
(i) octroi or terminal tax when goods enter a local area, or

(ii) excise when goods are manufactured or produced, or
(iii) customs when goods are imported or exported, or
(iv) sales tax when goods are sold, supplied or distributed.
In India, goods are subject to multiple taxation. Various organs of the

State levy these taxes which are a compulsory imposition under statutory
power. There is no direct relation between the tax-payer and the authority
levying the tax. A tax can, however, be levied only when a statutory power
is conferred on the taxing authority by a competent legislative body.
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The Central Sales Tax Act, 1956, came into force on January 5, 1957 and
it extends to the whole of India including the State of Jammu and Kashmir.
The Central Sales Tax Act formulates principles for determining when a sale
or purchase of goods takes place (a) in the course of inter-State trade of
commerce, (b) outside a State or (c) in the course of import into or export
from India.
When is a Sale or Purchase of Goods Said to Take Place outside a State (1)
Subject to the provisions contained in section 3, when a sale or purchase of
goods is determined in accordance with subsection (2) to take place inside
a State, such sale or purchase shall be deemed to have taken place outside
all other States.
(2) A sale or purchase of goods shall be deemed to take place inside a

State, if the goods are within the State—
a) in the case of specific or ascertained goods, at the time the contract

of sale is made; and
b) in the case of unascertained or future goods, at the time of their

appropriation to the contract of sale by the seller or by the buyer,
whether assent of the other party is prior or subsequent to such
appropriation.
Note - Where there is a single contract of sale or purchase of goods

situated at more places than one, the provisions of this subsection shall
apply as if there were separate contracts in respect of the goods at each of
such places.
Since the bonded warehouses are located in ports, they are within the
borders of the concerned State. Sales made to ships are often claimed as
sales outside the State or as sales in the course of export. The principles
laid down in section 4 (2) of the Act would apply in such cases and the
sales would be held as internal sales. The goods are intended for
consumption on board during voyage and hence there is no destination for
their export. So, they can’t be considered as sales in the course of export.
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11.7.2 Liability to Tax on Inter-State Sales
(1) Subject to the other provisions contained in this Act, every dealer
shall, with effect from such date as the Central Government may, by
notification in the Official Gazette, appoint, not being earlier than thirty
days from the date of such notification, be liable to pay tax under this
Act on all sales of goods other than electrical energy effected by him
in the course of inter-State trade or commerce during any year on and
from the date so notified: 
 
Provided that a dealer shall not be liable to pay tax under this Act on
any sale of goods which, in accordance with the provisions of
subsection (3) of section 5 is a sale in the course of export of those
goods out of the territory of India.
(1A) A dealer shall be liable to pay tax under this Act on a sale of any
goods effected by him in the course of inter-State trade or commerce
notwithstanding that no tax would have been leviable (whether on the
seller or the purchaser) under the sales tax law of the appropriate State if
that sale had taken place inside that State.
(2) Notwithstanding anything contained in sub-section (1) or subsection

(1A), where a sale of any goods in the course of inter-State trade or
commerce has either occasioned the movement of such goods from
one State to another or has been effected by a transfer of documents
of title to such goods during their movement from one State to
another, any subsequent sale during such movement effected by a
transfer of documents of title to such goods to a registered dealer, if
the goods are of the description referred to in subsection (3) of section
8, shall be exempt from tax under this Act: 
 
Provided that no such subsequent sale shall be exempt from tax under
this sub-section unless the dealer effecting the sale furnishes to the
prescribed authority in the prescribed manner and within the
prescribed time or within such further time as that authority may, for
sufficient cause, permit,—
a) a certificate duly filled and signed by the registered dealer from

whom the goods were purchased containing the prescribed
! !345
particulars in a prescribed form obtained from the prescribed

authority; and
b) if the subsequent sale is made to a registered dealer, a declaration

referred to in sub-section (4) of section 8: 
 
Provided further that it shall not be necessary to furnish the
declaration referred to in clause (b) of the preceding proviso in
respect of a subsequent sale of goods if,—
(a) the sale or purchase of such goods is, under the sales tax law of
the appropriate State exempt from tax generally or is subject to
tax generally at a rate which is lower than three per cent. or such
reduced rate as may be notified by the Central Government, by
notification in the Official Gazette, under subsection (1) of section
8 (whether called a tax or fee or by any other name); and
(b) the dealer effecting such subsequent sale proves to the

satisfaction of the authority referred to in the preceding proviso
that such sale is of the nature referred to in this sub-section.
(3) Notwithstanding anything contained in this Act, no tax under this Act
shall be payable by any dealer in respect of sale of any goods made by
such dealer, in the course of inter-State trade or commerce, to any
official, personnel, consular or diplomatic agent of—
i) any foreign diplomatic mission or consulate in India; or
ii) the United Nations or any other similar international body,
entitled to privileges under any convention or agreement to which

India is a party or under any law for the time being in force, if such
official, personnel, consular or diplomatic agent, as the case may be,
has purchased such goods for himself or for the purposes of such
mission, consulate, United Nations or other body.
(4) The provisions of subsection (3) shall not apply to the sale of goods
made in the course of inter-State trade or commerce unless the dealer
selling such goods furnishes to the prescribed authority a certificate in
the prescribed manner on the prescribed form duly filled and signed by
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the official, personnel, consular or diplomatic agent, as the case may

be.
11.7.3 Rates of Tax on Sales in the Course of Inter-State Trade or

Commerce
(1) Every dealer, who in the course of inter-State trade or commerce, sells
to a registered dealer goods of the description referred to in subsection
(3), shall be liable to pay tax under this Act, which shall be 3[two per
cent] of his turnover or at the rate applicable to the sale or purchase of
such goods inside the appropriate State under the sales tax law of that
State, whichever is lower: 
 
Provided that the Central Government may, by notification in the
Official Gazette, reduce the rate of tax under this subsection.
(2) The tax payable by any dealer on his turnover in so far as the turnover
or any part thereof relates to the sale of goods in the course of inter-
State trade or commerce not falling within sub-section (1), shall be at
the rate applicable to the sale or purchase of such goods inside the
appropriate State under the sales tax law of that State.
Exemption from sales tax
When sale or purchase is exempted from sales tax under the local Act,
goods manufactured by registered small scale industry is exempted from
local sales tax for five years but not from Central Sales Tax.
Rate of Tax in Inter-State Trade
Section 8 of the Act deals with inter State Tax Inter–State Sales tax is
charged at different rates depending upon the status of the buyer and
category of goods . To summarize the rates of inter–state tax for
declared goods as prescribed under the Act, the rates are as follows :
Rates of Inter State Sales Tax
(a) For declared goods : 4% on sale to Government

4% on sale to dealers for re-sale
As per State rates for all other sale.
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(b) For Non-declared Goods : 4% on sale to Government

4% on sale to authorized dealers
10% on all other sales
Subsection (5) of Section of the Act empowers the State Government to

exempt or reduce the rate of tax, if it is satisfied that it is necessary in the
public interest. In other words State Government is empowered to exempt
tax or levy a lower rate of tax in respect of inter-State sale or purchase of
such goods which takes place that State. Such information is given through
notification in the Official Gazette
11.8 DETERMINATION OF TURNOVER
(1) In determining the turnover of a dealer for the purpose of this Act, the
following deductions shall be made from the aggregate of the sale
prices, namely :
(a) the amount arrived at applying the following formula : 

(rate of tax × aggregate of sale prices) (100 + rate of tax) 
 
PROVIDED that no deduction on the basis of the above formula
shall be made if the amount by way of tax collected by a registered
dealer, in accordance with the provisions of this Act, has been
otherwise deducted from the aggregate of sale prices. 
 
Explanation : Where the turnover of a dealer is taxable at different
rates, the aforesaid formula shall be applied separately in respect of
each part of the turnover liable to a different rate of tax;
(b) the sale price of all goods returned to the dealer by the purchasers
of such goods, -
i) within a period of three months from the date of delivery of the

goods, in the case of goods returned before the 14th day of May,
1966;
ii) within a period of six months from the date of delivery of the
goods in the case of goods returned on or after the 14th day of
May, 1966 :
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PROVIDED that satisfactory evidence of such return of goods and of

refund or adjustment in accounts of the sale price thereof is produced
before the authority competent to assess or, as the case may be,
reassess the tax payable by the dealer under this Act; and
(c) such other deductions as the Central Government may, having

regard to the prevalent market conditions, facility of trade and
interests of consumers, prescribe.
(2) Save as otherwise provided in subsection (1), in determining the

turnover of a dealer for the purposes of this Act, no deduction shall be
made from the aggregate of the sale prices.
11.9 LEVY AND COLLECTION OF TAX AND PENALTIES
(1) The tax payable by any dealer under this Act on sales of goods
effected by him in the course of inter-State trade or commerce,
whether such sales fall within clause (a) or clause (b) of section 3,
shall be levied by the Government of India and the tax so levied shall
be collected by that Government in accordance with the provision of
subsection (2), in the State from which the movement of the goods
commenced: 
 
Provided that, in the case of a sale of goods during their movement
from one State to another, being a sale subsequent to the first sale in
respect of the same goods and being also a sale which does not fall
within subsection (2) of section 6, the tax shall be levied and collected
—
a) where such subsequent sale has been effected by a registered

dealer, in the State from which the registered dealer obtained or, as
the case may be, could have obtained, the form prescribed for the
purposes of subsection (4) of section 8 in connection with the
purchase of such goods; and
b) where such subsequent sale has been effected by an unregistered

dealer in the State from which such subsequent sale has been
effected.
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(2) Subject to the other provisions of this Act and the rules made
thereunder, the authorities for the time being empowered to assess,
re-assess, collect and enforce payment of any tax under general sales
tax law of the appropriate State shall, on behalf of the Government of
India, assess re-assess, collect and enforce payment of tax, including
any interest or penalty, payable by a dealer under this Act as if the tax
or interest or penalty payable by such a dealer under this Act is a tax
or interest or penalty payable under the general sales tax law of the
State; and for this purpose they may exercise all or any of the powers
they have under the general sales tax law of the State; and the
provisions of such law, including provisions relating to returns,
provisional assessment, advance payment of tax, registration of the
transferee of any business, imposition of the tax liability of a person
carrying on business on the transferee of, or successor to, such
business, transfer of liability of any firm or Hindu undivided family to
pay tax in the event of the dissolution of such firm or partition of such
family, recovery of tax from third parties, appeals, reviews, revisions,
references, refunds, rebates, penalties, charging or payment of
interest, compounding of offences and treatment of documents
furnished by a dealer as confidential, shall apply accordingly:
Provided that if in any State or part thereof there is no general sales tax
law in force, the Central Government may, be rules made in this behalf
make necessary provision for all or any of the matter specified in this
subsection.
(2B) If the tax payable by any dealer under this Act is not paid in time, the
dealer shall be liable to pay interest for delayed payment of such tax and
all the provisions for delayed payment of such tax and all the provisions
relating to due date for payment of tax, rate of interest for delayed
payment of tax, of the general sales tax law of each State, shall apply in
relation to due date for payment of tax, rate of interest for delayed
payment of tax, and assessment and collection of interest for delayed
payment of tax under this Act in such States as if the tax and the interest
payable under this Act were a tax and an interest under such sales tax law.
(3) The proceeds in any financial year of any tax, including any interest or
penalty levied and collected under this Act in any State (other than a
Union Territory) on behalf of the Government of India shall be assigned
! !350
to the State and shall be retained by it; and the proceeds attributable
to Union territories shall form part of the Consolidated Fund of India.
Penalties
If any person—(a) furnishes a declaration under subsection (2) of section 6

or sub-section (1) of section 6A or sub-section (4)or subsection (8) of
section 8, which he knows, or has reason to believe, to be false; or
(aa) fails to get himself registered as required by section 7 or fails to

comply with an order under subsection (3A) or with the requirements of
subsection 3(C) or subsection (3E) of that section;
(b) being a registered dealer, falsely represents when purchasing any class
of goods that goods of such class are covered by his certificate of
registration; or
(c) not being a registered dealer, falsely represents when purchasing

goods in the course of inter-State trade or commerce that he is a
registered dealer; or
(d) after purchasing any goods for any of the purposes specified
in 4[clause (b) or clause (c) or clause (d)] of subsection (3) or
subsection (6) of section 8 fails, without reasonable excuse, to make
use of the goods for any such purpose;
(e) has in his possession any form prescribed for the purpose of sub-
section (4) or sub-section (8) of section 8 which has not been obtained
by him or by his principal or by his agent in accordance with the
provisions of this Act or any rules made thereunder;
(f) collects any amount by way of tax in contravention of the provisions

contained in section 9A,he shall be punishable with simple
imprisonment which may extend to six months, or with fine or with
both; and when the offence is a continuing offence, with a daily fine
which may extend to fifty rupees for every day during which the
offence continues.
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Imposition of Penalty in Lieu of Prosecution
(1) If any person purchasing goods is guilty of an offence under clause (b)
or clause (c) or clause (d) of section 10, the authority who granted to
him or, as the case may be, is competent to grant to him a certificate
of registration under this Act may, after giving him a reasonable
opportunity of being heard, by order in writing, impose upon him by
way of penalty a sum not exceeding one and a half times the tax which
would have been levied under subsection (2) of section 8 in respect of
the sale to him of the goods, if the sale had been a sale falling within
that subsection: 
 
Provided that no prosecution for an offence under section 10 shall be
instituted in respect of the same facts on which a penalty has been
imposed under this section.
(2) The penalty imposed upon any dealer under subsection (1) shall be
collected by the Government of India in the manner provided in
subsection (2) of section 9—
a) in the case of an offence falling under clause (b) or clause (d) of

section 10, in the State in which the person purchasing the goods
obtained the form prescribed for the purposes of sub-section (4) of
section 8 in connection with the purchase of such goods;
b) in the case of an offence falling under clause (c) of section 10, in

the State in which the person purchasing the goods should have
registered himself if the offence had not been committed.
Phasing out CST
The Central Government has introduced the Taxation Laws (Amendment)

Bill, 2007, to phase out the Central Sales Tax (CST) in stages, leading to its
eventual abolition in three to four years.
The abolition of the CST on inter-State sale of goods to registered dealers

is aimed at ushering in an integrated Goods and Services Tax (GST) at the
Central level which is proposed to be introduced from April 1,2016. Piloting
the amendment Bill in the Lok Sabha, Finance Minister informed members
that in the CST percentage will be reduced in stages and eventually
! !352
abolished by March 31,2016, to pave the way for introduction of the GST
from April 1, 2016.
11.10 VAT – CONCEPT AND ADVANTAGES
11.10.1 Concept of VAT
The design of State-level VAT has been worked out by the Empowered
Committee through several rounds of discussion and striking a federal
balance between the common points of convergence regarding VAT and
flexibility for the local characteristics of the States. Since the State-level
VAT is centred around the basic concept of “set-off” for the tax paid earlier,
the needed common points of convergence also relate to this concept of
set-off/input tax credit, its coverage and related issues as elaborated
below.
The MODVAT (Modified Value Added Tax) scheme was introduced with
effect from May 1, 1986. Initially it covered selected items in only 37
Chapters which was gradually extended to 77 Chapters. Textile sector was
brought under MOD VAT in 1996 and the tobacco sector in 2000. MODVAT
was extended to the capital goods sector with effect from March 1. 1994.
MODVAT was renamed as CENVAT (Central Value Added Tax) with effect
from April 1,2000. Further, the Service Tax was brought under the head of
CENVAT. State level Value Added Tax was introduced in most States from
April 1, 2005. Now, GST implication from April 1st, 2016 is expected to
abolish VAT in all states.
! !353
Set-off/Input Tax Credit
The essence of VAT is in providing set-off for the tax paid earlier, and this is
given effect through the concept of input tax credit/rebate. This input tax
credit in relation to any period means setting off the amount of input tax
by a registered dealer against the amount of his output tax. The Value
Added Tax (VAT) is based on the value addition to the goods, and the
related VAT liability of the dealer is calculated by deducting input tax credit
from tax collected on sales during the payment period (say, a month).
11.10.2 Advantages of VAT
The introduction of VAT has the following advantages -
• a set-off is given for input tax as well as tax paid on previous purchases.
• other taxes, such as turnover tax, surcharge, additional surcharge, etc.

are abolished.
• overall tax burden is rationalized.
• prices, in general, tend to fall.
• Dealers can submit their self-assessment.
• transparency increases.
• higher revenue growth is observed.
• double taxation with cascading effect is eliminated.
• inter-State tax, like Central Sales Tax, will not be necessary.
• overall tax burden in process of goods and services is rationalized.
• existing system of inspection is replaced by built in assessment by the

dealers.
• makes the tax structure, simple and efficient.
! !354
• improves tax compliance.
• coordinates revenue growth with development by Ad Valorem rate of tax.
• there is fair and healthy competition in the interest of consumers.
The VAT will therefore help common people, traders, industrialists and also
the Government. It is indeed a move towards more efficiency, equal
competition and fairness in the taxation system.
11.11 VAT – PROCEDURES AND PENALTIES
11.11.1 Procedures of VAT registration and Collection
The following procedures were recommended in a white paper before

implication of VAT, and subsequently, they were applied to bring VAT into
practice.
Registration, Small Dealers and Composition Scheme
Registration of dealers with gross annual turnover above ` 5 lakh will be

compulsory. There will be provision for voluntary registration. All existing
dealers will be automatically registered under the VAT Act. A new dealer
will be allowed 30 days time from the date of liability to get registered.
Small dealers with gross annual turnover not exceeding ` 5 lakh will not be
liable to pay VAT. States will have flexibility to fix threshold limit within ` 5
lakh.
Small dealers with annual gross turnover not exceeding ` 50 lakh who are
otherwise liable to pay VAT, shall however have the option for a
composition scheme with payment of tax at a small percentage of gross
turnover. The dealers opting for this composition scheme will not be
entitled to input tax credit.
Tax Payer’s Identification Number (TIN)
The Tax Payer’s Identification Number will consist of 11 digit numerals

throughout the country. First two characters will represent the State Code
as used by the Union Ministry of Home Affairs. The set-up of the next nine
characters may, however, be different in different States.
! !355
Coverage of Set-Off/Input Tax Credit
This input tax credit will be given for both manufacturers and traders for
purchase of inputs/supplies meant for both sale within the State as well as
to other States, irrespective of when these will be utilised/sold. This also
reduces immediate tax liability.
Even for stock transfer/consignment sale of goods out of the State, input
tax paid in excess of 4% will be eligible for tax credit.
Carrying Over of Tax Credit
If the tax credit exceeds the tax payable on sales in a month, the excess
credit will be carried over to the end of next financial year. If there is any
excess unadjusted input tax credit at the end of second year, then the
same will be eligible for refund. Input tax credit on capital goods will also
be available for traders and manufacturers. Tax credit on capital goods may
be adjusted over a maximum of 36 equal monthly instalments.
The States may at their option reduce this number of instalments. There
will be a negative list for capital goods (on the basis of principles already
decided by the Empowered Committee) not eligible for input tax credit.
Treatment of Exports
For all exports made out of the country, tax paid within the State will be
refunded in full, and this refund will be made within three months. Units
located in SEZ and EOU will be granted either exemption from payment of
input tax or refund of the input tax paid within three months.
Inputs Procured from Other States
Tax paid on inputs procured from other States through inter-State sale and
stock transfer will not be eligible for credit. However, a decision has been
taken for duly phasing out of inter-State sales tax or Central sales tax. As a
preparation for that, a comprehensive inter-State tax information exchange
system is also being set up.
! !356
Issue of Tax Invoice, Cash Memo or Bill
This entire design of VAT with input tax credit is crucially based on
documentation of tax invoice, cash memo or bill. Every registered dealer,
having turnover of sales above an amount specified, shall issue to the
purchaser serially numbered tax invoice with the prescribed particulars.
This tax invoice will be signed and dated by the dealer or his regular
employee, showing the required particulars. The dealer shall keep a
counterfoil or duplicate of such tax invoice duly signed and dated. Failure
to comply with the above will attract penalty.
Returns
Under VAT, simplified form of returns will be notified. Returns are to be

filed monthly/quarterly as specified in the State Acts/Rules, and will be
accompanied with payment challans. Every return furnished by dealers will
be scrutinized expeditiously within prescribed time limit from the date of
filing the return. If any technical mistake is detected on scrutiny, the dealer
will be required to pay the deficit appropriately.
Procedure of Self-Assessment of VAT Liability
The basic simplification in VAT is that VAT liability will be self-assessed by

the dealers themselves in terms of submission of returns upon setting off
the tax credit. Return forms as well as other procedures will be simple in all
States.
There will no longer be compulsory assessment at the end of each year as

is existing now. If no specific notice is issued proposing departmental audit
of the books of accounts of the dealer within the time limit specified in the
Act, the dealer will be deemed to have been self-assessed on the basis of
returns submitted by him.
Because of the importance of the concept of self-assessment in VAT,

provision for “self-assessment” will be stated in the VAT Bills of the States.
Audit
Correctness of self-assessment will be checked through a system of

Departmental Audit. A certain percentage of the dealers will be taken up
! !357
for audit every year on a scientific basis. If, however, evasion is detected
on audit, the concerned dealer may be taken up for audit for previous
periods. This Audit Wing will remain delinked from tax collection wing to
remove any bias. The audit team will conduct its work in a time bound
manner and audit will be completed within six months. The audit report will
be transparently sent to the dealer also.
Simultaneously, a cross-checking, computerised system is being worked

out on the basis of coordination between the tax authorities of the State
Governments and the authorities of Central Excise and Income Tax to
compare constantly the tax returns and set-off documents of VAT system
of the States and those of Central Excise and Income Tax. This
comprehensive cross-checking system will help reduce tax evasion and also
lead to significant growth of tax revenue. At the same time, by protecting
transparently the interests of tax-complying dealers against the unfair
practices of tax-evaders, the system will also bring in more equal
competition in the sphere of trade and industry.
Other Taxes
As mentioned earlier, all other existing taxes such as turnover tax,

surcharge, additional surcharge and Special Additional Tax (SAT) would be
abolished. There will not be any reference to these taxes in the VAT Bills.
The States that have already introduced entry tax and intend to continue
with this tax should make it vatable. If not made vatable, entry tax will
need to be abolished. However, this will not apply to entry tax that may be
levied in lieu of octroi.
Coverage of Goods under VAT
In general, all the goods, including declared goods are covered under VAT
and are enjoying the benefit of input tax credit. The only few goods which
are outside VAT are liquor, lottery tickets, petrol, diesel, aviation turbine
fuel and other motor spirit since their prices are not fully market
determined. These will continue to be taxed under the Sales Tax Act or any
other State Act or even by making special provisions in the VAT Act itself,
and with uniform floor rates decided by the Empowered Committee.
! !358
VAT Rates and Classification of Commodities
Under the VAT system covering about 550 goods, there are only two basic
VAT rates of 4% and 12.5%, plus a specific category of tax-exempted
goods and a special VAT rate of 1% only for gold and silver ornaments, etc.
Thus the multiplicity of rates in the existing structure is done away with
under the VAT system.
Under exempted category, there are about 46 commodities comprising of

natural and unprocessed products in unorganized sector, items which are
legally barred from taxation and items which have social implications.
Included in this exempted category is a set of maximum of 10 commodities
flexibly chosen by individual States from a list of goods (finalised by the
Empowered Committee) which are of local social importance for the
individual States without having any inter-state implication. The rest of the
commodities in the list are common for all the States. Under 4% VAT rate
category, there are largest number of goods (about 270), common for all
the States, comprising of items of basic necessities such as medicines and
drugs, all agricultural and industrial inputs, capital goods and declared
goods. The schedule of commodities are attached to the VAT Bill of every
State. The remaining commodities, common for all the States, are falling
under the general VAT rate of 12.5%.
In terms of decision of the Empowered Committee, VAT on AED items

relating to sugar, textile and tobacco, because of initial organisational
difficulties, is not imposed for one year after the introduction of VAT. The
position will be reviewed shortly.
For successful implementation of State-level VAT, close interaction with

trade and industry is specially important. The Empowered Committee has
therefore also set up a Consultative Committee with one representative
from each of the national level trade organisations and national level
chambers of commerce and industry. This Committee has already started
interacting with the Empowered Committee. This process of interaction is
going on regularly to discuss issues and sort out problems of
implementation of VAT. Such Consultative Committees has also been set up
at the level of each State, and interaction with the State Government is
going on in a similarly regular manner.
! !359
11.11.2 Offences and penalty
(1) Whoever knowingly,-
a) not being a registered dealer under this Act, represents that he is or

was a registered dealer at the time when he sells or buys goods, or
b) furnishes a false return, or
c) produces before the Commissioner or the Tribunal, a false bill, cash

memorandum, voucher, declaration, certificate or other document
referred to in subsection (4) of section 29, or
d) keeps false account of the value of goods bought or sold by him in

contravention of subsection (1) of section 63, or
e) produces false accounts, registers or documents or knowingly

furnishes false information, or
f) issues to any person any certificate or declaration, under the Act,

rules or notifications, or a bill, cash memorandum, voucher, delivery
challan, lorry receipt or other document which he knows or has
reason to believe to be false, or
g) falsely represents that he is authorised under section 82 to appeal

before any authority in any proceeding, shall, on conviction, be
punished with rigorous imprisonment for a term which shall not be
less than one month but which may extend to one year and with
fine.
(2) Whoever willfully attempts in any manner whatsoever to evade any

tax leviable or payment of any tax, penalty or interest under this Act,
shall, on conviction, be' punished with rigorous imprisonment which
shall not be less than three months but which may extend to one year
and with fine.
(3) Whoever,-
a) fails, without sufficient cause, to comply with, the requirements of

subsection (3) of section 14, or
! !360
b) is engaged in business as a dealer without being registered under

section16, or
c) fails, without sufficient cause, to obtain, in lieu of the existing

certificate of registration, or
d) fails, without sufficient cause to furnish any information required by

section 18, or
e) fails, without sufficient cause to furnish a declaration or, as the case

may be, a revised declaration as provided in subsection (1) of
section 19 or, fails without sufficient cause to communicate the
permanent account number obtained under the Income Tax Act,
1961 or, as the case may be, fails to state whether he has applied
for the same and fails without sufficient cause to provide the details
of the application as provided in subsection (2) of section 19, or
f) fails, without sufficient cause, to furnish any return or, as the case
may be, a complete and selfconsistent return as required by section
20 by the date and in the manner prescribed, or
g) fails, without sufficient cause, to pay the tax deductible at source or

to deduct at source such tax, or fails without sufficient cause to
obtain the sales tax deduction account number or fails without
sufficient cause to file a return as required under the provisions of
section 31, or
h) fails, without sufficient cause, to comply with the requirements of

the notice issued under subsection (1)
i) fails, without sufficient cause, to comply with the requirements of

any order issued under subsection (1) of section 35, or
j) fails, without sufficient cause, to comply with the requirements of

any order issued under subsection (3) of section 38, or
k) fails, without sufficient cause, to comply with the requirements of

section 42, or
! !361
l) without reasonable cause, contravenes any of the previsions of

section 60, or
m) fails, without sufficient cause, to get his accounts audited or furnish

the report of the audit, shall, on conviction, be punished with simple
imprisonment for a term which may extend to six months and with
fine.
(4) Whoever aids or abets or induces any person in commission of any act
specified in subsection (1) or (2) shall, on conviction, be punished with
simple imprisonment which shall not be less than one month but which
may extend to one year and with fine and whoever, aids, abets or
induces any person in commission of any act specified in sub-section
(3) shall, on conviction, be punished with simple imprisonment which
may extend to one month and with fine.
(5) Whoever commits any of the acts specified in subsections (1) to (4)
and the offence is a continuing one under any of the provisions of
these subsections, shall, on conviction, be punished with daily fine not
less than rupees one hundred during the period of the continuance of
the offence, in addition to the punishments provided under this
section.
(6) Where a dealer is accused of an offence specified in sub-section (1),

(2) or (3), the person deemed to be the manager of the business of
such dealer under section 19 shall also be deemed to be guilty of such
offence, unless he proves that the offence was committed without his
knowledge or that he exercised all due diligence to prevent the
commission thereof.
(7) In any prosecution for an offence under this section, which requires a
culpable mental state on the part of the accused, the court shall
presume the existence of such mental state, but it shall be
a defence for the accused to prove the fact that he had no such mental
state with respect to the act charged as an offence in that prosecution.
Offences by companies
(1) Where an offence under this Act or the rules made thereunder has
been committed by a business entity, every person who at the time
! !362
the offence was committed, was incharge of, and was responsible to,
the business entity for the conduct of the business of the business
entity as well as the business entity shall be deemed to be guilty of the
offence and shall be liable to be proceeded against and punished
accordingly: 
 
PROVIDED that, nothing contained in this subsection shall render any
such person liable to any punishment provided in this Act if he proves
that the offence was committed without his knowledge or that he
exercised all due diligence to prevent the commission of such offence,
(2) Notwithstanding anything contained in subsection (1), where

an offence under this Act or rules made thereunder has been
committed by a business entity and it is proved that the offence has
been committed with the consent or connivance of, or is attributable to
any neglect on the part of any director, Manager, secretary or other
officer of the business entity, such director, manager, secretary or
other officer shall also be deemed to be guilty of that offence and shall
be liable to be proceeded against and punished accordingly.
(3) Where an offence under this Act has been committed by a Hindu
Undivided Family, the Karta thereof shall be deemed to be guilty of the
offence and shall be liable to be proceeded against and on conviction,
punished accordingly: 
 
PROVIDED that, nothing contained in this subsection shall render
the Karta liable to any punishment if he proves that the offence was
committed without his knowledge or that he had exercised all due
diligence to prevent the commission of such offence: 
 
PROVIDED FURTHER that, where an offence under this Act has been
committed by a Hindu Undivided Family and it is proved that the
offence has been committed with the consent or connivance of, or is
attributable to any neglect on the part of, any adult member of the
Hindu Undivided Family, such member shall also be deemed to be
guilty of that offence and shall be liable to be proceeded against and
on conviction, punished accordingly.
! !363
Cognizance of offences
1. Notwithstanding anything contained in the Code of Criminal Procedure,

1973, all offences punishable under this Act or rules
made thereunder shall be cognizable and bailable.
2. Notwithstanding anything contained in the Code of Criminal Procedure,

1973, a Metropolitan Magistrate or Judicial Magistrate, First Class may
impose on any person found guilty of an offence under section 71, 72 or
74, a punishment as provided in relevant sections.
3. If any prosecution for an offence under this Act has been instituted in
respect of the same facts on which a penalty has been imposed by the
Commissioner under section 29 or 61, then if the offence is
compounded under section 78 or, in any other case, on conviction as a
result of the final proceedings, the Commissioner shall refund to the
dealer the amount of penalty paid by him.
Investigation of offences
1. Subject to such conditions, if any, as may be prescribed, the

Commissioner may authorise, either generally or in respect of a
particular case or class of cases any officer or person subordinate to him
to investigate all or any of the offences punishable under this Act.
2. Every officer so authorised shall, in the conduct of such investigation

exercise the powers conferred by the Code of Criminal Procedure, 1973
(2 of 1974), upon an officer in charge of a police station for the
investigation of a cognizable offence.
Compounding of offences
1. The Commissioner may, either before or after the institution of

proceedings for any offence punishable under section 74 or under any
rules made under this Act, after affording the person concerned an
opportunity of being heard, accept from any person charged under
subsection (4) or under any rule, a sum not exceeding two thousand
rupees and in any other case a sum not exceeding double the amount of
tax which would have been payable in the sale, purchase or turnover to
which the offence relates, by way of composition of the offence,
! !364
2. On payment of such sum as may be determined by the Commissioner

under sub-section (1), no further proceedings shall be taken against the
accused person in respect the same offence and any proceedings, if
already taken, shall stand abated.
11.12 THE CUSTOMS ACT, 1962.
The Customs Duty Act in India was established on 13th December, 1962.
It is an Act to consolidate and amend the law relating to customs. BE it

enacted by Parliament in the Thirteenth Year of the Republic of India as
follows:-
(1) This Act may be called the Customs Act, 1962.

