In this article, we will do comprehensive analysis regarding chargeability of GST on High Sea Sales Transactions both after amendment in Schedule III effective from 01.02.2019 and before amendment. Further, we will also examine the reversibility of ITC pertaining to such transactions under section 17 if any.
Areas Covered in this Article
Section A : Meaning of High Sea Sales Transactions
High Sea Sales Transactions are very common in the business of Imports. Many of times it happens like, there was original agreement of purchase of shirts between A being Exporter (based in USA) & B being importer (based in India). After the goods being dispatched from port of dispatch (USA), B finds the customer "C" in India and B sold the said shirts before it reached the port of India and cleared by custom authorities. In this case, then finally, C will complete all custom formalities including payment of Custom Duty and take possession of Goods. Accordingly, this transaction of transfer of Goods by B to C through endorsement of document is called High Sea Sales in common parlance.
Custom Act allows this, as in The Custom Act, 1962, Importer has been defined in Section 2(62) as:
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;
Now in next section, we will discuss the chargeability of GST and Reversibility of ITC if any on such transactions
Section B: Chargeability of GST & Reversibility of ITC if any on High Sea Sales After Amendment
1. Chargeability of GST
As there is transfer of goods for consideration between B & C, there were lot of disputes regarding chargeability of GST on such transactions due to Section 7(2) of IGST Act (will be discussed in detail in Section D of the article).
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."
Therefore, 28th GST Council recommended to make changes in GST Laws to declare High Sea Sales transactions outside the preview of GST. Accordingly, Schedule III of the CGST Act, 2017 was amended though prospectively (w.e.f 01.02.2019) to declare that following three kinds of transactions will neither be supply of Goods nor service:
S.No. 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
It tries to cover the situation, where like in above example, C is based out of Sri Lanka and B transfers the ownership of Goods to C while shipment is en-route to India (outside the taxable territory of India). Accordingly, this transaction between B and C will be outside the preview of GST.
S.No. 8. (a) Supply of warehoused goods to any person before clearance for home consumption;
Explanation 2 .- For the purposes of paragraph 8, the expression " warehoused goods " shall have the same meaning as assigned to it in the Customs Act, 1962 (50 of 1962)
Custom Act allows for warehousing of Goods in Custom approved warehouses before clearance for home consumption. Accordingly, above entry covers the situation where Importer (Like B in above example) put the Goods into Custom approved warehouse and before clearing them for home consumption, transfer such goods to C. In this case, then C will clear them from warehouse for Home Consumption.
In this case, transaction of transfer of Goods from B to C will be outside the preview of GST.
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 clause covers any situation where Goods are transferred by the original importer (B) to any other person (C) before goods are cleared for home consumption by the Custom Authorities. Accordingly, any such transfer of Goods will also be outside the preview of GST even though goods are in the taxable territory of India.
2. Now, we will discuss whether any Reversal of ITC is required against such transactions
Since, these various type of High Sea Sales transactions are outside the preview of GST, now question comes whether ITC needs to be reversed pertaining to these transactions. In this regards, we will discuss eligibility of ITC in respect of Common ITC and specific ITC :
a. Common ITC : Section 17(2) read with Rule 42 requires proportionate reversal of Common ITC in respect of Exempt Supply (Broad Formula = Common ITC*Exempt Supply/Total Supply).
Since, High Sea Sales are outside preview of GST, there can be confusion regarding reversibility of proportionate common ITC (like related to Head Office, Administration etc.) pertaining to these transactions under Section 17(2) read with Rule 42. In this regard, an Explanation is being added to Section 17(3) (w.e.f. 01.02.2019), to clarify that No proportionate ITC is required to be reversed pertaining to High Sea Sales by keeping them outside the definition of Exempt Supply for Section 17(2) read with Rule 42.
Section 17(2): Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies...... Explanation: For the purposes of this sub-section, the expression "value of exempt supply" shall not include the value of activities or transactions specified in Schedule III , except those specified in paragraph 5 of the said Schedule
b. Specific ITC like Commission: There can be a scenario where some specific service is being availed for High Sea Sales like service of some commission agents. So, questions comes whether ITC can be availed against Commission paid dedicatedly for High Sea Sales.
In this regards, to the best of our mind, there is no specific provision in law to cover such situation. Explanation added to Section 17(3) is limited for Section 17(2) only. Moreover, it has persuasive value that ITC needs not be reversed for specific service also as it is not an exempt supply for said section.
However, considering the principle of equity and logic, it appears that ITC should not be allowed for the service which are dedicatedly being used for transactions like High Sea Sales which are outside the preview of GST.
Section C: Who is Responsible for Payment of IGST in case of High Sea Sales
As per Proviso to Section 5 of IGST Act, 2017, IGST needs to be paid on goods imported into India in accordance with the provisions of Section 3 of Customs Tariff Act, 1975.
Section 3(7) of the Customs Tariff Act:
Any article which is imported into India shall, in addition, be liable to integrated tax at such rate, not exceeding forty percent as is leviable under section 5 of the Integrated Goods and Services Tax Act, 2017 on a like article on its supply in India, on the value of the imported article as determined under sub-section (8) 9 [or sub-section ( 8A ), as the case may be].
So there was confusion regarding payment of IGST in case of High Sea Sales whether there was need to pay IGST twice one in terms of Section 5 of IGST Act and other in terms of Section 3(7) of Customs Tariff Act. Further, there was confusion whether "B" is also required to pay IGST in addition to "C".
To provide absolute clarity, on the basis of recommendation of 20th GST Council Meeting, a Circular No. 33 /2017-Cus dated 01.08.2017 was issued to clarify 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.
Accordingly, only the Final Importer (i.e. C in our example) needs to pay the IGST on the final value including all value addition happened in the chain of multiple high sea sales transactions. For this, Importer needs to submit entire chain of documents, such as original Invoice, high-seas-sales-contract, details of service charges/commission paid etc, with the Custom Authorities.
Now we will discuss last leg of our Article i.e.
Section D: Chargeability of GST on High Sea Sales Before Amendment
Before amendment in GST Laws as discussed in Section B above, there was lack of clarity regarding taxability of High Sea Sales due to language of Section 7(2) of IGST Act.
Section 7(2) of IGST Act:
(2) 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.
India is defined in Section 2(56) of CGST Act, 2017 as
"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;
One interpretation which can be adopted by the Department that since these were the goods which are imported in to territory of India and Supplied by "B" to "C" before it cross the customs frontier of India, it is an inter-state supply and GST is chargeable on it. Further, while amending GST Law, Trade represented (as being reported in agenda notes of GST Council Meeting) for retrospective amendment in Schedule III w.e.f 01.07.2017. However, Law was amended prospectively only w.e.f. 01.02.2019.
Another interpretation in the favour of the Trade is that in Section 7(2), territory of India is mentioned, however, in high sea sales transactions, generally goods are transferred when they are in international waters.
Further Article 286 of Indian Constitution prescribes that
286. Restrictions as to imposition of tax on the sale or purchase of goods.—
(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).
Moreover, applicability of IGST Act is limited to the India in terms of Section 1(2) of IGST Act. Therefore, it appears that specially where High Sea Sales Transactions are for the goods which are yet to enter territory of India, even before amendment came into force, such High Sea Sales Transactions may not fall with in the preview of GST.
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Disclaimer: We have taken due care to the best of our knowledge while explaining the provisions surrounding the issue purely for informational/academic purpose. It should not be considered as professional advice or consultancy to be relied upon. Further, we respect & acknowledge the difference of opinion with us. Further, Fab Gyan and its Team will not be responsible for any mistake.