Levy of GST on high seas sale transactions is a much debated topic these days. This article attempts to analyse the leviability of GST or otherwise on the high seas sale transactions.
“High Sea Sales” is a terminology used in common parlance for “Sale in the course of import” where sale is effected by transfer of documents of title to goods before goods cross the customs frontiers.
Let us first take a look at the constitutional framework which sets out the jurisdiction for taxability of high sea sales (now, “high sea supplies”). Article 286(1)(b) of the Constitution provides that no law of a State shall impose, or authorise the imposition of, a tax on the supply of goods or services or both, where such supply takes place in the course of import of goods or service or both into the territory of India. Further, Article 286(2) provides that Parliament may by law formulate inter alia principles for determining when a supply of goods or service or both takes place in the course of import. Also, Article 269A provides that supply of goods or services or both in the course of import into the territory of India shall be deemed to be supply in the course of inter-State trade or commerce and tax on such supplies shall be levied and collected by the Government of India.
However, it would be relevant to note that unlike Section 5(2) of the Central Sales Tax Act, 1956 which defined that 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, no definition has been provided for the term “supply of goods or services or both in the course of the import into the territory of India” under the IGST Act.
Territorial Jurisdiction of the GST Law
In the backdrop of the above constitutional framework, let us now peruse the relevant provisions of the GST Act. Before we proceed in this regard, let us briefly discuss and summarize the territorial jurisdiction of the GST Act. Section 1 of the Central Goods and Service Tax Act as well as Integrated Goods and Service Tax Act (hereinafter referred to as ‘the CGST Act’ and ‘the IGST Act’ respectively) provides that the Act extends to the whole of India. Further, Section 2(56) of the CGST Act defines ‘India’ to mean the territory of India as referred to in article 1 of the Constitution, its territorial waters, seabed and sub-soil underlying such waters, continental shelf, exclusive economic zone or any other maritime zone as referred to in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976, and the air space above its territory and territorial waters.
While territorial waters extends to a distance of 12 nautical miles into sea from the nearest point of the appropriate baseline, the Continental Shelf extends beyond the limit of the territorial waters to the outer edge of the continental margin or to a distance of 200 nautical miles from the baseline. Similarly, Exclusive Economic Zone is an area beyond and adjacent to the territorial waters, and the limit of such zone is 200 nautical miles from the baseline. Accordingly, it may be inferred that the jurisdiction of GST law would extend to 200 nautical miles into sea.
GST provisions relevant for determining high sea sales exigibility
Having briefly discussed the jurisdictional aspect of the GST Act, let us now look at the relevant provisions which need to be examined for the purpose of identifying the applicability of GST on high sea sale transactions. Section 5(1), its proviso and Section 7(2) of the IGST Act merit consideration here. Section 5(1) of the IGST Act is the charging section for levy of GST on inter-state supplies of goods or services. Proviso to Section 5(1) provides that GST on the goods imported into India shall be levied and collected in accordance with the customs provisions. Accordingly, IGST on actual importation of goods into India is levied under Section 3(7) of the Customs Tariff Act, 1975 (hereinafter referred to as ‘the CTA’). Section 7 of the IGST Act stipulates as to when a supply is treated as an inter-state supply. Section 7(2) provides that 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.
It would be relevant here to refer to Section 12 of the Customs Act, 1962 wherein wordings similar to proviso to Section 5(1) has been used and it has been provided that the customs duty would be leviable on goods imported into, or exported from, India. Accordingly, so far as proviso to Section 5(1) of the IGST Act is concerned, we can safely conclude that the said proviso covers the cases of actual import of goods into India and IGST would be payable on such imports at the time of filing of bill of entry under the customs law. However, when we analyse Section 7(2) of the IGST Act, a plain reading of it appears to be little confusing or rather self-contradictory. It stipulates that IGST would be applicable on goods imported into the territory of India till such goods cross the customs frontiers of India. The question arises as to whether goods can at all be said to have been imported into India until they cross the customs frontiers of India.