(2) It extends to the whole of India.
(3) It shall come into force on such date as the Central Government may
Definitions
1. “adjudicating authority” means any authority competent to pass any

order or decision under this Act, but does not include the
Board, Commissioner (Appeals) or Appellate Tribunal;
! !365
(1A) “aircraft” has the same meaning in the Aircraft Act, 1934 (22 of
1934);
(1B) “Appellate Tribunal” means the Customs, Excise and Service Tax
Appellate Tribunal constituted under section 129;
2. “assessment” includes provisional assessment, reassessment and any

order of assessment in which the duty assessed is nil;
3. “baggage” includes unaccompanied baggage but does not include motor

vehicles;
4. “bill of entry” means a bill of entry referred to in section 46;
5. “bill of export” means a bill of export referred to in section 50;
6. “Board” means the Central Board of Excise and Customs constituted

under the Central Boards of Revenue Act, 1963 (54 of 1963);
7. “coastal goods” means goods, other than imported goods, transported

in a vessel from one port in India to another;
(7A) “Commissioner (Appeals)” means a person appointed to be a

Commissioner of Customs (Appeals)
8. “Commissioner of Customs”, except for the purposes of Chapter XV,

includes an Additional Commissioner of Customs;
9. “conveyance” includes a vessel, an aircraft and a vehicle;
10.“customs airport” means any airport appointed under clause (a) of

section 7 to be a customs airport;
11.“customs area” means the area of a customs station and includes any
area in which imported goods or export goods are ordinarily kept before
clearance by Customs Authorities;
12.“customs port” means any port appointed under clause (a) of section 7
to be a customs port and includes a place appointed under clause (aa)
of that section to be an inland container depot;
! !366
13.“customs station” means any customs port, customs airport or land

customs station;
14.“dutiable goods” means goods which are chargeable to duty and on

which duty has not been paid;
15.“duty” means a duty of customs leviable under this Act;
16.“entry”, in relation to goods means an entry made in a bill of entry,

shipping bill or bill of export and includes in the case of goods imported
or to be exported by post, the entry referred to in section 82 or the
entry made under the regulations made under section 84;
17.“examination”, in relation to any goods, includes measurement and

weighment thereof;
18.“export”, with its grammatical variations and cognate expressions,

means taking out of India to a place outside India;
19.“export goods” means any goods which are to be taken out of India to a
place outside India;
20.“exporter”, in relation to any goods at any time between their entry for
export and the time when they are exported, includes any owner or any
person holding himself out to be the exporter;
21.“foreign-going vessel or aircraft” means any vessel or aircraft for the

time being engaged in the carriage of goods or passengers between any
port or airport in India and any port or airport outside India, whether
touching any intermediate port or airport in India or not, and includes—
(i) any naval vessel of a foreign Government taking part in any naval
exercises;
(ii) any vessel engaged in fishing or any other operations outside the
territorial waters of India;
(iii) any vessel or aircraft proceeding to a place outside India for any
purpose whatsoever;
! !367
(21A) “Fund” means the Consumer Welfare Fund established under

section 12C of the Central Excises and Salt Act, 1944 (1 of 1944)*;
22.“goods” includes—
a) vessels, aircrafts and vehicles;

b) stores;
c) baggage;
d) currency and negotiable instruments; and
e) any other kind of movable property;
23.“import”, with its grammatical variations and cognate expressions,

means bringing into India from a place outside India;
24.“import manifest” or “import report” means the manifest or report

required to be delivered under section 30;
25.“imported goods” means any goods brought into India from a place
outside India but does not include goods which have been cleared for
home consumption;
26.“importer”, in relation to any goods at any time between their

importation and the time when they are cleared for home consumption,
includes any owner or any person holding himself out to be the
importer;
27.“India” includes the territorial waters of India;
28.“Indian Customs Water” means the 9[waters extending into the sea
upto the limit of contiguous zone of India under section 5 of the
Territorial Waters Continental Shelf, Exclusive Economic Zone and other
Maritime Zones Act, 1976, (80 of 1976)] and includes any bay, gulf,
harbour, creek or tidal river;
29.“land customs station” means any place appointed under clause (b) of
section 7 to be a land customs station;
30.“market price”, in relation to any goods, means the wholesale price of

the goods in the ordinary course of trade in India;
! !368
(30A) “National Tax Tribunal” means the National Tax Tribunal

established under section 3 of the National Tax Tribunal Act, 2005 (49 of
2005);
31. “person-in-charge” means,—
a) in relation to a vessel, the master of the vessel;
b) in relation to an aircraft, the commander or pilot-in-charge of the

aircraft;
c) in relation to a railway train, the conductor, guard or other person

having the charge of the train;
d) in relation to any other conveyance, the driver or other person-in-

charge of the conveyance;
32. “prescribed” means prescribed by regulations made under this Act;
33. “prohibited goods” means any goods the import or export of which is
subject to any prohibition under this Act or any other law for the time
being in force but does not include any such goods in respect of which
the conditions subject to which the goods are permitted to be imported
or exported, have been complied with;
34. “proper officer”, in relation to any functions to be performed under this

Act, means the officer of customs who is assigned those functions by
the Board or the Commissioner of Customs ;
35. “regulations” means the regulations made by the Board under any
provision of this Act;
36. “rules” means the rules made by the Central Government under any
provision of this Act;
37. “shipping bill” means a shipping bill referred to in section 50;
38. “stores” means goods for use in a vessel or aircraft and includes fuel
and spare parts and other articles of equipment, whether or not for
immediate fitting;
! !369
39. “smuggling”, in relation to any goods, means any act or omission

which will render such goods liable to confiscation under section 111 or
section 113;
40. “tariff value”, in relation to any goods, means the tariff value fixed in
respect thereof under subsection (2) of section 14;
41. “value”, in relation to any goods, means the value thereof determined
in accordance with the provisions of subsection (1) or subsection (2) of
section 14;
42. “vehicle” means conveyance of any kind used on land and includes a
railway vehicle;
43. “warehouse” means a public warehouse appointed under section 57 or

a private warehouse licensed under section 58;
44. “warehoused goods” means goods deposited in a warehouse;
45. “warehousing station” means a place declared as a warehousing

station under section 9.
Objectives of the Act
1. The major objective is to Safeguard the domestic trade by imposing

duty on imported goods.
2. To reduce the imports in comparison with the exports to gain more

foreign currency.
3. To increase the revenue resources for the economic development of

India.
4. To protect Indian industry in the interest of trade, commerce and

economy.
5. To prevent dumping of foreign goods in India.
6. To prevent the smuggling activities so that duty revenue is not lost.
! !370
11.13 CUSTOMS DUTY - ASSESSMENT
1. After an importer has entered any imported goods under section 46 or

an exporter has entered any export goods under, section 50 the
imported goods or the export goods, as the case may be, or such part
thereof as may be necessary may, without undue delay, be examined
and tested by the proper officer.
2. After such examination and testing, the duty, if any, livable on such
goods shall, save as otherwise provided in section 85, be assessed.
3. For the purpose of assessing duty under subsection (2), the proper
officer may require the importer, exporter or any other person to
produce any contract, broker’s note, policy of insurance, catalogue or
! !371
other document whereby the duty livable on the imported goods or

export goods, as the case may be, can be ascertained, and to furnish
any information required for such ascertainment which it is in his power
to produce or furnish, and thereupon the importer, exporter or such
other person shall produce such document and furnish such information.
4. Notwithstanding anything contained in this section, imported goods or

export goods may, prior to the examination or testing thereof, be
permitted by the proper officer to be assessed to duty on the basis of
the statements made in the enter relating thereto and the documents
produced and the information furnished under subsection (3); but if it is
found subsequently on examination or testing of the goods or otherwise
that any statement in such entry or document or any information so
furnished is not true in respect of any matter relevant to the
assessment, the goods may, without prejudice to any other action which
may be taken under this Act, be re-assessed to duty.
5. Where any assessment done under subsection (2) is contrary to the

claim of the importer or exporter regarding valuation of goods,
classification, exemption or concessions of duty availed consequent to
any notification therefor under this Act, and in cases other than those
where the importer or the exporter, as the case may be, confirms his
acceptance of the said assessment in writing, the proper officer shall
pass a speaking order within fifteen days from the date of assessment
of the bill of entry or the shipping bill, as the case may be.
Provisional Assessment of Duty -
1. Notwithstanding anything contained in this Act but without prejudice to

the provisions contained in section 46 -
(a) where the proper officer is satisfied that an importer or exporter is

unable to produce any document or furnish any information
necessary for the assessment of duty on the imported goods or the
export goods, as the case may be; or
(b) where the proper officer deems it necessary to subject any imported
goods or export goods to any chemical or other test for the purpose
of assessment of duty thereon; or
! !372
(c) where the importer or the exporter has produced all the necessary
documents and furnished full information for the assessment of duty
but the proper officer deems it necessary to make further enquiry
for assessing the duty, the proper officer may direct that the duty
livable on such goods may, pending the production of such
documents or furnishing of such information or completion of such
test or enquiry, be assessed provisionally if the importer or the
exporter, as the case may be, furnishes such security as the proper
officer deems fit for the payment of the deficiency, if any, between
the duty finally assessed and the duty provisionally assessed.
2. When the duty leviable on such goods is assessed finally in accordance

with the provisions of this Act, then –
(a) in the case of goods cleared for home consumption or exportation,

the amount paid shall be adjusted against the duty finally assessed
and if the amount so paid falls short of, or is in excess of the duty
finally assessed, the importer or the exporter of the goods shall pay
the deficiency or be entitled to a refund, as the case may be;
(b) in the case of warehoused goods, the proper officer may, where the
duty finally assessed is in excess of the duty provisionally assessed,
require the importer to execute a bond, binding himself in a sum
equal to twice the amount of the excess duty.
3. The importer or exporter shall be liable to pay interest, on any amount

payable to the Central Government, consequent to the final assessment
order under subsection (2), at the rate fixed by the Central Government
under section 28AB from the first day of the month in which the duty is
provisionally assessed till the date of payment thereof.
4. Subject to subsection (5), if any refundable amount referred to in clause

(a) of subsection (2) is not refunded under that subsection within three
months from the date of assessment, of duty finally, there shall be paid
an interest on such unrefunded amount at such rate fixed by the Central
Government under section 27A till the date of refund of such amount.
5. The amount of duty refundable under subsection (2) and the interest
under subsection (4), if any, shall, instead of being credited to the Fund,
! !373
be paid to the importer or the exporter, as the case may be, if such
amount is relatable to—
(a) the duty and interest, if any, paid on such duty paid by the importer,
or the exporter, as the case may be, if he had not passed on the
incidence of such duty and interest, if any, paid on such duty to any
other person;
(b) the duty and interest, if any, paid on such duty on imports made by
an individual for his personal use;
(c) the duty and interest, if any, paid on such duty borne by the buyer,
if he had not passed on the incidence of such duty and interest, if
any, paid on such duty to any other person;
(d) the export duty as specified in section 26;
(e) drawback of duty payable under sections 74 and 75.
The tariff rates for customs duties are specified in Customs Tariff Act, 1975
as under:
1. Basic customs duty – From 5% to 10% for different commodities.

(Generally 10%)
2. National calamity contingent duty – NCCD – 10% to 45%. (` 50/- per

ton on crude oil.)
3. Special additional duty of customs – 4% to offset the effect of local tax

– VAT on some items.
4. Additional customs duty -'Countervailing duty' to offset the excise duty

effect on similar goods.
5. Protective duties – Imposed by notification of Tariff Commission to

protect certain goods.
6. Countervailing duty on subsidised goods – Countervailing duty to take

care of subsidies.
! !374
7. Anti-Dumping duty on dumped articles- Duty imposed upto margin of

dumping for certain items.
Apart from the above, some other duties were also imposed in between, as
under –
Education Cess: Education cess of 2% of customs duty was imposed from

9.7.2004.
SHE Cess: SHE cess of 1% of customs duty was imposed from 1.3.2007.
Determination of Duty Where Goods Consist of Articles Liable to

Different Rates of Duty. -
Except as otherwise provided in any law for the time being in force, where
goods consist of a set of articles, duty shall be calculated as follows :-
(a) articles liable to duty with reference to quantity shall be chargeable to

that duty;
(b) articles liable to duty with reference to value shall, if they are liable to
duty at the same rate, be chargeable to duty at that rate, and if they
are liable to duty at different rates, be chargeable to duty at the
highest of such rates;
(c) articles not liable to duty shall be chargeable to duty at the rate at
which articles liable to duty with reference to value are liable under
clause (b) :
Provided that, -
(a) accessories of, and spare parts or maintenance and repairing

implements for, any article which satisfy the conditions specified in the
rules made in this behalf shall be chargeable at the same rate of duty
as that article;
(b) if the importer produces evidence to the satisfaction of the proper

officer regarding the value of any of the articles liable to different rates
of duty, such article shall be chargeable to duty separately at the rate
applicable to it.
! !375
11.14 CUSTOMS DUTY DRAWBACK
Drawback means refund/rebate of the chargeable duty, in relation to any

goods manufactured in India and exported. Drawback amount equals to
the customs duty paid on imported goods inputs for the manufacture of
exported goods plus the excise duty of the manufactured goods. 
Drawback is not permitted in respect of coffee, tea, and agricultural

produce, as their inputs are not subject to customs duty and excise duty.
Drawback Allowable on Re-Export of Duty-Paid Goods
1. When any goods capable of being easily identified which have been
imported into India and upon which any duty has been paid on
importation-
(i) are entered for export and the proper officer makes an order
permitting clearance and loading of the goods for exportation under
section 51; or
(ii) are to be exported as baggage and the owner of such baggage, for
the purpose of clearing it, makes a declaration of its contents to the
proper officer under section 77 (which declaration shall be deemed
to be an entry for export for the purposes of this section) and such
officer makes an order permitting clearance of the goods for
exportation; or
(iii) are entered for export by post under section 82 and the proper
officer makes an order permitting clearance of the goods for
exportation, ninety-eight per cent of such duty shall, except as
otherwise hereinafter provided, be re-paid as drawback, if -
a) the goods are identified to the satisfaction of the Assistant

Commissioner of Customs as the goods which were imported;
and
b) the goods are entered for export within two years from the date
of payment of duty on the importation thereof : 
 
Provided that in any particular case the aforesaid period of two
! !376
years may, on sufficient cause being shown, be extended by the

Board by such further period as it may deem fit.
2. Notwithstanding anything contained in subsection (1), the rate of

drawback in the case of goods which have been used after the
importation thereof shall be such as the Central Government, having
regard to the duration of use, depreciation in value and other relevant
circumstances, may, by notification in the Official Gazette, fix.
3. The Central Government may make rules for the purpose of carrying out
the provisions of this section and, in particular, such rules may –
(a) provide for the manner in which the identity of goods imported in
different consignments which are ordinarily stored together in bulk,
may be established;
(b) specify the goods which shall be deemed to be not capable of being
easily identified; and
(c) provide for the manner and the time within which a claim for
payment of drawback is to be filed.
4. For the purposes of this section –
(a) goods shall be deemed to have been entered for export on the date
with reference to which the rate of duty is calculated under section
16;
(b) in the case of goods assessed to duty provisionally under section

18, the date of payment of the provisional duty shall be deemed to
be the date of payment of duty.
Drawback on Imported Materials Used in The Manufacture of Goods Which

are Exported -
1. Where it appears to the Central Government that in respect of goods of

any class or description manufactured, processed or on which any
operation has been carried out in India, being goods which have been
entered for export and in respect of which an order permitting the
clearance and loading thereof for exportation has been made under
! !377
section 51 by the proper officer, or being goods entered for export by

post under section 82 and in respect of which an order permitting
clearance for exportation has been made by the proper officer, a
drawback should be allowed of duties of customs chargeable under this
Act on any imported materials of a class or description used in
the manufacture or processing of such goods or carrying out any
operation on such goods, the Central Government may, by notification in
the Official Gazette, direct that drawback shall be allowed in respect of
such goods in accordance with, and subject to, the rules made under
subsection (2): 
 
Provided that no drawback shall be allowed under this sub-section in
respect of any of the aforesaid goods which the Central Government
may, by rules made under sub-section (2), specify, if the export value of
such goods or class of goods is less than the value of the imported
materials used in the manufacture or processing of such goods or
carrying out any operation on such goods] or class of goods, or is not
more than such percentage of the value of the imported materials used
in the manufacture or processing of such goods or carrying out any
operation on such goods or class of goods as the Central Government
may, by notification in the Official Gazette, specify in this behalf: 
 
Provided further that where any drawback has been allowed on any
goods under this sub-section and the sale proceeds in respect of such
goods are not received by or on behalf of the exporter in India within
the time allowed under the Foreign Exchange Management Act, 1999
(42 of 1999), such drawback shall be deemed never to have been
allowed and the Central Government may, by rules made under
subsection (2), specify the procedure for the recovery or adjustment of
the amount of such drawback. 
 
(1A) Where it appears to the Central Government that the quantity of a
particular material imported into India is more than the total quantity of
like material that has been used in the goods 1[manufactured,
processed or on which any operation has been carried out in India] and
exported outside India, then, the Central Government may, by
notification in the Official Gazette, declare that so much of the material
as is contained in the goods exported shall, for the purpose of
subsection (1), be deemed to be imported material.
! !378
2. The Central Government may make rules for the purpose of carrying out
the provisions of subsection (1) and, in particular, such rules may
provide—
(a) for the payment of drawback equal to the amount of duty actually
paid on the imported materials used in the manufacture or
processing of the goods or carrying out any operation on the goods
or as is specified in the rules as the average amount of duty paid on
the materials of that class or description used in the manufacture or
processing of export goods or carrying out any operation on export
goods of that class or description either by manufacturers generally
or by persons processing or carrying on any operation generally or
by any particular manufacturer or particular person carrying on any
process or other operation, and interest, if any, payable thereon; 
 
(aa) for specifying the goods in respect of which no drawback shall
be allowed; 
 
(ab) for specifying the procedure for recovery or adjustment of the
amount of any drawback which had been allowed under subsection
(1) or interest chargeable thereon;
(b) for the production of such certificates, documents and other

evidence in support of each claim of drawback as may be
necessary;
(c) for requiring the manufacturer or the person carrying on any

process or other operation] to give access to every part of his
manufactory to any officer of customs specially authorised in this
behalf by the Assistant Commissioner of Customs or Deputy
Commissioner of Customs to enable such authorised officer to
inspect the processes of manufacture, process or any other
operation carried out and to verify by actual check or otherwise the
statements made in support of the claim for drawback.
(d) for the manner and the time within which the claim for payment of
drawback may be filed;
3. The power to make rules conferred by subsection (2) shall include the
power to give drawback with retrospective effect from a date not earlier
! !379
than the date of changes in the rates of duty on inputs used in the
export goods.
Interest on Drawback -
1. Where any drawback payable to a claimant under section 74 or section

75 is not paid within a period of one month from the date of filing a
claim for payment of such drawback, there shall be paid to that claimant
in addition to the amount of drawback, interest at the rate fixed under
section 27A from the date after the expiry of the said period of one
month till the date of payment of such drawback:
2. Where any drawback has been paid to the claimant erroneously or it

becomes otherwise recoverable under this Act or the rules made
thereunder, the claimant shall, within a period of two months from the
date of demand, pay in addition to the said amount of drawback,
interest at the rate fixed under section 28AB and the amount of interest
shall be calculated for the period beginning from the date of payment of
such drawback to the claimant till the date of recovery of such
drawback.
Drawback shall not be allowed in respect of:
(a) Goods the market price of which is less than the amount of drawback.
(b) Goods where the drawback is less than fifty rupees.
(c) Goods which are likely to be smuggled back to India.
Refund of Duty - Asst. Commissioner of customs may issue an order for

refund to an applicant within three months from the date of receipt of the
applications.
11.15 OFFENSES AND PENALTY
Illegal imports and export of goods is to be prevented by applying the law

of customs. The restrictions across the border are exercised by allowing
the movement of goods and persons through points of entry and exit.
Various types of penalties are applied for different offences.
! !380
Penalty for Improper Importation of Goods
Any person, – (a) who, in relation to any goods, does or omits to do any
act which act or omission would render such goods liable to confiscation
under section 111, or abets the doing or omission of such an act, or
(b) who acquires possession of or is in any way concerned in carrying,

removing, depositing, harboring, keeping, concealing, selling or
purchasing, or in any other manner dealing with any goods which he
knows or has reason to believe are liable to confiscation under section
111, shall be liable,-
i) in the case of goods in respect of which any prohibition is in force

under this Act or any other law for the time being in force, to a
penalty not exceeding five times the value of the goods or one
thousand rupees, whichever is the greater;
ii) in the case of dutiable goods, other than prohibited goods, to a

penalty not exceeding five times the duty sought to be evaded on
such goods or one thousand rupees, whichever is the greater;
iii) in the case of goods in respect of which the value stated in the entry
made under this Act or in the case of baggage, in the declaration
made under section 77 (in either case hereafter in this section
referred to as the declared value) is higher than the value thereof, to
a penalty not exceeding five times the difference between the
declared value and the value thereof or one thousand rupees,
whichever is greater;
iv) in the case of goods falling both under clauses (i) and (iii), to a
penalty not exceeding five times the value of the goods or five times
the difference between the declared value and the value thereof or
one thousand rupees, whichever is the highest;
v) in the case of goods falling both under clauses (ii) and (iii), to a
penalty not exceeding five times the duty sought to be evaded on
such goods or five times the difference between the declared value
and the value thereof or one thousand rupees, whichever is the
highest.
! !381
Penalty for Attempt to Export Goods Improperly
Any person who, in relation to any goods, does or omits to do any act
which act or omission would render such goods liable to confiscation under
section 113, or abets the doing or omission of such an act, shall be liable,
—
(i) in the case of goods in respect of which any prohibition is in force

under this Act or any other law for the time being in force, to a
penalty not exceeding three times the value of the goods as declared
by the exporter or the value as determined under this Act , whichever
is the greater;
(ii) in the case of dutiable goods, other than prohibited goods, to a

penalty not exceeding the duty sought to be evaded or five thousand
rupees, whichever is greater;
(iii) in the case of any other goods, to a penalty not exceeding the value of
the goods, as declared by the exporter or the value as determined
under this Act, whichever is greater.
Penalty for Short-levy or Non-levy of Duty -
114A. Penalty for short-levy or non-levy of duty in certain cases.—Where

the duty has not been levied or has not been short-levied or the interest
has not been charged or paid or has been part paid or the duty or interest
has been erroneously refunded by reason of collusion or any wilful mis-
statement or suppression of facts, the person who is liable to pay the duty
or interest, as the case may be, as determined under subsection (2) of
section 28 shall, also be liable to pay a penalty equal to the duty or interest
so determined:
Provided that where such duty or interest, as the case may be, as
determined under sub-section (2) of section 28, and the interest payable
thereon under section 28AB, is paid within thirty days from the date of the
communication of the order of the proper officer determining such duty,
the amount of penalty liable to be paid by such person under this section
shall be twenty-five per cent. of the duty or interest, as the case may be,
so determined:
! !382
Provided further that the benefit of reduced penalty under the first proviso
shall be available subject to the condition that the amount of penalty so
determined has also been paid within the period of thirty days referred to
in that proviso:
Provided also that where the duty or interest determined to be payable is

reduced or increased by the Commissioner (Appeals), the Appellate
Tribunal or, as the case may be, the court, then, for the purposes of this
section, the duty or interest as reduced or increased, as the case may be,
shall be taken into account:
Provided also that where the duty or interest determined to be payable is

increased by the Commissioner (Appeals), the Appellate Tribunal or, as the
case may be, the court, then, the benefit of reduced penalty under the first
proviso shall be available if the amount of the duty or the interest so
increased, along with the interest payable thereon under section 28AB, and
twenty-five per cent. of the consequential increase in penalty have also
been paid within thirty days of the communication of the order by which
such increase in the duty or interest takes effect:
Provided also that where any penalty has been levied under this section, no
penalty shall be levied under section 112 or section 114.
Penalty for use of false and incorrect material
114AA. Penalty for use of false and incorrect material.—If a person

knowingly or intentionally makes, signs or uses, or causes to be made,
signed or used, any declaration, statement or document which is false or
incorrect in any material particular, in the transaction of any business for
the purposes of this Act, shall be liable to a penalty not exceeding five
times the value of goods.
Penalty for not Accounting of Goods
If any goods loaded in a conveyance for importation into India, or any

goods transshipped under the provisions of this Act or coastal goods
carried in a conveyance, are not unloaded at their place of destination in
India, or if the quantity unloaded is short of the quantity to be unloaded at
that destination, and if the failure to unload or the deficiency is not
accounted for to the satisfaction of the 1[Assistant Commissioner of
! !383
Customs or Deputy Commissioner of Customs , the person-in-charge of the

conveyance shall be liable, -
(a) in the case of goods loaded in a conveyance for importation into India
or goods transshipped under the provisions of this Act, to a penalty not
exceeding twice the amount of duty that would have been chargeable
on the goods not unloaded or the deficient goods, as the case may be,
had such goods been imported;
(b) in the case of coastal goods, to a penalty not exceeding twice the
amount of export duty that would have been chargeable on the goods
not unloaded or the deficient goods, as the case may be, had such
goods been exported.
Penalties for Contravention
Any person who contravenes any provision of this Act or abets any such
contravention or who fails to comply with any provision, of this Act with
which it was his duty to comply, where no express penalty is elsewhere
provided for such contravention or failure, shall be liable to a penalty not
exceeding ten thousand rupees.
Adjudication of Confiscations and Penalties
In every case under this Chapter in which anything is liable to confiscation

or any person is liable to a penalty, such confiscation or penalty may be
adjudged, -
(a) without limit, by a Commissioner of Customs or a Deputy

Commissioner of Customs ;
(b) where the value of goods liable to confiscation does not exceed two
lakh rupees, by an Assistant Commissioner of Customs or Deputy
Commissioner of Customs;
(c) where the value of the goods liable to confiscation does not exceed ten
thousand rupees, by a gazetted officer of customs lower in rank than
an Assistant Commissioner of Customs or Deputy Commissioner of
Customs.
! !384
Power of Settlement Commission to Grant Immunity from Prosecution and

Penalty
127H. Power of Settlement Commission to grant immunity from

prosecution and penalty.—
1. The Settlement Commission may, if it is satisfied that any person who

made the application for settlement under section 127B has co-operated
with the Settlement Commission in the proceedings before it and has
made a full and true disclosure of his duty liability, grant to such person,
subject to such conditions as it may think fit to impose, immunity from
prosecution for any offence under this Act 2[and also either wholly or in
part from the imposition of any penalty and fine] under this Act, with
respect to the case covered by the settlement provided that no such
immunity shall be granted by the Settlement Commission in cases
where the proceedings for the prosecution for any such offence have
been instituted before the date of receipt of the application under
section 127B.
2. An immunity granted to a person under subsection (1) shall stand

withdrawn if such person fails to pay any sum specified in the order of
the settlement passed under subsection (5) of section 127C within the
time specified in such order
3. An immunity granted to a person under subsection (1) may, at any

time, be withdrawn by the Settlement Commission, if it is satisfied that
such person had, in the course of the settlement proceedings, concealed
any particulars, material to the settlement or had given false evidence,
and thereupon such person may be tried for the offence with respect to
which the immunity was granted or for any other offence of which he
appears to have been guilty in connection with the settlement and shall
also become liable to the imposition of any penalty under this Act to
which such person would have been liable, had no such immunity been
granted.
! !385
11.16 ACTIVITIES FOR STUDENTS
1. Search on Internet the percentage of revenue generated by Excise Duty

and Customs Duty in India in the financial year 2013-14. Also try to find
state wise contribution for the same.
2. Search Indian government websites for the proposed changes in VAT,

CST and Service Tax to be incorporated by the new government from
01.04.2016 onwards, in the form of GST.
11.17 SUMMARY
• The Excise Duty is applicable to the goods which find a mention in the
Central Excise Tariff Act, 1965 (CETA).
• Specific duty is charged on the basis of per unit of quantity, e.g., weight,
volume or length.
• The maximum retail price declared on pre-packed commodities is

another basis for calculating excise duty.
• Excise is central tax imposed on manufacturing of goods in India.
• For an article to be 'goods' it must be movable and marketable.
• CENVAT is a way of levying excise duty where in a production chain duty

has to be paid on only on the additional value added in the course of
manufacturing.
• Value Added Tax Act replaces sales tax in the States. VAT is a concept
where only value addition is to be taxed. It applies only to sale of goods
within the States.
• The VAT applies to dealers. The term 'dealer' means a person who is
buying and selling in the same state.
• VAT applies to sale. Sale means transfer of goods in execution of works

contract, hire purchase and supply of goods by restaurants.
! !386
• Bullion, gold, silver or precious metals or items and jewellery made out
of them, and precious stones and semi-precious stones are to be taxed
at certain % of their turnover value.
• For all other commodities, there are three rates of taxation, 4%, 12.5%
and 20%.
• A registered dealer gets a VAT credit for tax already paid in the prior
transactions.
• Sale of goods in the course of inter-state trade and commerce are taxed
under the Central Sales Tax Act, 1956.
• Central Sales Tax excludes exports and sale within the State.
• For imports, a special duty is applied by the name of ‘Customs Duty’.
• For exports, a method of Duty Drawback is applicable to offer boost to

exports.
• Penalties are applicable for tax evasion at every stage.
1. Briefly explain ‘Central Excise Duty’.
2. What is 'Cess' in relation to ‘Excise Duty’?
3. In relation to the Excise Duty, explain 'clearance of goods’.
4. What is the point of application of the ‘Excise Duty’ and that of the
‘Sales Tax’?
5. Explain how the customs duty is different from the ‘Excise Duty’.
6. On which amount the Central excise duty in levied?
7. What are 'Excisable goods' under Excise Act? Name three excisable
goods in India.
8. Central Sales Tax is applicable to whom and who collects it?
! !387
9. When is a sale or purchase of goods said to take place outside a State?
10.Explain the difference between 'single point' and 'multiple point' sales
taxation.
11.Explain the full meaning of Value Added Tax (VAT)?
12.Write the objectives and advantages of VAT system.
13.Explain the method of implementing VAT.
14.Write the differences between MODVAT and CENVAT.
15.Why the necessity of GST has arisen and how it will be in the interests
of consumers?
16.Write a note on "goods" under the Customs Act, 1962.
17.What is "Taxable event”?
18.What is the meaning of term Prohibited exports and Prohibited imports,

and why are they necessary.
19.Explain 'Customs Duty’ and ‘warehouse’.
20.What is 'Duty Drawback'? Which duties are applicable for refunds in

‘Duty Drawback?
21.What are the objectives of Customs Act?
22.Explain in detail the scope of customs law in India.
23.Explain the powers of customs authorities.
24.Name the different types of customs import duties?
25.Describe the procedure for and methods of assessment of customs duty.
26.Discuss the concept of provisional assessment of duty under the

Customs Act, 1962.
! !388
1. Excise Duty is first paid by ____________.
a. Government
b. Manufacturer
c. Trader
d. Customer
2. For the purpose of Excise Duty,___________ is not considered as

‘India’.
a. Metro City
b. Government run company
c. Andaman and Nicobar
d. Special Economic Zone
3. The Sales Tax is levied on -
a. Manufacturing of goods
b. Transport of goods
c. Sale of goods
d. Consumption of goods
4. The term VAT is used to denote –
a. Value Added Tax

b. Very Attractive Tax
c. Volume Access Tax
d. All of the above
5. Duty Drawback is offered in case of -
a. Import of goods
b. Consumption of edible items
c. Fuel and gas consumption
d. Export of goods
Answers : (1-b), (2-d), (3-c), (4-a), (5-d).
! !389
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
! !390
INSURANCE LAW AND CONTRACTS
Chapter 12
Objectives
After completing this chapter, you will be able to define the principles of
insurance; examine the fundamental principles and types of insurance;
understand about the premium; know about the fire insurance and its
details; understand the types of marine insurance; define the express and
implied warranties; examine the marine losses; know about the need of
IRDA along with its objectives and functions; also the powers and duties of
IRDA; examine the role of insurance advisory committee and insurance
ombudsman.
Structure:
12.1 Law of Insurance

12.2 The Insurance Act, 1938
12.3 Risk and Compensation
12.4 Reinsurance
12.5 Fire Insurance
12.6 Miscellaneous Insurance
12.7 Marine Insurance
12.8 The Marine Insurance Act, 1963
12.9 Warranty
12.10 Marine Losses
12.11 IRDA
12.12 The Insurance Ombudsman
12.13 Activity for the Students
12.14 Summary
! !391
12.1 LAW OF INSURANCE
The business of Insurance in India, is governed by a number of Acts as

listed below. The Insurance is treated just like as a contract, where rights
and duties of both the parties are created. The Insurance Act, 1938 (as
amended uptodate), is the father of all insurance business in India, and
there are three major subcategories of insurance business, governed by
different acts, as follows -
1. The Life Insurance Corporation Act, 1956. (For Human Life Insurance)
2. The Marine Insurance Act, 1963. (For Marine Insurance)
3. The General Insurance Business (Nationalisation) Act, 1972. (For fire
and other insurances)
There are three types of major insurances - Life, Fire and Marine and
further, the insurance contracts are classified in the following four types -
(i) Life Insurance : This is the major type of insurance, which includes
life, accident, health and sickness insurance. The exact time of death
of a human being can never be predicted, and so his sickness/health
downfalls/injuries/non-functioning of any organ, etc., cannot be
predicted, and hence this is the most complicated type of insurance for
premium calculations and compensation amounts.
(ii) Property Insurance - This type of insurance takes care of fire, marine,
motor and miscellaneous risk of property – fixed or movable. The
premium is fixed on the purchase cost of the property, its age and
types of predicted damages like burglary, flood, riots, etc.
(iii) Insurance against Liability - Third party insurance in case of motor

vehicles, or workers compensation liability for industries, etc., come
under this type of insurance. The insurance covers only the liability
part for which the premium has been paid.
(iv) Guarantee Insurance: Credit Insurance is a type of Guarantee

Insurance. The insurer agrees to give compensation of a fixed decided
amount against loss arising through dishonesty or fraud or a breach of
contract.
Let us gather more knowledge on each of the above Acts, in detail.
! !392
12.2 THE INSURANCE ACT, 1938
‘The Insurance Act, 1938’ As amended by Insurance (Amendment)

Act, 2002’.
An Act to consolidate and amend the law relating to the business of

insurance
Whereas it is expedient to consolidate and amend the law relating to the

business of insurance; it is hereby enacted as follows: -
1. This Act may be called Insurance Act, 1938

Definitions
In this Act, unless there is anything repugnant in the subject or context, -
(1) “actuary” means an actuary possessing such qualifications as may be

specified by the regulations made by the Authority. 
 
