High Seas Sales under GST law - was clarification really required?
NOVEMBER 08, 2017
By K K Sharma, Member, Central Board of Excise & Customs (Retd.)
Responding to a reference, seeking clarity on the leviability of integrated goods and services tax (iGST)on high sea sales of imported goods, the CBEC issued a circular No. 33/2017-Cus dated 1.8.2017. It informed that:
(i) the GST "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 customs clearance 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"; and
(ii) "The above decision of the GST council is already envisioned in the provisions of sub-section (12) of section 3 of the Customs Tariff Act, 1975 inasmuch as in respect of imported goods all duties, taxes, cesses etc. shall be collected at the time of importation ."
Accordingly, the Circular concluded that iGST on imported goods shall be payable only once at the time of Customs clearance and value addition, resulting from the high sea sale(s), shall be part of the value chargeable to iGST.
2. In my humble view, however, there was neither a reason for any doubt nor need for any clarification, given the existing provisions of the Integrated Goods and Services Tax Act (iGST Act) as well as Customs Act, 1962 (CA) and Customs Tariff Act, 1975 (CTA). Let us understand this issue in terms of following pointed questions: -
A. What are the high seas?
B. What is a high sea sale?
C. How was a high sea sale treated in the pre-GST regime?
D. How is a high sea sale treated under the GST law?
E. Is there any difference between the treatment of high sea sales under the two dispensations?
A High seas
3. None of the three GST Acts, namely the Central Goods and Services Tax Act (cGST Act), the State Goods and Services Tax Act (sGST Act) and the iGST Act define the term high seas. Even the CA and CTA make no mention of it. We must, therefore, necessarily look for its meaning elsewhere. The Duhaine's Law Dictionary describes it as "the open ocean, not part of the exclusive economic zone, territorial sea or internal waters of any State." According to Article 1 of the UN Convention on High Seas, "The terms ‘high seas' means all parts of the sea that are not included in the territorial sea or in the internal waters of a State." Article 86 of the United Nations Convention on the Law of the Sea (UNCLOS) refers to high seas as " all parts of the sea that are not included in the exclusive economic zone, in the territorial seas or in the internal waters of a State, or in the archipelagic waters of an archipelagic State ."Article 87ibid adds -" The high seas are open to all States, whether coastal or land-locked ."
4. Thus, the high seas are international waters, lying outside the maritime jurisdiction of every State. These parts of oceans, seas, bays, gulfs etc. are open to and belong to all the States.That such waters fall outside the territorial jurisdiction of India as well is evident from how "India" has been defined in S. 2(56) of the cGST Act: "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, and the air space above its territory and territorial waters ."
5. Article 1 of the Constitution, referred to in S.2(56) of cGSTAct, is reproduced below:
"1. Name and territory of the Union---
(1) India, that is Bharat, shall be a Union of States.
(2) The States and the territories thereof shall be as specified in the First Schedule.
(3) The territory of India shall comprise -
(a) The territories of the States;
(b) The Union territories specified in the First Schedule; and
(c) such other territories as may be acquired."
Further, according to the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zone Act, 1976 (Teco, Exec & Mazo Act), while India's territorial waters extend up to 12 nautical miles, the continental shelf and exclusive economic zone go up to 200 nautical miles, from the baseline (coastline) on mainland as well as an individual island or group of islands.
6. It is to be remembered that, as acknowledged in S. 3 (1) of Teco, Exec & Mazo Act, the sovereignty of India extends only up to the territorial waters and to the seabed and subsoil underlying, and the air space over, such waters. However, the Central Government has, u/s 6(6)(a) and 7(7)(a) ibid, the power to extend, by notification in the official gazette, the limits of its continental shelf and exclusive economic zone respectively. But this can only be done subject to necessary "restrictions and modifications". And it is in exercise of this power that the Central Government has issued Notification S.O. No. 189(E), dated 7.2.2002 extending the reach of CA and the CTA to the continental shelf of India and the exclusive economic zone of India for the following limited purposes: -
"(a) the prospecting for extraction or production of mineral oils in the continental shelf of India or the exclusive zone of India, and
(b) the supply of any goods, as defined in clause (22) of section 2 of the Customs Act, 1962 in connection with any of the activities referred to in clause (a)".
