‘HIGH SEA SALES’ and treatment under GST scenario

I am today dealing with the issue of High Sea Sales under the GST scenario, which is not only complicated but is also important. In the pre-GST regime, transactions of ‘High Sea Sales’ are considered under Section 5 (2) of the CST Act, 1956 and were not treated either as intra or inter State sales, thereby not made exigible to tax under the State and CST Acts. The Goods and Services Tax Act, 2017 along with the Integrated Goods and Services Tax Act, 2017 stood implemented with effect from 01.07.2017.

Let us understand what is a High sea sale transaction and how it is taxable in the GST scenario, what are the required documents to be submitted and how to claim ITC. Generally business people carry out business operations either within the Country or globally. They procure goods from outside the country, bring them into India, pay Customs duty on such import and get the goods cleared. Goods so imported may either be used in the manufacture or sold. Sometimes they get purchase order from another person within the country or outside the country while the goods are on high seas ie., before the goods cross the Customs frontiers of India.

It is desirable to have some inputs from the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976. In relation to the territorial waters, the continental shelf, the exclusive economic zone or any other maritime zone of India, mean the limit of such waters, shelf or zone with reference to the mainland of India as well as the individual or composite group or groups of islands constituting part of the territory of India. Section 3 (1) of this Act reads as follows:-

(1) The sovereignty of India extends and has always extended to the territorial waters of India (hereinafter referred to as the territorial waters) and to the seabed and subsoil underlying, and the air space over, such waters

(2) The limit of the territorial waters is the line every point of which is at a distance of twelve nautical miles from the nearest point of the appropriate baseline.

(3) Not withstanding anything contained in sub-section (2), the Central Government may, whenever it considers necessary so to do having regard to International Law and State practice, alter, by notification in the Official Gazette, the limit of the territorial waters.

(4) No notification shall be issued under sub-section (3) unless resolutions approving the issue of such notification are passed by both Houses of Parliament.”

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. As per Section 2 (21) of the IGST Act, 2017, the said definition in the CGST Act, 2017 is made applicable for inter State transactions. Further as per Section 7 (2) of the IGST Act, ‘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. Section 5 (1) of the IGST Act provides for levy of tax on all inter State supplies of goods or services or both, subject to certain exceptions.

What are ‘high sea sales’?

A person places a purchase order on the foreign seller to purchase certain goods. The foreign seller dispatches such goods to the Indian buyer. If such person brings the goods from a foreign country and takes delivery after clearance, he is liable to pay IGST. On the other hand, the Indian buyer may sell such goods to another person while the goods are still on high seas ie., before the goods crossed the Customs Frontiers of India on a journey from a foreign destination. Such transactions are exactly covered by Section 7 (2) of the IGST Act, and are understood in commercial world as ‘high sea sale transactions’.

Is there any difference between normal import agreement and high sea sale Agreement?

Yes, in the normal import of goods, the importer physically receives goods from the port of discharge and brings into the domestic territory of the country. For such import the importer files the Bill of Lading (B/L) and acknowledges his ownership over the consignment of goods. In the case of high sea sale transactions, the original importer sells the goods to his customer, while the goods are still on high seas. Thus, unlike regular import of goods, the original importer himself doesn’t bring the goods into the territory of the country. The ownership and title in the goods are transferred to the buyer of the original importer. As per the provisions of the Customs Act, person importing the goods has to pay the Customs duty.

The final buyer must have all important documents evidencing high sea sales. They are the original import invoice, the high sea sales agreement, the invoice from the original Importer (Original Buyer) along with Bill of Lading, Bill of Entry and Certificate of Origin etc.

What are the documents required to consider high sea sales under the GST Law

(i) Commercial Invoice,

(ii) High Sale Agreement,

(iii) Bill of lading

(iv) Certificate of Origin,

(v) Import Invoice and

(vi) Insurance Certificate.

Meaning of Commercial Invoice: Commercial Invoice is a sale invoice for transaction of import consignment of goods under “High Sea Sale” and it must be in the Indian Currency and not in foreign currency. These commercial invoices must consist of quantities of the line items imported along with rates.

High sea sale Agreement: High sea sale agreement means, an agreement entered into by the original importer (Buyer) with the subsequent buyer, who finally takes delivery of the consignment goods after clearance by the Customs authorities.

Bill of Lading: Bill of Landing is an important document showing ownership and title of the consignment goods. This Bill of lading is an important document to demonstrate the passing of ownership of goods to a third party on the high sea sale.

Certificate of Origin: Certificate of Origin means This Certificate provides information of the original destination of the consignment goods. Further this document is necessary for calculating Customs Duties, sanctions, certificating the quality, standards etc,. The Original buyer must attach this certificate of Origin form to the high sea sale commercial invoice.

Import Invoice: Import Invoice means the invoice which reflects the original agreement, completed between the consignee and the seller located in the initial country of export or origin. This is different from the high sea sale invoice as the intermediate seller on high seas may alter the prices of the goods.

Insurance Certificate: Insurance Certificate means” The original buyer of insurance for the goods for import may also assign the insurance in favour of the subsequent buyer (Second purchaser) of High Seas.

Whether the IGST paid by the final buyer at the time of taking delivery of the consignment goods is available as “Input Tax Credit” ?

In this regard, once the original buyer endorses the documents in favour of subsequent buyer, the original buyer is not required to pay Customs and IGST and, only the final buyer shall discharge Customs duty and IGST at the time of taking delivery of the consignment goods as per the high sea sale agreement, Commercial Invoice and Bill of Lading etc., Such final buyer is eligible to claim IGST as Input Tax Credit.

Sri P.V. Subba Rao garu, (Retd. Joint Commissioner, A.P.Sales Tax), Advocate & Tax Consultant, Hyderabad sent the following query to CBEC by mail dated 1.7.2017.

“Under Section 7 (2) of IGST Act, 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. This is what we generally understand as High sea sales. Proviso under Section 5 (1) says that IGST has to be paid on goods imported into India as per Section 3 of the Customs Tariff Act. Thus the original importer as well as the subsequent purchaser has to pay IGST resulting in double payment of tax on the same transaction. Pl clarify the position.”

In Circular No. 33 /2017-Cus in F.No.450/131/2017-Cus IV Government of India Ministry of Finance Department of Revenue (Central Board of Excise and Customs) dated the 1st August, 2017, it has been stated as follows:-

GST council has deliberated the levy of Integrated Goods and Services Tax on high sea sales in the case of imported goods. The council has decided that IGST on high sea sale (s) transactions of imported goods, whether one or multiple, shall be levied and collected only at the time of importation i.e. when the import declarations are filed before the Customs authorities for the customs clearance purposes for the first time. Further, value addition accruing in each such high sea sale shall form part of the value on which IGST is collected at the time of clearance.”

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