(1A) “Authority” means the Insurance Regulatory and Development
Authority, established under sub-section (1) of section 3 of the
Insurance Regulatory and Development Authority Act, 1999; 
 
(1AA)“policy-holder” includes a person to whom the whole of the
interest of the policyholder in the policy is assigned once and for all,
but does not include an assignee thereof whose interest in the policy is
defeasible or is for the time being subject to any condition;
(2) “approved securities,” means-
i) Government securities and other securities charged on the revenue of

the Central Government or of the Government of a State or
guaranteed fully as regards principal and interest by the Central
Government or the Government of any State;
ii) debentures or other securities for money issued under the authority
of any Central Act or Act of a State Legislature by or on behalf of a
! !393
port trust or municipal corporation or city improvement trust in any

Presidency-town;
iii) shares of a corporation established by law and guaranteed fully by

the Central Government or the Government of a State as to the
repayment of the principal and the payment of the divided;
iv) securities issued or guaranteed fully as regards principal and interest

by the Government of any ‘Part B’ State, and specified as approved
securities for the purposes of this Act by the Central Government by
notification in the Official Gazette; and
(3) “Auditor" means a person qualified under the Chartered Accountants

Act, 1949 (38 of 1949), to act as an auditor of companies ; 
 
(4A) "banking company" and "company" shall have the meanings
respectively assigned in them in clauses (c) and (d) of subsection (1)
of Section 5 of the Banking Companies Act, 1949 (10 of 1949);
(5) "certified" in relation to any copy or translation of a document required

to be furnished by or on behalf of an insurer or a provident society as
defined in Part III means certified by a principal officer of such insurer
or provident society to be a true copy or a correct translation, as the
case may be; 
 
(5A) "chief agent" means a person who, not being a salaried employee
of an insurer, in consideration of any commission-
i) performs any administrative and organising functions for the insurer,

and
ii) procures life insurance business for the insurer by employing or

causing to be employed insurance agents on behalf of the insurer;
(5B) "Controller of Insurance" means the officer appointed by the

Central Government under section 2B to exercise all the powers,
discharge the functions and performs the duties of the Authority under
this Act or the Life Insurance Corporation Act, 1956 (31 of 1956) or
the General Insurance Business (Nationalisation) Act, 1972 (57 of
! !394
1972) or the Insurance Regulatory and Development Authority Act,

1999;
(6) "Court" means the principal Civil Court of original jurisdiction in a

district and includes the High Court in exercise of its ordinary original
civil jurisdiction; 
 
(6A) "fire insurance business" means the business of effecting,
otherwise than incidentally to some other class of insurance business,
contracts of insurance against loss by or incidental to fire or other
occurrence customarily included among the risks insured against in
fire insurance Policies; 
 
(6B)"general insurance business" means fire, marine or miscellaneous
insurance business, whether carried on singly or in combination with
one or more of them;
(7) "Government security" means a Government security as defined in the

Public Debt Act, 1944 (18); 
 
(7A) “Indian insurance company” means any insurer being a company-
- which is formed and registered under the Companies Act, 1956 (1 of
1956); 
- in which the aggregate holdings of equity shares by a foreign
company, either by itself or through its subsidiary companies or its
nominees, do not exceed twenty-six percent paid-up equity capital of
such Indian insurance company; whose sole purpose is to carry on life
insurance business or general insurance business or re-insurance
business.
(8) "insurance company" means any insurer being a company, association

or partnership which may be wound up under the Indian Companies
Act, 1913 (7 of 1913), or to which the Indian Partnership Act, 1932 (9
of 1932), applies; 
 
(8A) “insurance co-operative society” means any insurer being a co-
operative society,
a) which is registered on or after the commencement of the Insurance

(Amendment) Act, 2002, as a co-operative society under the Co-
! !395
operative Societies Act, 1912 (2 of 1912) or under any other law for
the time being in force in any State relating to Co-operative Societies
or under the Multi-State Co-operative Societies Act, 1984 (51 or
1984);
b) having a minimum paid-up capital, (excluding the deposits required

to be made under section 7), of rupees one hundred crores;
c) in which no body corporate, whether incorporated or not, formed or

registered outside India, either by itself or through its subsidiaries or
nominees, at any time, holds more than twenty-six per cent of the
capital of such Co-operative Society;
d) whose sole purpose is to carry on life insurance business or general

insurance business in India:
(9) "Insurer" means-
a) any individual or unincorporated body of individuals or body

corporate incorporated under the law of any country other than
India, carrying on insurance business not being a person specified in
subclause (c) of this clause which- (i) carries on that business in
India, or (ii) has his or its principal place of business or is domiciled
in India, or (iii) with the object of obtaining insurance business,
employs a representative, or maintains a place of business, in
India;
b) any body corporate not being a person specified in subclause (c) of

this clause carrying on the business of insurance, which is a body
corporate incorporated under any law for the time being in force in
India; or stands to any such body corporate in the relation of a
subsidiary company within the meaning of the Indian Companies
Act, 1913 (7 of 1913), as defined by sub-section (2) of section 2 of
that Act, and
c) any person who in India has a standing contract with underwriters

who are members of the Society of Lloyd's whereby such person is
authorised within the terms of such contract to issue protection
notes, cover notes, or other documents granting insurance cover to
others on behalf of the underwriters, but does not include a
! !396
principal agent chief agent, special agent or an insurance agent or a

provident society as defined in Part III;
(10)"insurance agent" means an insurance agent licensed under Sec. 42

who receives agrees to receive payment by way of commission or
other remuneration in consideration of his soliciting or procuring
insurance business including business relating to the continuance,
renewal or revival of policies of insurance; 
 
(10A) "investment company" means a company whose principal
business is the acquisition of shares, stocks debentures or other
securities; 
 
(10B) “intermediary or insurance intermediary” shall have the meaning
assigned to it in clause (f) of subsection 2 of the Insurance Regularoty
and Development Authority Act, 1999 (41 of 1999)
(11)“life insurance business" means the business of effecting contracts of

insurance upon human life, including any contract whereby the
payment of money is assured on death (except death by accident only)
or the happening of any ;
(12)"Manager" and "officer" have the meanings assigned to those

expressions in clauses (9) and (11), respectively of Section 2 of the
Indian Companies Act, 1913
(13)"Managing agent" means a person, firm or company entitled to the

management of the whole affairs of a company by virtue of an
agreement with the company, and under the control and direction of
the directors except to the extent, if any, otherwise provided for in the
agreement, and includes any person, firm or company occupying such
position by whatever name called. 
 
(13A) "marine insurance business" means the business of effecting
contracts of insurance upon vessels of any description, including
cargoes, freights and other interests which may be legally insured, in
or in relation to such vessels, cargoes and freights, goods, wares,
merchandise and property of whatever description insured for any
transit, by land or water, or both, and whether or not including
warehouse risks or similar risks in addition or as incidental to such
! !397
transit, and includes any other risks customarily included among the
risks insured against in marine insurance policies; 
 
(13B) "miscellaneous insurance business" means the business of
effecting contracts of insurance which is not principally or wholly of any
kind or kinds included in clause (6A), (11) and (13A);
(14)"prescribed" means prescribed by rules made under this Act; and
(15)"principal agent" means a person who, not being a salaried employee

of an insurer, in consideration of any commission - (i) performs any
administrative and organising functions for the insurer; and (ii)
procures general insurance business whether wholly or in part by
employing or causing to be employed insurance agents on behalf of
the -
(16)"private company" and "public company" have the meanings

respectively assigned to them in Clauses (13) and (13A) of Sec. 2 of
the Indian Companies Act, 1913 (7 of 1913);
(17)"special agent" means a person who, not being a salaried employee of

an insurer, in consideration of any commission, procures life insurance
business for the insurer whether wholly or in part by employing or
causing to be employed insurance agents on behalf of the insurer, but
does not include a chief agent.
12.3 RISK AND COMPENSATION
12.3.1 Risk: Insurance is a business which basically deals in risk. If there

is no risk, there is no Insurance. Also, the exact time of occurrence of risk
factor is not known, and so the insurance is necessary to cover the losses
due to risk. But every business risk cannot be insured against. The risk has
to satisfy certain criteria such as – (A) The probability of the risk should be
calculated to calculate the premium. After all, the insurance business is
based on theory of probability. (B) The loss caused due to the risk should
be predictable and possible to convert to currency amount. (C) The loss
should be accidental and not due to intended human efforts. (D) The loss
should not be catastrophic.
! !398
These four elements of an insurable risk are characteristics that permit the
successful operation of the insurance. It is to be noted that every risk
cannot be insured against. If an insurance against a risk has to exist, (a)
the risk should not be artificial ; (b) the risk should be commonly known;
(c) the loss due to risk should be capable of estimation in common
currency and (d) the insured party should have real interest in non-
occurrence of the risk or in avoiding the risk.
The type of risk and the amount of compensation and the time period of
the insurance offered is documented in a document known as – Insurance
Policy.
Earlier, a contract of insurance was assumed like a wagering contract. The

policy money is payable on the happening of a future uncertain event. In
the case of whole life insurance the date of occurrence of the event is
uncertain, so the date of payment of money is also uncertain. In the case
of fire, marine and other forms of insurance the happening of the event
upon which the money is payable, is itself uncertain. :Earlier the common
belief was that "Insurance is a contract on speculation". But nowadays the
view is that insurance contracts are not speculative or wagering contracts.
! !399
12.3.2 Compensation
Principles for Determining Compensation
Part A
The compensation to be given by the Corporation to an insurer having a

share capital on which dividend or bonus is payable, who has allocated as
bonus to policy-holders the whole or any part of the surplus as disclosed in
the abstracts prepared in accordance with Part II of the Fourth Schedule to
the Insurance Act in respect of the last actuarial investigation relating to
his controlled business as at a earlier than the 1st day of January, 1955,
shall be computed in accordance with the provisions contained in
paragraph 1 or paragraph 2, whichever is more advantageous to the
insurer.
Paragraph 1.— Twenty times the annual average of the share of the surplus
allocated to shareholders as disclosed in the abstracts aforesaid in respect
of the relevant actuarial investigations multiplied by a figure which
represents the proportion that the average business in force during the
calendar years 1950 to 1955 bears to the average business in force during
the calendar years comprised in the period between the date as at which
the actuarial investigation immediately preceding the earliest of the
relevant actuarial investigations was made and the date as at which the
last of such investigations was made.
Paragraph 2.— Half the amount payable under paragraph 1 plus the paid-
up capital or assets equivalent thereto, or, in the case of a composite
insurer, that part of the paid-up capital or assets equivalent thereto which
has or been transferred to and vested in the Corporation under this Act less
the amount, if any of expenses or losses or both capitalised by the insurer
for the purposes of Form A in the First Schedule to the Insurance Act.
Provided that in the case of any such insurer in respect of whom an order
has been made under section 35 the amount computed as follows shall be
deemed to be the annual average of the surplus:—
a. There shall be deducted from the annual average of the surplus, interest
at 31/2 per cent, per annum for one year calculated on the assets
specified in any order made under subsection (2) of section 35;
! !400
b. With respect to the balance arrived at under clause (a), there shall be
computed an amount that bears the same proportion to the said
balance as the liability on policies appertaining to the controlled
business of the insurer, other than those expressed in any foreign
currency issued on the lives of persons who are citizens of India, bears
to the liability in respect of all policies appertaining to such business,
the liabilities on policies being computed as at the 31st day of
December, 1955, in accordance with the provisions contained in clause
(b) of the Second Schedule:
Part B
Paragraph 3. Assets —
a. The market value of any land or buildings.
b. The market value of any shares, securities or other investments held by

the insurer.
c. The total amount of the premiums paid by the insurer in respect of all
leasehold properties reduced in the case of each such premium by an
amount which bears to such premium the same proportion as the
expired term of the lease in respect of which such premium shall have
been paid bears to the total term of the lease.
d. The amount of debts due to the insurer, whether secured or unsecured,

to the extent to which they are reasonably considered to be recoverable.
e. The amount of premiums which have fallen due to the insurer on

policies of life Insurance but have not been paid and the days of grace
for payment of which have not expired.
f. The amount of cash held by the insurer whether in deposit with a bank
or otherwise.
g. The value of all tangible assets other than those falling within any of the
preceding clauses.
! !401
Paragraph 4 Liabilities —
a. The total amount of liabilities of the insurer to holders of policies in

respect of his controlled business on account of matured claims on
which payment has to be made.
b. The total amount of liabilities of the insurer to holders of policies in

respect of his controlled business which have not matured for payment,
the liabilities in respect thereof being calculation on the following
actuarial bases:—
i) In respect of whole-life assurances and endowment assurances, the

mortality table to be used shall be the Oriental (23-35) ultimate
mortality table, and an interest rate of 31/4 per cent, per annum
shall be assumed and for expenses 20 per cent of office premiums in
the case of with-profit policies and 15 per cent of office premiums in
the case of non-profit policies shall be reserved;
ii) In respect of other policies such actuarial bases determined by the

actuary making the valuation as may be consistent with the basis
specified in clause (i); and
iii) In determining the liabilities of insurers under clause (b) the actuary
shall make all the usual provisions and reserves as are ordinarily
done in such cases.
c. The total amount of all other liabilities of the insurer.
d. Where, as a result of the actuarial valuation of policy liabilities made

under clause, (b) the life insurance fund is shown to be in surplus, a
sum equal to 96 per cent.of such surplus shall be deemed to be a
liability under this paragraph.
Paragraph 5.—If the insurer to whom compensation is to be given under

this part is a displaced insurer, the compensation to be given shall be
computed in accordance with following provisions:—
Firstly, there shall be ascertained the losses incurred by the displaced

insurer in respect of claims arising by deaths established by the displaced
insurer to have been caused by the civil disturbances which took place on
! !402
the occasion of the setting up of the Dominions of India and Pakistan, the
total loss being taken as the difference between the amounts paid as
claims in respect of such deaths and the total amount of the actuarial
reserve in respect of the relevant policies;
Secondly, there shall be ascertained the difference between the market

value as at the 15th day of August 1947, of any immovable property in
West Pakistan belonging to the displaced insurer and the market value
thereof determined under Paragraph 3 of this part, or, where any such
immovable property has been sold before the 19th day of January, 1956,
the difference between the market value thereof as at the 15th day of
August 1947, and the sale price;
Thirdly, there shall be ascertained the amount of deposits held by the

displaced insurer in banks which could not be withdrawn on account of a
moratorium declared under any law for the time being in force, to the
extent to which such deposits have become losses;
Fourthly, there shall be ascertained the difference between the market

value as at the 15th day of August, 1947, of any shares in any company
now carrying on business in West Pakistan held by the displaced insurer
and which had been acquired before the 15th day of August, 1947, and the
market value of such shares as at the 19th day of January, 1956.
The amount of compensation to be given to the displaced insurer under

this part shall be—
(a) The amount which would have to be given to him if this Paragraph had
not been enacted, plus
(b) An amount which represents one-half of the difference between the

compensation which would have to be given to him if to the value of
the assets referred to in Paragraph 3 there had been added the sum of
the four items referred to in this Paragraph and with respect to the
liabilities referred to in Paragraph 4, the life insurance fund had been
increased by a like sum, and the compensation which would have to be
given to him if this Paragraph had not been enacted or one half of the
paid-up capital of the displaced insurer whichever is less.
! !403
PART C
The compensation to be given by the Corporation to an insurer:—
a. Having no share capital; or
b. Having a share capital on which a dividend or bonus is not payable;

Shall be in the form of an addition at the rate of rupee one per thousand
in respect of the sun assured (excluding bonuses) under each with-profit
policy, and in the case of an insurer falling under clause (b), such
compensation shall also include a sun equivalent to the paid-up capital
of the insurer to be paid to him.
Principles for Determining the Value of Liabilities in Certain Cases
The total amount of the liabilities of an insurer incorporated outside India

for the purposes of subsection (2) of section 36 shall be the sum of the
amounts computed in accordance with the following provisions:—
(a) The total amount of liabilities of the insurer to holders of policies in

respect of his controlled business on account of matured claims on
which payment has to be made:
(b) The total amount of liabilities of the insurer to holders of policies in

respect of his controlled business which have not matured for
payment, the liabilities in respect thereof being the liabilities calculated
in accordance with method B below or the mean of the liabilities
calculated in accordance with method A and method B below,
whichever is greater.
Method A.—Actuarial liability calculated on the same bases as adopted by

the insurer at the last actuarial investigation as at a date earlier than the
1st of January, 1955.
Method B.—Actuarial liability calculated on the methods knows as the

modified net premium method of valuation, the mortality table to be used
being the Oriental (25-35) ultimate mortality table, an interest rate of 21/2
per cent, per annum being assumed and the allowance for first year
expenses being ` 40 per thousand rupees of the sum assured by the policy.
! !404
Principles for Determining Compensation Payable to Chief Agents
The compensation payable to a chief agent shall consist of seventy-five per

cent, of the overriding commission specified in the contract relating to chief
agency with the insurer on the renewal premiums received by the
Corporation during a period of ten years from the appointed day in respect
of the business procured by the chief agent before the appointed day; and
such compensation shall be determined and paid annually for the said
period.
Principles for Determining Compensation Payable to Special Agents
The compensation payable to a special agent shall consist of one eighth of

his annual average earnings during the period beginning on the 1st day of
January, 1952, and ending on the 31st day of December, 1955, in the form
of overriding commissions in respect of business procured by him through
insurance agents.
Return of Premium
Sometimes, the conditions are such that the contract of insurance becomes
void, e.g., when the affected party has opted to avoid the contract. Or,
sometimes the consideration has failed, e.g., where the property insured is
destroyed before the commencement of business. Thus, in some cases, the
insurer is bound to return the premiums.
The cases might be non-disclosure of facts or mistakes by the insured, or a

fraud made by him or the insurance agent, or cancellation by the insured
or insurer due to some ignorance earlier, or negligence, or in some cases,
the surrender of the policy in the free-look period. In such cases, the
premium is returned by the insurer. There are specific laws about the life
insurance policies about this by IRDA.
12.4 REINSURANCE
Reinsurance is a term used when the insurer find that the risk involved is
beyond his capacity, so he insures the same risk either wholly or partially
with other insurers. This can happen in all kinds of insurance. The insurer
has an insurable interest in the subject-matter insured to the extent of the
amount insured by him because a contract of re-insurance is also a
! !405
contract of indemnity. The regular principles of insurance like insurable

interest, utmost good faith, etc, are also applicable to reinsurance.
Reinsurer is allowed to get a proportionate part of the premium. He gets

the benefits of the terms and conditions of the original policy. If for any
reason the original policy lapses, the reinsurance is also ended with
immediate effect. Reinsurer is liable to pay the portion of the risk
transferred to him. Reinsurer is liable only to the first insurer because there
is no contract between the insurer and the originally insured person.
Double insurance is a term applied when the same risk and the same
subject-matter is insured with more than one insurer. If a person, who is
the owner of a factory building, insures it against fire for ` 10,00,000 with
one insurer and insures the same factory building for ` 5,00,000 with
another insurer, that is double insurance. However, if the assured insurers
the same risk and the same subject with two or more independent
insurers, and the total sum insured exceeds the actual value of the subject-
matter, the assured is said to be over-insured by double insurance. Here, in
this case, the assured cannot recover more than the actual amount of loss.
Because, in cases other than life and personal accident insurance, the
contract of insurance is a contract of indemnity.
The major differences between reinsurance and double insurance are (a) In
case of double insurance, the same risk and same subject is covered, while
in reinsurance, the part of risk is transferred to another insurer. (b) In case
of double insurance other than life, the loss will be shared by all the
insurers (In case of life insurance being double, all the insurers are liable;
while in reinsurance, the reinsurer is liable for proportionate part of the
loss. (c) In double insurance, each insurer is liable directly to policy holder,
while the re-insurer is liable only to the first insurer. (d) Double insurance
is a method of assuring the benefit of insurance. (In case of life insurance
the insured may have any number of policies and for any amount) While
reinsurance is a method of reducing of the risk of the insurer.
12.5 FIRE INSURANCE
The fire insurance contracts are governed by the Insurance Act, 1938 (as
amended up to date) and the General Insurance Business (Nationalisation)
Act, 1972, besides the judicial decisions of courts.
! !406
The Insurance Act defines fire insurance as : "Fire insurance business

means the business of effecting, otherwise than incidentally to some other
class of business contracts of insurance against loss by or incidental to fire
or other occurrence customarily included among the risks injured against in
fire insurance policies”.
‘Fire’ in a fire insurance policy is the fire when something burns. Fire
produces heat and light but either of them alone is not fire. Electricity or
Lightning is not fire. But if that ignites something, the damage may be
covered by a fire policy. Unless there is actual ignition and loss be
proximately caused by such ignition, the insurers are not liable. The heat of
the sun often contacts timber, but that would not be considered as loss by
fire. Note that had the heat might be cause by actual ignition of premises
where the timber was kept, the damage shall be deemed as 'damage by
fire'. To understand the fire insurance business governed by the General
Insurance Business (Nationalisation) Act, 1972, let us study the details and
definitions of the act.
The General Insurance Business (Nationalisation) Act, 1972
1. This Act may be called the General Insurance Business (Nationalisation)

Act, 1972.
2. It is applicable to all States of India.
! !407
Definitions
(a) "acquiring company" means any Indian insurance company and, where
a scheme has been framed involving the merger of one Indian
insurance company in another or the amalgamation of two or more
such companies, means the Indian insurance company in which any
other company has been merged or the company which has been
formed as a result of the amalgamation; 206
(b) "appointed day" means such day , not being a day later than the 2nd
day of January, 1973, as the Central Government may, by notification,
appoint;
(c) "Companies Act" means the Companies Act, 1956 (1 of 1956);
(d) "Corporation" means the General Insurance Corporation of India

formed under section 9;
(e) "existing insurer" means every insurer the management of whose

undertaking has vested in the Central Government under section 3 of
the General insurance (Emergency Provisions) Act, 1971 (17 of 1971),
and includes the undertaking of the Life Insurance Corporation in so
far as it relates to the general insurance business carried on by it;
(f) "foreign insurer" means an existing insurer incorporated under the law
of any country outside India;
(g) "general insurance business" means fire, marine or miscellaneous

insurance business, whether carried on singly or in combination with
one or more of them, but does not include capital redemption business
and annuity certain business;
(h) "Government company" means a Govt. company as defined in section

617 of the Companies Act;
(i) "Indian insurance company" means an existing insurer having a share

capital who is a company within the meaning of the Companies Act;
! !408
(j) "Insurance Act" means the Insurance Act, 1938 (4 of 1938);
(k) "Life Insurance Corporation" means the Life Insurance Corporation of

India established under the Life Insurance Corporation Act, 1956 (31
of 1956);
(l) "notification" means a notification published in the Official Gazette;
(m) "prescribed" means prescribed by rules made under this Act;
(n) "Schedule" means the Schedule to this Act;
(o) "scheme" means the scheme framed under section 16 2
(p) words and expressions used in this Act but not defined herein and
defined in the Insurance Act, shall have the meanings respectively
assigned to them in that Act,
(q) words and expressions used in this Act but not defined herein or in the
Insurance Act and defined in the Companies Act, shall have the
meanings respectively assigned to them in the Companies Act.  
 
General Insurance Corporation of India was formed under which four
companies were established to take care of General Insurance (Other
than Life Insurance) and which included fire insurance, marine
insurance and miscellaneous insurance business.
! !409
Fire Insurance Policies
The policies of fire insurance are divided into seven types based on the
type of policy. The insured sums may or may not be different in these
types, but the type of risk may be different.
The types of policies are – (i) Ordinary – The insured amount equals the
original stated price of the property less the depreciated cost. (ii) Specific –
Where the liability equals the specific amount , which is less than the total
original cost of the property, and the loss reimbursed is the actual loss
incurred; which is less than the insured amount. (iii) Valued policy – Where
the insurer is bound to pay specific amount irrespective of the actual loss.
(iv) Average Policy – Here the insurer does not pay the full loss amount but
pays only a pre-decided proportion of the loss for which it is insured. This
is done basically to reduce the premium and cover the loss to certain
extent. (v) Replacement policy – Here the insurer pays the cost of
replacement of the property or its part under consideration. (vi) Floating
policy – To cover the property situated at different places, this type of
policy is used. It is based on average of the prices. (vii) Combined policy –
When the cause of loss may be different, this policy is used. Say, along
with fire, riots/burglary/flood, etc. In this type, the loss of downtime of the
property/equipment may also be added but the premium rises in such
cases.
On the happening of any loss or damage to the property or goods insured,

the assured should give the notice of loss to the insurer, then immediately
report to the police if the fire is caused by arson, then submit the
statement of claim in writing along with the police report copy. Particulars
of other insurance, if any, are also required to be mentioned. The claim
should be submitted within 15 days of mishap, and should include evidence
of the losses.
12.6 MISCELLANEOUS INSURANCE
Personal Accident Insurance
The accident or miscellaneous department covers those types of risk which

are not covered either under Fire or Marine Departments. Its scope is
therefore, very wide and extensive and includes such a wide range of
contingencies as may not be included in the strict interpretation of the
! !410
term ‘Accident’. The Accident or the miscellaneous insurance includes many

subsections under which different classes of business are transacted. A
special feature of this department is that it covers many branches which
are grouped together in it which are apparently unrelated to each other.
However in practise, unrelated risks are grouped together for the
convenience of the insured.
In case of personal accident insurance, the insurer promises to pay a

certain sum of money to the insured in case of injury by accident and to
the dependent of the insured in case of death by accident. Normally, the
insurer has to pay a fixed sum of money. He is not required to indemnify
the assured. The contract of insurance is made in the same manner as
other forms of insurance. The contract must satisfy all the essential
requirements of an insurance contract. In India, accident insurance
against railway accidents is almost unknown but insurance against
accidents during air journeys is very popular. Recently, Indian Railways is
also considering to adopt accident insurance limited to the journey, by
purchase of extra coupons, like ari journey coupons. Insurance against
personal accident may be and usually is, a part of motor car insurance,
known as ‘third party insurance’ which is compulsory in car and two
wheeler owners.
Insurance against theft : Goods may be insured against robbery or theft.

The policy in such cases lays down what risks are covered. The
policyholders is usually required to take all reasonable precautions against
loss by theft or robbery. In burglary and accident notice/information must
be given to the insurer immediately or as soon as possible, followed by a
police station F.I.R.
Motor Vehicle Insurance (Motor Vehicles Act of 1988)
In case of road accidents, which are more in quantity in India, the Motor
Vehicles Act,1988 has laid down specific clauses for preparing proper
documents for claiming insurance.
Definitions
a. “authorised insurer” means an insurer for the time being carrying on

general insurance business in India under the General Insurance
Business (Nationalisation) Act, 1972 (57 of 1972), and any Government
! !411
insurance fund authorised to do general insurance business under that

Act;
b. “certificate of insurance” means a certificate issued by an authorised

insurer in pursuance of subsection (3) of section 147 and includes a
cover note complying with such requirements as may be prescribed, and
where more than one certificate has been issued in connection with a
policy, or where a copy of a certificate has been issued, all those
certificates or that copy, as the case may be;
c. “liability”, wherever used in relation to the death of or bodily injury to

any person, includes liability in respect thereof under section 140;
d. “policy of insurance” includes “certificate of insurance”;
e. “property” includes goods carried in the motor vehicle, roads, bridges,

culverts, causeways, trees, posts and mile-stones;
f. “reciprocating country” means any such country as may on the basis of

reciprocity be notified by the Central Government in the Official Gazette
to be a reciprocating country for the purposes of this Chapter;
g. “third party” includes the Government.
Duty of driver in case of accident and injury to a person.
When any person is injured or any property of a third party is damaged, as

a result of an accident in which a motor vehicle is involved, the driver of
the vehicle or other person in charge of the vehicle shall—
a. unless it is not practicable to do so on account of mob fury or any other

reason beyond his control, take all reasonable steps to secure medical
attention for the injured person, 1[by conveying him to the nearest
medical practitioner or hospital, and it shall be the duty of every
registered medical practitioner or the doctor on the duty in the hospital
immediately to attend to the injured person and render medical aid or
treatment without waiting for any procedural formalities], unless the
injured person or his guardian, in case he is a minor, desires otherwise;
! !412
b. give on demand by a police officer any information required by him, or,

if no police officer is present, report the circumstances of the
occurrence, including the circumstances, if any, for not taking
reasonable steps to secure medical attention as required under clause
(a), at the nearest police station as soon as possible, and in any case
within twenty-four hours of the occurrence; 2[(c) give the following
information in writing to the insurer, who has issued the certificates of
insurance, about the occurrence of the accident, namely:—
(i) insurance policy number and period of its validity;

(ii) date, time and place of accident;
(iii) particulars of the persons injured or killed in the accident;
(iv) name of the driver and the particulars of his driving licence.
Explanation.—For the purposes of this section the expression
“driver” includes the owner of the vehicle.]
Liability to pay compensation in certain cases on the principle of no

fault.
1. Where death or permanent disablement of any person has resulted from

an accident arising out of the use of a motor vehicle or motor vehicles,
the owner of the vehicle shall, or, as the case may be, the owners of the
vehicles shall, jointly and severally, be liable to pay compensation in
respect of such death or disablement in accordance with the provisions
of this section.
2. The amount of compensation which shall be payable under subsection

(1) in respect of the death of any person shall be a fixed sum of 1[fifty
thousand rupees] and the amount of compensation payable under that
subsection in respect of the permanent disablement of any person shall
be a fixed sum of twenty-five thousand rupees.
3. In any claim for compensation under subsection (1), the claimant shall
not be required to plead and establish that the death or permanent
disablement in respect of which the claim has been made was due to
any wrongful act, neglect or default of the owner or owners of the
vehicle or vehicles concerned or of any other person.
4. A claim for compensation under subsection (1) shall not be defeated by

reason of any wrongful act, neglect or default of the person in respect of
! !413
whose death or permanent disablement the claim has been made nor
shall the quantum of compensation recoverable in respect of such death
or permanent disablement be reduced on the basis of the share of such
person in the responsibility for such death or permanent disablement.
Provisions as to other right to claim compensation for death or

permanent disablement.
1. The right to claim compensation under section 140 in respect of death

or permanent disablement of any person shall be in addition to 1[any
other right, except the right to claim under the scheme referred to in
section 163A (such other right hereafter] in this section referred to as
the right on the principle of fault) to claim compensation in respect
thereof under any other provision of this Act or of any other law for the
time being in force.
2. A claim for compensation under section 140 in respect of death or

permanent disablement of any person shall be disposed of as
expeditiously as possible and where compensation is claimed in respect
of such death or permanent disablement under section 140 and also in
pursuance of any right on the principle of fault, the claim for
compensation under section 140 shall be disposed of as aforesaid in the
first place.
3. Notwithstanding anything contained in sub-section (1), where in respect

of the death or permanent disablement of any person, the person liable
to pay compensation under section 140 is also liable to pay
compensation in accordance with the right on the principle of fault, the
person so liable shall pay the first-mentioned compensation and—
(a) if the amount of the first-mentioned compensation is less than the

amount of the second-mentioned compensation, he shall be liable to
pay (in addition to the first-mentioned compensation) only so much
of the second-mentioned compensation as is equal to the amount
by which it exceeds the first mentioned compensation;
(b) if the amount of the first-mentioned compensation is equal to or

more than the amount of the second-mentioned compensation, he
shall not be liable to pay the second-mentioned compensation.
! !414
Necessity for insurance against third party risk.
In this section, the act defines the necessity of a third party insurance in
India, where the damaged person gets the amount from the vehicle owner
or driver. The damaged person has himself not paid any premium but he
has suffered due to the accident and hence the necessity. The act has
elaborated all the required points in details, including the rights of the third
party. In addition to this, the owner of a motor vehicle may and, usually
does, insure his vehicle against any damage that it may suffer. He may also
insure against personal accident to himself and other occupants of the
motor vehicle.
The policies under motor insurance are (i) act liability (ii) their party only
and (iii) comprehensive policy. A comprehensive policy covers the risks like
damage to car parts or body, removal, charge for repairs, third party
liabilities, costs and expenses incurred with risk, repair changes, medical
expenses etc.
12.7 MARINE INSURANCE
Marine Policy or Sea Policy is issued in case of Marine Insurance. Normally,

a marine insurance is effected only against risks at sea. But the contract
may by its express terms or by usage of trade be extended so as to protect
the assured against loss on inland waters or on any land risk which may be
incidental to the sea voyage. A marine insurance policy may cover a ship in
the course of building or launching of a ship, or any adventure of ship or
boat at the sea.
! !415
The Marine Insurance may be obtained to cover the vessel and its
equipment (furniture, fittings, engines, machinery etc.); or Cargo and
goods in the shipment (Cargo Insurance); Or Shipping Freight (freight
insurance); Or to take care of damages by collision, storm, etc. (Liability
Insurance).
12.8 The Marine Insurance Act, 1963
Short title and commencement.—
1. This Act may be called the Marine Insurance Act, 1963.
2. It shall come into force on such date1 as the Central Government may,
Definitions.—In this Act, unless the context otherwise requires,—
(a) “contract of marine insurance” means a contract of marine insurance

as defined by section 3;
(b) “freight” includes the profit derivable by a shipowner from the

employment of his ship to carry his own goods or other movables, as
well as freight payable by a third party, but does not include passage
money;
(c) “insurable property” means any ship, goods or other movables which
are exposed to maritime perils;
(d) “marine adventure” includes any adventure where—
(i) any insurable property is exposed to maritime perils;
(ii) the earnings or acquisition of any freight, passage money,

commission, profit or other pecuniary benefit, or the security for
any advances, loans, or disbursements is endangered by the
exposure of insurable property to maritime perils;
(iii) any liability to a third party may be incurred by the owner of or

other person interested in or responsible for, insurable property by
reason of maritime perils;
! !416
(e) “maritime perils” means the perils consequent on, or incidental to, the
navigation of the sea, that is to say, perils of the sea, fire, war perils,
pirates, rovers, thieves, captures, seizures, restraints and detainments
of princes and peoples, jettisons, barratry and any other perils which
are either of the like kind or may be designated by the policy;
(f) “movables” means any movable tangible property, other than the ship,
and includes money, valuable securities and other documents;
(g) “policy” means a marine policy;
(h) “ship” includes every description of vessel used in navigation;
(i) “suit” includes counter-claim and set-off.
Marine insurance defined.—A contract of marine insurance is an agreement

whereby the insurer undertakes to indemnify the assured, in the manner
and to the extent thereby agreed, against marine losses, that is to say, the
losses incidental to marine adventure.
Mixed Sea and Land Risks.—
1. A contract of marine insurance may, by its express terms, or by usage

of trade, be extended so as to protect the assured against losses on
inland waters or on any land risk which may be incidental to any sea
voyage.
2. Where a ship in course of building or the launch of a ship, or any

adventure analogous to a marine adventure, is covered by a policy in
the form of a marine policy, the provisions of this Act, in so far as
applicable, shall apply thereto, but, except as by this section provided,
nothing in this Act shall alter or affect any rule of law applicable to any
contract of insurance other than a contract of marine insurance as by
this Act defined. Explanation.—An adventure analogous to a marine
adventure’ includes an adventure where any ship, goods or other
movables are exposed to perils incidental to local or inland transit.
Lawful marine adventure.—Subject to the provisions of this Act, every

lawful marine adventure may be the subject of a contract of marine
insurance.
! !417
Avoidance of wagering contracts.—Every contract of marine insurance by

way of wagering is void.
A contract of marine insurance is deemed to be a wagering contract—
(a) where the assured has not an insurable interest as defined by this Act,
and the contract is entered into with no expectation of acquiring such
an interest; or
(b) where the policy is made “interest or no interest”, or “without further

proof of interest than the policy itself”, or “without benefit of salvage to
the insurer”, or subject to any other like term: Provided that, where
there is no possibility of salvage, a policy may be effected without
benefit of salvage to the insurer.
Insurable interest defined.—
1. Subject to the provisions of this Act, every person has an insurable

interest who is interested in a marine adventure.
2. In particular a person is interested in a marine adventure where he

stands in any legal or equitable relation to the adventure or to any
insurable property at risk therein, in consequence of which he may
benefit by the safety or due arrival of insurable property, or may be
prejudiced by its loss, or by damage thereto, or by the detention
thereof, or may incur liability in respect thereof.
Reinsurance.—
1. The insurer under a contract of marine insurance has an insurable

interest in his risk, and may reinsure in respect of it.
2. Unless the policy otherwise provides, the original assured has no right
or interest in respect of such reinsurance.
Advance freight.—In the case of advance freight, the person advancing the
freight has an insurable interest, in so far as such freight is not repayable
in case of loss.
! !418
Charges of insurance.—The assured has an insurable interest in the

charges of any insurance which he may effect.
Quantum of interest.—
1. Where the subject-matter insured is mortgaged, the mortgagor has an

insurable interest in the full value thereof, and the mortgagee has an
insurable interest in respect of any sum due or to become due under the
mortgage.
2. A mortgagee, consignee, or other person having an interest in the

subject-matter insured may insure on behalf and for the benefit of other
persons interested as well as for his own benefit.
3. The owner of insurable property has an insurable interest in respect of

the full value thereof, notwithstanding that some third person may have
agreed, or be liable to indemnify him in case of loss.
Assignment of interest.—Where the assured assigns or otherwise parts with