This reminds me of somewhat similar dispute and consequential judicial pronouncements issued under the customs law. As the taxable event under the Customs Act is import of goods into India and as India included territorial waters, it was contended that the ‘import’ is complete as soon as goods enter the territorial waters. However, the Hon’ble Supreme Court in a plethora of judicial pronouncements including in the case of Garden Silk Mills Ltd. vs. UOI [1999 (113) ELT 358] held that the import of goods in India commences when the goods enter into territorial waters but continues and is completed when the goods become part of the mass of goods within the Country once such goods cross the customs barrier and bill of entry for home consumption is filed. If we apply the ratio of the said judgement in the context of above provision, the provision of Section 7(2) of the IGST Act would become self-contradictory as the said provision attempts to tax the goods imported into India till they cross the customs frontiers, while in terms of the above judgement, goods cannot be said to be imported unless they cross the customs frontiers of India.
At this juncture, it would be worthwhile to refer to the term “imported goods” as defined in the Customs Act, 1962. The said term has been defined to mean any goods brought into India from a place outside India but does not include goods which have been cleared for home consumption. However, it may be noted that no similar definition has been incorporated under the GST provisions and accordingly, it may not be apposite to assign the specific meaning given to the said term under the Customs Act for the purpose of analysing the scope of Section 7(2) of the IGST Act. It would also be relevant to note here that Section 7(2) of the IGST Act uses the words “goods imported” and not “imported goods” as defined in the Customs Act.
Having said that, one important distinction that one needs to bear in mind is that in case of customs law, the taxable event is the import of goods into India, whereas in GST, it is the supply of goods or services in India. Accordingly, while customs duty cannot be imposed unless goods are imported into India (which has been interpreted by Courts to take place once the bill of entry for home consumption is filed), the GST can be levied on any supply, whether such supply takes place before or after the goods cross the customs frontiers, so long as the supply is effected in India; that is to say, it will not be a constraint for levy of GST on supplies even though such supplies is effected in the territorial waters before the goods are cleared for home consumption. Given this, one may be inclined to interpret Section 7(2) in the manner that it covers supplies where goods are supplied after they have entered into India till they cross the customs frontiers. Such an interpretation would also be in line with the above referred constitutional provisions viz. Article 286 and Article 269A of the Constitution.
In fact, if we carefully examine, Section 7(2) uses the words “till they cross the customs frontiers of India” and not “upon their crossing the customs frontiers of India” i.e. the provision does not refer to a point of time but refers to a period of time and has two parts to it; one covering the cases where supply has been effected after the goods have entered into India (as defined u/s 2(56) of the CGST Act) but before their customs clearance (colloquially, referred to as ‘high sea sales’) and other covering the cases of actual importation of goods into India i.e. when the goods cross the customs frontiers of India. While levy of IGST on actual importation of goods is governed by Section 3(7) of the CTA, levy in respect of the high sea sales would be governed by Section 5(1) of the IGST Act and accordingly, IGST would be applicable on the same. Indeed, the differentiation has been carved out in the law itself where Section 7(2) covers “supply of goods imported into the territory of India, till they cross the customs frontiers of India”, proviso to Section 5(1) stipulating levy under the CTA covers only “integrated tax on goods imported into India”. However, it would be advisable if the Government appropriately amend the provisions of Section 7(2) so as to clearly classify the supplies of imported goods as well as goods imported into India as inter-state supplies, borrowing/incorporating the definition of the term ‘imported goods’ from the Customs Act, 1962, so that the confusion in the said regard can be put to rest.