7. Thus, while India enjoys full sovereignty up to the limit of its territorial waters (12 nautical miles from coastal baseline), its sovereignty beyond this and up to 200 kms is restricted to the said two specified purposes. This is in conformity with the provisions of Art. 3 (relating to full sovereignty up to and over territorial waters), and Art. 56 & 76 (relating to limited sovereignty over exclusive economic zone and continental shelf respectively) of the UNCLOS. It is not without reason, therefore, that while "India", as per S. 2(27) of CA, "includes the territorial waters of India" (12 nautical miles), u/s 2(56) of cGST Act, its territory extends up to 200 nautical miles from the coast. Its legal implication is that the 2-way supply of goods or services or both between India up to its territorial waters (full sovereignty) on one hand and the waters beyond,up to 200 nautical miles (limited sovereignty) on the other, for the purposes specified in para 6(a) & (b) above, is to be treated as domestic trade and commerce and not as export or import.
8. Accordingly, it can safely be concluded that all those parts of seas or oceans which lie beyond 200 nautical miles from India's mainland or from any individual island or group of islands are the high seas.
B. High sea sale
9. A high sea sale is a sale of goods by a consignee, named in the relevant bill of lading, to another buyer while the goods are en route to their eventual destination. A high sea sale does not mean that sale transaction must be made while the vessel carrying the cargo is still on high seas. It can be made any time after the vessel has crossed the territorial waters of the exporting country but before it enters the territorial waters of the importing country.
10. High sea sales are common and beneficial to both seller and buyer. The seller secures his selling profit without suffering the hassles and charges associated with Customs clearance of goods at the port of importation. The buyer saves on domestic tax which would be otherwise payable on resale of the same goods to him by the importer (high sea seller).
11. For any transaction to be accepted as a high sea sale, it must be made before the import general manifest (IGM) is filed under S.30 of the CA and supported by appropriate documentation necessary for Customs clearance such as:
(i) a copy of a high sea sale agreement entered between the high sea seller and buyer;
(ii) a copy of document of title (bill of lading) duly endorsed by the high sea seller to the high sea buyer;
(iii) a copy of the letter addressed to the carrier (shipping line) informing about the high sea sale and the details of high sea buyer. This is essential to enable the carrier to replace the consignee's name in the IGM which is required to be filed with the Customs well before the arrival of vessel at the port of discharge; and
(iv) high sea seller's invoice in domestic currency, in favour of the high sea buyer.
12. There is no bar on multiple high sea sales involving the same goods. What will be relevant for the Customs purposes is the last of such sales and supporting documents, for it is the last of the high sea sale values which will be relevant for valuation of the goods under S.14 of the CA. The Customs authorities may also ask for other relevant documents, such as original invoice issued by the foreign supplier to the first consignee and documentation relating to each of the subsequent sales, with a view to establishing a complete high sea sale chain.
C. Treatment of high sea sale in pre-GST regime
13. Under the respective State VAT laws prevailing till 30.6.2017, the VAT was payable by a dealer on his sales/turnover effected within the State. Under the Central Sales Tax Act, 1956, the tax was payable on sale of goods made in the course of inter-State trade or commerce. No tax was payable under either legislation on any sale transaction made in the course of import. In an order dated 25.9.1998, passed in the case of Mineral and Metal Trading Corporation Vs Sales Tax Officer, Hon'ble Supreme Court had held that a high sea sale made in the course of import was not liable to central sales tax.
14. Under the CA, where duties of Customs are levied on goods imported into India, no duty was separately leviable on high sea sales, for the goods were yet to be imported. However, on importation, duty was chargeable and, therefore, charged on the value of goods at the time and place of importation, i.e. CIF plus landing charges. This value, called the assessable or transaction (of importation) value, included the high sea seller's margin and, therefore, the duty paid on the total value included that attributable to the high sea seller's profit.
15. Thus, during the pre-GST regime, while the State VAT laws and the CST Act had no jurisdiction with respect to high sea sales, under the CA, it was considered a part of the import transaction and charged to import duty accordingly.
D. Treatment of high seas sales under GST law
16. As the high sea sales are not intra-State supplies, as defined in S.8 of iGST Act, the sGST Act and utGST Act are not applicable to them. However, the import transaction that subsumes the high sea sale, is aninter-State supply, envisaged under S.7(2) of the iGST Act, and, therefore, provisions of iGST Act are attracted. Further, u/s 20 of iGST Act, nearly all provisions of cGST Act have been made applicable to iGST Act. Also, the provisions of S.8(1) of the GST (Compensation to States) Act, 2017 (GST CS Act) will be applicable, for they apply both to the intra-State and inter-State supplies.