his interest in the subject-matter insured, he does not thereby transfer to
the assignee his rights under the contract of insurance, unless there be an
express or implied agreement with the assignee to that effect. But the
provisions of this section do not affect transmission of interest by operation
of law.
Insurance is uberrimae fidei.—A contract of marine insurance is a contract

based upon the utmost good faith, and if the utmost good faith be not
observed by either party, the contract may be avoided by the other party.
When contract is deemed to be concluded.—A contract of marine insurance

is deemed to be concluded when the proposal of the assured is accepted by
the insurer, whether the policy be then issued or not; and for the purpose
of showing when the proposal was accepted, reference may be made to the
slip, covering note or other customary memorandum of the contract,
although it be unstamped.
Contract must be embodied in policy.—A contract of marine insurance shall

not be admitted in evidence unless it is embodied in a marine policy in
accordance with this Act. The policy may be executed and issued either at
the time when the contract is concluded, or afterwards.
! !419
What policy must specify
A marine policy must specify—
1. the name of the assured, or of some person who effects the insurance
on his behalf;
2. the subject matter insured and the risk insured against;
3. the voyage, or period of time, or both, as the case may be, covered by
the insurance;
4. the sum or sums insured;
5. the name or names of the insurer or insurers.
Signature of insurer
1. A marine policy must be signed by or on behalf of the insurer.
2. Where a policy is subscribed by or on behalf of two or more insurers,

each subscription, unless the contrary be expressed, constitute a
distinct contract with the assured.
Voyage and time policies
1. Where the contract is to insure the subject-matter at and from, or from

one place to another or others, the policy is called a “voyage policy”,
and where the contract is to insure the subject matter for a definite
period of time, the policy is called a “time policy”. A contract for both
voyage and time may be included in the same policy.
2. A time policy which is made for any time exceeding twelve months is
invalid.
Valued policy
1. A policy may be either valued or unvalued.
2. A valued policy is a policy which specifies the agreed value of the

subject matter insured.
! !420
3. Subject to the provisions of this Act, and in the absence of fraud, the
value fixed by the policy is, as between the insurer and assured,
conclusive of the insurable value of the subject intended to be insured,
whether the loss be total or partial.
4. Unless the policy otherwise provides, the value fixed by the policy is not
conclusive for the purpose of determining whether there has been a
constructive total loss.
Unvalued policy - An unvalued policy is a policy which does not specify

the value of the subject matter insured, but subject to the limit of the sum
insured, leaves the insurable value to be subsequently ascertained, in the
manner hereinbefore explained.
Floating policy by ship or ships
1. A floating policy is a policy which describes the insurance in general

terms, and leaves the name or names of the ship or ships and other
particulars to be defined by subsequent declaration.
2. The subsequent declaration or declarations may be made by

endorsement on the policy, or in other customary manner.
3. Unless the policy otherwise provides, the declarations must be made in

the order of dispatch or shipment. They must, in the case of goods,
comprise all consignments within the terms of the policy, and the value
of the goods or other property must be honestly stated, but an omission
or erroneous declaration may be rectified even after loss or arrival,
provided the omission or declaration was made in good faith.
4. Unless the policy otherwise provides, where a declaration of value is not

made until after notice of loss or arrival, the policy must be treated as
an unvalued policy as regards the subject matter of that declaration.
Construction of terms in policy
1. A policy may be in the form in the Schedule.
2. Subject to the provisions of this Act, and unless the context of the policy
otherwise requires, the terms and expressions mentioned in the
! !421
Schedule shall be construed as having the scope and meaning assigned

to them in the Schedule.
Premium to be arranged
1. Where an insurance is effected at a premium to be arranged, and no

arrangement is made, a reasonable premium is payable.
2. Where an insurance is effected on the terms that an additional premium

is to be arranged in a given event, and that event happens but no
arrangement is made, then a reasonable additional premium is payable.
Double insurance
1. Where two or more policies are effected by or on behalf of the assured

on the same adventure and interest or any part thereof, and the sums
insured exceed the indemnity allowed by this Act, the assured is said to
be over-insured by double insurance.
2. Where the assured is over-insured by double insurance—
a) the assured, unless the policy otherwise provides, may claim

payment from the insurers in such order as he may think fit,
provided that he is not entitled to receive any sum in excess of the
indemnity allowed by this Act;
b) where the policy under which the assured claims is a valued policy,
the assured must give credit as against the valuation, for any sum
received by him under any other policy, without regard to the actual
value of the subject matter insured;
c) where the policy under which the assured claims is an unvalued

policy he must give credit, as against the full insurable value, for
any sum received by him under any other policy;
d) where the assured receives any sum in excess of the indemnity

allowed by this Act, he is deemed to hold such sum in trust for the
insurers, according to their right of contribution among themselves.
! !422
12.9 WARRANTY
Nature of warranty
1. A warranty, in the following sections relating to warranties, means a

promissory warranty, that is to say a warranty by which the assured
undertakes that some particular thing shall or shall not be done, or that
some condition shall be fulfilled, or whereby he affirms or negatives the
existence of a particular state of facts.
2. A warranty may be express or implied.
3. A warranty, as above defined, is a condition which must be exactly

complied with, whether it be material to the risk or not. If it be not so
complied with, then, subject to any express provision in the policy the
insurer is discharged from liability as from the date of the branch of
warranty but without prejudice to any liability incurred by him before
that date.
When breach of warranty excused.—
1. Non-compliance with a warranty is excused when, by reason of a

change of circumstances, the warranty ceases to be applicable to the
circumstances of the contract, or when compliance with the warranty is
rendered unlawful by any subsequent law.
2. Where a warranty is broken, the assured cannot avail himself of the

defence that the breach has been remedied, and the warranty complied
with before loss.
3. A breach of warranty may be waved by the insurer.
Express warranties.—
1. An express warranty may be in any form of words from which the

intention to warrant is to be inferred.
2. An express warranty must be included in, or written upon, the policy, or

must be contained in some document incorporated by reference into the
policy.
! !423
3. An express warranty does not exclude implied warranty, unless it be

inconsistent therewith.
Warranty of neutrality.—
1. Where insurable property, whether ship or goods, is expressly warranted

neutral, there is an implied condition that the property shall have a
neutral character at the commencement of the risk, and that, so far as
the assured can control the matter, its neutral character shall be
preserved during the risk.
2. Where a ship is expressly warranted “neutral”, there is also an implied

condition that, so far as the assured can control the matter, she shall be
properly documented, that is to say, that she shall carry the necessary
papers to establish her neutrality, and that she shall not falsify or
suppress her papers, or use simulated papers. If any loss occurs
through breach of this condition, the insurer may avoid the contract. 
 
No implied warranty of nationality.—There is no implied warranty as to
the nationality of a ship, or that her nationality shall not be changed
during the risk. 
 
Warranty of good safety - Where the subject matter insured is
warranted “well” or “in good safety” on a particular day, it is sufficient if
it be safe at any time during that day.
! !424
Warranty of seaworthiness of ship
1. In a voyage policy there is an implied warranty that at the

commencement of the voyage the ship shall be seaworthy for the
purpose of the particular adventure insured.
2. Where the policy attaches while the ship is in port, there is also an
implied warranty that she shall, at the commencement of the risk, be
reasonably fit to encounter the ordinary perils of the port.
3. Where the policy relates to a voyage which is performed in different

stages, during which the ship requires different kinds of or further
preparation or equipment, there is an implied warranty that at the
commencement of each stage the ship is seaworthy in respect of such
preparation or equipment for the purposes of that stage.
4. A ship deemed to be seaworthy when she is reasonably fit in all respects

to encounter the ordinary perils of the sea of the adventure insured.
5. In a time policy there is no implied warranty that the ship shall be

seaworthy at any stage of the adventure, but where, with the privity of
the assured, the ship is sent to sea in an unseaworthy state, the insurer
is not liable for any loss attributable to unseaworthiness.
No implied warranty that goods are seaworthy.—
1. In a policy on goods or other movable there is no implied warranty that

the goods or movables are seaworthy.
2. In a voyage policy on goods or other movables there is an implied

warranty that at the commencement of the voyage the ship is not only
seaworthy as a ship, but also that she is reasonably fit to carry the
goods or other movables to the destination contemplated by the policy.
Warranty of legality.—There is an implied warranty that the adventure

insured is a lawful one, and that, so far as the assured can control the
matter, the adventure shall be carried out in a lawful manner.
! !425
Implied conditions as to commencement of risk.—
1. Where the subject matter is insured by a voyage policy “at and from” or
“from” a particular place, it is not necessary that the ship should be at
that place when the contract is concluded, but there is an implied
condition that the adventure shall be commenced within a reasonable
time, and that if the adventure be not so commenced the insurer may
avoid the contract.
2. The implied condition may be negatived by showing that the delay was
caused by circumstances known to the insurer before the contract was
concluded, or showing that he waived the condition.
Alteration of port of departure.—Where the place of departure is specified

by the policy, and the ship instead of sailing from that place sails from any
other place, the risk does not attach.
Sailing for different destination.—Where the destination is specified in the

policy, and the ship, instead of sailing for that destination, sails for any
other destination, the risk does not attach.
Change of voyage.—
1. Where, after the commencement of the risk, the destination of the ship
is voluntarily changed from the destination contemplated by the policy,
there is said to be a change of voyage.
2. Unless the policy otherwise provides, where there is a change of

voyage, the insurer is discharged from liability as from the time of
change, that is to say, as from the time when the determination to
change it is manifested, and it is immaterial that the ship may not in
fact have left the course of voyage contemplated by the policy when the
loss occurs.
Deviation.—
1. Where a ship, without lawful excuse, deviates from the voyage

contemplated by the policy, the insured is discharged from liability as
from the time of deviation, and it is immaterial that the ship may have
regained her route before any loss occurs.
! !426
2. There is a deviation from the voyage contemplated by the policy—
a) where the course of the voyage is specifically designated by the

policy, and that course is departed from; or
b) where the course of the voyage is not specifically designated by the

policy, but the usual and customary course is departed from.
3. The intention to deviate is immaterial; there must be a deviation in fact

to discharge the insurer from his liability under the contract.
Several ports of discharge.—
1. Where several ports of discharge are specified by the policy, the ship
may proceed to all or any of them, but, in the absence of any usage or
sufficient cause to the contrary, she must proceed to them, or such of
them as she goes to, in the order designated by the policy. If she does
not there is a deviation.
2. Where the policy is to “ports of discharge”, within a given area, which

are not named, the ship must, in the absence of any usage or sufficient
cause to the contrary, proceed to them, or such of them as she goes to,
in their geographical order. If she does not there is a deviation.
Delay in voyage.—In the case of a voyage policy, the adventure insured

must be prosecuted throughout its course with reasonable despatch, and, if
without lawful excuse it is not so prosecuted, the insurer is discharged
from liability as from the time when the delay became unreasonable.
Excuse for deviation or delay.—
1. Deviation or delay in prosecuting the voyage contemplated by the policy

is excused—
a) where authorised by any special term in the policy; or
b) where caused by circumstances beyond the control of the master

and his employer; or
! !427
c) where reasonably necessary in order to comply with an express or

implied warranty; or
d) where reasonably necessary for the safety of the ship or subject-

matter insured; or
e) for the purpose of saving human life or aiding a ship in distress

where human life may be in danger; or
f) where reasonably necessary for the purpose of obtaining medical or

surgical aid for any person on board the ship; or
g) where caused by the barratrous conduct of the master or crew, if

barratry be one of the perils insured against.
2. When the cause excusing the deviation or delay ceases to operate, the
ship must resume her course, and prosecute her voyage, with
reasonable dispatch.
When premium payable.—Unless otherwise agreed, the duty of the assured

or his agent to pay the premium, and the duty to the insurer to issue the
policy to the assured or his agent, are concurrent conditions, and the
insurer is not bound to issue the policy until payment or tender of
premium.
12.10 MARINE LOSSES
Included and excluded loses
1. Subject to the provisions of this Act, and unless the policy otherwise
provides, the insurer is liable for any loss proximately caused by a peril
insured against, but, subject as aforesaid, he is not liable for any loss
which is not proximately caused by a peril insured against.
2. In particular—
a) the insurer is not liable for any loss attributable to the wilful
misconduct of the assured, but, unless the policy otherwise
provides, he is liable for any loss proximately caused by a peril
! !428
insured against, even though the loss would not have happened but
for the misconduct or negligence of the master or crew;
b) unless the policy otherwise provides, the insurer on ship or goods is

not liable for any loss proximately caused by delay, although the
delay be caused by a peril insured against;
c) unless the policy otherwise provides, the insurer is not liable for
ordinary wear and tear, ordinary leakage and breakage, inherent
vice or nature of the subject matter insured, or for any loss
proximately caused by maritime perils.
Partial and total loss
1. A loss may be either total or partial. Any loss other than a total loss, is a
partial loss.
2. A total loss may be either an actual total loss, or a constructive total

loss.
3. Unless a different intention appears from the terms of the policy, an

insurance against total loss includes a constructive, as well as an actual,
total loss.
4. Where the assured brings a suit for a total loss and the evidence proves
only a partial loss, he may, unless the policy otherwise provides, recover
for a partial loss.
5. Where goods reach their destination in specie, but by reason of

obliteration of marks, or otherwise, they are incapable of identification,
the loss, if any is partial and not total.
Actual total loss
1. Where the subject matter insured is destroyed, or so damaged as to

cease to be a thing of the kind insured, or where the assured is
irretrievably deprived thereof, there is an actual total loss.
2. In the case of an actual total loss no notice of abandonment need be

given.
! !429
Missing ship.—Where the ship concerned in the adventure is missing, and

after the lapse of a reasonable time no news of her has been received, an
actual total loss may be presumed.
Constructive total loss defined
1. Subject to any express provision in the policy, there is a constructive

total loss where the subject matter insured is reasonably abandoned on
account of its actual total loss appearing to be unavoidable, or because
it could not be preserved from actual total loss without an expenditure
which would exceed its value when the expenditure had been incurred.
2. In particular, there is a constructive total loss—
i) where the assured is deprived of the possession of his ship or goods

by a peril insured against, and
(a) it is unlikely that he can recover the ship or goods, as the case
may be, or
(b) the cost of recovering the ship or goods, as the case may be,
would exceed their value when recovered; or
ii) in the case of damage to a ship, where she is so damaged by a peril

insured against that the cost of repairing the damage would exceed
the value of the ship when repaired. In estimating the cost of repairs,
no deduction is to be made is respect of general average
contributions to those repairs payable by other interests, but account
is to be taken of the expense of future salvage operations and of any
future general average contributions to which the ship would be liable
if required; or
iii) in the case of damage to goods, where the cost of repairing the
damage and forwarding the goods to their destination would exceed
their value on arrival.
Effect of constructive total loss—Where there is a constructive total loss the

assured may either treat the loss as a partial loss, or abandon the subject
matter insured to the insurer and treat the loss as if it where an actual
total loss.
! !430
Particular average loss
1. A particular average loss is a partial loss of the subject-matter insured,

caused by a peril insured against, and which is not a general average
loss.
2. Expenses incurred by or on behalf of the assured for the safety or

preservation of the subject-matter insured, other than general average
and salvage charges, are called particular charges. Particularly charges
are not included in particular average.
General average loss
1. A general average loss is a loss caused by or directly consequential on a

general average act. It includes a general average expenditure as well
as a general average sacrifice.
2. There is a general average act where any extraordinary sacrifice or

expenditure is voluntarily and reasonably made or incurred in time of
peril for the purpose of preserving the property imperilled in the
common adventure.
3. Where there is a general average loss, the party on whom it falls is

entitled, subject to the conditions imposed by maritime law, to a ratable
contribution from the other parties interested, and such contribution is
called a general average contribution.
4. Subject to any express provision in the policy, where the assured has
incurred a general average of expenditure, he may recover from the
insurer in respect of the proportion of the loss which falls upon him; and
in the case of a general average sacrifice, he may recover from the
insurer in respect of the whole loss without having enforced his right of
contribution from the other parties liable to contribute.
5. Subject to any express provision in the policy, where the assured has
paid, or is liable to pay, a general average contribution in respect of the
interest insured, he may recover therefor from the insurer.
6. In the absence of express stipulation, the insurer is not liable for any
general average loss or contribution where the loss was not incurred for
! !431
the purpose of avoiding, or in connection with the avoidance of a peril

insured against.
7. Where ship, freight, and cargo, or any two of those interests, are owned
by the same assured, the liability of the insurer in respect of general
average losses or contributions is to be determined as if those interests
were owned by different persons.
Extent of liability of insurer for loss
1. The sum which the assured can recover in respect of a loss on a policy
by which he is insured, in the case of an unvalued policy to the full
extent of the insurable value or in the case of a valued policy to the full
extent of the value fixed by the policy, is called the measure of
indemnity.
2. Where there is a loss recoverable under the policy, the insurer or each
insurer if there be more than one, is liable for such proportion of the
measure of indemnity as the amount of his subscription bears to the
value fixed by the policy in the case of a valued policy, or to the
insurable value in the case of an unvalued policy.
Total loss - Subject to the provisions of this Act, and to any express
provision in the policy, where there is a total loss of the subject matter
insured—
1. if the policy be a valued policy, the measure of indemnity is the sum

fixed by the policy;
2. if the policy be an unvalued policy the measure of indemnity is the

insurable value of the subject-matter insured.
Partial loss of ship Where a ship is damaged, but is not totally lost, the
measure of indemnity subject to any express provision in the policy, is as
follows:—
1. where the ship has been repaired, the assured is entitled to the
reasonable cost of the repairs, less the customary deductions, but not
exceeding the sum insured in respect of any one casualty;
! !432
2. where the ship has been only practically repaired, the assured is entitled
to the reasonable cost of such repairs, computed as above, and also to
be indemnified for the reasonable depreciation, if any, arising from the
unprepaired damage, provided that the aggregate amount shall not
exceed the cost of repairing the whole damage, computed as above;
3. where the ship has not been repaired, and has not been sold in her
damaged state during the risk, the assured is entitled to be indemnified
for the reasonable depreciation arising from the unrepaired damage, but
not exceeding the reasonable cost of repairing such damage, computed
as above;
4. where the ship has not been repaired, and has been sold in her
damaged state during the risk, the assured is entitled to be indemnified
for the reasonable cost of repairing the damage, computed as above,
but not exceeding the depreciation in value as ascertained by the sale.
Partial loss of freight - Subject to any express provision in the policy,

where there is a partial loss of freight, the measure of indemnity is such
proportion of the sum fixed by the policy in the case of a valued policy or of
the insurable value in the case of an unvalued policy, as the proportion of
freight lost by the assured bears to the whole freight at the risk of the
assured under the policy.
Partial loss of goods, merchandise, etc - Where there is a partial loss

of goods, merchandise, or other movable, the measure of indemnity,
subject to any express provision in the policy, is as follows:—
1. where part of the goods, merchandise or other movable insured by a

valued policy is totally lost, the measure of indemnity is such proportion
of the sum fixed by the policy as the insurable value of the part lost
bears to the insurable value of the whole, ascertained as in the case of
an unvalued policy;
2. where part of the goods, merchandise or other movable insured by an

unvalued policy is totally lost, the measure of indemnity is the insurable
value of the part lost, ascertained as in case of total loss;
3. where the whole or any part of the goods or merchandise insured has
been delivered damaged at its destination, the measure of indemnity is
such proportion of the sum fixed by the policy in the case of a valued
! !433
policy, or of the insurable value in the case of an unvalued policy, as the

difference between the gross sound and damaged values at the place of
arrival bears to the gross sound value;
4. “Gross value” means the wholesale price, or, if there be no such price,
the estimated value, with, in either case, freight, landing charges, and
duty paid beforehand; provided that, in the case of goods or
merchandise customarily sold in bond, the bonded price is deemed to be
the gross value. “Gross proceeds” means the actual price obtained at a
sale where all charges on sale are paid by the sellers.
Successive losses
1. Unless the policy otherwise provides, and subject to the provisions of

this Act, the insurer is liable for successive losses, even though the total
amount of such losses may exceed the sum insured.
2. Where, under the same policy, a partial loss, which has not been
repaired or otherwise made good, is followed by a total loss, the
assured can only recover in respect of the total loss: Provided that
nothing in this section shall affect the liability of the insurer under the
suing and labouring clause.
1 2 . 1 1 I R D A ( I N S U R A N C E R E G U L ATO RY A N D
DEVELOPMENT AUTHORITY)
In the year 1993 in April, the Central Government set up a committee on

insurance sector reforms, known as the Malhotra Committee. In January
1994, the Government accepted the entry of private players in this sector.
In addition to Indian companies, a number of international companies have
shown strong interest in entering the Indian insurance sector, both life and
general.
Most experts agreed that there is considerable potential that can be

exploited by new entrants. In the life insurance sector, the ratio of
premium expenditure to gross domestic product is a low 1.2 per cent. This
is much lower than many developed and developing economies. Similarly,
in the general insurance business; premium expenditure is only about 0.6
per cent of the Gross Domestic Product (GDP). In the non-life insurance
business, corporate covers are usually insisted upon by financing
! !434
institutions, thus leading to wide coverage. However, there is low coverage

in personal lives.
The Indian Insurance Act of 1938, covering both life and non-life insurance,
was formed after the regulation of the insurance business was introduced
with the Indian Life Assurance Companies Act in 1912; and subsequently,
the Indian Insurance Companies Act followed in 1928. After the
nationalisation of insurance business, certain provisions of the Insurance
Act became redundant, as most of the regulatory functions were included
in Life Insurance Corporation (LIC) and General Insurance Corporation
(G1C) themselves. After following the recommendations of the Malhotra
Committee, an interim insurance Regulatory Authority (IRA) was setup in
1996.
The Lok Sabha passed the Insurance Regulatory and Development

Authority (IRDA) Bill on December 2,1999 ; and then the Rajya Sabha
passed the Bill on December 7. The Bill became an Act after obtaining
Presidential assent. The Insurance Act has given statutory status to IRDA,
and thus IRDA was established and started its operations.
As per the Act, an applicant; may be Indian of in collaboration with foreign

insurance company; granted a certificate of registration, and they were
allowed to commence business within 12 months. An extension of another
12 months may be granted by the IRDA, depending on the circumstances.
Insurers will also have to obtain an annual renewal of certificate from the
IRDA.
! !435
IRDA Act :
Short Title, Extent and Commencement
1. This Act may be called the Insurance Regulatory and Development

Authority Act, 1999.
by notification in the Official Gazette, appoint: Provided that different
dates may be appointed for different provisions of this Act and any
reference in any such provision to the commencement of this Act shall
be construed as a reference to the coming into force of that provision.
Definitions
1. In this Act, unless the context otherwise requires, -
a) "appointed day" means date on which the Authority is established

under subsection (1) of section 3;
b) "Authority" means the Insurance Regulatory and Development

Authority established under subsection (1) of section 3;
c) "Chairperson" means the Chairperson of the Authority;
d) "Fund" means the Insurance Regulatory and Development Authority

Fund constituted under subsection (1) of section 16;
e) "Interim Insurance Regulatory Authority" means the Insurance

Regulatory Authority set up by the Central Government through
Resolution No.17(2)/94-Ins-V, dated the 23rd January, 1996;
f) "intermediary or insurance intermediary" includes insurance brokers,

reinsurance brokers, insurance consultants, surveyors and loss
assessors;
g) "member" means a whole time or a part time member of the

Authority and includes the Chairperson;
! !436
h) "notification" means a notification published in the Official Gazette;
i) "prescribed" means prescribed by rules made under this Act;
j) "regulations" means the regulations made by the Authority. (2)

Words and expressions used and not defined in this Act but defined in
the Insurance Act, 1938 (4 of 1938) or the Life Insurance Corporation
Act, 1956 (31 of 1956) or the General Insurance Business
(Nationalisation) Act, 1972 (57 of 1972) shall have the meanings
respectively assigned to them in those Acts.
IRDA - Establishment and Incorporation of Authority.
1. With effect from such date as the Central Government may, by

notification, appoint, there shall be established, for the purposes of this
Act, an Authority to be called "the Insurance Regulatory and
Development Authority”.
2. The Authority shall be a body corporate by the name aforesaid having

perpetual succession and a common seal with power, subject to the
provisions of this Act, to acquire, hold and dispose of property, both
movable and immovable, and to contract and shall, by the said name,
sue or be sued.
3. The head office of the Authority shall be at such place as the Central
Government may decide from time to time.
4. The Authority may establish offices at other places in India.
Composition of Authority
The Authority shall consist of the following members, namely:- (a) a

Chairperson; (b) not more than five whole-time members; (c) not more
than four part-time members, to be appointed by the Central Government
from amongst persons of ability, integrity and standing who have
knowledge or experience in life insurance, general insurance, actuarial
science, finance, economics, law, accountancy, administration or any other
discipline which would, in the opinion of the Central Government, be useful
to the Authority: Provided that the Central Government shall, while
appointing the Chairperson and the whole-time members, ensure that at
! !437
least one person each is a person having knowledge or experience in life

insurance, general insurance or actuarial science, respectively.
Tenure of Office of Chairperson and other Members.
1. The Chairperson and every other whole-time member shall hold office
for a term of five years from the date on which he enters upon his office
and shall be eligible for reappointment: Provided that no person shall
hold office as a Chairperson after he has attained the age of sixty-five
years: Provided further that no person shall hold office as a whole-time
member after he has attained the age of sixty two years.
2. A part-time member shall hold office for a term not exceeding five years
from the date on which he enters upon his office.
3. Notwithstanding anything contained in subsection (1) or subsection (2),

a member may - (a) relinquish his office by giving in writing to the
Central Government notice of not less than three months.
Administrative Powers of Chairperson.- The Chairperson shall have the

powers of general superintendence and direction in respect of all
administrative matters of the Authority.
Meetings of Authority.(1) The Authority shall meet at such times and

places and shall observe such rules and procedures in regard to transaction
of business at its meetings (including quorum at such meetings) as may be
determined by the regulations.
(2) The Chairperson, or if for any reason he is unable to attend a meeting

of the Authority, any other member chosen by the members present
from amongst themselves at the meeting shall preside at the meeting.
(3) All questions which come up before any meeting of the Authority shall
be decided by a majority of votes by the members present and voting,
and in the event of an equality of votes, the Chairperson, or in his
absence, the person presiding shall have a second or casting vote.
(4) The Authority may make regulations for the transaction of business at
its meetings.
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Duties, Powers and Functions of Authority
1. Subject to the provisions of this Act and any other law for the time
being in force, the Authority shall have the duty to regulate, promote
and ensure orderly growth of the insurance business and re-insurance
business.
2. Without prejudice to the generality of the provisions contained in

subsection (1), the powers and functions of the Authority shall include, -
(a) issue to the applicant a certificate of registration, renew, modify,
withdraw, suspend or cancel such registration; (b) protection of the
interests of the policyholders in matters concerning assigning of policy,
nomination by policy holders, insurable interest, settlement of insurance
claim, surrender value of policy and other terms and conditions of
contracts of insurance; (c) specifying requisite qualifications, code of
conduct and practical training for intermediary or insurance
intermediaries and agents; (d) specifying the code of conduct for
surveyors and loss assessors; (e) promoting efficiency in the conduct of
insurance business; (f) promoting and regulating professional
organisations connected with the insurance and reinsurance business;
(g) levying fees and other charges for carrying out the purposes of this
Act; (h) calling for information from, undertaking inspection of,
conducting enquiries and investigations including audit of the insurers,
intermediaries, insurance intermediaries and other organisations
connected with the insurance business; (i) control and regulation of the
rates, advantages, terms and conditions that may be offered by insurers
in respect of general insurance business not so controlled and regulated
by the Tariff Advisory Committee under section 64U of the Insurance
Act, 1938 (4 of 1938); (j) specifying the form and manner in which
books of account shall be maintained and statement of accounts shall be
rendered by insurers and other insurance intermediaries; (k) regulating
investment of funds by insurance companies; (l) regulating maintenance
of margin of solvency; (m) adjudication of disputes between insurers
and intermediaries or insurance intermediaries; (n) supervising the
functioning of the Tariff Advisory Committee; (o) specifying the
percentage of premium income of the insurer to finance schemes for
promoting and regulating professional organisations referred to in
clause (f); (p) specifying the percentage of life insurance business and
general insurance business to be undertaken by the insurer; and (q)
exercising such other powers as may be prescribed.
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Constitution of Funds
1. There shall be constituted a fund to be called "the Insurance Regulatory

and Development Authority Fund" and there shall be credited thereto-
(a) all Government grants, fees and charges received by the Authority;
(b) all sums received by the Authority from such other source as may be
decided upon by the Central Government; (c) the percentage of
prescribed premium income received from the insurer. (2) The Fund
shall be applied for meeting - (a) the salaries, allowances and other
remuneration of the members, officers and other employees of the
Authority; (b) the other expenses of the Authority in connection with the
discharge of its functions and for the purposes of this Act.
Accounts and Audit
1. The Authority shall maintain proper accounts and other relevant records
and prepare an annual statement of accounts in such form as may be
prescribed by the Central Government in consultation with the
Comptroller and Auditor-General of India.
2. The accounts of the Authority shall be audited by the Comptroller and

Auditor-General of India at such intervals as may be specified by him
and any expenditure incurred in connection with such audit shall be
payable by the Authority to the Comptroller and Auditor-General.
3. The Comptroller and Auditor-General of India and any other person

appointed by him in connection with the audit of the accounts of the
Authority shall have the same rights, privileges and authority in
connection with such audit as the Comptroller and Auditor-General
generally has in connection with the audit of the Government accounts
and, in particular, shall have the right to demand the production of
books of account, connected vouchers and other documents and papers
and to inspect any of the offices of the Authority.
4. The accounts of the Authority as certified by the Comptroller and

Auditor-General of India or any other person appointed by him in this
behalf together with the audit-report thereon shall be forwarded
annually to the Central Government and that Government shall cause
the same to be laid before each House of Parliament.
! !440
Miscellaneous
Power of Central Government to Issue Directions.
1. Without prejudice to the foregoing provisions of this Act, the Authority

shall, in exercise of its powers or the performance of its functions under
this Act, be bound by such directions on questions of policy, other than
those relating to technical and administrative matters, as the Central
Government may give in writing to it from time to time. PROVIDED that
the Authority shall, as far as practicable, be given an opportunity to
express its views before any direction is given under this subsection.
2. The decision of the Central Government, whether a question is one of

policy or not, shall be final.
Power of Central Government to Supersede Authority.
1. If at any time the Central Government is of the opinion- (a) that, on

account of circumstances beyond the control of the Authority, it is
unable to discharge the functions or perform the duties imposed on it by
or under the provisions of this Act, or (b) that the Authority has
persistently defaulted in complying with any direction given by the
Central Government under this Act or in the discharge of the functions
or performance of the duties imposed on it by or under the provisions of
this Act and as a result of such default the financial position of the
Authority or the administration of the Authority has suffered; or (c) that
circumstances exist which render it necessary in the public interest so to
do, the Central Government may, be notification and for reasons to be
specified therein, supersede the Authority for such period, not
exceeding six months, as may be specified in the notification and
appoint a person to be the Controller of Insurance under section 2B of
the Insurance Act, 1938 (4 of 1938), if not already done : Provided that
before issuing any such notification, the Central Government shall give a
reasonable opportunity to the Authority to make representations, if any,
of the Authority.
2. Upon the publication of a notification under sub-section (1) superseding

the Authority, - (a) the Chairperson and other members shall, as from
the date of supersession, vacate their offices as such; (b) all the
powers, functions and duties which may, by or under the provisions of
! !441
this Act, be exercised or discharged by or on behalf of the Authority

shall, until the Authority is reconstituted under subsection(3), be
exercised and discharged by the Controller of Insurance; and (c) all
properties owned by the Authority shall, until the Authority is
reconstituted under subsection(3), vest in the Central Government.
3. On or before the expiration of the period of supersession specified in the

notification issued under subsection(1), the Central Government shall
reconstitute the Authority by a fresh appointment of its Chairperson and
other members and in such case any person who had vacated his office
under clause(a) of subsection(2) shall not be deemed to be disqualified
for reappointment.
4. The Central Government shall cause a copy of the notification issued

under subsection(1) and a full report to any action to be laid before
each House of Parliament at the earliest.
Protection of Action Taken in Good Faith.
No suit, prosecution or other legal proceedings shall lie against the Central
Government or any officer of the Central Government or any member,
officer or other employee of the Authority for anything which is in good
faith done or intended to be done under this Act or the rules or regulations
made thereunder: Provided that nothing in this Act shall exempt any
person from any suit or other proceedings which might, apart from this
Act, be brought against him.
Delegation of Powers
(1) The Authority may, by general or special order in writing, delegate to

the Chairperson or any other member or office of the Authority subject to
such conditions, if any, as may be specified in the order such of its powers
and functions under this Act as it may deem necessary. (2) The Authority
may, by a general or special order in writing, also form committees of the
members and delegate to them the powers and functions of the Authority
as may be specified by the regulations.
! !442
Power to Make Rules.
(1) The Central Government may, by notification, make rules for carrying
out the provisions of this Act. (2) In particular, and without prejudice to the
generality of the foregoing power, such rules may provide for all or any of
the following matters, namely : (a) the salary and allowances payable to,
and other terms and conditions of service of, the members other than part-
time members under subsection(1) of section 7; (b) the allowances to be
paid to the part-time members under sub-section(2) of section 7; (c) such
other powers that may be exercised by the Authority under clause (q) of
subsection(2) of section 14; (d) the form of annual statement of accounts
to be maintained by the Authority under subsection(1) of section 17; (e)
the form and the manner in which and the time within which returns and
statements and particulars are to be furnished to the Central Government
under subsection(1) of section 20; (f) the matters under subsection(5) of
section 25 on which the Insurance Advisory Committee shall advise the
Authority; (g) any other matter which is required to be, or may be,
prescribed, or in respect of which provision is to be or may be made by
rules.
Establishment of Insurance Advisory Committee
(1)The Authority may, by notification, establish with effect from such date
as it may specify in such notification, a Committee to be known as the
Insurance Advisory Committee. (2) The Insurance Advisory Committee
shall consist of not more than twenty-five members excluding exofficio
members to represent the interests of commerce, industry, transport,
agriculture, consumer forum, surveyors, agents, intermediaries,
organisations engaged in safety and loss prevention, research bodies and
employees' association in the insurance sector. (3) The Chairperson and
the members of the Authority shall be the ex officio Chairperson and ex
officio members of the Insurance Advisory Committee. (4) The objects of
the Insurance Advisory Committee shall be to advise the Authority on
matters relating to the making of the regulations under section 26. (5)
Without prejudice to the provisions of subsection(4), the Insurance
Advisory Committee may advise the Authority on such other matters as
may be prescribed.
! !443
Power to Make Regulations
(1)The Authority may, in consultation with the Insurance Advisory

