I. Introduction
In a normal import of goods transaction, importer purchases goods from an overseas supplier, physically transports them into any customs station in India, pays customs duty, and transports them to their desired place of business. Many a times, the importer may choose to sell the goods before they reach the customs station in India when the goods are in transit; such transactions are popularly known as ‘High Sea Sales’.
High Sea Sales is a commonly prevalent trade practice in which the Original Importer sells goods to a buyer located in India or otherwise before the goods crosses the customs frontiers of a country. It means that the sale of goods happens after the goods are dispatched from the port of loading but before they reach the port of discharge. High Sea Sales can happen through both Water and Air.
Example of High Sea Sale for better understanding –
Mr. A of India buys machinery from Japan and sells it to another person while it is still in transit. This transaction can be referred to as a High Sea Sale.
II. Understanding the Definition
High Sea Sales are a common trade practice in which the Original Importer sells the goods to a third party before the goods “cross the customs frontiers of the country”.
Custom Frontiers: As per Section 2(4) of the Customs Act,1962, Custom Frontiers means the limits of the area of a customs station as defined in section 2 of the Customs Act,1962, in which imported goods are ordinarily kept before clearance by customs authorities.
Custom Stations include customs ports, customs airports, international courier terminals, foreign post offices, or land customs stations where the customs authorities conduct the clearance of Imported and Exported goods, including the collection of taxes and duties.
III. Difference between Regular Imports and High Sea Sale
In case of Regular Imports, the importer receives the goods from the port/airport and himself clears the same through Customs. However, in case of High Sea Sales, the goods are sold while the goods are on High Seas i.e. before crossing the Customs Frontiers and the person to whom the goods are eventually sold on the high sea and who clears them from any customs station is liable to comply with the customs and GST procedures for clearance of the same.
IV. High Sea Sales under the Constitution of India
As per Article 286 of the Indian Constitution, no State shall impose or authorize the imposition of tax on Sale or Purchase that takes place:
a. Outside the state or
b. In the course of Import of Goods into, or Export of Goods outside, the territory of India.
Hence, High Sea Sales are not exigible to tax as per the Constitution of India.
However, it empowers Parliament to establish principles for determining when a sale or purchase of goods occurs in any of the above-mentioned ways.
V. Tax Implication on High Sea Sale in the pre-GST regime
The GST Implication on High Sea Sales becomes more significant due to the fact that High Sea Sales was not exigible to tax in the pre-GST regime. In the pre-GST regime, be it Customs, Central excise, or VAT laws, High Sea Sale transactions were not taxed as the goods had not entered India.
Section 5(2) of the CST Act,1956 makes it clear what constitutes as Supply in the course of the Import of Goods into the territory of India.
As per Section 5(2) of CST Act, 1956, “A sale or purchase of goods shall be deemed to take place in the course of the import of the goods into the territory of India only if the sale or purchase either occasions such import or is effected by a transfer of documents of title to the goods before the goods have crossed the customs frontiers of India.”
In simpler terms, it means a Sale or Purchase of goods shall be deemed to take place in the course of the import of goods into the territory of India only if:
i. The Sale or Purchase of Goods results in such import.
ii. The Sale or Purchase happens before the goods cross the Customs Frontiers of India by way of transfer of Documents of title to goods (i.e. Bill of Lading or Shipping Invoices).
However, Section 6 of the CST Act, 1956, establishes the leviability of CST on Inter-State sales. Under this section, no tax liability is imposed on:
a. Sale or purchase of goods outside a State.
b. Sale or purchase of goods in the course of import into the territory of India, i.e., High Sea Sale.
This clearly rules out High Sea Sale from the ambit of tax implication in the pre-GST Regime.
VI. Implication of GST on High Sea Sale
As discussed above, High Sea Sale transactions are not exigible for tax in the pre-GST regime. However, with the implementation of GST, the applicability of GST on High Sea Sales came into question because the GST Act categorised it as an Inter State transaction under Section 7 of the CGST Act, 2017. Nevertheless, it also listed such transaction in Schedule III of the CGST Act,2017, which outlines transactions that are not considered as Supply under GST Act. A comprehensive discussion is provided below to clarify the applicability of High Sea Sale under the GST Act.
GST Implication as per Section 7 of the CGST Act, 2017
As per section 7(1)(a) of the CGST Act, 2017 the expression supply includes various forms of supply such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made by a person for a consideration in the course or furtherance of business and as per section 2(21) of IGST Act,2017 the said definition is also applicable to Inter-State transactions.
Further, the IGST Act,2017 made clear that High Sea Sale will be leviable to GST by explaining such a transaction in sub-section 2 of section 7 of the IGST Act,2017.
As per Section 7(2) of IGST Act,2017, “Supply of goods imported into the territory of India, till they cross the customs frontiers of India, shall be treated to be a supply of goods in the course of inter-State trade or commerce.”
The above-mentioned section clearly states the eligibility of such High Seas Sales transactions and makes it leviable as an Inter-State transaction, i.e., IGST will be paid on such transactions.