17. According to S.7(2) of the iGST Act, "Supply of goods imported into India, till they cross the Customs frontier of India, shall be treated to be a supply of goods in the course of inter-State trade or commerce". The "Customs frontier of India", as per S.2(4) of the iGST Act, " means the limits of a Customs area as defined in Section 2 of the Customs Act, 1962 .The "Customs area", under S.2(11) of the Customs Act, 1962," means the area of a customs station and includes any area in which imported goods or export goods are ordinarily kept before clearance by Customs Authorities". The area in any port where imported goods are ordinarily kept for clearance, i.e. for assessment, inspection/examination, verification of compliance requirements, and pending payment of Customs duty and other port charges, is commonly known as docks.
18. Thus, in terms of the iGST Act, import of goods into India, i.e. the supply up until their stay in the docks is treated as inter-State supply. After the Customs clearance and movement out of the docks, the nature of further supply would depend on whether the goods remain in the same State or are moved to another one. What all this means is that, like inter-State supplies of goods, the goods imported into India, including those purchased in a high sea sale, are also to suffer the levy under S. 5 of the iGST Act. In addition, a compensation cess is also leviable u/s 8(2) of the GST CS Act,if the imported goods happen to be one of those mentioned in the Schedule to that Act.
19. But the iGST, that is leviable under S.5 of iGST Act, is also payable on all goods imported into India in accordance with the provisions of S. 3(7) of CTA, before they are cleared by the Customs authorities from the Customs frontier/area. Not only that, the compensation cess, referred to above and whereever applicable, is also payable u/s 3(9) of CTA.
20. Does it, therefore, mean that IGST and compensation cess (where leviable), shall be payable twice on the same goods imported into India, before they are cleared by the Customs? This is what the doubt seemed to be which the said CBEC circular has sought to allay. In my view, however, there was no ground for doubt on the issue warranting CBEC's clarification. The GST law itself addresses this issue very succinctly.
21. While S. 5(1) of iGST Act provides for levy of iGST on all inter-State supplies of goods and S.7(2) thereof treats the supply of goods imported into India, till they cross the Customs frontier of India, as inter-state supply, the proviso to S.5(1) of iGST Act makes it clear that "the integrated tax on goods imported into India shall be levied and collected in accordance with the provisions of section 3 of the CTA ". The proviso adds that such tax shall be levied and collected "on the value as determined under the said Act at the point when duties of customs are levied on the said goods undersection 12 of the Customs Act, 1962 ." Thus, very unambiguously, this proviso to S. 5(1) of iGST itself implies that the iGST is to be levied and collected not as an independent supply transaction but as a part of import transaction under S. 3 of CTA.(emphasis supplied)
22. Now , what do the provisions of the said section 3 of CTA say about (i) levy of iGST, (ii) the point when the duties of Customs under section 12 of CA are to be levied, and (iii) the value on which iGST is to be collected? Taking the point No. (i) first, the said S.3 captioned "Levy of additional duty equal to excise duty,sales tax, local taxes and other charges", provides for levy of 5 kinds of Customs duties/taxes on goods imported into India, in addition to the basic customs duty which is leviable under S.2 of that Act. These 5 duties/taxes are:
(a) an "additional duty" u/s 3(1) "equal to the excise duty" for the time being in force and leviable on a like article if produced or manufactured in India;
(b) "such additional duty" u/s 3(3) "as would counter-balance" the excise duty leviable on any raw materials, components and ingredients of the same nature as, or similar to those, used in the production or manufacture of such articles as may be notified;
(c) such" additional duty "u/s 3(5) "as would counter-balance" the sales tax, value added tax, local tax or any other charges, leviable for the time being in force on the sale, purchase or transportation in India on such articles as may be notified;
(d) integrated tax u/s 3(7) on any article imported into India at the rate leviable on the supply of like article in India u/s 5 of iGST Act, and on the value of imported article as determined under S. 3(8); and
(e) compensation cess u/s 3(9) on any article imported into India, at the rate leviable u/s 8 of the GST CS Act on the like article on its supply in India, and on value of imported article as determined under S. 3(10).