Committee, by notification, make regulations consistent with this Act and
the rules made thereunder to carry out the purposes of this Act. (2) In
particular, and without prejudice to the generality of the foregoing power,
such regulations may provide for all or any of the following matters,
namely :- (a) the time and places of meetings of the Authority and the
procedure to be followed at such meetings including the quorum necessary
for the transaction of business under subsection(1) of section 10; (b) the
transactions of business at its meetings under subsection(4) of section 10;
(c) the terms and other conditions of service of officers and other
employees of the Authority under subsection(2) of section 12; (d) the
powers and functions which may be delegated to Committees of the
members under subsection(2) of section 23; and (e) any other matter
which is required to be, or may be, specified by regulations or in respect of
which provision is to be or may be made by regulations.
Rules and Regulations to be Laid before Parliament
Every rule and every regulation made under this Act shall be laid, as soon
as may be after it is made, before each House of Parliament, while it is in
session, for a total period of thirty days which may be comprised in one
session or in two or more successive sessions, and if, before the expiry of
the session immediately following the session or the successive session
aforesaid, both Houses agree in making any, modification in the rule or
regulation or both Houses agree that the rule or regulation should not be
made, the rule or regulation shall thereafter have effect only in such
modified form or be of no effect, as the case may be; so, however, that any
such modification or annulment shall be without prejudice to the validity of
anything previously done under that rule or regulation.
IRDA Objectives
The objectives of the IRDA are (a) to open the insurance sector for private
sector in order to take care of the policy holders’ interests, (b) to regulate
insurance and reinsurance companies by ensuring continued financial
soundness and solvency of the insurance companies, (c) to supervise the
activities of intermediaries by eliminating dishonesty and unhealthy
competition, and (d) to amend the Insurance Act, 1938, the Life Insurance
! !444
Corporation Act, 1956 and the General Business Nationalisation Act, 1972 ;
periodically.
Establishment of Insurance Advisory Committee (IAC) and Tariff

Advisory Committee
Section 25 of the IRDA Act specifies how to establish the Insurance

Advisory Committee (IAC). The IAC will consist of not more than 25
members excluding ex-officio members to represent the interests of
commerce, industry, transport, agriculture, consumer for a, surveyors,
agents, intermediaries, organisations engaged in safety and loss
prevention, research bodies and employees' associations.
Section 64U provides the powers of the Tariff Advisory Committee (TAC) to
regulate rates, advantages, terms and conditions that may be offered by
general insurance companies. This committee regulates the rates,
advantages, terms and conditions that may be offered by insurers in
respect of any risk.
12.12 THE INSURANCE OMBUDSMAN
! !445
The Insurance Ombudsman scheme was created by Government of India

for individual policyholders to have their complaints settled out of the
courts system in a cost-effective, efficient and impartial way. There are 12
Insurance Ombudsman in different locations and you can approach the one
having jurisdiction over the location of the insurance company office that
you have a complaint against.
Under Notification dated IIth November, 1998; redressal of Public

Grievances rules, 1998 were reframed, providing for appointment of
Insurance Ombudsman by the Governing Body of Insurance Council
constituted under these rules. And accordingly, the Governing Body of
Insurance Council has appointed Insurance Ombudsman. The Insurance
Ombudsman has been awarded with powers to receive and consider
complaints from the insurer, in the following circumstances -
The insurer can approach the Ombudsman with complaint if:
• They have first approached their insurance company with the complaint
and
• They have not resolved it

• Not resolved it to peoples’ satisfaction or
• Not responded to it at all for 30 days
• The complaint pertains to any policy which has taken as an individual and
• The value of the claim including expenses claimed is not above Rs 20
lakh
The complaint to the Ombudsman can be about:
• Any partial or total repudiation of claims by an insurer

• Any dispute about premium paid or payable in terms of the policy
• Any dispute on the legal construction of the policies as far as it relates to
claims
• Delay in settlement of claims

• Non-issue of any insurance document to the insurer after payment of
premium
! !446
The settlement process
Recommendation:
The Ombudsman will act as counselor and mediator and
• Arrive at a fair recommendation based on the facts of the dispute
• If the customer accepts this as a full and final settlement, the

Ombudsman will Inform the company which should comply with the
terms in 15 days
Award:
If a settlement by recommendation does not work, the Ombudsman will -
• Pass an award within 3 months of receiving the complaint and which will
be
➡ A speaking award with the detailed reasoning

➡ Binding on the insurance company but
➡ Not binding on the policyholder
➡ The Ombudsman can also award an ex-gratia payment
Once the Award is passed
• Insurer has to accept the award in writing and the insurance company
has to be informed of it within 30 days and
• The Insurance company has to comply with the award in 15 days after
that.
Note : The manner of settlement of complaint or passing of an award by

the Ombudsman shall be in accordance with provisions of the aforesaid
notified redressal of Public Grievances Rules, 1998.
! !447
12.13 ACTIVITY FOR STUDENTS
1. Search Google for Life Insurance Companies in India and their market
share last year.
2. Draft a compliant letter to insurance ombudsman as to non-receipt of a

policy document even after the discharging of your loan.
12.14 SUMMARY
• Except the Life Insurance, all other types of Insurances fall under
‘General Insurance’.
• Insurance business is regulated by the respective acts and the Insurance

Regulatory Development Authority (IRDA).
• The objective of IRDA is to take care of policy holders’ interest, by

supervising the activities of intermediaries so as to eliminate dishonest
and unhealthy competition.
• Fire insurance means the insurance against any loss caused by fire.
• Marine insurance is effected for losses occurred to the goods and ships at
sea/large rivers.
• The Regulatory Authority has formed a Code of Conduct for players in the
insurance business.
• Insurance advisory committee has been established representing the

interests of members concealed with insurance business dealings.
• Insurance Ombudsman has been appointed and vested with powers to

receive and consider complaints.
! !448
1. What are the details of a contract of Insurance?
2. Explain the term ‘insurable interest’.
3. Define the contract of reinsurance.
4. Write down the differences between reinsurance from double insurance.
5. Explain the term ‘cover note’ with reference to insurance.
6. What are the two essential features of a fire insurance contract?
7. What is meaning of 'fire' in a fire policy?
8. How can a fire insurance policy be assigned?
9. Define a fire insurance contract.
10.What are the rights of insurer in a fire policy?
11.Writes short notes on Motor Vehicle Insurance.
12.What are perils of the sea?
13.What is a 'mixed' policy of marine insurance?
14.When is premium in marine insurance returnable?
15.What are the three interests which are risked during the course of a sea
voyage?
16.Explain briefly the various kinds of marine insurance policies.
17.What are the objectives of IRDA?
18.What are the powers of Central Government in regulating the business

of insurance?
19.What are the functions, powers and duties of IRDA?
20.Write short notes on ‘Insurance Ombudsman’.
! !449
1. ReInsurance of a insurance policy is done by the __________
a. Government
b. Original Insurer
c. IRDA
d. Customer
2. A fire Insurance is usually done for a period of ________.
a. Lifetime
b. Ten years
c. One year
d. Any of the above
3. A motor vehicle insurance serves the maximum purposes of

___________
a. On property (vehicle) insurance

b. Against personal accident
c. Against liability for accidents
d. All of the above
4. If there is no ________ at the place of stock, fire insurance cannot be

claimed.
a. ignition
b. heat
c. high temperature
d. combustion fuel
5. The main objective of IRDA is to take care of the interest of -
a. Central Government
b. Insurer company
c. State Government
d. Policyholder
Answers : (1-b), (2-d), (3-d), (4-a), (5-d).
! !450
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
! !451
TYPES OF INTELLECTUAL PROPERTY RIGHTS (IPR)
Chapter 13
TYPES OF INTELLECTUAL PROPERTY
RIGHTS (IPR)
Objectives
supply chain management, the evaluation of supply chain management,
the need of legal aspects in the supply chain management, and the
importance of various legal aspects in the supply chain management.
Structure:
13.1 Protection of Intellectual Property Rights

13.2 The Copyright Act, 1957
13.3 Patents
13.4 Trademarks and Brands
13.5 Activity for Students
13.6 Summary
! !452
13.1 PROTECTION OF INTELLECTUAL PROPERTY RIGHTS
Intellectual Property, Copyright, Authorship, and Individuality in Print,

Music and Internet.
When the alphabet was invented, spoken epics could be converted into an
abstract representation - writing. The experience of the spoken epic poem
could be transformed into written format. Although books can be read
aloud and therefore, retain some similarity to the communal nature of the
oral tradition, books can also be read silently in solitude, emphasizing the
individual reader. The figure of the author is not only the role of creator to
the content, but also to appropriate ownership of that creation to
whomever owns the property rights to that content.
Copyright law protects the specific manifestations of ideas and facts, but
not those ideas and facts themselves. When commemoration was no longer
used to experience memory, individual authors came to be recognized as
readers became less participatory in the process of getting meaning from
the work. The author as creator became an individual who gave meaning to
an audience fragmented by the ability of the written word to separate its
readers from one another. The author serves as a meeting point for
individual readers to receive meaning, whereas in pre-literate times, this
meaning would have been constructed by a the entire group in the
immediacy of the performance.
Earlier, this was restricted only to the field of Print, Machinery Design,
Pharmacy and Music, but subsequently, after the introduction and
widespread of Internet, the information has become more and more
available at everybody’s fingertips and the necessity of copyright and
patent protection became inevitable. The formation of General Agreement
on TRIPs (Trade Related Aspects of Intellectual Property Rights) under the
GATT (Now-WTO) accelerated the implementation of Intellectual Property
Rights worldwide. So the “information with commercial value” gained its
importance.
The various means of legal protection are - patents, copyrights, industrial

designs, geographical indications, trademarks, and the protection of layout
designs of integrated circuits. Some countries have also added trade
secrets in their nation’s copyright acts to protect their manufacturers.
! !453
The basic Copyright Act in India started with The Copyright Act, 1957.
13.2 THE COPYRIGHT ACT, 1957
Meaning of copyright
For the purposes of this Act, “copyright” means the exclusive right subject
to the provisions of this Act, to do or authorise the doing of any of the
following acts in respect of a work or any substantial part thereof, namely:
—
(a) in the case of a literary, dramatic or musical work, not being a

computer programme,—
i) to reproduce the work in any material form including the storing of it

in any medium by electronic means;
ii) to issue copies of the work to the public not being copies already in
circulation;
iii) to perform the work in public, or communicate it to the public;
iv) to make any cinematograph film or sound recording in respect of the

work;
v) to make any translation of the work;
vi) to make any adaptation of the work;
vii)to do, in relation to a translation or an adaptation of the work, any of

the acts specified in relation to the work in subclauses (i) to (vi);
(b) in the case of a computer programme,—
i) to do any of the acts specified in clause (a);
ii) to sell or give on commercial rental or offer for sale or for

commercial rental any copy of the computer programme:
! !454
Provided that such commercial rental does not apply in respect of

computer programmes where the programme itself is not the essential
object of the rental.
(c) in the case of an artistic work,—
i) to reproduce the work in any material form including depiction in

three dimensions of a two dimensional work or in two dimensions of a
three dimensional work;
ii) to communicate the work to the public;
iii) to issue copies of the work to the public not being copies already in
circulation;
iv) to include the work in any cinematograph film;
v) to make any adaptation of the work;
vi) to do in relation to an adaptation of the work any of the acts specified

in relation to the work in subclauses (i) to (iv);
(d) in the case of a cinematograph film,—
i) to make a copy of the film including a photograph of any image

forming part thereof;
ii) to sell or give on hire or offer for sale or hire, any copy of the film,
regardless of whether such copy has been sold or given on hire on
earlier occasions;
iii) to communicate the film to the public;
in the case of a sound recording,—
i) to make any other sound recording embodying it;
ii) to sell or give on hire, or offer for sale or hire, any copy of the sound
recording, regardless of whether such copy has been sold or given on
hire on earlier occasions;
iii) to communicate the sound recording to the public.
! !455
Short title, extent and commencement
1. This Act may be called the Copyright Act, 1957
2. It extends to the whole of India
(a) “adaptation” means,—
i) in relation to a dramatic work, the conversion of the work into a

non-dramatic work;
ii) in relation to a literary work or an artistic work, the conversion of

the work into a dramatic work by way of performance in public or
otherwise;
iii) in relation to a literary or dramatic work, any abridgement of the

work or any version of the work in which the story or action in
conveyed wholly or mainly by means of pictures in a form suitable
for reproduction in a book, or in a newspaper, magazine or similar
periodical;
iv) in relation to a musical work, any arrangement or transcription of

the work;
v) in relation to any work, any use of such work involving its

rearrangement or alteration;
(b) ‘‘work of architecture’’ means any building or structure having as

artistic character or design, or any model for such building or
structure;
(c) “artistic work” means,—
(i) a painting, a sculpture, a drawing (including a diagram, map, chart

or plan), an engraving or a photograph, whether or not any such
work possesses artistic quality;
(ii) a work of architecture; and
! !456
(iii) any other work of artistic craftsmanship;
(d) “author’’ means,—
i) in relation to a literary or dramatic work, the author of the work;
ii) in relation to a musical work, the composer;
iii) in relation to an artistic work other than a photograph, the artist;
iv) in relation to a photograph, the person taking the photograph;
v) in relation to a cinematograph film or sound recording, the

producer; and
vi) in relation to any literary, dramatic, musical or artistic work which is

computer-generated, the person who causes the work to be
created;
(dd) “broadcast” means communication to the public—
i) by any means of wireless diffusion, whether in any one or more of

the forms of signs, sounds or visual images; or
ii) by wire,and includes a re-broadcast;
(e) “calendar year” means the year commencing on the 1st day of
January;
(f) “cinematograph film” means any work of visual recording on any

medium produced through a process from which a moving image may
be produced by any means and includes a sound recording
accompanying such visual recording and “cinematograph” shall be
construed as including any work produced by any process analogous to
cinematography including video films; 
 
(ff) “communication to the public” means making any work available
for being seen or heard or otherwise enjoyed by the public directly or
by any means of display or diffusion other than by issuing copies of
! !457
such work regardless of whether any member of the public actually

sees, hears or otherwise enjoys the work so made available.
Note—For the purposes of this clause, communication through satellite or

cable or any other means of simultaneous communication to more than
one household or place of residence including residential rooms of any
hotel or hostel shall be deemed to be communication to the public;
(ffa) “composer”, in relation to a musical work, means the person

who composes the music regardless of whether he records it in any
form of graphical notation; 
 
(ffb) “computer” includes any electronic or similar device having
information processing capabilities; 
 
(ffc) “computer programme” means a set of instructions expressed in
words, codes, schemes or in any other form, including a machine
readable medium, capable of causing a computer to perform a
particular task or achieve a particular result; 
 
(ffd) “copyright society” means a society registered under sub-
section (3) of section 33;
(g) “delivery”, in relation to a lecture, includes delivery by means of any

mechanical instrument or by broadcast;
(h) “dramatic work” includes any piece of recitation, choreographic work or

entertainment in dumb show, the scenic arrangement or acting, form
of which is fixed in writing or otherwise but does not include a
cinematograph film; 
 
(hh) “duplicating equipment” means any mechanical contrivance or
device used or intended to be used for making copies of any work;
(i) “engravings” include etchings, lithographs, wood-cuts, prints and other

similar works, not being photographs;
(j) “exclusive license” means a license which confers on the licensee or on

the licensee and persons authorised by him, to the exclusion of all
other persons (including the owner of the copyright) any right
! !458
comprised in the copyright in a work, and “exclusive licensee” shall be

construed accordingly;
(k) “Government work” means a work which is made or published by or

under the direction or control of—
i) the Government or any department of the Government;

ii) any Legislature in India;
iii) any Court, Tribunal or other judicial authority in India;
(l) “Indian work” means a literary, dramatic or musical work,—
i) the author of which is a citizen of India; or

ii) which is first published in India; or
iii) the author of which, in the case of an unpublished work is, at the
time of the making of the work, a citizen of India;
(m) “infringing copy” means,—
i) in relation to a literary, dramatic, musical or artistic work, a

reproduction thereof otherwise than in the form of a
cinematographic film;
ii) in relation to a cinematographic film, a copy of the film made on

any medium by any means;
iii) in relation to a sound recording, any other recording embodying

the same sound recording, made by any means;
iv) in relation to a programme or performance in which such a

broadcast reproduction right or a performer’s right subsists under
the provisions of this Act, the sound recording or a
cinematographic film of such programme or performance, if such
reproduction, copy or sound recording is made or imported in
contravention of the provisions of this Act;
(n) “lecture” includes address, speech and sermon;
(o) “literary work” includes computer programmes, tables and

compilations including computer databases;
! !459
(p) “musical work” means a work consisting of music and includes any
graphical notation of such work but does not include any words or any
action intended to be sung, spoken or performed with the music;
(q) “performance”, in relation to performer’s right, means any visual or

acoustic presentation made live by one or more performers;
(r) “performer” includes an actor, singer, musician, dancer, acrobat,

juggler, conjurer, snake charmer, a person delivering a lecture or any
other person who makes a performance;
(s) “photograph” includes photo-lithograph and any work produced by any

process analogous to photography but does not include any part of a
cinematograph film;
(t) “plate” includes any stereotype or other plate, stone, block, mould,
matrix, transfer, negative ,duplicating equipment or other device used
or intended to be used for printing or reproducing copies of any work,
and any matrix or other appliance by which sound recording for the
acoustic presentation of the work are or are intended to be made;
(u) “prescribed” means prescribed by rules made under this Act;
(v) “producer”, in relation to a cinematograph film or sound recording,

means a person who takes the initiative and responsibility for making
the work;
(w) “reprography” means the making of copies of a work, by photocopying

or similar means;
(x) “sound recording” means a recording of sounds from which such

sounds may be produced regardless of the medium on which such
recording is the method by which the sounds are produced;
(y) “work” means any of the following works, namely:—
i) a literary, dramatic, musical or artistic work;

ii) a cinematograph film;
iii) a sound recording;
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(z) “work of joint authorship” means a work produced by the collaboration

of two or more authors in which the contribution of one author is not
distinct from the contribution of the other author or authors;
Literary work: Scope
The definition of “literary work” given in section 2 of the Act is an inclusive

definition and, therefore, not exhaustive. Its “literary work” includes tables
and compilations. Dissertation is, therefore, prima facie a literary work.
The expression “work” inter alia means a literary work. The word “original”
does not mean that the work must be the expression of original or
invented thought. Copyright Acts are not concerned with the origin of
ideas, but with the expression of thoughts and in the case of “literary
work” with the expression of thoughts in print or writing. The originality
which is required relates to the expression of the thought but the Act does
not require that the expression must be in an original or novel form, but
that the work must not be copied from another work that it should
originate from the author.
Video tape within the definition of cinematograph film
In view of the extended definition of a cinematograph film in section 2 (f),

which includes any process analogous to cinematography, the video tape
had to be taken to come within the definition of cinematograph film.
Meaning of publication
Meaning of publication – For the purposes of this Act, “publication” means

making a work available to the public by issue of copies or by
communicating the work to the public.
When work not deemed to be published or performed in public
Except in relation to infringement of copyright, a work shall not be deemed

to be published or performed in public, if published, or performed in public,
without the license of the owner of the copyright.
! !461
When work deemed to be first published in India
For the purposes of this Act, a work published in India shall be deemed to
be first published in India, notwithstanding that it has been published
simultaneously in some other country, unless such other country provides a
shorter term of copyright for such work, and a work shall be deemed to be
published simultaneously in India and in another country does not exceed
thirty days or such other period as the Central Government may, in relation
to any specified country, determine.
Certain disputes to be decide by Copyright Board
Certain disputes to be decide by Copyright Board - If any question arises
a. Whether a work has been published or as to the date on which a work

was published for the purposes of Chapter V, or
b. Whether the term of copyright for any work is shorter in any other
country than that provided in respect of that work under this Act, it shall
be referred to the Copyright Board constituted under section 11 whose
decision thereon shall be final:
Provided that if in the opinion of the Copyright Board, the issue of copies or
communication to the public referred to in section 3 was of an insignificant
nature, it shall not be deemed to be publication for the purposes of that
section.
Nationally of author were the making of unpublished work is

extended over considerable period -
Where, in the case of an unpublished work the making of the work is

extended over a considerable period, the author of the work shall, for the
purposes of this Act, be deemed to be a citizen of, or domiciled in, that
country of which he was a citizen or wherein he was domiciled during any
substantial part of that period.
Activities which are not Copyright Violations
The copyright act has made provisions for permitting several activities.
These are detailed provisions. Some of the provisions are known to a
! !462
common man, but they are reproduced to know exactly what the law says
–
• Reproduction of work for the purpose of functioning of law, e.g. judicial

proceedings.
• Reporting current events in newspapers or in other media, along with use

of photographs.
• Using them for the purpose of private use, research, criticism or review.
• Reading or recitation in public, of an extract from a published literary or

dramatic work.
• Publication of passages of literary work for educational purpose.
• Reproduction of any matter published in official gazette, along with all

remarks and comments.
• Reproduction or publication of judgment or order of a court unless it has

been prohibited.
• The reproduction of literary, dramatic, musical or artistic work in the

course of instructions.
• Making a copy to protect against loss of the original, in case of a work on

computer only.
• Making copies of a computer program or adapting it for non commercial

personal use.
Duration of Copyright Protection
The law allows copyright protection to be available for a limited number of

years. The period is decided considering the benefits of the creator as well
as benefits of the society. The duration of protection is up to lifetime of the
author and is continued for 60 years after the death of the author, for the
literary, dramatic, musical or artistic work of the known artists/writers. In
case of anonymous or pseudonymous, copyright is for sixty years from the
date of publication. Whereas, the copyright for the photograph or a film,
! !463
copyright protection is available for a period of sixty years from the date of
its first publication.
Copyright Office -
1. There shall be established for the purposes of this Act on office to be

called the Copyright Office.
2. The Copyright Office shall be under the immediate control of the

Registrar of Copyrights who shall act under the superintendence and
direction of the Central Government.
3. There shall be seal for the Copyright Office.
Registrar and Deputy Registrars of Copyrights
1. The Central Government shall appoint a Registrar of Copyrights and may

appoint one or more Deputy Registrars of Copyrights.
2. A Deputy Registrar of Copyrights shall discharge under the

superintendence and direction of the Registrar of Copyrights such
functions of the Registrar under this Act as the Registrar of Copyrights
such functions of the Registrar under this Act as the Registrar may, from
time to time, assign to him : and any reference in this Act to the
Registrar of Copyrights shall include a reference to a Deputy Registrar of
Copyrights when so discharging any such functions.
Ownership of Copyright and the Rights of the Owner
First owner of copyright -
Subject to the provisions of this Act, the author of a work shall be the first
owner of the copyright therein:
Provided that—
a. in the case of a literary, dramatic or artistic work made by the author in

the course of his employment by the proprietor of a newspaper,
magazine or similar periodical under a contract of service or
apprenticeship, for the purpose of publication in a newspaper, magazine
! !464
or similar periodical, the said proprietor shall, in the absence of any

agreement to the contrary, be the first owner of the copyright in the
work in so far as the copyright relates to the publication of the work in
any newspaper, magazine or similar periodical, or to the reproduction of
the work for the purpose of its being so published, but in all other
respects the author shall be the first owner of the copyright in the work;
b. subject to the provisions of clause (a), in the case of a photograph

taken, or a painting or portrait drawn, or an engraving or a
cinematograph film made, for valuable consideration at the instance of
any person, such person shall, in the absence of any agreement to the
contrary, be the first owner of the copyright therein;
c. in the case of a work made in the course of the author’s employment

under a contract of service or apprenticeship, to which clause (a) or
clause (b) does not apply, the employer shall, in the absence of any
agreement to the contrary, be the first owner of the copyright therein; 
 
(cc) in the case of any address or speech delivered in public, the person
who has delivered such address or speech or if such person has
delivered such address or speech on behalf of any other person, such
other person shall be the first owner of the copyright therein
notwithstanding that the person who delivers such address or speech,
or, as the case may be, the person on whose behalf such address or
speech is delivered, is employed by any other person who arranges such
address or speech or on whose behalf or premises such address or
speech is delivered;
d. in the case of a Government work, Government shall, in the absence of

any agreement to the contrary, be the first owner of the copyright
therein; 
 
(dd) in the case of a work made or first published by or under the
direction or control of any public undertaking, such public undertaking
shall, in the absence of any agreement to the contrary, be the first
owner of the copyright therein;
! !465
No ownership in case of mere ‘idea’
A person may have a brilliant idea for a story, or for a picture, or for a play,
and one which, so far as he is concerned, appears to be original, but, if he
communicates that idea to an author or a playwriter or an artist, the
production which is the result of the communication of the idea to the
author or the artist or the playwright is the copyright of the person who
has clothed the idea in a form, whether by means of a picture, a play, or a
book, and the owner of the idea has no rights in the product.
Assignment of copyright -
1. The owner of the copyright in an existing work or the prospective owner

of the copyright in a future work may assign to any person the copyright
either wholly or partially and either generally or subject to limitations
and either for the whole term of the copyright or any part thereof. 
 
Provided that in the case of the assignment of copyright in any future
work, the assignment shall take effect only when the work comes into
existence.
2. Whereas the assignee of a copyright becomes entitled to any right

comprised in the copyright, the assignee as respects the rights to
assigned, and the assignor as respects the rights not assigned, shall be
treated for the purposes of this Act as the owner of copyright and the
provisions of this Act shall have effect accordingly.
3. In this section, the expression, “assignee” as respects the assignment of

the copyright in any future work includes the legal representatives of
the assignee, if the assignee dies before the work comes into existence.
Dispute with respect to assignment of copyright -
1. If an assignee fails to make sufficient exercise of the rights assigned to

him, and such failure is not attributable to any act or omission of the
assignor, then, the Copyright Board may, on receipt of a complaint from
the assignor and after holding such inquiry as it may deem necessary,
revoke such assignment.
! !466
2. If any dispute arises with respect to the assignment of any copyright,

the Copyright Board may, on receipt of a complaint from the aggrieved
party and after holding such inquiry as it considers necessary, pass such
order as it may deem fit including an order for the recovery of any
royalty payable: Provided that Copyright Board shall not pass any order
under this subsection to revoke the assignment unless it is satisfied that
the terms of assignment are harsh to the assignor in case the assignor
is also the author:
13.3 PATENTS
History of Patents in India
The history of Patent law in India starts from 1911 when the Indian Patents
and Designs Act, 1911 was enacted. The present Patents Act, 1970 came
into force in the year 1972, amending and consolidating the existing law
relating to Patents in India.
Application of Patent
In India, a patent application can be filed, either alone or jointly, by true

and first inventor or his assignee. Procedure for Grant of a Patent in India
! !467
After filing the application for the grant of patent, a request for
examination is required to be made for examination of the application by
the Indian Patent Office. After the First Examination Report is issued, the
Applicant is given an opportunity to meet the objections raised in the
report. The Applicant has to comply with the requirements within 12
months from the issuance of the First Examination Report. If the
requirements of the first examination report are not complied with within
the prescribed period of 12 months, then the application is treated to have
been abandoned by the applicant. After the removal of objections and
compliance of requirements, the patent is granted and notified in the
Patent Office Journal.
Product Patent
The Patent Act provides for grant of product patent. Previously, for food,
pharmaceutical and chemical products only process patent was granted.
This meant that anybody was free to manufacture the same or similar
product by a process different from the patented one. This is no more
allowed because of the adoption of the product patent.
Term of Patent
The term of every patent in India is twenty years from the date of filing the
patent application, irrespective of whether it is filed with provisional or
complete specification. However, in case of applications filed under the
Patent Cooperative Treaty (PCT), the term of twenty years begins from the
international filing date. Payment of Renewal Fee It is important to note
that a patentee has to renew the patent every year by paying the renewal
fee, which can be paid every year or in lump sum.
Restoration of Patent
A request for restoration of patent can be filed within eighteen months

from the date of cessation of patent along with the prescribed fee. After
the receipt of the request, the matter is notified in the official journal for
further processing of the request. Patent of Biological Material If the
invention uses a biological material which is new, it is essential to deposit
the same in the International Depository Authority (“IDA”) prior to the
filing of the application in India in order to supplement the description. If
such biological materials are already known, in such a case it is not
! !468
essential to deposit the same. The IDA in India located at Chandigarh is

known as Institute of Microbial Technology (IMTECH).
The Rights granted by a Patent
If the grant of the patent is for a product, then the patentee has a right to
prevent others from making, using, offering for sale, selling or importing
the patented product in India. If the patent is for a process, then the
patentee has the right to prevent others from using the process, using the
product directly obtained by the process, offering for sale, selling or
importing the product in India directly obtained by the process. Before
filing an application for grant of patent in India, it is important to note
“What is not Patentable in India?” Following, i.e., an invention which is (a)
frivolous, (b) obvious, (c) contrary to well established natural laws, (d)
contrary to law, (e) morality, (f) injurious to public health, (g) a mere
discovery of a scientific principle, (h) the formulation of an abstract theory,
(i) a mere discovery of any new property or new use for a known
substance or process, machine or apparatus, (j) a substance obtained by a
mere admixture resulting only in the aggregation of the properties of the
components thereof or a process for producing such substance, (k) a mere
arrangement or rearrangement or duplication of known devices, (l) a
method of agriculture or horticulture and (m) inventions relating to atomic
energy, are not patentable in India. Maintainability of Secrecy by the Indian
Patent Office (IPO) All patent applications are kept secret up to eighteen
months from the date of filing or priority date, whichever is earlier, and
thereafter they are published in the Official Journal of the Patent Office
published every week. After such publication of the patent application,
public can inspect the documents and may take the photocopy thereof on
the payment of the prescribed fee. Compulsory Licensing One of the most
important aspects of Indian Patents Act, 1970, is compulsory licensing of
the patent subject to the fulfillment of certain conditions. At any time after
the expiration of three years from the date of the sealing of a patent, any
person interested may make an application to the Controller of Patents for
grant of compulsory license of the patent, subject to the fulfillment of
following conditions, i.e., the reasonable requirements of the public with
respect to the patented invention have not been satisfied; or that the
patented invention is not available to the public at a reasonable price; or
that the patented invention is not worked in the territory of India. It is
further important to note that an application for compulsory licensing may
be made by any person notwithstanding that he is already the holder of a
! !469
license under the patent. For the purpose of compulsory licensing, no

person can be stopped from alleging that the reasonable requirements of
the public with respect to the patented invention are not satisfied or that
the patented invention is not available to the public at a reasonable price
by reason of any admission made by him, whether in such a licence or by
reason of his having accepted such a licence. The Controller, if satisfied
that the reasonable requirements of the public with respect to the patented
invention have not been satisfied or that the patented invention is not
available to the public at a reasonable price, may order the patentee to
grant a licence upon such terms as he may deem fit. However, before the
grant of a compulsory license, the Controller of Patents shall take into
account following factors: The nature of invention; The time elapsed, since
the sealing of the patent; The measures already taken by the patentee or
the licensee to make full use of the invention; The ability of the applicant
to work the invention to the public advantage; The capacity of the
applicant to undertake the risk in providing capital and working the
invention, if the application for compulsory license is granted; As to the
fact whether the applicant has made efforts to obtain a license from the
patentee on reasonable terms and conditions; National emergency or other
circumstances of extreme urgency; Public non commercial use;
Establishment of a ground of anti competitive practices adopted by the
patentee. The grant of compulsory license cannot be claimed as a matter of
right, as the same is subject to the fulfilment of above conditions and
discretion of the Controller of Patents. Further judicial recourse is available
against any arbitrary or illegal order of the Controller of Patents for grant of
compulsory license.
Exceptions for the Patent
The Government has protected certain rights to themselves about some

exceptions for the rights of be patentee. Any patented product or process
may by made, imported or used by or on behalf of the government for its
own use or purpose. The Central Government may also acquire a patent for
public purpose, if necessary. Any patented medicine or drug may be
imported by the Government for the purpose merely of its own use or for
distribution in any dispensary, hospital or other medical institution
maintained by or on behalf of the Government or any other dispensary,
hospital or other medical institution specified by the government in public
interest. Any patented process or product may be used or made by any
! !470
person, for the purpose merely of experiment or research including the

imparting of instructions to pupils.
Infringement of Patent
Patent infringement proceedings can only be initiated after grant of patent

in India but may include a claim retrospectively from the date of
publication of the application for grant of the patent. Infringement of a
patent consists of the unauthorized making, importing, using, offering for
sale or selling any patented invention within the India. Under the (Indian)
Patents Act, 1970 only a civil action can be initiated in a Court of Law.
Further, a suit for infringement can be defended on various grounds
including the grounds on which a patent cannot be granted in India and
based on such defense, revocation of Patent can also be claimed.
Patents Amendment Act, 2005
The Patents (Amendment) Act, 2005; published on 5th April, 2005 is now
to be referred for the latest developments in the Act, as compared with the
earlier version, and the ‘Budapest Treaty’ on the international recognition
of the deposit of micro organisms for the purposes of patent procedure has
been adopted. This amended Act has to be referred for the latest
amendments and versions.
13.4 TRADEMARKS AND BRANDS
Trademarks and Brands are used; or nowadays hammered through media;

to popularize and maintain product identity and to accelerate product
promotion.
A trade mark is incorporated to protect the manufacturer/seller’s exclusive

rights to use the specific registered brand name and/or specifically
designed brand mark. A trademark is given legal protection because it is
capable of exclusive appropriation.
! !471
A brand is intended to identify the goods or services of one seller or group

of sellers and to clearly differentiate them from those of competitors, and
also to popularize them. It is very common to use a name, term, sign,
symbol, or design or a combination of them, to develop and establish a
brand. The Brand name is that part of the brand which can be pronounced
verbally and communicated by media. Brand mark is a symbol, design or
distinctive coloring or lettering form of a brand.
Brands and Trademarks have to be registered with the proper authorities to

use them officially and to avoid the duplication/misuse by the competitors.
They are controlled in India by The Trade marks Act,1999.
The Trademarks Act, 1999
The Indian law relating to trademarks as been amended and consolidated

and a Trade and Merchandise Mark Act, 1958 has been replaced by the
Trade Marks Act, 1999.
An Act to amend and consolidate the law relating to trademarks, to provide

for registration and better protection of trademarks for goods and services
and for the prevention of the use of fraudulent marks. Be it enacted by
Parliament in the Fiftieth Year of the Republic of India as follows:-
! !472
1. This Act may be called the Trademarks Act, 1999.

by notification in the Official Gazette, appoint:
Provided that different dates may be appointed for different provisions of

this Act, and any reference in any such provision to the commencement of
this Act shall be construed as a reference to the coming into force of that
provision.
Definitions and interpretation
1. In this Act , unless the context otherwise requires, -
(a) “Appellate Board” means the Appellate Board established under

section 83:
(b) “assignment” means an assignment in writing by act of te parties

concerned;
(c) “associated trademarks” means trademarks deemed to be, or

required to be, registered as associated trademarks under this Act;
(d) “Bench” means a Bench of the Appellate Board;
(e) “certification trademark” means a mark capable of distinguishing

the goods or service in connection with which it is used in the
course of trade which are certified by the proprietor of the mark in
respect of origin, material, mode of manufacture of goods or
performance of service not so certified and registrable as such
under Chapter IX in respect of those goods or service in the name,
as proprietor of the certification trademark, of that person;
(f) “Chairman” means the Chairman of the Appellate Board.
(g) “collective mark” means a trade mark distinguishing the goods or

services of members of an association of persons (not being a
partnership within the meaning of the Indian Partnership Act, 1932
(9 of 1932) which is the proprietor of the mark from those of
others.
! !473
(h) “deceptively similar”, – A mark shall be deemed to be deceptively

similar to another mark if it so nearly resembles that other mark as
to be likely to deceive or cause confusion.
(i) “false trade description” means-
I. a trade description which is untrue or misleading in a material

respect as regards the goods or services to which it is applied or
II. any alteration of a trade description as regards the goods or

services to which it is applied, whether by way of addition,
effacement or otherwise, where that alteration makes the
description untrue or misleading in a material respect, or
III.any trade description which denotes or implies that there are

contained, as regards the goods to which it is applied, more yards
or metres than there are contained therein standard yards or
standard metres, or
IV. any marks or arrangement or combination thereof when applied-
a) to goods in such a manner as to be likely to lead persons to

believe that the goods are the manufacture or merchandise of
some person other than the person whose merchandise or
manufacture they really are.
b) in relation to services in such a manner as to be likely to lead

persons to believe that the services are provided or rendered by
some persons other than the person whose services they really
are, or
V. any false name or initials of a person applied to goods or service in

such manner as if such name or initials were a trade description in
any case where the name or initials-
a) is or are not a trademark or part of a trademark, and
b) is or are identical with or deceptively similar to the name or

initials of a person carrying on business in connection with
! !474
goods or services of the same description or both and who has

not authorized the use of such name or initials, and
c) is or are either the name or initials of a fictions person or some

person not bona fide carrying on business in connection with
such goods or services.
And the fact that a trade description is a trademark or part of a

trademark shall not prevent such trade description being a false
trade description within the meaning of this Act.
(j) “goods” means anything which is the subject of trade or

manufacture.
(k) “Judicial Member” means a Member of the Appellate Board

appointed as such under this Act, and includes the Chairman and
the Vice-Chairman.
(l) “limitations” (with its grammatical variations) means any limitation

of the exclusive right to the use of a trademark given by the
registration of a person as proprietor thereof, including limitations of
that right a to mode or area of use within India or outside India.
(m) “mark” includes a device, brand, heading, lable, ticket, name,

signature, word, letter, numeral, shape of goods, packaging or
combination of colours or any combination thereof.
(n) “Member” means a Judicial Member or a Technical Member of the

Appellate Board and includes the Chairman and the Vice-Chairman.
(o) “name” includes and abbreviation of a name.
(p) “notify” means to notify in the Trademark Journal published by the

Registrar.
(q) “package” includes any case, box, container, covering, folder,

recetacle, vessel, casket, bottle, wrapper, labler, band, ticket, reel,
frame, capsule, cap, lid, stopper and cork.
! !475
(r) “permitted use: in relation to a registered trademark, means the

use of trademark-
i) by a registered user of the trademark in relation to goods or

service-
a) with which he is connected in the course of trade, and
b) in respect of which the trademark remains registered for the

time being, and
c) for which he is registered as registered user, and
d) which complies with any conditions or limitations to which the

registration of registered user is subject, or
ii) by a person other than the registerd proprietor and registered user
in relation to goods or services-
a) with which he is connected in the course of trade, and
b) in respect of which the trademark remains registered for the

time being, and
c) by consent of such registered proprietor in a written agreement,

and
d) which complies with any conditions or limitations to which such

user is subject and to which the registration of the trademark is
subject.
(s) “prescribed” means prescribed by rules made under this Act.
(t) “register” means the Register of Trademark referred to in subsection

(1) of section 6.
(u) “registered” (with its grammatical variations) means registered

under this Act.
! !476
(v) “registered proprietor” in relation to a trademark, means the person

for the time being entered in the register as proprietor of the
trademark.
(w) “registered trademark” means a trademark which is actually on the

register and remaining in force.
(x) “registered user” means a person who is for the time being
registered as such under section 49.
(y) “Registrar” means the Registrar of Trade mark referred to in section

3.
(z) “service” means service of any description which is made available

to potential users and includes the provisions of services in
connection with business of any industrial or commercial matters
such as banking, communication, education, financing, insurance,
chit funds, real estate, transport, storage, material treatment,
processing, supply of electrical or other energy, boarding, lodging,
entertainment, amusement, construction, repair, conveying of news
or information and advertising. 
 