However, Schedule III of the CGST Act, 2017 contradicts the section mentioned above.
GST Implication as per Schedule III of CGST Act, 2017
As per Schedule III of the CGST Act, 2017, “8. (b) Supply of goods by the consignee to any other person, by endorsement of documents of title to the goods, after the goods have been dispatched from the port of origin located outside India but before clearance for home consumption”.
This clearly rules out High Sea Sales from being taxable under the GST Act, as the transaction is listed in Schedule III of the CGST Act, 2017, which excludes transactions listed under the said Schedule from the ambit of being supply under the GST Act.
However, the goods that are imported to India will be taxable as Inter State Supply, i.e., IGST will be levied as the said goods are imported to India. This now divides the High Sea Sales transaction into two circumstances based on which leviability will be decided, which are as follows:
i. High Sea Sale made to a person in India
ii. High Sea Sale made to a person outside India
If the High Sea Sale is made to a person in India, then IGST will be levied not on the High Sea Sale Transaction, but it will be levied when the goods are brought into India, i.e., Customs Clearance. However, if such sale is made to a person outside India, then such transaction will not be subject to taxability as the transaction has occurred outside India without the goods coming to India and such transaction is ruled out from the ambit of it being supply as the said transaction is listed in Schedule III of CGST Act,2017.
Furthermore, the proviso under section 5(1) of the IGST Act, 2017 states that Integrated tax shall be levied on goods imported to India in accordance with section 3 of the Customs Tariff Act. This implies that both the original importer and the final buyer need to pay IGST, leading to the double payment of tax; such contradictory provisions in the Act created uncertainty for taxpayers regarding the mechanism of tax collection under the GST Act concerning High Sea Sales.
To clarify the same, the Ministry of Finance Department of Revenue issued Circular No. 33 /2017-Customs, dated August 1, 2017, which clarified that IGST shall only be paid by the Final Buyer at the time of importation i.e. when the import declarations are filed before the Customs authorities for customs clearance purposes for the first time. Further, it also mentioned that any value additions made to such High Sea Sale transaction shall form part of the amount on which such IGST is calculated.
Value on which IGST should be calculated
As per section 15 of the CGST Act read with Circular No. 32/2004-Cus, dated May 11, 2004, the value of High Sea Sales charges shall be taken as 2% of CIF value i.e. High Sea Sale Contract price shall be CIF Value + 2% of CIF value, or the actual price paid whichever is higher and thus be the value taken for the purpose of IGST calculation.
ITC Eligibility
The Final Buyer is eligible to claim input tax credit of the IGST paid by him at the time of Customs Clearance; original importer cannot avail the ITC as he is relieved from the responsibility of Customs Clearance as well as from payment of taxes and duties at the time of Clearance which are paid by the Final Buyer.
VII. Documents required for a transaction to be classified as High Sea Sales
The following are the documents required for a High Sea Sale transaction:
1. High Sea Sale Agreement (HSS Agreement): It is an agreement between the original buyer and subsequent buyer for delivery of the goods after customs clearance.
2. Commercial Invoice: The sales invoice for a High Sea Sales transaction, specifying quantities and rates of the items. Such an invoice shall be denoted in the home currency of the original buyer and not in a foreign currency.
3. Import Invoice: It reflects the original agreement between the Seller and the Original buyer.
4. Certificate of Origin: It is an international trade document that certifies the country where the goods are produced or manufactured. It is often required by the Customs authority to determine tariffs and duties, sanctions, and quality certifications.
5. Insurance Certificates: This is the original buyer’s insurance for the imported goods, but can also be assigned to the subsequent buyer of the High Sea Sales transaction.
6. Bill of Lading: It is a legal document of ownership and title of goods during High Sea Sale.
VIII. Conclusion
High Sea Sales is a common trade practice that allows importers to sell goods while they are still in transit. Under the pre-GST regime, such transactions were not subject to taxation since they were considered outside the taxable territory. However, with the introduction of GST, an initial ambiguity arose regarding their treatment. Under the IGST Act, 2017, High Sea Sales were classified as inter-state supplies, which are potentially subject to IGST. On the other hand, Schedule III of the CGST Act, 2017 clarified that such sales are not considered a supply, thus exempting them from GST at the transaction stage.
Initially, there were concerns about the possibility of double taxation. However, the government addressed this issue through Circular No. 33/2017-Customs, clarifying that IGST will only be paid by the final buyer at the time of importation. The valuation for IGST will be based on the CIF value plus 2% of the CIF value, or the actual price paid, whichever is higher. Additionally, the final buyer can claim the input tax credit for the IGST paid, while the original importer is relieved of tax obligations. The required documentation, including the High Sea Sale Agreement, Bill of Lading, and Commercial Invoice, ensures transparency and compliance.
Overall, the introduction of GST brought clarity to the taxation of High Sea Sales, ensuring compliance and preventing tax evasion while streamlining the trade process.
Authors:
CA Nitesh Jain Chartered Accountant |
Vishal Vyas Article – N J Jain & Associates |
Author Bio
