Understanding High Sea Sales: GST Implications and Procedures

High sea sales represent a lawful trading practice where the initial importer sells goods to another party before those goods undergo customs clearance. This article explores the GST implications for high sea sales, how they differ from standard imports, and the essential documentation required for these transactions.

Definition of High Sea Sales Under GST

High sea sales involve a transaction where the purchaser of goods resells them to another entity while the items are still in transit across the high seas. This means the sale occurs after the goods have departed from the loading port but before they arrive at the discharge port for customs processing.

For instance, if a Mumbai-based buyer acquires electronic devices from China and subsequently sells them to a Chennai buyer while they are still in transit and prior to crossing India's customs frontiers, this constitutes a high sea sale. Such sales can also be made to buyers located outside India.

A high sea sale agreement must be executed once the goods are dispatched from their origin and before their arrival at the Indian destination. This principle also extends to goods imported via air. Upon finalizing the agreement, ownership is transferred to the new buyer.

Differentiating Regular Imports from High Sea Sales

In a conventional import scenario, the importer physically receives the goods at the port or airport and introduces them into the country. Imports typically occur when domestic industries cannot produce comparable goods efficiently or at a lower cost, or to acquire raw materials unavailable locally.

Conversely, in a high sea sale transaction, the initial importer does not directly bring the goods into the country. Instead, the ownership and title of the goods are transferred to a subsequent buyer, either within the same country or internationally, before the goods cross India's customs frontiers.

GST Applicability on High Sea Sales

According to Section 7(2) of the IGST Act, the supply of goods imported into India's territory, up to the point they cross the customs frontiers, is considered an inter-state supply. Consequently, goods sold through a high sea sale before clearing customs are subject to IGST.

For example, if M/s ABC Ltd. in Bangalore imports goods from Singapore, but these goods are sold to M/s XYZ Ltd. in Chennai before customs clearance, this inter-state sale incurs IGST.

However, if high sea sales are made to a buyer outside India (e.g., M/s ABC Ltd. sells goods to a USA buyer instead of Chennai), GST is typically not applicable. The CGST Amendment Act of 2018, via Schedule III, Para 7, clarifies that the supply of goods from one non-taxable territory to another non-taxable territory, without the goods entering India, is not considered a supply under GST law. Therefore, no GST is charged since the goods do not enter India's taxable territory.

Timing of IGST Levy on High Sea Sales

As per a circular issued by the CBIC, IGST on high sea sales, regardless of the number of transactions, is only levied and collected at the point of importation. This means IGST is imposed when the import declarations are first filed with customs authorities for clearance.

Valuation for IGST on High Sea Sales

Any value added to the goods during high sea sales will be included when calculating the taxable value for IGST collection during customs clearance. This implies that the final buyer is responsible for paying GST on the total value of the goods, including any value added from prior high sea sales, at the time of importation.

A circular from the CBEC in 2004 specified that "high-seas-sales-charges" are typically considered 2% of the CIF (Cost, Insurance, and Freight) value. However, if the actual contract price for the high sea sale exceeds the CIF value plus 2%, the actual contract price paid by the last buyer will be used for assessment purposes.

For instance, if Mr. X in Bangalore imports goods from China with a CIF value of Rs. 2,000 and sells them to Mr. Y in Chennai for Rs. 2,500 via a high sea sale, customs will assess the value as the higher of Rs. 2,040 (Rs. 2,000 * 1.02) or Rs. 2,500. Since Rs. 2,500 is higher, it will serve as the base for customs duty. IGST will then be applied to this value plus any applicable customs and other import duties.

Essential Documentation for High Sea Sales

For high sea sale (HSS) clearance, the following documents are typically required:

• Commercial Invoice: An invoice in Indian currency for the high sea sales transaction, detailing quantities and rates.
• Import Invoice: Reflects the initial agreement between the consignee and the original seller.
• Certificate of Origin: A document specifying the goods' country of origin, crucial for customs duties, sanctions, and quality certification.
• Insurance Certificate: The original buyer's insurance for the imported goods, which can also be assigned to the subsequent high sea sales buyer.
• High Sea Sale Agreement (HSS agreement): A formal agreement between the initial and subsequent buyers for goods delivery after customs clearance.
• Bill of Lading: A document signifying ownership and title transfer of goods during the high sea sale.

Input Tax Credit Claim by the Final Buyer

Yes, the ultimate buyer in an HSS arrangement is eligible to claim Input Tax Credit (ITC) for the GST paid on the transaction. When the original buyer endorses the necessary documents to the subsequent buyer, the original buyer is absolved of customs duty and IGST payment. Instead, the final buyer pays these taxes upon receiving the goods. Consequently, only the final buyer can claim the ITC for the IGST they have paid.

Advance Ruling for High Sea Sales under GST

An advance ruling offers applicants clarity and certainty regarding their GST tax liabilities. Such rulings, provided by the Authority for Advance Ruling (AAR), are binding on both the applicant and government authorities, ensuring a clear understanding of tax obligations.

Consider a case involving M/s. BASF India Ltd., which sought a ruling from the Maharashtra AAR on IGST applicability and ITC reversal for high sea sales.

Question 1: The applicant purchased goods from an overseas related party based on customer orders and resold them while in transit, before customs clearance in India. The query was whether IGST would be levied on sales to customers known to the applicant at the time of placing the initial overseas order.

Ruling 1: The AAR ruled negatively, stating that IGST would not be leviable on such sales made before customs clearance in India. However, it was noted that IGST would still be levied at the point of import into India.

Question 2: The applicant also asked if ITC on inputs, input services, and common input services would need to be reversed if the transaction was deemed an exempt supply under Section 17 of the CGST Act, due to not being subject to IGST.

Ruling 2: The AAR confirmed this, ruling affirmatively that ITC would need to be reversed proportionate to the inputs and services used if the transaction was treated as an exempt supply.

It is important to remember that this ruling is specific to M/s BASF India Limited and serves only as persuasive guidance for others; it is not broadly applicable to all businesses.

Conclusion

High Sea Sales present several advantages, allowing buyers to resell goods without awaiting their initial importation. Nevertheless, these transactions demand meticulous documentation and strict compliance. Both the original high sea sale importer and the subsequent buyer must furnish proof of ownership transfer occurring before the goods enter the customs area. Failure to provide such evidence may lead to overpayment of taxes.