(za) “trade description” means any description, statement or
other indication, direct or indirect,-
i) as to the number, quantity, measure, gauge or weight of any

goods, or
ii) as to the standard of quality of any goods or services according

to a classification commonly used or recognized in the trade, or
iii) “drug” as defined in the Drugs and Cosmetics Act, 1940 (23 of
194)) or “food” as defined in the Prevention of Food
Adulteration Act, 1954 (37 of 1954), or
iv) as to the place or country in which or the time at which any

goods or services were made, produced or provided, as the case
may be, or
! !477
v) as to the name and address or other indication of the identity of

the manufacturer or of the person providing the services of the
person for whom the goods are manufactured or services are
provided, or
vi) as to the mode of manufacture or producing any goods or

providing services, or
vii)as to the material of which any goods are composed, or
viii)as to any goods being the subject of an existing patent,

privilege or copyright, and includes-
a) any description as to the use of any mark which according to

the custom of the trade is commonly taken to be an
indication of any of the above matters.
b) the description as to any imported goods contained in any bill

of entry or shipping bill.
c) any other description which is likely to be misunderstood or

mistaken for all or any of the said matters.
(zb) “trademark” means a mark capable of being represented

graphically and which is capable of distinguishing the goods or
services of one person from choose of others and may include
shape of goods, their packaging and combination of colours , and in
relation to Chapter XII (other than section 107), a registered
trademark or mark used in relation to goods or services for the
purpose of indicating or so as to indicate a connection in the course
of trade between the goods or services, as the case may be, and
some person having the right as proprietor to use the mark, and in
relation to other provisions of this Act, a mark used or proposed to
be used in relation to goods or services for the purpose of indicating
or so to indicate to a connection in the course of trade between the
goods or services, as the case may be, and some person having the
right, either as proprietor or by way of permitted user, to use the
mark whether with or without any indication of the identity of that
person, and includes a certification trademark or collective mark
! !478
(zc) “transmission” means transmission by operation of law,

devolution on the personal representative of a deceased person and
any other mode of transfer, not being assignment.
(zd)“Technical Member” means a Member who is not a Judicial

Member.
(Ze) “tribunal” means the Registrar or, as the case may be, the
Appellate Board, before which the proceeding concerned is pending.
(zf) “Vice-Chairman” means a Vice-Chairman of the Appellate

Board.
(zg)“well-known trademark” in relation to any goods or service,

means a mark which has becomes so to the substantial segment of
the public which uses such goods or receives such services that the
use of such mark in relation to other goods or services would be
likely to be taken as indicating a connection in the course of trade
or rendering of services between those goods or services and a
person using the mark in relation to the first mentioned goods or
services. 
 
In this Act, unless the context otherwise requires, any reference –
to “trademark” shall include reference to “collective mark” or
“certification trademark”. 
 
To the use of a mark shall be construed as a reference to the use of
printed or other visual representation of the mark. 
 
To the use of a mark in relation to goods, shall be construed as a
reference to the use of the mark upon, or n any physical or in any
other relation whatsoever, to such goods. 
 
In relation to goods, shall be construed as a reference to the use of
the mark as or as part of any statement about the availability,
provision or performance of such services. 
 
To the Registrar shall be construed as including a reference to any
officer when discharging the functions of the Registrar in pursuance
of subsection (2) of section 3. 
! !479
To the Trademarks Registry shall be construed as including a

reference to any office of the Trademarks Registry. 
 
For the purposes of this Act, goods and services are associated with
each other if it is likely that those goods might be sold or otherwise
traded in and those services might be provided by the same
business and so with description of goods and descriptions of
services.
Application for registration -
1. Any person claiming to be the proprietor of a trademark used or

proposed to be used by him, who is desirous of registering it, shall apply
in writing to the Registrar in the prescribed manner for the registration
of his trademark.
2. A single application may be made for registration of a trademark for

different classes of goods and services and fee payable therefor shall be
in respect of each such class of goods or services.
3. Every application under subsection (1) shall be filed in the office of the
Trademarks Registry within whose territorial limits the principal place of
business in India of the applicant or in the case of joint applicants the
principal place of business in India of the applicant whose name is first
mentioned in the application as having a place of business in India, is
situate: 
 
Provided that where the applicant or any of the joint applicants does not
carry on business in India, the application shall be filed in the office of
the Trademarks Registry within whose territorial limits the place
mentioned in the address for service in India as disclosed in the
application, is situate.
4. Subject to the provisions of this Act, the Registrar may refuse the
application or may accept it absolutely or subject to such amendments,
modifications, conditions or limitations, if any, as he may think fit.
5. In the case of a refusal or conditional acceptance of an application, the

Registrar shall record in writing the grounds for such refusal or
! !480
conditional acceptance and the materials used by him in arriving at his

decision.
Note : For the registration of a trademark an application is to be made to

the Registrar. A single application can be made for registration of a
trademark for different classes of goods and services by paying prescribed
fee for each such class of goods and services.
Registration -
1. Subject to the provisions of section 19, when an application for

registration of a trademark has been accepted and either—
(a) the application has not been opposed and the time for notice of
opposition has expired; or
(b) the application has been opposed and the opposition has been
decided in favour of the applicant, the Registrar shall, unless the
Central Government otherwise directs, register the said trademark
and the trademark when registered shall be registered as of the
date of the making of the said application and that date shall,
subject to the provisions of section 154, be deemed to be the date
of registration.
2. On the registration of a trademark, the Registrar shall issue to the

applicant a certificate in the prescribed form of the registration thereof,
sealed with the seal of the Trademarks Registry.
3. Where registration of a trademark is not completed within twelve

months from the date of the application by reason of default on the part
of the applicant, the Registrar may, after giving notice to the applicant
in the prescribed manner, treat the application as abandoned unless it is
completed within the time specified in that behalf in the notice.
4. The Registrar may amend the register or a certificate of registration for

the purpose of correcting a clerical error or an obvious mistake.
! !481
Rights conferred by registration -
1. Subject to the other provisions of this Act, the registration of a

trademark shall, if valid, give to the registered proprietor of the
trademark the exclusive right to the use of the trade mark in relation to
the goods or services in respect of which the trademark is registered
and to obtain relief in respect of infringement of the trademark in the
manner provided by this Act.
2. The exclusive right to the use of a trademark given under subsection (1)
shall be subject to any conditions and limitations to which the
registration is subject.
3. Where two or more persons are registered proprietors of trademarks,

which are identical with or nearly resemble each other, the exclusive
right to the use of any of those trademarks shall not (except so far as
their respective rights are subject to any conditions or limitations
entered on the register) be deemed to have been acquired by any one
of those persons as against any other of those persons merely by
registration of the trademarks but each of those persons has otherwise
the same rights as against other persons (not being registered users
using by way of permitted use) as he would have if he were the sole
registered proprietor.
Grounds for refusal of registration
1. The trademarks
(a) which are devoid of any distinctive character, that is to say, not
capable of distinguishing the goods or services of one person from
those of another person;
(b) which consist exclusively of marks or indications which may serve in

trade to designate the kind, quality, quantity, intended purpose,
values, geographical origin or the time of production of the goods or
rendering of the service or other characteristics of the goods or
service;
! !482
(c) which consist exclusively of marks or indications which have become

customary in the current language or in the bona fide and
established practices of the trade, shall not be registered :
Provided that a trademark shall not be refused registration if before the

date of application for registration it has acquired a distinctive character as
a result of the use made of it or is a well-known trademark.
2. A mark shall not be registered as a trademark if -
(a) it is of such nature as to deceive the public or cause confusion;
(b) it contains or comprises of any matter likely to hurt the religious

susceptibilities of any class or section of the citizens of India;
(c) it comprises or contains scandalous or obscene matter;
(d) its use is prohibited under the Emblems and Names (Prevention of
Improper Use) Act, 1950 (12 of 1950).
3. A mark shall not be registered as a trademark if it consists

exclusively of
(a) the shape of goods which results from the nature of the goods
themselves; or
(b) the shape of goods which is necessary to obtain a technical result;

or
(c) the shape which gives substantial value to the goods.
Test of similarity
In order to come to the conclusion whether one mark is deceptively similar

to another the broad and essential features of the two are to be
considered. They should not be placed side by side to find out if there are
any differences in the design and if so whether they are of such a character
as to prevent one design from being mistaken for the other. It would be
enough if the impugned mark bears such an overall similarity to the
! !483
registered mark as would be likely to misled a person usually dealing with

one to accept the other if offered to him.
It is common knowledge that ’bidis’ are being used by persons belonging to

poorer and illiterate or semi-literate class. Their level of awareness is not
high. It cannot be expected of them that they would comprehend and
understand the fine differences between the two labels, which may be
detected on comparing the two labels when placed side by side. The
essential features of the two labels are common.
4. Limitation as to colour -
(1) A trademark may be limited wholly or in part to any combination of

colours and any such limitation shall be taken into consideration by
the tribunal having to decide on the distinctive character of the
trade mark.
(2) So far as a trademark is registered without limitation of colour, it

shall be deemed to be registered for all colours.
5. Relative grounds for refusal of registration -
(1) Same as provided in section 12, a trade mark shall not be

registered if, because of—
a) its identity with an earlier trademark and similarity of goods or

services covered by the trademark; or
b) its similarity to an earlier trademark and the identity or similarity

of the goods or services covered by the trademark, there exists a
likelihood of confusion on the part of the public, which includes the
likelihood of association with the earlier trademark.
(2) A trademark which -
a) is identical with or similar to an earlier trademark; and
b) is to be registered for goods or services which are not similar to

those for which the earlier trademark is registered in the name of
a different proprietor, shall not be registered, if or to the extent,
! !484
the earlier trademark is a well known trademark in India and the

use of the later mark without due cause would take unfair
advantage of or be detrimental to the distinctive character or
repute of the earlier trademark.
(3) A trademark shall not be registered if, or to the extent that, its use
in India is liable to be prevented—
a) by virtue of any law in particular the law of passing off protecting

an unregistered trademark used in the course of trade; or
b) by virtue of law of copyright.
(4) Nothing in this section shall prevent the registration of a trademark

where the proprietor of the earlier trademark or other earlier right
consents to the registration, and in such case the Registrar may
register the mark under special circumstances under section 12.
(5) A trademark shall not be refused registration on the grounds

specified in subsections (2) and (3), unless objection on any one or
more of those grounds is raised in opposition proceedings by the
proprietor of the earlier trademark.
(6) The Registrar shall, while determining whether a trademark is a well

known trademark, take into account any fact which he considers
relevant for determining a trademark as a well known trademark
including -
i) the knowledge or recognition of that trademark in the relevant

section of the public including knowledge in India obtained as a
result of promotion of the trade mark;
ii) the duration, extent and geographical area of any use of that
trademark;
iii) the duration, extent and geographical area of any promotion of the
trademark, including advertising or publicity and presentation, at
fairs or exhibition of the goods or services to which the trademark
applies;
! !485
iv) the duration and geographical area of any registration of or any

application for registration of that trademark under this Act to the
extent they reflect the use or recognition of the trademark;
v) the record of successful enforcement of the rights in that

trademark; in particular, the extent to which the trademark has
been recognised as a well known trademark by any court or
Registrar under that record.
(7) The Registrar shall, while determining as to whether a trademark is

known or recognised in a relevant section of the public for the
purposes of subsection (6), take into account -
i) the number of actual or potential consumers of the goods or

services;
ii) the number of persons involved in the channels of distribution of

the goods or services;
iii) the business circles dealing with the goods or services,to which
that trade mark applies.
(8) Where a trade mark has been determined to be well-known in at

least one relevant section of the public in India by any court or
Registrar, the Registrar shall consider that trade mark as a well
known trademark for registration under this Act.
(9) The Registrar shall not require as a condition, for determining

whether a trademark is a well known trademark, any of the
following, namely:—
i) that the trademark has been used in India;

ii) that the trademark has been registered;
iii) that the application for registration of the trademark has been filed
in India;
iv) that the trademark—
a. is well known in; or

b. has been registered in; or
! !486
c. in respect of which an application for registration has been filed

in, any jurisdiction other than India; or
v) that the trademark is well known to the public at large in India.
(10)While considering an application for registration of a trademark and

opposition filed in respect thereof, the Registrar shall -
i) protect a well known trademark against the identical or similar

trade marks;
ii) take into consideration the bad faith involved either of the
applicant or the opponent affecting the right relating to the
trademark.
(11)Prohibition of registration of names of chemical elements or

international non-proprietary names 
 
No word—
(a) which is the commonly used and accepted name of any single
chemical element or any single chemical compound (as
distinguished from a mixture) in respect of a chemical substance
or preparation, or
(b) which is declared by the World Health Organisation and notified

in the prescribed manner by the Registrar from time to time, as
an international non-proprietary name or which is deceptively
similar to such name, shall be registered as a trade mark and any
such registration shall be deemed for the purpose of section 57
to be an entry made in the register without sufficient cause or an
entry wrongly remaining on the register, as the circumstances
may require.
(12)Use of names and representations of living persons or persons

recently dead -
Where an application is made for the registration of a trademark which

falsely suggests a connection with any living person, or a person whose
death took place within twenty years prior to the date of application for
! !487
registration of the trademark, the Registrar may, before he proceeds with

the application, require the applicant to furnish him with the consent in
writing of such living person or, as the case may be, of the legal
representative of the deceased person to the connection appearing on the
trademark, and may refuse to proceed with the application unless the
applicant furnishes the registrar with such consent.
Appellate Board
The Intellectual Property Appellate Board by the Central Government has

been provided to exercise the jurisdiction, powers and authority conferred
on it by or under this Act.
This Board shall consist of a Chairman, Vice-Chairman and such number of

other Members, as the Central Government may, deem fit. The jurisdiction,
powers and authority of the Appellate Board may be exercised by Benches
thereof. A Bench shall consist of one judicial Member and one Technical
Member and shall sit at such place as the Central Government may specify.
An appeal can be made to the Appellate Board in the prescribed manner
within three months from the date on which the order or decision sought to
be appealed against in communicated to such person preferring the appeal.
Offences and Penalties
Offences under the Act are punishable by imprisonment and fine. Such
offences include falsifying and falsely applying trademarks, and trade
descriptions etc., selling goods or providing services to which false
trademarks or false trade description is applied, or for falsifying and falsely
applying Trademarks, or for falsely representing a Trademark as
registered.
13.5 ACTIVITY FOR STUDENTS
1. You have developed a computer program for filing the returns of a

salaried person in India. Write down the procedures to register your
creative work with the registrar of the office of the Registrar of the
Copyrights.
2. Search on Internet the registered trademarks of the various biscuit

manufacturers in India.
! !488
13.6 SUMMARY
• Act of Copyright is applicable to literary work, music, film, artistic work,

computer program and television broadcast.
• Copyright vests in the person who produces the work or who pays
substantial amount for it.
• The Copyright Act exempts certain use from the application of the act.
These are mainly non-commercial purpose for a public purpose.
• The copyright is for a period of 60 years.
• Copyright violation attracts criminal proceedings and penalty, including

imprisonment.
• A patent is a monopoly right for the use of an invention.
• An application for the patent is to be made to the Controller of Patents.
• The invention should be unique and useful to obtain a patent for the
same.
• The patentee can sell, assign or license the rights in the patent.
• A method of agriculture or horticulture cannot be patented.
• Surgical or other processes for treating human beings cannot be

patented.
• In case of trademarks, Service marks, or collective and certification

marks can be registered.
• Foreign trademarks can be assigned and registered with a very few

restraints.
• The Act has strengthened civil and criminal liabilities for misusing
trademarks.
! !489
1. Write down the legal effects of infringement of copyright of a literary

work in India.
2. How are the patents registered in India?
3. How can the Intellectual Property Rights be safeguarded?
4. Write a short note on – ‘The Rights Granted by a Patent’.
5. List down the formalities involved while applying for a patent.
6. Explain the procedure for registration of a trade mark.
7. What are not considered as ‘inventions’ in the meaning of Patent Act,

1970?
8. Write a short note on – ‘The Rights Conferred by Registration of a

Trademark’.
1. A patent is a legal protection granted for ____________
a. Product
b. Invention
c. Discovery
d. Person
2. Patents are granted for all products for a period of ______years.
a. Unlimited
b. Fifty
c. Hundred
d. Twenty
! !490
3. The items which are not patentable are ______.
a. Method of agriculture or horticulture

b. Process of treatment of human beings or animals
c. Method of playing a game
d. All of the above
4. The duration of a copyright protection is ____ years from the date of

original publication.
a. Sixty
b. Twenty
c. Hundred
d. None of the above
5. A patentee can __________ the right in the patent which he is

holding.
a. Assign
b. License
c. Sell
d. Either / All of the above.
Answers : (1-b), (2-d), (3-d), (4-a), (5-d).
! !491
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !492
GST AND SUPPLY CHAIN MANAGEMENT
Chapter 14
Objectives
GST and its importance in the present business scenario; the salient
features of GST; the proposed rates and proposed model of GST; the
Implications and Impact of GST on supply chain management; comparison
of scenario of GST in India and in other major business countries of the
world, and its possible shortcomings.
Structure:
14.1 GST – Definition and Need in India

14.2 Objectives of GST
14.3 Proposed Model of GST
14.4 GST – Proposed Tax Rates
14.5 GST – Proposed Exemptions
14.6 Implementation of GST
14.8 Summary
! !493
14.1 GST – DEFINITION AND NEED IN INDIA
14.1.1 Definition
Goods and Service Tax (GST) is a comprehensive tax levy on manufacture,

sale and consumption of goods and service at a national level.
GST is a tax on goods and services with value addition at each stage
having comprehensive and continuous chain of set-of benefits from the
producer’s/service provider’s point up to the retailer’s level where only the
final consumer should bear the tax.
The principal broad-based consumption taxes that the GST would replace
are the CENVAT and the Service Tax levied by the Centre and the VAT
levied by the states. All these are multi-stage value added taxes. The
structure of these taxes today is much better than the system that
prevailed a few years ago, which was described in the Bagchi Report as
“archaic, irrational, and complex – according to knowledgeable experts, the
most complex in the world”. Over the past several years, significant
progress has been made to improve their structure, broaden the base and
rationalize the rates.
14.1.2 Need of GST in India
In spite of the improvements made in the tax design and administration

over the past few years, the systems at both central and state levels
remain complex. Their administration leaves a lot to be desired. They are
subject to disputes and court challenges, and the process for resolution of
disputes is slow and expensive. At the same time, the systems suffer from
substantial compliance gaps, except in the highly organized sectors of the
economy. There are several factors contributing to this unsatisfactory state
of affairs. This scenario generated a need of major tax reform in India, in
line with the current trend in major developed and developing countries in
the world.
The significant improvements made under the reformed tax structure of

VAT are:
• the replacement of the single-point state sales taxes by the VAT in all of
the states and union territories,
! !494
• reduction in the Central Sales Tax rate to 2%, from 4%, as part of a
complete phase out of the tax,
• the introduction of the Service Tax by the Centre, and a substantial

expansion of its base over the years,
• rationalization of the CENVAT rates by reducing their multiplicity
• replacement of many of the specific rates by ad valorem rates based on

the maximum retail price (MRP) of the products.
These changes have yielded significant dividends in economic efficiency of

the tax system, ease of compliance, and growth in revenues. The State
VAT eliminated all of the complexities associated with the application of
sales taxes at the first point of sale. The consensus reached among the
States for uniformity in the VAT rates has brought an end to the harmful
tax competition among them. It has also lessened the cascading of tax.
The application of CENVAT at fewer rates and the new system of CENVAT
credits has likewise resulted in fewer classification disputes, reduced tax
cascading, and greater neutrality of the tax. The introduction of the Service
Tax has been a mixed blessing. While it has broadened the tax base, its
structure is complex. The tax is levied on specified services, classified into
one hundred different categories. This approach has spawned many
disputes about the scope of each category. Unlike goods, services are
malleable, and can and are often packaged into composite bundles that
include taxable as well as non-taxable elements. Also, there is no
standardized nomenclature for services, such as the HSN for goods. The
design of the CENVAT and state VATs was dictated by the constraints
imposed by the Constitution, which allows neither the Centre nor the
States to levy taxes on a comprehensive base of all goods and services and
at all points in their supply chain. The Centre is constrained from levying
the tax on goods beyond the point of manufacturing, and the States in
extending the tax to services. This division of tax powers makes both the
CENVAT and the state VATs partial in nature and contributes to their
inefficiency and complexity. The principal deficiencies of the current
system, which need to be the primary focus of the next level of reforms,
are discussed below.
The CENVAT is levied on goods manufactured or produced in India. This

gives rise to definitional issues as to what constitutes manufacturing, and
! !495
valuation issues for determining the value on which the tax is to be levied.
While these concepts have evolved through judicial rulings, it is recognized
that limiting the tax to the point of manufacturing is a severe impediment
to an efficient and neutral application of tax.
Moreover, the effective burden of tax becomes dependent on the supply

chain, i.e., the taxable value at the point of manufacturing relative to the
value added beyond this point. It is for this reason that virtually all
countries have abandoned this form of taxation and replaced it by multi-
point taxation system extending to the retail level. Australia is the most
recent example of an industrialized country replacing a tax at the
manufacturing or wholesale level by the GST extending to the retail level.
The previous tax was found to be unworkable, in spite of the high degree
of sophistication in administration in Australia. It simply could not deal with
the variety of supply chain arrangements in a satisfactory manner.
Considering all these facts and the shortcomings in the present system,
and also to remain competitive in the global market, the need for
introduction of GST has come to the front now and it is of utmost priority
to put it into operation as early as possible.
14.2 OBJECTIVES OF GST
The basic objective of tax reform would be to address the problems of the
current system. It should establish a tax system that is economically
efficient and neutral in its application, distributionally attractive, and simple
to administer. The distributional or sectoral concerns have been at the
heart of the excessive differentiation of the Indian tax system—but that the
objectives are negated by the cascading effects of the taxes. While an
optimal design of the consumption tax system, taking into account both
production efficiency and distributional concerns, would not imply
uniformity of the overall tax structure, the desired structure can be
achieved by a combination of taxes and transfers. The optimal pattern of
tax rates implied by a given degree of aversion to poverty and concern for
the poor is to be analysed. At high levels of concern for the poor, one
would reduce the tax on cereals (but not dairy products) and increase the
taxes on non-food items (durables). Thus, a differentiated overall structure
appears desirable for a country in which the government has consistently
expressed a concern for the poor.
! !496
However, individual taxes should not be highly differentiated, as that

complicates administration and makes it difficult to evaluate the overall
effects of the tax design. This applies particularly to value added type of
taxes. In principle, a single rate (or at the most two-rate) VAT, together
with excises and spending measures could achieve the desired
distributional effects, for reasonable degrees of inequality aversion of
policymakers. In particular, it is important from an administrative
perspective that close substitutes should not be taxed at very different
rates, to avoid leakages and distortions. Revenue considerations suggest
that the tax base should be broad, and comprise all items in the consumer
basket, including goods, services, as well as real property.
The neutrality principle would suggest that:
• the tax be a uniform percentage of the final retail price of a product,

regardless of the supply-chain arrangements for its manufacturing and
distribution;
• the tax on inputs be fully creditable to avoid tax cascading; and
• the tax be levied on the basis of the destination principle, with all of the
tax on a given product/service accruing in the jurisdiction of its final
consumption.
Multiple VAT rates become a source of complexity, and disputes, for

example, over borderlines, adding to the costs of tax administration and
compliance. It is for this reason that countries like New Zealand,
Singapore, and Japan have chosen to apply the tax at a low and uniform
rate, and address any concerns about vertical equity through other fiscal
instruments, including spending programs targeted to lower-income
households.
Another important objective of tax reform is simplification of tax

administration and compliance, which is dependent on three factors. The
first determining factor for simplicity is the tax design itself. Generally, the
more rational and neutral the tax design, the simpler it would be to
administer and encourage compliance. If the tax is levied on a broad base
at a single rate, there would be few classification disputes and the tax-
specific record keeping requirements for vendors would be minimal. The
! !497
tax return for such a system can be as short as the size of a postcard. It
would simplify enforcement, and encourage voluntary compliance.
The second factor is the infrastructure for tax administration, including the
design of tax forms, data requirements, system of tax rulings and
interpretations, and the procedures for registration, filing and processing of
tax returns, tax payments and refunds, audits, and appeals. A modern tax
administration focuses on providing services to taxpayers to facilitate
compliance. It harnesses information technology to enhance the quality of
services, and to ensure greater transparency in administration and
enforcement.
The third factor in a federation such as India is the degree of

harmonization among the taxes levied by the Centre and the States. The
Empowered Committee has already indicated a preference for a dual GST,
consisting of a Centre GST and a State GST. Under this model,
harmonization of the Centre and State GSTs would be critical to keep the
overall compliance burden low. Equally important is harmonization of GSTs
across the states.
An important consideration in the design of reform options is the degree of

fiscal autonomy of the Centre and the States. It goes without saying that
the power to govern and to raise revenues go together. The Constitution of
India lays down a clear division of powers between the Centre and the
States, including the power to levy taxes. Such a system would have much
to commend itself from the perspectives of economic efficiency and the
establishment of a common market within India. It is interesting to note
that China moved to a centralized VAT with revenue sharing with the
provinces ensuring that provinces got as much revenues as under the prior
arrangements, plus a share of the increment.
GST is a single national levy and all the GST revenues collected by the
center are returned to the states. However, such a compromise is unlikely
to find much favor with the States in India, as is already revealed in their
preference for the Dual GST. To give political substance to the federal
structure in India, the States (as well as the Centre) are likely to insist that
they have certain autonomy in exercise of their taxation powers. Full
autonomy would mean that:
! !498
• retain the power to enact the tax,

• enjoy the risks and rewards of ‘ownership’ of the tax,
• be accountable to their constituents, and
• be able to use the tax as an instrument of social or economic policy.
Notwithstanding the above, there is a clear recognition of the need for

harmonization of the Centre and State Taxes. Fiscal autonomy is important
to allow the Centre and the States to set the tax rates according to their
revenue needs. Harmonization of tax laws and administrative procedures is
needed to simplify compliance and enforcement. It is also necessary to
ensure that inter-State differences in policies and procedures do not
generate additional economic distortions. An important question then is the
desired degree of harmonization and the mechanism for achieving it.
The elements of harmonization can be divided into three broad sets: tax
rates, tax base and tax infrastructure, i.e., the administration and
compliance system. The first two elements could be viewed as important
levers on which States would want to have some degree of control to
achieve their social, economic, and fiscal policy objectives.
These considerations suggest that harmonization of virtually all major

areas of GST law and administration would be desirable. There is merit in
keeping even the GST rate(s) uniform, at least during the initial years until
the infrastructure for the new system is fully developed. Harmonized laws
would mean lower compliance costs for taxpayers and may also improve
the efficiency of fiscal controls. The Central Sales Tax (CST) in India
provides a very useful for model for such harmonization. The CST is a
state-level tax, applied to inter-state sales of goods, based on the origin
principle. The tax law (including the base, rates, and the procedures) is
enacted by Parliament, but the States collect and keep the tax. It is a
perfect example of absolute harmonization, with the States enjoying the
risks and rewards of ownership of the tax.
14.3 PROPOSED MODEL OF GST
GST will not be an additional tax. CGST will include central excise duty
(Cenvat), service tax, and additional duties of customs at the central level;
and value added tax, central sales tax, entertainment tax, luxury tax,
octroi, lottery taxes, electricity duty, state surcharges related to supply of
goods and services and purchase tax at the State level.
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In defining the proposed model of GST, the starting point is the basic
structure of the tax. For this purposes, we start with the assumption that
any replacement of the current taxes would be in the form of a classical
VAT, which is consumption type (allowing full and immediate credit for both
current and capital inputs attributable to taxable supplies) and destination
based (i.e., the tax levied on the basis of the place of consumption of the
goods and services, not the place of production). Under this system,
credits for input taxes are allowed on the basis of invoices issues by the
vendors registered for the tax. This is the most common type of structure
adopted around the world. In order to achieve this, the assignment of
powers to levy the tax to be given to the Centre and the States, and the
tax base and rates to be accordingly decided.
The main options for the VAT assignments include:
• Concurrent Dual GST,

• National GST, and
• State GSTs.
All these options require an amendment to the Constitution, which is

expected to be completed in 2015. Mostly, a model of Dual GST is expected
to be adopted. Under this model, the tax is levied concurrently by the
Centre as well as the States. Both the Central Government and the
Empowered Committee appear to favor this model. While full details of the
model are still awaited, two variants have been identified in public
discussions so far. The initial variant, discussed in November, 2007,
entailed both the Centre and the States levying concurrently the GST on
goods, but most of the services (except services of a local nature)
remaining subject to the Centre GST only. The Central GST would thus
apply to both goods and services, extending to the entire supply chain,
including wholesale and retail trade. The State GSTs would largely be
confined to goods only, with minor changes from the current State VATs.
Under the more recent variant, both goods and services would be subject
to concurrent taxation by the Centre and the States. This variant is closer
to the model recommended by the Kelkar Committee in 2002.
The main difference between the two variants is in the treatment of

services, reflecting apprehensions about the feasibility of defining the place
of supply (i.e., destination) of inter-State services. Even the more recent
variant recognizes that there would be a set of inter-State services for
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which the place of destination would be difficult to determine. The State

tax on these services would be collected by the Centre, and then
apportioned among the States in some manner.
Other notable features of this variant are as follows:
• There would a single registration or taxpayer identification number, based

on the Permanent Account Number (PAN) for direct taxation. Three
additional digits would be added to the current PAN to identify
registration for the Centre and State GSTs.
• States would collect the State GST from all of the registered dealers. To
minimize the need for additional administrative resources at the Centre,
States would also assume the responsibility for administering the Central
GST for dealers with gross turnover below the current registration
threshold of Rs 1.5 crores under the central Excise (CENVAT). They would
collect the Central GST from such dealers on behalf of the Centre and
transfer the funds to the Centre.
• Procedures for collection of Central and State GSTs would be uniform.