However, even if we assign such meaning to the provisions of Section 7(2) of the IGST Act, it can bring only such transaction into the ambit of GST where supplies have been effected within “India” (as defined under Section 2(56) of the CGST Act) i.e. within 200 nautical miles of the baseline. Any high sea sale taking place beyond such limits would be beyond the jurisdiction of the GST law and accordingly, the same cannot be subjected to GST on the strength of Section 5(1)/7(2) of the IGST Act in as much as Section 7(2) recognises only those supplies as inter-state supplies where the goods have been imported into India (till they cross the customs frontiers) and not all supplies made in the course of import into India.
Let us understand the above with the help of an example. Say A is the foreign exporter, B in the intermediate buyer/seller on high seas and C is the ultimate buyer who files the bill of entry for home consumption. Now, so far as the import of goods by C is concerned, there is no confusion that it would be subject to IGST under the provisions of the CTA. However, so far as transaction between B and C is concerned, the applicability of IGST would be dependent on the place where the transaction has been effected, that is to say, if the transaction between B and C has taken place beyond 200 nautical miles, it would not be subject to the levy of IGST but if such transaction has been effected within 200 nautical miles, IGST would be applicable.
It would be a practical challenge both for the assessee as well as for the dept. to ascertain the location of the vessel when the high sea sale has been effected. In fact, given the fact that the vessel is continuously moving, particular point of time (and not merely the date) of the high sea sales may be required to be determined to ascertain the taxability of high sea sale. Given the case, it may be worthwhile for the Government to define the mechanism as to how to identify if a supply has been effected within India or outside India.
Let us now peruse Section 9 of the IGST Act. The said section overrides other provisions of the IGST Act and provides the following:
shall, for the purposes of this Act, be deemed to be in the coastal State or Union territory where the nearest point of the appropriate baseline is located.
A bare perusal of the above provision may tempt one to classify a high sea sale as an intra-state supply where the high sea seller and port of import are in the same state. However, it must be kept in mind that in terms of Article 286 and Article 269A of the Constitution, supply of goods or services or both in the course of import into the territory of India shall be deemed to be supply in the course of inter-state trade and accordingly, Section 9 cannot govern such cases to the said extent and will have limited applicability.
Though the law is silent on the location of supplier of goods, it is generally understood to be the location from where the supplies are effected and accordingly, in the case of high sea sales, the supplier may be liable to register himself in the coastal state. Further, it would also be relevant here to refer to Section 11 of the IGST Act which stipulates that the place of supply of goods imported into India shall be the location of the importer. However, the IGST Act is silent on the place of supply of goods in case of high sea sales. It would be ideal if the Government declares the principal place of business of the high sea seller as the location of supplier of goods, and the principal place of business of high sea buyer as the place of supply in case of high sea sale transactions. This would obviate the need of the high sea seller to take multiple registrations in various coastal states and administration of such transactions easy.
Clarification by CBEC
Recently, the CBEC has issued a Circular bearing no. 33/2017-Cus to clarify (or perhaps to confuse) the position with respect of applicability of IGST on high sea sales. The Circular provides that all inter-state transactions are subject to IGST and that high sea sales of imported goods are akin to inter-state transactions. It has been stated that the matter was presented to the Board as to whether high sea sales of imported goods would be chargeable to IGST twice i.e. at the time of customs clearance under Section 3(7) of the CTA and also separately under Section 5 of the IGST Act. It has been clarified that the GST Council has deliberated and decided that IGST on high sea sale transaction of imported goods 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 form part of the value on which IGST is collected at the time of clearance. It has further been clarified that the above decision of GST Council has already been envisioned in the provisions of Section 3(12) of the CTA.
If we carefully examine the above circular, it may be observed that the Circular suffers from a number of lacunae. The circular has been issued under the Customs laws while it seeks to clarify the leviability of IGST on high sea sales which is not governed by the Customs law. It need not be reiterated here that under the customs laws, IGST is leviable only in respect of transactions involving actual importation of goods when the bill of entry for home consumption is filed and not in respect of the high sea sales which is the transaction preceding such importation of goods.
