HIGH SEA SALES.NO IGST IS PAYABLE

[Sadanand Bulbule]

What are ‘high sea sales’?

1. The word “high sea” means the open ocean, especially which is not within any country's jurisdiction or popularly known as “international waters” over which no country can exercise its sovereignty.

           While “high sea sales” (HSS) transactions are not new to the Customs and Commercial Taxes Departments as they are prevailing under the Customs Act,1962 and Section 5(2) of the CST Act 1956 respectively, yet it is significant to brush the memory afresh in the backdrop of the IGST Act. In the case of High Sea Sales (HSS) transactions, the original importer sells the goods to his customer while the goods are still on high seas. Thus unlike actual 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.

            HSS is also applicable to goods imported by air. Sea appearing in ‘high sea sales’ should not be constructed by its grammatical meaning. As long as the sale is formalized after dispatch from airport / port of origin and before arrival at the first port of discharge / airport at destination, such sale is considered as HSS.

2. In simple words,  High Sea sales (HSS) is a sale carried out by the carrier document consignee to another buyer while the goods are yet on high seas or after their dispatch from the seaport/ airport of origin and before their arrival at the seaport / airport of destination. HSS is considered as a sale carried out outside the territorial jurisdiction of India and, therefore, it is not coming under the term ‘Imports’. Accordingly there is no tax and it is the benefit. Normally a legal contract on high sea sale has to be entered between high sea buyer and high sea seller. All documents need to be mentioned as ‘on high sea sale bases’ including packing list and new invoices. The value of invoice can be either existing invoice value or new high sea sale value depends upon the understanding between high sea sale buyer and seller. If the HSS seller does not want to disclose the existing selling rate of original sales, he can issue a new invoice mentioning the high sea sale value.  But the value as determined by the Customs Authority while clearing the import goods for home consumption shall be the final for levy of IGST.

3.In terms of Section 2(26) of the Customs Act, 1962, the importer is defined like this:  "importer", in relation to any goods at any time between their importation and the time when they are cleared for home consumption, includes any owner, beneficial owner or any person holding himself out to be the importer. Consequently the importer who gets the import goods cleared for home consumption or warehousing shall electronically make entries in Bill of Entry (BoE) as mandated under Section 46 of the Customs Act, 1962.

4. Section 2( 28) of the Customs Act, 1962 defines:  "Indian customs waters" means the waters extending into the sea up to the limit of Exclusive Economic Zone under section 7 of the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 (80 of 1976) and includes any bay, gulf, harbour, creek or tidal river.

 5. Usually there are standardised documents prescribed to regulate high sea sales. They are: (a) commercial 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, (b) Bill of Lading (BoL) 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,(c) Import 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,(d) The original buyer of insurance for the goods for import may also assign the insurance in favour of the subsequent buyer (third person) on High Seas.

6. Some of the relevant provisions of the IGST Act, 2017 are reproduced hereunder for ready reference:

a. Section 2(10) of the IGST Act, 2017 defines: ‘‘Import of goods” with its grammatical variations and cognate expressions, means bringing goods into India from a place outside India.

b. Section 5(1) of the IGST Act stipulates that, Subject to the provisions of sub-section (2), there shall be levied a tax called the integrated goods and services tax on all inter-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 of the Central Goods and Services Tax Act and at such rates, not exceeding forty per cent., as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person:

Provided that the integrated tax on goods imported into India shall be levied and collected in accordance with the provisions of Section 3 of the Customs Tariff Act, 1975 (on the value as determined under the said Act at the point when duties of customs are levied on the said goods under section 12 of the Customs Act, 1962).

c. Section 7(2) of the IGST Act, 2017 defines: 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. 

7. Keeping in mind these collective provisions governing HSS, here is an example for better understanding. An importer in Bengaluru places a purchase order on the American exporter to purchase certain goods. The American exporter dispatches such goods to the Bengaluru original importer. If the Bengaluru original importer brings the goods from America and takes delivery after Customs clearance, he is liable for payment of Customs duty besides IGST. On the other hand, if the Bengaluru original importer sells such goods to another domestic buyer in Chennai, being the third person, while the goods are still on high seas ie., before the goods have crossed the Customs Frontiers of India on a journey from an American destination, such sales transactions are covered by Section 2(10) read with Section 7 (2) of the IGST Act and are understood in commercial world as ‘High Sea Sale’ transactions.

               Later when the Chennai buyer actually takes delivery of the import goods after filing Bill of Entry (BoE) in FORM-1 which contains the details of IEC, PAN  & GSTIN at Sea, Air or Land Port, he is assessed for the payment of Customs duty and the IGST. The Bengaluru buyer being the original buyer pays the consideration to the American exporter in foreign currency and in turn the Chennai buyer would pay the consideration to Bengaluru original importer in Indian currency. As such the Chennai buyer, being the third person, is entitled to avail ITC of IGST paid on the value of import goods on filing the Bill of Entry (BoE). IGST on import goods being the “self-paid tax”, the provisions of Section 16(2)(aa) of the CGST Act,2017 are not applicable to such transactions.