There would be one common tax return for both taxes, with one copy
given to the Central authority and the other to the relevant State
authority.
• Other indirect taxes levied by the Centre, States, or local authorities at

any point in the supply chain would be subsumed under the Central or
the State GST, as long as they are in the nature of taxes on consumption
of goods and services.
• GST on export would be zero rated.
• Both CGST and SGST will be levied on import of goods and services into
the country. The incidence of tax will follow the destination principle and
the tax revenue in case of SGST will accrue to the State where the
imported goods and services are consumed. Full and complete set-off will
be available on the GST paid on import on goods and services.
At a broad conceptual level, this model has a lot to commend itself. It

strikes a good balance between fiscal autonomy of the Centre and States,
and the need for harmonization. It empowers both levels of government to
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apply the tax to a comprehensive base of goods and services, at all points
in the supply chain. It also eliminates tax cascading, which occurs because
of truncated or partial application of the Centre and State taxes.
14.4 GST – PROPOSED TAX RATES
In the proposed GST design for India, it has been suggested that the tax
would need to be levied at a combined Centre-State tax rate of 20 per
cent, of which 12% would go to the Centre and 8% to the states . While
they fall below the present combined Centre and State statutory rate of
26.5% (Cenvat of 14%, and VAT of 12.5%), GST at these rates would
encounter significant consumer resistance, especially at the retail level,
and would give rise to pressures for exemptions and/or lower rates for
items of daily consumption. With the notable exception of Scandinavian
countries, where the tax is levied at the standard rate of 25%, few
countries have been successful in levying and sustaining a VAT/GST at such
high rates. Successful GST models adopted by other countries had a very
broad base and a relatively modest tax rate, especially at the time of
inception. For example, the New Zealand GST was introduced at the rate of
10%, with a base consisting of virtually all goods and services (with the
exception of financial services). The Singapore GST was introduced at 3%,
but the rate has now been raised to 7% as inefficient excises and customs
duties have been progressively eliminated.
Turning to an estimation of the size of the GST base in India, the GST rates
that would be required to replace the current indirect tax revenues of the
Centre and the States. Poddar and Bagchi (2007) calculations show that if
the GST were to be levied on a comprehensive base, the combined Centre-
State revenue neutral rate (RNR) need not be more than 12%. This rate
would apply to all goods and services, with the exception of motor fuels
which would continue to attract a supplementary levy to maintain the total
revenue yield at their current levels.
The GST rates will have to be finalized on the item/services based. For the
goods/ services of common needs, separate rates have to be proposed.
Following three major categories are suggested to be adopted for
finalization
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14.4.1 GST on Food Items
This is most important as the application of GST to food would have more
impact on those living at or below subsistence levels. Food accounts for
one-third of total private final consumer expenditures. For those at the
bottom of the income scale, it doubtless accounts for an even higher
proportion of total expenditures and incomes. Taxing food could thus have
a major impact on the poor. By the same token, a complete exemption for
food would significantly shrink the tax base. There are additional
considerations that are pertinent to the treatment of food.
• Food includes a variety of items, including grains and cereals, meat, fish,
and poultry, milk and dairy products, fruits and vegetables, candy and
confectionery, snacks, prepared meals for home consumption, restaurant
meals, and beverages. In most jurisdictions where reduced rates or
exemptions are provided for food, their scope is restricted to basic food
items for home consumption. However, the definition of such items is
always a challenge and invariably gives rise to classification disputes. In
India, basic food, however defined, would likely constitute the vast bulk
of total expenditures on food.
• In India, while food is generally exempt from the CENVAT, many of the
food items, including foodgrains and cereals, attract the state VAT at the
rate of 4%. Exemption under the state VAT is restricted to unprocessed
food, e.g., fresh fruits and vegetables, meat and eggs, and coarse grains.
Beverages are generally taxable, with the exception of milk.
• In the rural sector, the predominant distribution channel for unprocessed

food would be either a direct sale by the farmer to final consumers or
through small distributors/retailers. Even where food is within the scope
of the GST, such sales would largely remain exempt because of the small
business registration threshold.
• Given the large size of farm community in India, which is mostly

unorganized, consideration needs to be given to whether it is advisable
to exempt (with no right of input tax deduction) all unprocessed farm
produce sold by them at the farm gate. In the case of cash crops
(produce for further manufacturing or processing, e.g., cotton, coffee
beans, and oil seeds), it would not be in the interest of the farmers to be
exempted from tax. They should thus be allowed the option of voluntary
! !503
registration to pay the tax. It is recognized that an exemption for first

sale at the farm gate would be difficult to administer and create
inefficiencies in distribution and marketing of farm produce.
These considerations pose some difficult policy issues. Given that food is
currently exempt from the CENVAT, the GST under a single-rate,
comprehensive-base model would lead to at least a doubling of the tax
burden on food (from 4% state VAT to a combined GST rate of 10-12%). It
would call for some tangible measures to offset the impact on the lower-
income households. One would be to limit the exemption only to cereals,
as some of the other food items have lower distributional characteristics.
An exemption for food has the potential to totally unravel the simplicity and
neutrality of GST.
One could consider a lower rate for food, instead of complete exemption. If
the lower rate were to be 5%, the revenue neutral standard rate (based on
2005 rate structure) would be pushed up to 16%. This may be a
reasonable compromise, provided all other goods and services are made
taxable at the single standard rate of 16%. The risk is that the lower rate
for food would become the thin edge of the wedge which would create
irresistible demands for the opening the door wider.
An important question is the definition of food that would be eligible for the
lower rate. To keep the base broad, and limit the preference to items of
consumption by the lower income households, the lower rate should be
confined to ‘unprocessed’ food items (including vegetables, fruit, meat,
fish, and poultry). Its scope can be further restricted by excluding from the
preference food pre-packaged for retail sale. This definition would not be
without problems, especially where the processing value added is small.
For example, if wheat were taxable at 5% as unprocessed food, but flour
taxable at 16% as processed food, it would encourage consumers to buy
wheat and then have it processed into flour. Overall, the preferred option
would appear to be a single-rate, comprehensive-base GST. While no
option is perfect, it has the advantage of simplicity and neutrality. As noted
earlier, sales of unprocessed food in rural India would largely remain
exempted under this option because of the small business exemption. The
poor can be further insulated from its impact through direct spending
programs, and/or exempt from tax any sales under the Public Distribution
System (PDS).
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14.4.2 Land and Real Property
Under a modern GST/VAT housing and construction services are treated

like any other commodity. Thus, when a real estate developer builds and
sells a home, it is subject to VAT on the full selling price, which would
include the cost of land, building materials, and construction services.
Commercial buildings and factory sales are also taxable in the same way,
as are rental charges for leasing of industrial and commercial buildings.
There are only two exceptions: (1) resale of used homes and private
dwellings, and (2) rental of dwellings:
• A sale of used homes and dwellings is exempted because the tax is

already collected at the time of their first purchase, especially for homes
acquired after the commencement of the tax. If the sale were to be
made taxable, then credit would need to be given for the tax paid on the
original purchase and on any renovations and additions after the
purchase. Except where the prices have gone up, the net incremental tax
on resale may not be significant. Theoretically, this system does create a
windfall for the existing homes build and acquired prior to the
commencement of the tax. In practice, the windfall is not significant as
the home construction would have attracted other taxes on construction
materials and services that prevailed at the time.
• Residential rentals are also exempted for the same reason. If rents were
to be made taxable, then credit would need to be allowed on the
purchase of the dwelling and on repairs and maintenance. Over the life of
the dwelling, the present value of tax on the rents would be
approximately the same as the tax paid on the purchase of the dwelling
and on any renovation, repair, and maintenance costs. In effect (and as
with other consumer durables), payment of VAT on the full purchase
price at acquisition is a prepayment of all the VAT due on the
consumption services that the house will yield over its full lifetime. A
resale of a dwelling is exempted for the same reason: the tax was pre-
paid when the dwelling was initially acquired.
• Many private individuals and families own residential dwellings (including

their homes and summer residences) which they may rent to others.
They are generally not in the VAT system, so do not get a credit for the
VAT paid when they initially acquire their new home. Nor do they claim
any credit for any repairs or renovations they may have made to the
! !505
existing homes. If the rental of such dwelling were subject to tax, owners
should also be given a credit for the taxes paid on such costs, which
would be complex, and difficult to monitor. Sale or rental of vacant land
(which includes rental of car parking spaces, fees for mooring of boats
and camping sites is also taxable under the ‘modern’ VAT system. It
would make sense to incorporate these concepts in the design of GST in
India as well.
• Conceptually, it is appropriate to include land and real property in the

GST base. To exclude them would, in fact, lead to economic distortions
and invite unnecessary classification disputes as to what constitutes
supply of real property.
• In the case of commercial and industrial land and buildings, their

exclusion from the base would lead to tax cascading through blockage of
input taxes on construction materials and services. It is for this reason
that even under the European system an option is allowed to VAT
registrants to elect to treat such supplies as taxable.
• Housing expenditures are distributed progressively in relation to income

and their taxation would contribute to the fairness of the GST.
• The State VAT and the Service Tax already apply to construction
materials and services respectively, but in a complex manner. For
example, there is significant uncertainty whether a pre-construction
agreement to sell a new residential dwelling is a works contract and
subject to VAT. Where the VAT does apply, disputes arise about the
allocation of the sale price to land, goods, and services. While land is the
only major element that does not attract tax, the tax rates applicable to
goods and services differ, necessitating a precise delineation of the two.
Extending the GST to all real property supplies, including construction
materials and services, would bring an end to such disputes, simplify the
structure, and enhance the overall economic efficiency of the tax. Stamp
duty is a cascading tax on each conveyance of title to real property,
whereas the GST is a tax on final consumer expenditures. The GST does
not impinge on commercial property transactions, after taking into
account the benefit of input tax credits. It does not result in tax
cascading. Under the model described above, in the case of residential
dwellings, the GST would apply to the first sale only. Thus, the two taxes
cannot be viewed as substitutes. However, the application of GST to real
! !506
property transactions does warrant a review of the structure and rates of

stamp duties and registration fees. The rates should be lowered and the
structure rationalized when the GST is introduced.
14.4.3 Financial Services
Financial services are exempted from VAT in all countries. The principal
reason is that the charge for the services provided by financial
intermediaries (such as banks and insurance companies) is generally not
explicit - a fee - but is taken as a margin, that is hidden in interest,
dividends, annuity payments, or such other financial flows from the
transactions. For example, banks provide the service of operating and
maintaining deposit accounts for their depositors, for which they charge no
explicit fee. The depositors do, however, pay an implicit fee, which is the
difference between the pure interest rate (i.e., the interest rate which could
otherwise be earned in the market without any banking services) and the
interest actually received by them from the bank on the deposit balance.
The fee is the interest foregone. Similarly, the charge for the services
provided by banks to the borrowers is included in the interest charged on
the loan. It is the excess of the interest rate on the loan over the pure rate
of interest or cost of funds to the bank for that loan.
It would be straightforward to levy the tax on this implicit fee if the

reference ‘pure rate’ were easily observable—but it is not. The spread
between borrowing and lending rates, could be measured, and taken as
measuring the total value added by the intermediary. But in order for the
crediting mechanism to work properly, it is necessary to go further and
allocate this value-added to borrower and lender (with a credit on the tax
paid due only to registered taxpayers)—which again raises the problem of
identifying a reference pure interest rate.
Some financial services are, of course, charged for by a direct and explicit
fee, examples being an account charge or foreign exchange commission.
Services provided for an explicit charge could be subjected to VAT in the
normal way with the taxable recipient having a right of deduction, and a
growing number of countries do this. Nevertheless, some countries exempt
them all, while others limit the exemption to banking and life insurance.
The exemption avoids the need to measure the tax base for financial
transactions, but gives rise to other distortions in the financial markets.
The denial of credit to the exempt financial institutions for the VAT charged
! !507
on their inputs creates disincentives for them to outsource their business

process operations. Where they render services to business clients, the
blockage of input tax credits results in tax cascading, adversely affecting
their competitive position in the international markets.
Taxing explicit fees for financial services, but treating margin services as
exempt, is a possible answer, but it is conceptually flawed (as the same
service will be treated differently for VAT purposes depending on how the
remuneration for it is taken) and runs the risk that there will be some
arbitrage between the two methods of charging to lessen the VAT charge.
14.5 GST - PROPOSED EXEMPTIONS
The following items are proposed to be exempted from GST –
• Levies on petroleum products

• Levies on alcoholic products
• Taxes on lottery and betting
• Basic customs duty and safeguard duties on import of goods into India
• Entry taxes levied by municipalities or panchayats
• Entertainment and Luxury taxes
• Electricity duties/taxes
• Stamp duties on immovable properties
• Taxes on vehicles
14.6 IMPLEMENTATION OF GST
In order to have effective implementation of GST, the laws and

administration have to be harmonized. The need for Centre-State and
inter-State harmonization is paramount under the Dual GST. The ultimate
goal would be a unified base and one set of rules for the two taxes. There
is an example of Australia where the GST is imposed and administered as a
single unified tax levied by the national government. All the revenues from
the tax are then distributed to the states. Another such example is that of
Harmonized Sales Tax (HST) in Canada, which is levied in three of the ten
provinces. The tax is levied and administered under a unified law by the
national government, much like the Australian GST. The key difference is in
the revenue allocation system. Under the Canadian system, provincial
participation in the HST is elective, not mandatory. The tax is levied at the
national rate of 7 per cent (now reduced to 5%), which is increased by 8%
! !508
per cent in those provinces which have elected to participate in it. The
revenues attributable to the supplementary rate of 8 percent are then
distributed among the participating provinces on the basis of a statistical
calculation of the tax base in those provinces (which approximates the
revenues they would have collected if they had levied a separate tax of
their own). In Australia, there is no State “participation”. The tax is a
federal tax that is distributed to the States under a political agreement.
The revenues are distributed as grants to the States, taking into account
factors such as fiscal capacity and need of individual States. In terms of
the operation of the law, the enactment of the law, and the jurisdiction of
law, it is exclusively a federal tax.
The system in the Province of Quebec in Canada offers another model of

harmonization of the national and sub-national taxes. Quebec levies a
goods and services tax, called Quebec Sales Tax (QST), the legislation for
which follows very closely the model for the federal GST. The two taxes
have the same base, definitions, and rules, but levied under two separate
statutes. To ensure harmonization of administration, the two governments
have entered into a tax collection agreement under which the collection,
administration and enforcement of the federal GST is delegated to the
provincial government. The agreement defines the role and responsibilities
of the two governments and the policies and procedures to be followed in
administering the tax. The federal government retains the power to make
any changes in the legislation and to issue rulings, and interpretations,
which are adhered to by the province in administering the federal GST. In
practice, the province accepts the federal rulings and interpretations for
both GST and QST, given the similarities in the two statutes.
The EU model is yet another example. This model is quite distinct from the
Australian and Canadian models. The focus in the EU model is on
minimization of distortions in trade and competition, and not on
harmonization of administration. Thus, the VAT base (subject to continuing
derogations) is harmonized, as are the basic rules governing the
mechanism and application of VAT (time of supply, valuation, place of
supply etc). The rates are harmonized only within broad bands (e.g., the
standard rate may not be less than 15%) and administration is largely a
matter for the member states to decide (but must respect basic principles
such as neutrality).
! !509
As noted earlier, the CST in India also offers an interesting model of the
harmonization mechanism. The CST law is central, but the tax is
administered and collected by the States. Indeed, this appears to be most
suitable model for India. The GST law for both the Centre and the States
would be enacted by Parliament under this model. It would define the tax
base, place of taxation, and the compliance and enforcement rules and
procedures. The rates for the State GST could be specified in the same
legislation, or delegated to the State legislatures. The legislation would
empower the Centre and the States to collect their respective tax amounts,
as under the CST.
If the governments fail to reach a political compromise on the CST model,

the Quebec model would appear to be the next best alternative. It respects
fiscal autonomy of the two levels of government, yet facilitates
harmonization through the mechanism of binding tax collection agreements
between the Centre and the States. These agreements would, in turn,
encourage adoption of a common GST law.
The Centre can play an important role of providing a forum to discuss and
develop the common architecture for the harmonized administration of the
two taxes. It would have responsibility to develop policies and procedures
for GST, in consultation with the Empowered Committee, e.g., on the place
of supply rules, taxpayer registration and identification numbers, model
GST law, design of tax forms and filing procedures, data requirements and
computer systems, treatment of specific sectors (e.g., financial services,
public bodies and governments, housing, and telecommunications), and
procedures for collection of tax on cross-border trade, both inter-State and
international. The proposal made by the Empowered Committee (for
delegation of administration of the Centre GST for smaller dealers to the
States) is very similar, even though the contractual framework for it is yet
to be developed.
1. Search on Government web sites the progress and latest articles on GST
implementation in India.
2. Study the proposed GST rates for luxury items, viz., imported cars,
alcoholic drinks, and cigarettes.
3. Study from the latest Annual Budget Presentation of Central

Government on the subject of GST.
! !510
14.8 SUMMARY
• Goods and Service Tax (GST) is a comprehensive tax levy on

manufacture, sale and consumption of goods and service at a national
level.
• Objective of GST is to establish a tax system that is economically

efficient and neutral in its application, distributionally attractive, and
simple to administer.
• CGST will include central excise duty (Cenvat), service tax, and
additional duties of customs at the central level; and value-added tax,
central sales tax, entertainment tax, luxury tax, octroi, lottery taxes,
electricity duty, state surcharges related to supply of goods and services
and purchase tax at the State level.
• GST on export would be zero rated.
• Both CGST and SGST will be levied on import of goods and services into
the country.
• A few items are proposed to be exempted from GST.
1. Give brief definition of GST and explain its need in India.
2. What are the advantages in the area of tax collection due to

implementation of GST?
3. Write down point by point the objectives of GST .
4. Which taxes and duties are expected to be abolished in the proposed

GST implementation?
5. Which taxes will be out of the range of GST as per existing propositions?
6. Explain how the traders, the customers and the farmers will be
benefitted by the proper implementation of GST?
! !511
1. The word GST stands for______
a. General Service Tax

b. Government Service Tax
c. Goods and Services Tax
d. Government State Tax
2. The proposed GST is sure to replace______
a. Excise Duty
b. VAT
c. Service Tax
d. All of the above
3. In the present tax system, CENVAT stands for______
a. Common Value Added Tax

b. Central Value Added Tax
c. Central Volume Available Tax
d. Common Value Arranged Tax
4. The proposed GST system will consist of______
a. GST-1 and GST-2

b. Separate Tax for each State of India
c. Heavy Export Tax
d. CGST and SGST
5. In the present tax structure, Central Excise Duty is collected at the point
of______
a. Manufacturing
b. Distribution
c. Warehousing
d. Servicing
Answers : (1-c), (2-d), (3-b), (4-d), (5-a).
! !512
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !513
GLOBAL SUPPLY CHAIN MANAGEMENT AND WTO
Chapter 15
GLOBAL SUPPLY CHAIN MANAGEMENT AND
WTO
Objectives
At the end of the chapter, you will be able to understand the details and
objectives of the WTO - World Trade Organisation . Also, you will know
about the challenges and issues of global supply chain management. The
WTO agreements will be known to you and also the advantages of the
agreements for all the member countries.
Office of the World Trade Organisation - Geneva
Structure:
15.1 Supply Chain Types and Challenges

15.2 Importance of Global Free Trade
15.3 Need for Change in GSCM
15.4 GATT and WTO
15.5 WTO - Agreements
15.7 Summary
! !514
15.1 SUPPLY CHAIN TYPES AND CHALLANGES
15.1.1 Types of Supply Chains
Not every supply chain is the same, of course. Nor is every company
involved in supply chains active across the same sets of activities. For
example, Company ‘A’ manages 15,000 suppliers across a wide range of
industries in over 40 countries. Company ‘B’ handles not only
manufacturing components, but also spare parts for ATM networks in India.
Company ‘C’ runs cold storage supply chains for perishable items in India
alongside a traditional system that does not require refrigeration and such
careful attention to temperature details. All of these diverse tasks require
different sets of skills and management activities. What unites big players,
however, is expertise in managing systems, making investments in the
individuals who operate these systems, and building up the capacity to
explore new options and opportunities for expansion and distribution.
15.1.2 Managing inventory
One of the most important roles for many manufacturing supply chain
operators is managing inventory. Because lead companies are increasingly
pressing their vendors to manage inventory, this task now falls to suppliers
or to the last rungs of the value chain. Keeping inventory low and located
at different levels of the chain dramatically increases the flexibility and
agility of the supply chain. It also lowers the costs because carrying
inventory no longer appears on the company’s bottom line. Supply chain
operators help by managing inventory flow to ensure that the goods arrive
at the right place at exactly the right time.
As an example, Company ‘X’ produces computer kits for assembly into Dell
Computers. Approximately 50 different suppliers produce the components
that all need to be put together for the production line. When they began
this task, it took the company eight hours to pull the stock and put the kits
together. However, the time soon fell to four hours. Now, when an order is
received, Company ‘X’ can deliver the kit components to the line for
assembly by Dell in just 45 minutes.
However, this requires very precise timing. If any one of the 50 suppliers is
late on a delivery, the entire line comes to a halt. Because most of the
components are coming from different countries, it requires very close
! !515
coordination across multiple countries and tight communication with

customs officials to be able to deliver on time. It also requires company ‘X’
to provide help in setting up resilience for the supply chain network to
ensure that companies have more than one source for critical supplies. This
means that if some disaster knocks out a part of the chain, the rest of the
network of distribution facilities can take over from elsewhere in the
region. Managing inventory requires a delicate balance between carrying
just enough expensive stock to avoid running out, but not too much to
burden the balance sheet. There is one other aspect to carrying low
inventory, however, that is important to note — it quickly uncovers
problems elsewhere in the system. Any internal inefficiency that could be
disguised under conditions of high inventory is rapidly exposed with low
stocks. If orders are being received late, for instance, it might not be too
noticeable when ample items are already sitting on the shelves. If the
cupboard is bare, a late order will be glaringly obvious.
15.1.3 Shifting products across borders
Globally competitive firms literally use the world as their platform. They
source raw materials from everywhere. Imported components — nearly 70
per cent of their total inventory — are vital to creating the final products.
Of the remaining 30 per cent of products that are produced domestically,
many also include some imported components or raw materials as well.
Without imports, it is not possible to create products for the domestic
market or to manufacture exports. Wind energy provides an excellent
example of this kind of globally sourced product. To create huge wind
blades, one of Dow’s customers requires a specialty product created by
Dow. The supply chain for this chemical starts with an oil well somewhere
in the North Sea, which is shipped to a refinery in Amsterdam. From there
the raw material is shipped to the Dow manufacturing facility in Germany.
Afterwards, some is shipped to the Republic of Korea where they do a
relatively high distillation process. Then this product is sent to China for
formulation where it is packed into small drums and sent to the customer
for manufacture of wind blades. In fact, a major manufacturer like Dow
now spends more money on logistics and services than on manufacturing.
This is particularly true considering that costs in logistics are not simply the
costs of the tankers and trucks, but also the inventory costs, service costs,
government requirements, reporting requirements, import duty tariffs, and
issues like labeling, materials safety, managing inventory, and so forth. As
a result, a huge payoff for business comes from standardization and
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optimization in logistics. How can the cycle be shortened? How can

inventory be pushed around better and faster? For businesses, it is easier
to shift products from one location to another through various operations
and touch points while maintaining consistency and standardization in
terms of reporting in terms of values, duty, tariffs and so forth. Anything
that can be done to reduce costs and improve efficiency in transferring
goods across borders would be extremely helpful and welcome.
15.1.4 The role of outsourcing
One risk for supply chain operators is disintermediation — the possibility

that lead firms might decide to cut out the middle man and do things
themselves at some point. For instance, Dell Computer could opt to bundle
their own computer kits and not rely on earlier supplier any longer.
However, this does already happen in some cases. Carter’s, a children’s
clothing company, does not outsource the entire production of a paticular
clothing to company ‘A’. Instead, only certain aspects of logistics are
handed over to them.
What pushes a firm to decide when to outsource and when to hang on to

production internally? In part it comes down to core competencies. If there
is some aspect of the job that is either viewed as a critical competency for
the firm to handle in-house or, if the firm believes it can do this aspect
better and be more cost effective internally, it will not outsource. If,
however, neither condition holds, the task can be handed off to another
firm. The same thing is true for the supply chain operators themselves. If
they do not have a core competency for a task, they should also outsource
the task to some other firm with better, lower cost options for completing
it. It is, after all, just as important for supply chain operators and big
manufacturers to be nimble and keep their own costs down. Their
shareholders and Wall Street analysts are seeking high returns on
investment, which requires them to avoid diverting company performance
by insisting on performing non-key tasks in-house.
One aspect that bigger supply chain operators bring to the task, however,
is specialized knowledge of markets. For example, Company ‘A’ work with
suppliers not only in well-known parts of China, but increasingly in more
distant places. Building up knowledge requires a commitment on the part
of the firm to form relationships with firms, local government officials,
regional actors and other stakeholders. Such an investment may not be
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something that lead firms want to make, but rather to outsource to their
supply chain operators instead.
15.1.5 Pressures for consolidation
Building these relationships can be costly and time consuming. As a result,

it can be hard for smaller players to invest in such resources. Even within
supply chain and logistics operators, there is an increasing push towards
consolidation into larger firms. Not everyone can handle the pressure for
lower margins, higher costs and higher demands for service. Many have
gone out of business. A company in China bought one company every
three weeks in 2011, on average, because they found so many
opportunities.
15.1.6 The role of transportation
Global business relies on efficient means of transportation. The exact

method of transport depends on the business model. Many of the leading
companies use multiple methods — air, rail, road and ships. For some
companies, such as Zara, nearly all shipments are via air. This includes
sourcing some products from Asia, shipping via air back to Spain, then
returning finished goods via air back to Asia for consumers. Despite
expensive shipping costs, Zara remains one of the most profitable clothing
retailers in the world. Why do they use air freight every day? Because their
business model is all about limited fashion. The time of conceptualization
to appearance in the retail store is about six weeks and such a compressed
schedule requires products to move via air. For this company, though their
obsolescence is nearly zero, given their quick response and the fact that
they carry almost no inventory costs at all. If, however, another company
were to try to follow a similar model and air freight all their goods without
being properly geared up for that, they would be bound to fail. Their
logistics costs will be sky high. So, it is important to pick the right transport
model for the overall business model.
Express delivery by air freight is frequently used for fast-moving consumer

electronics, medical devices and pharmaceutical products, and precision
instruments. It is also used for critical replacement and repair parts, and
for samples and late orders. In addition to speed, firms are increasingly
using express companies because they can rely on door-to- door delivery
systems with careful tracking and monitoring of packages along the way.
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However, one challenge that some companies and logistics firms face in
using multiple transportation modes is that the management of
transportation within government falls to different agencies. As a result,
the rules regarding use of road, rail, ship, and air for freight are complex,
fragmented, and vary tremendously across different countries.
For example, the World Bank Logistics Index 2012, notes that lead time for
imports in Asia alone can vary from 1–4 days, time processing at the
border similarly varies from 1–4 days, and physical inspection rates for
cargo shipments could be as little as one per cent manual inspection to as
high as 35 per cent in India and 31 per cent in Indonesia.
For exports, the same report notes 1–3 days lead time for processing a 40
feet container from point of origin to port of loading. The costs, including
agents fees, port, airport or other charges, range from US$ 178 in
Singapore to US$ 310 in Viet Nam to US$ 918 in India. For companies like
UPS, managing these differences can be challenging. The daily delivery
volume for the company is 16.3 million documents and packages, with
2012 revenue of US$ 54.1 billion. More than two per cent of global GDP
moves around the world in UPS trucks and planes and, if it were
independent, the company would have the world’s 9th largest airline.
15.1.7 Innovation
Supply chain operators are grappling with labour challenges. Getting

sufficient workers with the right set of skills is proving to be difficult. As a
result, more of the process is being automated with a higher reliance on
information technology. Singapore is trying to create something new in a
“supply chain city.” This is a dedicated, highly automated facility designed
by YCH Group for up to 10,000 supply chain experts, professionals and
practitioners. It has been designed from the beginning to allow for very
flexible operations. For example, it allows firms to manufacture on the
spot, change designs, test products, and prepare to scale up if things go
well. It also includes a huge automated storage and retrieval system for
inventory. The facility encourages the clustering of suppliers in one place.
Singapore’s Economic Development Board has strongly backed up the
project.
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15.1.8 Changing government policies
All of the logistics operators spoke warmly of specific measures taken by

some countries to speed up the processing of goods. One such example is
bonded logistics parks (BLPs). China makes particularly good use of BLPs.
Among other benefits, they allow an on-the-spot refund of taxes due for
exports. (Although BLPs are different in different parts of the world —
those in India are not the same as those in China.) But some countries
have implemented policies that make it difficult for companies to locate
inventory domestically. To return to the example of the Dell computer
assembly for a moment, although most of the components are delivered
just-in-time for assembly, it can be critical to have some inventory on
hand, as well as spare parts. But a variety of policies can make it
impossible for Dell or YCH to locate such a facility in some domestic
jurisdictions.
Equally problematic can be policies that create extra challenges to servicing

equipment. In many places, domestic rules make it too costly to allow a
proper third-party repair hub to operate outside the country and allow
products to flow easily across borders. This means that firms must set up
suboptimal domestic repair operations, resulting in higher servicing costs
for consumers and firms. Other rules can make it hard for firms to operate
in value chains. For example, lead firms may start operating in a market as
a joint venture. If the business is successful, the lead firm may decide to
take over the business from the joint venture partner. Even if the transition
is entirely amicable between firms, government regulations could turn this
into a nightmare. Customs officials may now regard the company as a
“non-trusted company” in the same category as a new importer and
subject to 100 per cent inspections, higher guarantees, and so forth.
Other problematic rules conflict with the value chain pressures to push
inventory to suppliers. Lead firms may want suppliers to hold inventory.
But in many territories, suppliers cannot hold inventory unless they are
resident companies, as there are no provisions for non-resident importers.
This could require suppliers to do all sorts of contortions to satisfy the
domestic requirements that are not desirable from the perspective of a
global value chain. YCH has had to develop a creative solution to this
problem in India. They are now allowed to represent suppliers that do not
have a physical presence in India. The company underwrites the inventory,
takes part of the license, brings the shipments into the country, and
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transfers the product to the manufacturer on a just-in-time basis. Global

value chains have been promoted as one way that countries can pursue
economic development. This is especially true since most developing
countries rely heavily on small and medium enterprises (SMEs), rather
than on large firms. SMEs, even from developing countries, are often seen
as important actors in a global supply chain in providing parts and
components, for example. However, one particular challenge for SME
participation comes from the pressures of lead firms to push inventory
costs down on the suppliers. For larger firms or those with secure
financing, the costs of holding inventory might be manageable. For SMEs,
these costs are prohibitive. Imagine that you are being asked to hold a US
$ 1 million in inventory. This has to be held for a full month, plus the time
it takes for the order to be delivered. It could also take another 60–75 days
to be paid for this delivery. This leaves the company with no cash flow for
several months and several million tied up in inventory. Solving this
problem requires some creative thinking on the part of governments and
financial institutions. Another set of business obstacles comes from
incompatible regulations and standards. Distribution centers currently need
to carry two different sets of pallets — one for Europe and one standard
size. If you want to ship products from Asia to the Russian Federation and
on to Europe via rail, it needs to change cargos three times. Why? Because
the rail width is different. Each change adds significantly to the cost and
complexity of moving goods. One bright spot is the creation of data
messaging protocols for air freight. This will allow any airline transporting
cargo to know exactly what data has been transmitted and ensure the
quality of that data. It will also help secure the supply chain by limiting the
handoffs or touch points along the chain. The buy-in for the program so far
has been limited, particularly to countries that are technologically savvy.
But, should the program spread in the future, the benefits could be
significant.
15.2 IMPORTANCE OF GLOBAL FREE TRADE
15.2.1 The importance of global free trade
Not surprisingly, top supply chain and lead manufacturing firms believe
passionately in the importance of maintaining free and open trade. The
dream for many is to have the ability to source, ship and sell products in
the most efficient locations, and to do so as seamlessly as possible. Falling
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transport and communications costs have made it easier than ever for
companies to participate in a global economy.
Supply chain operators can be extremely creative, inventive problem

solvers. They manage to bring together suppliers and lead firms from far-
flung regions across the globe. Many persevere in the face of difficult
obstacles, including a wide variety of policies that stand in the way of the
smooth movement of goods. One important lesson business leaders
recognize is the need for continuous engagement with government
policymakers. Without regular feedback and conversations with the policy
community, neither side may be entirely aware of the obstacles faced by
the other. Dialogues on global value chains can be one important
mechanism for getting diverse groups to talk openly about key issues —
and lead to better policy results. The differentiated roles can be seen in
retail banking. Mortgages tend to be the magnetic product. Customers are
most likely to change banks in order to get a good deal on a mortgage. The
banking relationship is anchored by the current account. Unsecured
lending, as with an overdraft or debit card balance, is the profit engine.
Further, mobile banking supports a bank’s image as an innovator and
provides opportunities for differentiation.
The same differentiated roles exist in supply chains. Often sourcing brings
new clients to an intermediary and sourcing plus logistics anchor the
relationship. “Onshore” services such as distribution, wholesaling and
retailing have become the principal sources of value and growth, while
product design and development are the spice. In the future, deep market
knowledge of China and India will attract new clients. Managing supply
chain sustainability and integrity is likely to be an important relationship
anchor. Finance and e-commerce platforms will be key profit engines, while
brands and risk management will be fertile ground for innovation.
Requiring each element of supply chain service to justify itself as a profit
centre is a dangerous oversimplification. The customer relationship should
be the profit centre.
The services that play the key roles change over time as the relationship
matures and the customer’s situation evolves. Customers, in the context of
relationships, determine the value of individual services.
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Dramatic changes in supply chain architectures and objectives and their

associated value systems are underway. Possible future architectures
include:
• Changes in the Chinese supply base, e.g., far more sophisticated and
sustainable
• Manufacture in Asia to sell in Asia, e.g., China is a huge domestic market
• Nearshoring, e.g., manufacturing in Mexico for the US market
• Manufacture to order, e.g., very flexible and rapid supply chains, and
• Adding value close to customers, e.g., final assembly and finishing.
Government policies and regulations are a very significant part of the

business landscape and will influence future supply chain architectures and
objectives. Inconsistencies across jurisdictions incentivize regulatory
arbitrage. Government policies clearly impact the magnitude and
accessibility of market opportunities as through barriers to entry,
regulation of competition, procurement practices and the advocacy of
particular technologies. Government policies affect the dynamics of
product, service and business model innovation. Governments can drive
the virtuous dynamics by reducing the risks for other participants, such as
through the establishment of standards, protection of intellectual property,
being a lead user of innovative technology, tax incentives for risky
investments and making markets more open, transparent and efficient.
There is a circular relationship between government policies and
regulations and market conditions. Sometimes regulations shape the
market but often they respond, e.g., to incidents regarding product or
process safety, personal privacy, and environmental impact.
15.2.2 Changing Landscape of the Business
The business landscape is changing rapidly and, in many respects,

discontinuously. Supply chains face significant disruptions in the markets
where they operate and an inflection point for the sources of value and
growth. Many factors are combining to reshape supply chains and their
associated value systems. These dynamics are connected. They reinforce
and accelerate one another. The principal drivers of change are:
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• Adoption and commoditization of broadband

