The term ‘high sea sales’ is used for those sales or supplies that are performed when the affected goods are still on the high seas and have not yet reached the destination port. It is a common trade practice whereby the original importer sells the goods to a third person before the goods are entered for customs clearance. These sales usually take place even before the bill of entry is filed. After the high seas sale of the goods, the customs declarations such as Bill of Entry etc. is filed by the person who buys the goods from the original importer during the said sale.
Treatment under GST
Under the GST Regime, GST is chargeable on supply of goods or services of both by a supplier to a recipient. The term ‘supply’ has been defined in Section 7(1) of the Central Goods and Service Tax Act, 2017 (“CGST Act”) as ‘all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.’ Furthermore, Section 7(2) of the said Act lays down that the activities or transactions specified in Schedule III of the Act shall be treated neither as a supply of goods nor a supply of services.
Thus, in order to determine whether ‘supply’ is taking place, a transaction would have to be examined in accordance with the above section. Since the term ‘supply’ includes any sale, a high seas sale would also fall under its ambit, since it is carried out with a consideration and in the course or furtherance of business. The supply can either be an inter-state or and intra-state supply. 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” and thus these sales are in the nature of inter-state supplies.
Controversy under GST
Under the GST Regime, all inter-state transactions are subject to integrated tax as per Section 5 of the Integrated Goods and Service Tax Act, 2017 (“IGST Act“). As per the proviso to Section 5(1) of the IGST Act, tax on imported goods in accordance with the provisions of Section 12 of the Customs Act, 1962 and Section 3 of the Customs Tariff Act, 1975. Therefore, it raised the question whether the transaction would be chargeable to GST twice; first, at the time when the goods were first sold u/s 5 of the IGST Act, and then at the time of customs clearance under Section 3(7) of Customs Tariff Act,1975.
To address the above difficulty, CBIC issued Circular No. 33/2017-Customs dated 01.08.2017 (“Circular”) which clarified that IGST on high sea sales 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 clearance for the first time by the importer (i.e., the last buyer in the chain), Further, it stated that 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.
It was also stated that the importer (i.e., the last buyer in the chain) would be required to furnish the entire chain of documents, such as original Invoice, high-seas-sales-contract, details of service charges/commission paid etc., to establish a link between the first contracted price of the goods and the last transaction.
The CGST Act was also amended vide the CGST (Amendment) Act, 2018, w.e.f. 1-2-2019 by way of which new entries were added into Schedule III in the list of those activities/transactions which shall be treated as neither supply of goods or of services. The amendment added the following entries:
7. Supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into India.
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.
The above entries cover different kinds of transaction. Entry 7 relates to ‘merchant trade transactions’ wherein goods are sent to the customer (in a non-taxable territory) from another non-taxable territory without entering India. Entry 8(b) covers high seas sales, wherein the goods are supplied by the original importer to another person before the goods enter India for customs clearance. Thus, the intention of the government, as expressed in the Circular, has been reflected in the law by way of the amendment.
Reversal of ITC
Section 17 of the CGST Act states that credit shall be restricted only to so much of ITC as is attributable to taxable supplies, including zero-rates supplies. In other words, ITC as is attributable to exempt supplies shall have to be reversed. As per Section 2(47) of the CGST Act, the term ‘exempt supply’ means ‘supply of goods or services or both which attracts nil rale of tax, or which may be wholly exempt from tax under Section 11 or under Section 6 of the IGST Act, and includes non-taxable supply.’ Further, ‘non-taxable supply’ has been defined in Section 2(78) of the CGST Act as ‘supply of goods or services or both which is not leviable to tax under this Act or under the IGST Act’.
A question arises whether high seas sales would be considered ‘non-taxable supply’. Since Section 7(2) of the CGST Act clearly states that the activities covered in Schedule III of the said act shall be treated neither as a supply of goods nor a supply of services, it can be argued that high seas sales are not ‘supply’ in the first place and thus cannot be ‘non-taxable supply’. Consequently, such transactions would also fall outside of the ambit of ‘exempt supply.’ Thus, since it is not covered under ‘exempt supply’, there would be no ITC reversal requirement as per Section 17 of the CGST Act.
However, a contrary view has been taken in the case of BASF India Ltd.  69 GST 341 (AAR-Maharashtra)], wherein the Authority for Advance Rulings (“AAR”), wherein it was held the goods which are sold on high seas sale basis are ‘non-taxable supply’ as no tax is leviable on them till the time of customs clearance in accordance with and compliance of Section 12 of the Customs Act, 1962 and Section 3 of the Customs Tariff act, 1975. Thus, as per the AAR, the transaction would qualify as ‘exempt supply’ and the ITC to the extent of inputs, input services and common input services would be required to be reversed as per Section 17 of the CGST Act.
A few rulings relevant to the present topic have been discussed herein. Firstly, in the case of BASF India Ltd. (Supra) the AAR held that since in the case of a high seas sale, such a transaction does not quality as ‘supply’ under the said act and thus GST would not be applicable on the same. A similar view was also adopted by the Kerala AAR in case of M/s. Synthite Industries Ltd.  12 GSTL 395 (AAR-Kerala)] where it was held that if goods are not imported to India, i.e., they are directly exported to another country, then GST is not applicable on such transactions.
However, a contrary view has recently emerged in the case of M/s. Sterlite Technologies Ltd. [Advance Ruling No. GUJ/GAAR/R/04/2020 dated 17.03.2018, Gujarat AAR] wherein the issue was whether GST is payable on goods sold to customer located outside India, where goods are shipped to the customer’s premises (a) directly from the premises of a third party vendor located outside India and (b) directly from the vendor’s premises (located outside India). Regarding the first type of transaction, the AAR held that it was a high seas sale and therefore not chargeable to GST as per the Circular and the ruling in M/s Synthite (Supra). However, regarding the second query, it was held that IGST is payable on goods sold to a customer located outside India, if goods are shipped directly from the vendor’s premises (outside India) to the customer’s premises. This was held on the basis of the observation that the since the supplier is located in India, and the place of supply is outside India thus the same would be an inter-state supply in terms of the provisions of Section 7(5) of IGST Act.
It is to be noted, however, that the said decision has not taken into account the amendments brought to Schedule III by insertion of Entry 7 as discussed above, and therefore it can still be argued that such transactions are outside the scope of levy of IGST altogether.