8.So as per the provisions of the Customs Act, the person importing the goods for home consumption has to pay the Customs Duty at such rates as specified under the Customs Tariff Act, 1975 after  proper determination of rate of duty and tariff valuation of import goods besides the IGST concurrently. There are 98 chapters containing ‘Basic Rate of duty / Classification / Tariff Items’ on imports in the First Schedule to the Customs Tariff Act, 1975. And in terms of Section 47 of the Customs Act, 1962, the Proper Officer makes an order for the clearance of import goods for home consumption only on being fully satisfied that any goods entered for home consumption are not ‘prohibited goods’ and the importer has paid the Customs Duty and the IGST. Thus the moment goods, brought into India from a foreign country, are cleared for home consumption, they get mixed with the local goods and cease to be imported goods.

9. Now coming back to the GST administration in many instances, some of the Proper Officers on intercepting the conveyance carrying such import goods, detain and express doubts about the credibility of High Sea Sales transactions and issue notices under the GST Act, 2017 on the ground that the commercial invoice issued by the original Indian importer does not reflect the GST amount. As discussed (supra) on high sea sales transactions, no taxes can be charged, much less GST.   Since there is still ambiguity about the place of supply of goods, it may be noted that, IGST Act is only applicable in India as per Section 1(2) of the IGST Act and India as defined under Section 2(56) of the CGST Act is applicable to the IGST Act vide Section 20 of the IGST Act as under:

“(56) “India” means 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 (80 of 1976), and the air space above its territory and territorial waters;”

Thus, IGST can only be levied on the inter-state transactions in terms of Section 5(1) of the IGST Act taking place inside the Indian Territory. As, High Sea Sales take place outside India, IGST is not leviable.

10.  The newly substituted Article 286 of the Indian Constitution provides restrictions as to imposition of tax on the sale or purchase of goods, as under:

 Article 286. (1) No law of a State shall impose, or authorise the imposition of, a tax on the supply of goods or of services or both, where such supply takes place-

(a) outside the State; or

(b) in the course of the import of the goods or services or both into or export of the goods or services or both out of the territory of India.

(2) Parliament may by law formulate principles for determining when a supply of goods or of services or both in any of the ways mentioned in clause (1).

11. Based on the restriction as to imposition of tax on sale or purchase goods or service outside the territory of India in terms of Article 286, the judgement dated 23/01/2020 of the Hon’ble Gujarat rendered in the case of  MOHIT MINERALS PVT LTD VERSUS UNION OF INDIA & 1 OTHER [2020 (1) TMI 974 - GUJARAT HIGH COURT] which is based on landmark rulings of the Hon’ble Supreme Court, has held that, no tax is leviable under the Integrated Goods and Services Tax Act, 2007, on the ocean freight for the services provided by a person located upto the customs station of clearance in India and the levy and collection of tax of such ocean freight under the Notification.No.8/2017 and entry No.10 of the Notification No. 10/2017 Integrated Rate dated 28/06/2017 is not permissible in law. The ratio of the judgement of the Gujarat High Court (supra) setting aside the IGST on ocean freight charges is exactly akin to the principles governing the concept of high sea sales based on the object of Article 286, being outside the territory of India.

                 However the Union of India has filed a Special Leave to Appeal before the Hon’ble Supreme Court against the Gujarat High Court dated 23/01/2020 vide (Special Leave to Appeal (C) No(s).13958/2020). The last notice issued by the Supreme Court was on 03/01/2022. So the SLP is yet to be disposed off.

12. Further based on the ratio of its own judgement dated 23/01/2020 rendered in the case of MOHIT MINERALS PVT LTD VERSUS UNION OF INDIA & 1 OTHER [2020 (1) TMI 974 - GUJARAT HIGH COURT] which is referred at Para No.11 above, the Hon’ble Gujarat High Court in its similar judgement dated 18/08/2020 rendered in the case of Bharat Oman Refineries Ltd. Vs Union of India in No.- R/Special Civil Application No. 8881 of 2020  (2020 (8) TMI 568) has allowed the refund of IGST paid on ocean freight services supplied by a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India upto the customs station of clearance in India.

13. 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 1^st 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.”

14. Thus in my view, the proviso to the charging Section 5(1) of the IGST Act, makes it abundantly clear that, the IGST on goods imported into India shall be levied and collected in accordance with the provisions of Section 3 of the Customs Tariff Act, 1975 on the value as determined under the said Act at the point when the Customs Duty is levied on the said goods under Section 12 of the Customs Act, 1962. And the point of levy under Section 12 of the Customs Act would arise only when a Bill of Entry (BoE) is filed under Section 68 of the Customs Act.

15. In these situations, Article 286 (supra) instils a sense of strong confidence and creates conscious correction among the tax payers as the object of high sea sale is to be fully free from tax.