• Innovations in media and e-commerce
• Increased market transparency
• Deconstruction of integrated value chains
• A discontinuity in consumer aspirations and use of technology, and
• China becoming a vibrant domestic market
Ubiquitous, very-low-cost broadband connectivity is disrupting and

reshaping how products and services are packaged, marketed, delivered
and used. It changes the social dynamics of markets, creates the new
economics of information, enables deconstruction of integrated value
chains, stimulates innovation and accelerates the commoditization of many
products and services. It offers exciting new opportunities to established
companies while posing major threats to their strategies, business models
and cultures.
The new economics of information are changing the way content is

generated and distributed and the way supply chain members
communicate with one another.
Traditionally, the economics of information were based on several simple

laws. The first law was the tradeoff between reach and richness. You could
reach a huge audience with a simple, undifferentiated message such as a
television advertisement, or you could deliver a complex, personalized
message to a very small audience, as in a salesman talking one-on-one to
a potential customer. The Internet eliminates this tradeoff. Rich messages
can be sent in a highly personalized form to large audiences. Many small
audiences are as good a one large audience, maybe better. The second law
was economies of scale in broadcasting. The larger the audience reached,
the lower the cost per message. That, too, has been changed by the
Internet.
Now the cost per message can be constant, and very low, independent of
the size of the audience reached. Thus, “...the more end-users a network
has, the more valuable the network becomes to the users. Metcalf’s Law,
named after the founder of 3Com and father of Ethernet, states that the
potential value of a network is proportional to the square of the number of
connections.”
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The third law was diminishing returns to scale. Unit costs would not decline
indefinitely with size. Beyond a certain point they would become constant
or even rise because of bureaucracy and complexity. In the world of digital
media and e-commerce, the cost per transaction can be essentially zero.
Instead of driving up costs and reducing the profitability of a relationship,
today the rule has become the more transactions you have with a
customer, the better. Very frequent contacts are essential for building
brand value, customer satisfaction, trust and sticky relationships. The
world is changing, as “...web services are breaking down barriers between
disparate systems, organizations and creating webs of new relationships.
The shift from closed proprietary networks to the Internet is a very

important development. The Internet is the antithesis of walled garden
systems where customers are restricted to a pre–determined range of
products and services. It inevitably leads to greater customer
independence. Some supply chain functions like sourcing are vulnerable to
disintermediation. e-commerce makes it easy for customers to deal directly
with manufacturers, markets, and one another. Other functions such as
retailing face intermediation by aggregators such as Google and Baidu who
challenge them for the customer relationship. These developments are
disrupting established patterns of influence, control, value creation, and
value capture in supply chains.
The next wave of disruptive innovations includes mobile broadband, smart

phones like the Apple iPhone and “web 2.0”. What is happening in media
shows the future of retailing. Both markets are shifting from a traditional
hub-and-spoke structure to a much more complex decentralized grid
architecture. Much of the innovation is occurring in the peer-to-peer (P2P)
context, as with Facebook, Groupon, Vent Priveé and Gilt Groupe. An
increasing amount of the innovative software is open source, e.g., Android.
Applications and contents are becoming web-based rather than staying on
“fat” clients such as PCs and local servers. This new environment must be
thought of as more than a technological phenomenon.
It also is a major social phenomenon characterized by an explosion of self-

expression and viral content, cloud computing and large-scale piracy of
intellectual property (IP). The emergence of personal media, social
networks and virtual communities is especially significant. It will be
increasingly difficult to maintain control over IP. Forward-thinking
companies are considering where to go “open source.” The new social
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ecosystems have powerful network effects. They can drive the emergence
of dominant standards and for next-generation platforms and supply
chains. Increasing market openness and the new economics of information
create a very different ecology. It is far more transparent, competitive and
unforgiving. An ever-greater number of customers will find out who has the
best service, technology and prices, who treats customers well and who
does not. If you are not one of the best, you will find it more and more
difficult to attract and retain high-value customers. The competition will be
intense and unavoidable. As they say in the US: “you can run but you can’t
hide!”
15.2.3 The changes are disruptive
Each of the drivers of change is quite significant. The combination is highly

disruptive. The situation at Foxconn put the global spotlight on workplace
conditions in China and other low-cost manufacturing locations. The effect
is unfolding in three waves –immediate, near term, and mid term. It
already has precipitated rapid increases in unit labour costs that are
spreading from China to other countries. This produced strong pressures to
improve productivity and/or relocate factories. In the mid term, the
resulting surge in disposable income and consumption will offer exciting
new opportunities for retailers, brands and supply chain members.
Innovations in media and e-commerce have dramatically increased market

transparency. News travels quickly through blogs, social networks and
Twitter. There is no place to hide when something goes wrong. BP’s
incident in the Gulf of Mexico wiped 55 per cent off its market capitalization
in a matter of weeks and badly damaged its reputation. Foxconn has made
sustainability a priority issue among consumers, retailers and brand
owners. They, and inescapably supply chain members, face much greater
reputational risk and financial liability with respect to product safety.
A holistic, end-to-end approach to supply chain sustainability is essential.

It is clear that “some leading companies have already suffered reputational
and brand damage when problems have been uncovered, even if they are
not contracted to the offending supplier. Consumers will not understand the
contractual complexities, only that a brand is associated with unethical
practices.” Increased market transparency also intensifies competition.
Innovative information aggregators like RedLaser and GoodGuide facilitate
comparison shopping by both B2C and B2B buyers. Others like Panjiva
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make it easier for retailers to connect directly with manufacturers. The

risks of disintermediation, of retailers going direct to manufacturers and
manufacturers going direct to consumers, are significant. Greater
transparency enables deconstruction of the value chain and entry of new
competitors who attack the sweet spot and commoditize it. The most likely
result is margin squeeze for intermediaries and commoditization of
traditional sourcing services based on the agency business model.
Intermediaries are caught between higher product costs and customers
facing weak markets who are unwilling to accept cost increases. Greater
customer power, with Wal-Mart as the extreme example, amplifies this
problem. The sweet spot in the value chain is shifting toward the
customers to wholesale, retail and brands.
A generational discontinuity, especially in China, is reshaping the business

landscape. The “under-30s” are dramatically different from their parents in
their aspirations, attitudes toward consumption and use of technology.
They are always connected to their friends and acquaintances through
mobile phones, Twitter and Facebook. They have a voracious appetite for
digital media. They are driving the explosion of social networks, media, and
commerce through companies like YouTube, Groupon, Vent Privée and Gilt
Group. These young people expect to have a much better life than their
parents and want the material trappings of success as soon as possible.
China is in many respects the biggest and most elusive prize. The country
is transitioning from primarily a centre of low cost export manufacturing to
a large and rapidly growing domestic market. Asian investors are acquiring
high-end western brands such as Jaguar, Hickey Freeman, MCM, Pringle,
Hardy Amies and Gieves & Hawkes, in large part to address this emerging
opportunity. The next step will be to develop global products, brands, and
creative leaders in China. But China needs to turn “made in China” from a
negative into a plus. The problem is similar to “made in Japan” 50 years
ago – perceptions and reality of low quality, oppressive “sweat shops”,
endless product safety scandals and rampant forgery of brands.
Supply chains and their associated value systems will be complex and defy
simple descriptions. They will be simultaneously concentrated (at the
manufacturing level and for buyer power and brands), fragmented (many
new types of channels, intermediaries, and segments) and integrated (in
terms of markets, products, customer relationships, and e-commerce
platforms). And as described by Fine (1998) the balance among
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concentration, fragmentation, and integration is dynamic. In the short

term, integrated value chains will be unbundled, attacked and
commoditized. Then a new wave of innovations will drive re-bundling and
de-commoditization.
15.3 NEED FOR CHANGE IN GSCM
15.3.1 GSCM – Requirements and the need for change :
Supply chain members must contend with a set of complex, interrelated

strategic issues:
• Greater bi-directionality as in bringing products to developing markets,

handling e-commerce returns, recycling products at the end of their lives
• Serving domestic markets as well as exports, addressing the explosive

demand for goods and services in China, India, and other markets
• Major changes in where and how value is created and captured as

through product design, development of powerful brands, and e-
commerce
• Where innovation occurs and its character, for example: China becoming
a hotbed of creativity, innovation around customer experiences and other
intangibles
• Integrated versus specialist business models – anticipating cycles in

supply chain architectures and their associated value system
• Off-shoring versus near-shoring as with increased importance of regional

supply chains, emphasis on adding value close to customers
• Achieving and maintaining supply chain integrity such as building trust,

turning “made in China” from a negative into a plus, and
• New business models including close follower to demand trends, produce

to order, rapid production scale-up and integrated end-to-end solutions
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The imperatives for success in this new market ecology begin with greater
coordination among supply chain members. There are many opportunities
to create value through collaboration and information sharing and to
combine capabilities and information in ways that serve customers better.
This will require relationships within supply chains to become far more
“integral” as defined by Fine (2005) and Pipenbrock (2009).
The culture of most supply chains is distinctly entrepreneurial. An

entrepreneurial culture is inherently competitive for opportunities,
resources, recognition and rewards. Entrepreneurs must be convinced that
collaboration and sharing generate greater value and that they will get a
fair share. The key is quick wins with clear financial payoffs.
A survey of chief supply chain officers explored the importance of various

supply chain levers. It found: “...supply chain executives have been using
multiple levers to help support value creation. Information visibility is a
means for companies to coordinate their supply chain activities to increase
efficiency, reduce waste, and improve response time reliability. Hence
information visibility becomes the foundation for all other levers.”
The sources of value and growth are shifting significantly. Principal

businesses such as wholesaling, retailing, brands and financial services are
more capital intensive than sourcing based on the agency model. With
more capital at risk customer information and market intelligence have
become critically important. The next stage is to develop a portfolio of
third-generation value-added services for suppliers, retailers and brand
owners. In addition to product design and development, these services
could include market intelligence, hosted platforms and applications,
managing sustainability and advice regarding best practices in
manufacturing, doing business in China, sustainability and supply chain
integrity, and e-commerce solutions.
These services are “third-generation” because they are significantly more

dependent on technology and formal intellectual property, as with
databases, software and models, than the first-generation agency services
and second-generation principal businesses. The future is in value-added
services and customer experiences based on innovative use of information
and sophisticated analytics. This will require investments in IT platforms,
intellectual property and people with new skills and capabilities. Supply
chain members must decide when to develop these assets internally and
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when to buy them through acquisitions and venture investments. Roberts

and Liu (2001) conclude that a company should use, in a timely and
appropriate way, a broad range of business development strategies,
including alliances, joint ventures, licensing, equity investments and
mergers and acquisitions, in order to perform optimally over its underlying
technology life cycle.
The lead time for building revenues and profits from third-generation
services is significant and the successful business models are unclear, but
think of retail merchandise managers using a portal for market analysis,
sourcing, procurement, supply chain optimization, inventory control and
multi-channel fulfilment. The immediate challenge is to start and accelerate
the learning process regarding which services customers and suppliers
want and need, how to demonstrate their value, the right business models
to monetize them and how to defend them from commoditization.
As noted above, managing supply chain sustainability and its associated

risks have become high priority issues. Locke et al., (2009) undertook
groundbreaking research into the effectiveness of compliance and
commitment-based approaches to sustainability. They concluded that the
compliance model rests on misguided theoretical and empirical
assumptions: “In contrast, ...a more commitment-oriented approach to
improving labour standards coexists and, in many of the same factories,
complements the traditional compliance model. This commitment-oriented
approach, based on joint problem solving, information exchange, and the
diffusion of best practices, is often obscured by the debates over traditional
compliance programmes but exists in myriad factories throughout the
world and has led to sustained improvements in working conditions and
labor rights at these workplaces.”
Plambeck et al., (2012) focus on the challenges in China in the following

passage: “Given how much of the world’s manufacturing takes place in
China and the damage it has wrought on that country’s environment, most
analysts expect that multinational brands’ supply chains will face increasing
scrutiny in the coming years.” The authors highlight the limitations and
counter-productive effects of an audit and enforcement approach to health,
safety, environment and labour practices. They present a series of activities
for getting to know your supply chain and then acting effectively based on
that knowledge. “Any sustainability effort in China must start by creating a
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context that facilitates identification and visibility into the supply chain,”
they conclude.
Innovation is a key element of a successful response to the changing

business landscape. But innovation is not easy. Large, mature companies
often lack the capabilities to be successful with a disruptive product or
service innovation. There are significant obstacles that should be reduced
or eliminated. Successful innovation is a journey defined by the lessons
learned from a series of quick, low-cost experiments. The willingness to
experiment and ability to learn are critical success factors.The imperative
now should be to get started quickly, simply and inexpensively. The
objective of these experiments is to demonstrate an idea and its value by
making the innovation tangible. Quick wins reinforce the commitment to
innovation and accelerate the virtuous dynamics of learning and value
creation. Research has highlighted critical success factors for innovation
initiatives.
• Experiment inexpensively and often – overcome the bias toward doing

things on a large scale and the aversion to anything “quick and dirty”
• Prototype early – expect this to be an iterative process, assume you

won’t get it right the first time, and show the prototype to customers.
• Empower managers two to three levels from the top to approve and fund
experiments – most of the time this can be business unit leaders
• Expect failures – encourage people to try and enable them to “fail soft”
without career damage
• Involve customers – listen to them, learn from them and recognize that
often they are the source of innovation.
• Use social networks to encourage and reward sharing – the business

benefits must come first, then the personal satisfaction
• Create much more value from existing assets – make innovative use of
current capabilities, information and relationships
• Establish mechanisms for internalizing new technologies – eliminate the

obstacles to collaboration with smaller ventures and outside vendors, and
! !531
• Show the payoff in practical terms – measure the effect on customer

satisfaction and retention, staff turnover and productivity, revenues and
profits
e-commerce is developing rapidly in all markets. It is a strategic priority

and major source of growth for existing customers. And the pure plays
such as Amazon offer a wide range of new opportunities like private label
programmes. Supply chain members need to get ahead of customers
regarding e-commerce. Many still are racing to catchup. The current lack of
e-commerce understanding and capabilities and the obstacles to effective
collaboration with small ventures and other sources of e-commerce
technology are very serious problems. Bold action is required to deal with
them. Differences among supply chains are important for how we think
about change and policy impacts. The following typology recognizes
differences along four dimensions:
• Architecture – modular versus integral relationships, global versus

regional, physical flows versus digital
• Objectives – cost, quality, speed, flexibility, innovation, resilience, policy

benefits
• Sources of value – manufacturing, services, retailing, brands, design,

intellectual property, and
• Key dynamics – competition, commoditization, clock speed,

fragmentation, integration, concentration.
In theory, there are many combinations of these factors but in practice a

limited set of variations are most significant. Here are two examples:
modular/global architecture moving physical goods with the primary
objective of cost minimization, creating value through sourcing and
retailing in a highly competitive and commoditized market environment
(Wal-Mart); and integral/global architecture with the primary objectives of
flexibility and innovation, creating value through brand, design and IP, in a
fast moving market dominated by a few powerful players (Apple).
Many traditional supply chains generate value primarily through operational

services such as sourcing and logistics. Relationships are modular such as
undifferentiated, transactional and easily substituted. These supply chains
! !532
are the most vulnerable to commoditization and disruption and where the
members will have the greatest difficulty prospering in the new market
ecology. The most robust supply chains create value by supporting a
strong, differentiated brand. Examples include Amazon, Apple, Body Shop,
Ikea, Nike and Zara. Relationships are integral, deep, strategic and
enduring. There is a level of mutual trust that enables information sharing
among supply chain members and thus collaborative problem solving,
learning and performance improvement. These supply chains are the most
flexible and adaptive.
The major challenge facing supply chain members is to prepare for a very
different business landscape, sooner than most expect. Some understand
the need for change and the changes that are needed, but others do not.
Many are thinking incrementally and seem overconfident, even complacent.
They say: “we understand what is happening and are already responding.
We have plenty of time. Don’t worry, everything is under control.” These
words have been heard many times before, for example, from leaders of
the major telecom groups when the Internet, broadband, mobile, and Wi-Fi
were turning their world upside-down. It is what is called as active inertia.
The capabilities, culture and beliefs that made a company successful
become constraints that cause insufficient and ineffective responses to
market disruptions. Our understanding of the dynamics that are reshaping
global supply chains is incomplete. The influences of government extend
beyond trade policies, taxation and market regulation. They can include
proactive collaboration with the private sector to create enabling
infrastructure and resources. How do these initiatives affect the objectives,
architecture and sources of value and key dynamics of supply chains?
15.3.2 Role of WTO in Global SCM
Much of the literature on supply chains focuses on products. Services,

including finance, healthcare, education, and entertainment have their
supply chains, too. How do service supply chains differ from those for
products? What are the implications of the digitalization and virtualization
of services? These are very fertile areas for research. In brief, the World
Trade Organization (WTO) is the only international organization dealing
with the global rules of trade between nations. Its main function is to
ensure that trade flows as smoothly, predictably and freely as possible.
! !533
The result is assurance. Consumers and producers know that they can
enjoy secure supplies and greater choice of the finished products,
components, raw materials and services that they use. Producers and
exporters know that foreign markets will remain open to them. The result
is also a more prosperous, peaceful and accountable economic world.
Decisions in the WTO are typically taken by consensus among all member
countries and they are ratified by members’ parliaments. Trade friction is
channeled into the WTO’s dispute settlement process where the focus is on
interpreting agreements and commitments, and how to ensure that
countries’ trade policies conform with them. That way, the risk of disputes
spilling over into political or military conflict is reduced. By lowering trade
barriers, the WTO’s system also breaks down other barriers between
peoples and nations. At the heart of the system – known as the multilateral
trading system – are the WTO’s agreements, negotiated and signed by a
large majority of the world’s trading nations, and ratified in their
parliaments. These agreements are the legal ground-rules for international
commerce. Essentially, they are contracts, guaranteeing member countries
important trade rights. They also bind governments to keep their trade
policies within agreed limits to everybody’s benefit. The agreements were
negotiated and signed by governments. But their purpose is to help
producers of goods and services, exporters, and importers conduct their
business. The goal is to improve the welfare of the peoples of the member
countries.
15.4 GATT and WTO
15.4.1 GATS and GATT
The General Agreement on Trade in Services (GATS) is the first multilateral

agreement, under the auspices of Uruguay Round, to provide legally
enforceable rights to trade in a wide range of services along with their
progressive liberalization. Though very little liberalization was actually
achieved, the negotiations on trade in services established the institutional
structure for negotiating liberalization in the future. Many of the developing
countries have not been very receptive to the conception of GATS mainly
due to non-existence of such rules in the past and also because many of
the service sectors had always enjoyed heavy protection. GATS provides
developing countries with an opportunity to integrate into the global
economy through adopting more liberal policies with regard to trade in
services. Both the developing as well as the developed countries would
! !534
gain through liberalization of various service-sectors. In fact, inefficiencies

in the service-sectors of a developing economy impact negatively on the
export competitiveness of its agriculture and manufacturing sectors,
through forward linkages, thus becoming one of the contributory factors
leading to unfavorable balance of current account. The GATS employs a
multi-country computable general equilibrium model to demonstrate
potential gains in welfare for the developing countries from their
liberalization of trade in services. The gains get enhanced further when
developed countries also undertake similar liberalization. Salient features
of India's commitments under GATS can be strengthened and India's
brilliant success in software services can go further. Unilateral moves by
the Indian government towards liberalizing imports of computer software
and hardware along with facilitating inflow of FDI into these sectors during
the 1990s have been the major contributory factors in this success story.
The World Trade Organization came into being in 1995. One of the
youngest of the international organizations, the WTO is the successor to
the General Agreement on Tariffs and Trade (GATT) established in the wake
of the Second World War. So while the WTO is still young, the multilateral
trading system that was originally set up under GATT is well over 50 years
old. The past 50 years have seen an exceptional growth in world trade.
Merchandise exports grew on average by 6% annually. Total trade in 2000
was 22-times the level of 1950. GATT and the WTO have helped to create a
strong and prosperous trading system contributing to unprecedented
growth. The system was developed through a series of trade negotiations,
or rounds, held under GATT. The first rounds dealt mainly with tariff
reductions but later negotiations included other areas such as anti-
dumping and non-tariff measures. The last round – the 1986-94 Uruguay
Round – led to the WTO’s creation. The negotiations did not end there.
Some continued after the end of the Uruguay Round. In February 1997 an
agreement was reached on telecommunications services, with 69
governments agreeing to wide-ranging liberalization measures that went
beyond those agreed in the Uruguay Round. In the same year, 40
governments successfully concluded negotiations for tariff-free trade in
information technology products, and 70 members concluded a financial
services deal covering more than 95% of trade in banking, insurance,
securities and financial information. In 2000, new talks started on
agriculture and services. These have now been incorporated into a broader
work programme, the Doha Development Agenda (DDA), launched at the
fourth WTO Ministerial Conference in Doha, Qatar, in November 2001. The
! !535
agenda adds negotiations and other work on non-agricultural tariffs, trade

and environment, WTO rules such as anti-dumping and subsidies,
investment, competition policy, trade facilitation, transparency in
government procurement, intellectual property, and a range of issues
raised by developing countries as difficulties they face in implementing the
present WTO agreements.
15.4.2 WTO - Basics
Location: Geneva, Switzerland Established : 1 January 1995 Created by :

Uruguay Round negotiations (1986-94) Membership : 160 countries(on 26
June 2014) Budget : 197 million Swiss francs for 2013 Functions:
Administering WTO trade agreements, Forum for trade negotiations,
Handling trade disputes, Monitoring national trade policies, Technical
assistance and training for developing countries, Cooperation with other
international organization.
15.4.3 WTO - Structure
The WTO has 160 members, accounting for almost 95% of world trade.
Around 25 others are negotiating membership. Decisions are made by the
entire membership. This is typically by consensus. A majority vote is also
possible but it has never been used in the WTO, and was extremely rare
under the WTO’s predecessor, the General The WTO’s top level decision
making body is the Ministerial Conference which meets at least once every
two years. Below this is the General Council (normally ambassadors and
heads of delegation in year in the Geneva headquarters. The General
Council also meets as the Trade Policy Review Body and the Dispute
Settlement Body. At the next level, the Goods Council, Services Council
and Intellectual Property (TRIPS) Council report to the General Council.
Numerous specialized committees, working groups and working parties
deal with the individual agreements and other are formed as per the
environment, development, membership applications and regional trade
agreements.
15.4.4 WTO -Secretariat
The WTO Secretariat, based in Geneva, has around 640 staff and is headed
by a director General. Since most decisions are taken by the members
themselves, the Secretariat does not have the decision making role that
! !536
other international bureaucracies are given. The Secretariat’s main duties

are to supply technical support for the various councils and committees
and the ministerial conferences, to provide technical assistance for
developing countries, to analyze world trade, and to explain WTO airs to
the public and media. The Secretariat also provides some forms of legal
assistance in the dispute settlement process and advises governments
wishing to become members of the WTO. The annual budget is roughly 197
million Swiss francs.
15.5 WTO AGREEMENTS
15.5.1 WTO Agreements
In order to ensure that trade is as fair as possible, and as free as is

practical, negotiation of rules and abiding by them was emphasized by
WTO. The WTO’s rules – the agreements – are the result of negotiations
between the members. The current set were the outcome of the 1986-94
Uruguay Round negotiations which included a major revision of the original
General Agreement on Tariffs and Trade (GATT). GATT is now the WTO’s
principal rule-book for trade in goods. The Uruguay Round also created
new rules for dealing with trade in services, relevant aspects of intellectual
property, dispute settlement, and trade policy reviews. The complete set
runs to some 30,000 pages consisting of about 30 agreements and
separate commitments (called schedules) made by individual members in
specific areas such as lower customs duty rates and services market-
opening. Through these agreements, WTO members operate a non-
discriminatory trading system that spells out their rights and their
obligations. Each country receives guarantees that its exports will be
treated fairly and consistently in other countries’ markets. Each promises
to do the same for imports into its own market. The system also gives
developing countries some flexibility in implementing their commitments.
15.5.2 Goods
It all began with trade in goods. From 1947 to 1994, GATT was the forum
for negotiating lower customs duty rates and other trade barriers; the text
of the General Agreement spelt out important rules, particularly non-
discrimination. Since 1995, the updated GATT has become the WTO’s
umbrella agreement for trade in goods. It has annexes dealing with specific
sectors such as agriculture and textiles, and with specific issues such as
! !537
state trading, product standards, subsidies and actions taken against

dumping.
15.5.3 Services
Banks, insurance firms, telecommunications companies, tour operators,

hotel chains and transport companies looking to do business abroad can
now enjoy the same principles of freer and fairer trade that originally only
applied to trade in goods. These principles appear in the new General
Agreement on Trade in Services (GATS). WTO members have also made
individual commitments under GATS stating which of their services sectors
they are willing to open to foreign competition, and how open those
markets are.
15.5.4 Intellectual Property
The WTO’s Intellectual Property Agreement amounts to rules for trade and
investment in ideas and creativity. The rules state how copyrights, patents,
trademarks, geographical names used to identify products, industrial
designs, integrated circuit layout-designs and undisclosed information such
as trade secrets – “intellectual property” – should be protected when trade
is involved.
15.5.6 Dispute Settlement
The WTO’s procedure for resolving trade quarrels under the Dispute
Settlement Understanding is vital for enforcing the rules and therefore for
ensuring that trade flows smoothly. Countries bring disputes to the WTO if
they think their rights under the agreements are being infringed.
Judgements by specially-appointed independent experts are based on
interpretations of the agreements and individual countries’ commitments.
The system encourages countries to settle their differences through
consultation. Failing that, they can follow a carefully mapped out, stage-by-
stage procedure that includes the possibility of a ruling by a panel of
experts, and the chance to appeal the ruling on legal grounds. Confidence
in the system is borne out by the number of cases brought to the WTO –
more than 300 cases in ten years compared to the 300 disputes dealt with
during the entire life of GATT (1947-94).
! !538
15.5.7 Trade Policy Review
The Trade Policy Review Mechanism’s purpose is to improve transparency,

to create a greater understanding of the policies that countries are
adopting, and to assess their impact. Many members also see the reviews
as constructive feedback on their policies. All WTO members must undergo
periodic scrutiny, each review containing reports by the country concerned
and the WTO Secretariat.
15.5.8 Developing Countries’ Development and Trade
Over three-quarters of WTO members are developing or least developed

countries. All WTO agreements contain special provision for them, including
longer time periods to implement agreements and commitments, measures
to increase their trading opportunities, provisions requiring all WTO
members to safeguard their trade interests, and support to help them build
the infrastructure for WTO work, handle disputes, and implement technical
standards. The 2001 Ministerial Conference in Doha set out tasks, including
negotiations, for a wide range of issues concerning developing countries.
Some people call the new negotiations the Doha Development Round.
Before that, in 1997, a high-level meeting on trade initiatives and technical
assistance for least-developed countries resulted in an “integrated
framework” involving six intergovernmental agencies, to help least-
developed countries increase their ability to trade, and some additional
preferential market access agreements. A WTO Committee on Trade and
Development, assisted by a Sub-Committee on Least-Developed Countries,
looks at developing countries’ special needs. Its responsibility includes
implementation of the agreements, technical cooperation, and the
increased participation of developing countries in the global trading
system.
15.5.9 Technical Assistance and Training
The WTO organizes hundreds of technical cooperation missions to

developing countries annually. It holds on average three trade policy
courses each year in Geneva for government officials. Regional seminars
are held regularly in all regions of the world with a special emphasis on
African countries. Training courses are also organized in Geneva for officials
from countries in transition from central planning to market economies.
The WTO has set up reference centers in over 100 trade ministries and
regional organizations in capitals of developing and least-developed
! !539
countries. These centers provide computers and internet access to enable

ministry officials to keep abreast of events in the WTO through online
access to the WTO’s immense database of official documents and other
material. Efforts are also being made to help countries that do not have
permanent representatives in Geneva. The organization functions
predictably. It does this by administering trade agreements, acting as a
forum for trade negotiations, settling trade disputes, and reviewing
national trade policies.
1. Study the contents of the website www.wto.org for the latest

updations.
2. Enroll yourself in the SCM Forum on Linkedin to remain in touch with the
latest developments in SCM on a global level.
15.7 SUMMARY
• To make effective global supply chain management, it has become

necessary to consolidate into larger firm from the same nation.
• Clustering of suppliers in one place is effective in managing

competitiveness in global supplies.
• Innovations in media and e-commerce have dramatically increased

market transparency.
• The main function of WTO is to ensure that trade flows as smoothly,

predictably and freely as possible.
• GATS provides developing countries with an opportunity to integrate into

the global economy through adopting more liberal policies with regard to
trade in services.
• The WTO’s rules – the agreements – are the result of negotiations

between the members.
• The WTO’s Intellectual Property Agreement amounts to rules for trade

and investment in ideas and creativity.
! !540
1. Write short note on ‘History of GATT’.
2. Explain in details the objectives of WTO.
3. With reference to the Global Supply Chain, give a brief description of

‘Role of Outsourcing’ and ‘Role of Transportation’.
4. Write short note on ‘Importance of Global Free Trade’.
5. What are the WTO Agreements? Give brief description of each.
6. How WTO has evolved? Give brief description of its structure and
operations.
1. The term WTO stands for_________
a. World Tourism Operations

b. Web Through Opportunities
c. World Trade Opportunities
d. World Trade Organisation
2. The head office of WTO is located at_________
a. London
b. Geneva
c. New York
d. Tokyo
3. The long form of GATT is_________
a. General Agreement on Tariff and Trade

b. General Agreement on Travel and Tourism
c. General Assignment of Trade and Travel
d. None of the above
! !541
4. WTO started its operations from the year_________
a. 1945
b. 1950
c. 2000
d. 1995
5. WTO helps its member countries for_________
a. Exports to USA
b. Political Stability
c. Global Free Trade
d. Increasing the tourism
Answers : (1-d), (2-b), (3-a), (4-d), (5-c).
! !542
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !543

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LEGAL ASPECTS IN SUPPLY

Program Design and Advisory Team

Prof. B.N. Chatterjee Mr. Manish Pitke

Prof. Kanu Doshi Prof. B.N. Chatterjee

Prof. Dr. V.H. Iyer Mr. Smitesh Bhosale

Prof. B.N. Chatterjee Prof. Vineel Bhurke

Prof. Venkat lyer Dr. Pravin Kumar Agrawal

Prof. Dr. Pradeep Pendse Mrs. Margaret Vas

Prof. Sandeep Kelkar Mr. Anuj Pandey

Prof. Dr. Swapna Pradhan Course Editor

Prof. Bijoy B. Bhattacharyya Prof. B.N. Chatterjee

Mr. P.M. Bendre Course Coordinators

Mr. Ajay Prabhu Ms. Kirti Sampat

Mr. A.S. Pillai Mr. Kishor Tamhankar

COPYRIGHT © by Prin. L.N. Welingkar Institute of Management Development & Research.

NOT FOR SALE. FOR PRIVATE CIRCULATION ONLY.

1st Edition (June-2015)

1 Supply Chain Management – Legal Aspects 3-11

1.1 Introduction to Supply Chain Management (SCM)

1.1 INTRODUCTION TO SUPPLY CHAIN MANAGEMENT

In the era of competitive market, every company or a service providing

1.2 DEFINITION OF SUPPLY CHAIN MANAGEMENT

Supply chain is the complete process of receiving a customer order,

Various independent suppliers, firms supplying products and service

According to the Supply Chain Council, U.S.A., the Supply Chain

Thus, the Supply Chain Management encompasses every effort involved in

1.3 THE EVOLUTION OF SCM

• 1904 – Traces of outsourcing was seen when Charles S. Rolls became

• 1975-1980 – Companies began migrating from an inventory ‘push’ to

• 1980 – Emergence of SCM

• 1985 – WallMart introduced the concept of Cross-docking.

• 1996 – Internet revolutionized the distribution system of the business.

• 1998 – Concept of e-Commerce changed the definition of business and

1.4 VARIOUS TYPES OF LEGALITIES IN SCM

A company ‘ABC’ which is a public limited company, having its

1. Indian Contract Act – The order placed by company ‘ABC’ on company

3. Indian Negotiable Instruments Act – To take care of the Bill of

4. Companies Act – Since ABC is a public limited company, the provisions

5. Indian Partnership Act – Since XYZ is a partnership firm, the

6. Law of Insurance – These provisions are to be taken care considering

7. Carriers Act – As the material is to be transported through road by a

10.Octroi/LBT Act at Pune – As may be applicable during the execution

The complexity can be further illustrated by studying the following

1. The company X buys valves to install in their boilers. This contract is

2. The company Y manufactures cosmetics and buys chemicals for the

3. The company Z makes cartons for packaging and supplies to various

4. Companies doing procurement and storage of some petroleum products

1.5 IMPORTANCE OF LEGAL ASPECTS IN SCM

The following facts are to be considered while understanding the

• The laws and regulations keep changing at regular as well as at sporadic

• The interpretation of a law may change depending on the judicial

• Sometimes, some laws are amended with ‘retrospective effect’. So the

A TYPICAL FLOW CHART IN A MANUFACTURING COMPANY

1.6 ACTIVITIES FOR THE STUDENTS

1. Considering your daily meals as the product, and considering you as

3. Find out the evolvement of Supply Chain Management in the 20th

1.8 SELF ASSESSMENT QUESTIONS

1. Give brief definition of ‘Supply Chain Management’.

1.9 MULTIPLE CHOICE QUESTIONS

1. In SCM, C denotes which of the following?

2. SCM relates to the activity of –

3. SCM is applicable in case of following industry/activity –

4. In the term SCM, S denotes for –

Answers : (1-c), (2-b), (3-a), (4-d), (5-d). 