Further, as per S. 3(12), all the provisions of CA (including that relating to valuation of imported goods u/s 14) would apply to duties or tax or cess chargeable under that section 3.
23. It is to be noted that while the first three levies -- (a) to (c) above -speak of levy of "additional duty" (on certain goods like a few petro products and tobacco products which are still chargeable to Central Excise duty), there is no reference to additional duty when it comes to the other two levies under (d) & (e) above, namely integrated tax and the compensation cess. Thus, even though independent identity of iGST and compensation cess has been kept intact, with a view to aligning it with S.16 of cGST Act read with S. 2(62) ibid (relating to ITC availment), overall cover of additional duty of Customs u/s 3 of CTA can't be and has not been removed because, legally speaking, imported goods can't be seen to be subjected to any duty or tax other than Customs duties.
24. Let us now move to the point No. (ii), referred to in para 22 above, about the time of payment of iGST/cess. The iGST/cess are to be levied at the point when, as mandated in the proviso to S.5(1) of iGST Act, "the duties of customs are levied on the said goods undersection 12 of the Customs Act, 1962". Now, the Customs duties are levied on the goods after the same have been imported into India but before they are cleared by the Customs. The term "import" has been defined, almost identically in S. 2(10) of iGST Act and S.2(23) of the CA, as "bringing into India from outside India". Further, "India" under S. 2(27) of the CA has been defined, as noted earlier, thus: "India includes the territorial waters of India".
25. Accordingly, import happens, in terms of S.2(23) read with S. 2(27) of CA, when a vessel bringing the goods crosses the line marking outer limit of India's territorial waters (12 nautical miles). However, the transaction of import for the purposes of S.14 of CA is complete only at the time when the imported goods are delivered or landed at the place of importation, including the port of discharge. The value of this transaction has been described u/s 14 of CA as "the price actually paid or payable for the goods when sold for export to India for delivery at the time and place of importation". This value is denoted, in international commercial terms, as CIF value plus landing charges. Notably, this is the value, determined under S.14 of CA, for levy and collection only of Basic Customs duty under S.2 of CTA. (Emphasis supplied)
26. Finally, we come to the point No.(iii), i.e. the value for the levy of iGST and compensation cess. Both of them are payable, as noted in para 22(d) & (e) supra, on the value to be determined as per the provisions of S.3(8) and 3(10) respectively of the CTA. In terms of these two sub-sections, the value of an imported article will be the aggregate of:
(a) value of imported article determined u/s 14(1) of the Customs Act, 1962 or, as the case may be, the tariff value fixed u/s 14(2) thereof; and
(b) any duty of Customs chargeable on that article u/s 12 of the Customs Act, 1962 (i.e. basic customs duty) and any sum chargeable on that article under any law for the time being in force as an addition to, and in the same manner as, a duty of customs, but does not include the tax referred to in S. 3(7) or S.3(9), i.e. the iGST or compensation cess.
Incidentally, this manner of including, in the assessable value of the goods, all taxes/duties payable on the imported goods except the iGST and compensation cess, is in line with that u/s 15(2)(a) of cGST Act. That explains why the safeguard duty and anti-dumping duty, leviable u/s 8B and 9A respectively of the CTA, which did not form a part of S.14 (of CA) value till 30.6.2017, have become includible thereafter.
27. Where does a high sea sale fit into this scheme of levy of iGST & compensation cess on imported goods? It is very evident by now that a high sea sale of goods becomes a part of import transaction of those goods which is taxable in accordance with the provisions of section 3 of CTA. The rationale, manner and modalities of its taxation have been elaborated in para 22-26 above. To sum up, the high sea sale transaction gets merged into the import transaction, with the high sea buyer replacing the original consignee (high sea seller) as the importer and paying all duties/taxes that are detailed in para 22 supra.
E. Difference between pre-GST and post GST dispensation vis a vis high sea sales
28. There is thus no difference between the two dispensations vis-à-vis high sea sale of goods. The legal provisions in the GST law are as unambiguous as they were earlier on how to tax such sales, not independently but as a part of import transaction of the goods, for so long as they are in the high seas, i.e. out of India's territorial waters, they are not taxable at all.
29. There was, thus, neither any reason for doubt nor need for clarification on the issue, much less for deliberation and decision by the GST Council.
(The author is based at Chandigarh and is associated with GSTaxperts as Chief Patron. The views expressed are strictly personal.)
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