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(F) Divide incidental expenses, which are chiefly incurred in connection with the conveyance of the mails between the United Kingdom and Brindisi, in the same proportions as the cost of the service.

'(G) Deduct the extra receipts of the service (ie., sums received for sea con- veyance of foreign closed mails) sharing the amount between the contributing parties in the proportion which each bears of the cost of the service.

"24. The Imperial Post Office further proposes→→

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(1) That each Administration contributing its full share of the cost assessed as above indicated, shall make no further payment in respect of mails despatched by it over the service, and shall be credited with a proportionate share of the amount of any penalties inflicted upon the Packet Company in respect of the Eastern Mail Service; and

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(2) That when the principles are decided by the Arbitrator, an account shall be prepared by the Imperial Post Office and audited by the India Office, the amounts thus ascertained to be payable by India, &c., to the end of the present contract.'

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5. Lord Morley's Award (the full text of which is given in Appendix B.) was to the following effect :-

(a) That, as regards the Australian Service, the arrangement proposed by the Post Office should be adopted during the continuance of the contract, and that £85,000 should be appropriated to that service. When the present contract expires, it appears to me that it would be desirable to enter into separate contracts for the two services. (6) That, as regards the sections between Colombo and Shanghai, India should not continue to be made liable for any loss which may be incurred on these sections, but that she should pay transit rates for any use she may make of this portion of the mail route, the receipt from such transit rates being credited to the sections.

(c) That the postage collected in the two countries, and the receipts from other Administrations for land and sea transit on mails sent over the line should be pooled, and the balance of the united collect- ions, after deducting the cost of continental transit and rates paid to other countries, should be equally divided. (d) That, subject to the above-mentioned conditions, the apportionment of the subsidy, £245,000, should be regulated in accordance with the principles laid down in paragraphs 23 and 24 of the case of the Post Office, with this exception, that the Indian Government should bear the whole expense of sea sorting on the Bombay line, which, by Article 35 of the contract, is fixed at £7,500. Under this article the Postmaster-General may give notice to the Com. pany that he no longer requires provision to be made for sea sort- ing, and may deduct £7,500 from the subsidy. I understand that he would be willing to give this notice if the Indian Government desires him to do so.

(e) That an account should be prepared by the Imperial Post Office, and audited by the India Office, and that the amounts thus as- certained shall be payable by the contributing countries to the end of the contract.

6. Appendix C shows how the award works out if applied to India and the Eastern Colonies on the basis of the statistics of 1901, the middle year of the contract, with the result that the contributions would be: India, £59,330; Ceylon, £6,055; Straits, £7,719; and Hongkong, £12,893.

7. If the Colonies agree to the proposal that the principles of Lord Morley's Award should be extended to them, it is understood that they would be relieved from the payments for parcels, referred to in paragraph 1 above, and that the receipts for parcels in the various countries would be pooled in the manner des- cribed in Appendix D.

8. The Secretary of State for the Colonies is not prepared to agree, without qualification, to the extension of the principles of Lord Morley's Award to the Eastern Colonies, as he maintains that their case is different from and their interest in some measure in conflict with those of India, but he has agreed to the matter being submitted to arbitration on the understanding that the Colonies are not to