Evenif we ignore this for the moment and go by the purported intention of the Circular to clarify the leviability of IGST on high sea sale transactions, the Circular is vague and absurd in as much as one the one hand, it clarifies that the high sea sales are akin to inter-state transactions but on the other hand, it clarifies that the same is not exigible per se. The very issue/query sought to be clarified appears to be loosely drafted where it seeks to clarify as to whether the high sea sale of imported goods would be chargeable to IGST twice. Now, whether the CBEC recognises import of goods by filing Bill of Entry same as a high sea sale? If that is not so, where is the question of taxing the high sea sales twice as sought to be clarified by the CBEC. Again, reference of Section 3(7) of the CTA for explaining the levy of IGST on high sea sale is totally misplaced. We have already discussed that the provisions of Section 3(7) or for that matter Section 3(12) of the CTA can only deal with the cases of actual importation of goods under the Customs law and the same cannot provide for the levy/non-levy of IGST on supplies effected before bill of entry for home consumption is filed. Further, the Circular is completely silent about the application/scope of Section 7(2) of the IGST Act and accordingly, the same can, in no case, be relied upon to examine the scope of Section 7(2) of the IGST Act.
It has been mentioned that the GST Council has decided that IGST on high sea sale transaction of imported goods shall be levied and collected at the time of importation i.e. when import declarations are filed for the customs clearance and reference is made to Section 3(12) of the CTA for the governing provisions in the said regard. For ease of understanding, the provision contained under Section 3(12) of the CTA is reproduced hereunder:
“The provisions of the Customs Act, 1962 and the rules and regulations made thereunder, including those relating to drawbacks, refunds and exemption from duties shall, so far as may be, apply to the duty or tax or cess, as the case may be, chargeable under this section as they apply in relation to the duties leviable under that Act.”.
Now, it would be very clear that Section 3(12) of the CTA has applicability only in respect of the duties leviable under Section 3 of the CTA i.e. inter alia in respect of IGST leviable on actual importation of goods, and when levy of IGST on high sea sale is not at all guided by Section 3 of the CTA, how Section 3(12) of the CTA can give effect to the purported decision of the GST Council. In fact, if GST Council had taken such decision, it should have been given effect to either by suitably amending Section 7(2) of the IGST Act or by way of issuance of an exemption notification to the said effect. However, in my view, when the intention of the Government has been to limit the exemptions and when supplies within India are subject to levy of GST at each stage, I find no reason to exempt/exclude high sea supplies from GST levy and unnecessarily force the assessees to reverse the ITC.
While the instant circular has not really clarified the position in respect of high sea sales, it has opened the scope for re-agitation of already settled issues e.g. it provides that value addition accruing in each high sea sale shall form part of the value on which IGST is collected at the time of clearance. Now, lot of questions may arise here: whether value addition would include only positive value addition, whether reduction in price cannot be termed as negative value addition etc. When the levy is on import and when Section 14 of the Customs Act, 1962 clearly stipulates that the transaction value relevant for customs valuation is the price actually paid or payable for delivery at the time and place of importation, it is difficult to understand as to why such type of clarification requiring levy of IGST on value addition in each high sea sale is required to be separately mentioned. Earlier also, some customs houses were requiring minimum 2% value addition as high sea sales charges to be added to the declared CIF value. Ultimately, the CBEC had to provide a clarification vide Circular No. 32/2004-Cus that high sea sale contract price paid by the last buyer would constitute the transaction value and inclusion of commission on notional basis may not be appropriate. Now, with the fresh clarification having been issued requiring IGST payment on each value addition, let us see as to how the field officers interpret such clarification.
In my view, IGST is leviable on high sea sales under Section 5(1) read with Section 7(2) of the IGST Act and even after the issuance of the above circular, it would be worthwhile to discharge GST on such transactions (subject, of course, to the consideration regarding blockage of working capital), else one would be required to reverse its input tax credit proportionately, as such transactions would otherwise be treated as exempted supplies.