Multiple taxes levied and collected by the Centre and states in India have been replaced by one tax called Goods and Services Tax (GST) since July 2017. GST is a multi-stage value added tax on consumption of goods or services or both.
The impact of change of Value Added Tax (VAT) regime can also be seen on the Customs Act, 1962. Under GST regime, certain duties and taxes that were levied at the time of import of material like Basic Customs Duty (BCD), Social Welfare Surcharge (SWS), Anti-dumping duty, Safeguard duty are still continued as they were levied prior to the introduction of GST. However, Countervailing Duty (CVD) and Special Additional Duty of Customs (SAD) have been entirely replaced by the Integrated Goods and Services Tax (IGST).
High Sea Sales
‘High Sea Sales’ (HSS) is a common trade practice around the globe whereby the original buyer/importer of material transfers/sells the said goods to a third person before the goods are entered for customs clearance in the destination country.
‘High Sea Sales’ is a sale carried out by the actual consignee/buyer (i.e., the consignee shown in the Bill of Lading) to another buyer while the goods are on high seas, i.e., after their dispatch from the loading port and before their arrival at the discharge port. To put it simply, it refers to the sale of goods by the importer/buyer to a third party after the goods have left the customs of any other country and before it enters the custom frontier of India. This sale is done through transfer of documents of the ownership of goods when the goods are still in transit.
For example, a buyer from Delhi buys certain goods from the United Kingdom. However, while the goods are still in transit and still due to enter the custom frontiers of India, the buyer sells the goods to another party in Bangalore. This transaction is referred to as a ‘high sea sale.’ High sea sales may also be made by an original buyer who was outside India and also the subsequent sale of the purchased goods may be done to a buyer outside India.
| As per Section 2(4) of the Customs Act, 1962, the area of any customs station where goods are held after being imported and before being cleared by relevant customs officials is known as ‘custom frontier’. |
High sea sale agreements must be signed after the goods have left the custom frontier of the exporting country and before it reaches the customs frontiers of India. The term ‘high sea’ does not limit the applicability to just the imports made via sea but includes any items imported via air as well. However, it shall only be applicable if the new buyer becomes the owner of the goods imported once the import is complete.
Constitutional Validity
The concept of High Sea Sales finds its authority from Article 286 (1) (b) of the Constitution of India which states that no law of a State shall charge or authorize the charging of a tax on the sale or purchase of goods, where such sale/purchase takes place during the period of import of the goods into or export of the goods out of India.
Article 286(2) further provides that the Parliament may by law formulate principles for determining when a sale or purchase of goods takes place in any of the ways mentioned above.
Duties and Taxes on High Sea Sales
Goods and Service Tax (GST)
- Final Buyer is outside India
Supply of goods from a place outside India to another place outside India without the goods entering the country is not taxable under the Goods and Services Tax Act, 2017, irrespective of the fact that the supplier and/or the recipient is located in India.
Clause 7 of schedule III of the Act declares that such merchant trade transactions are not considered supply of goods or services. However, this is not applicable in the case where services are provided with supply of goods; thus in this case, GST is levied on the supply of services from a place outside India to another place outside India. Hence, where transport, marketing or auxiliary business services are provided with a supply of goods, they attract GST.
The GST Council has clarified that final buyers are responsible for the payment of integrated goods and services tax (IGST) on filing import declarations for customs clearance. Clause 8 was added to schedule III of the GST Act to provide that high sea sales and supply from customs warehouses shall not amount to either the supply of goods or supply of services. ‘Value added’ is included in calculating GST and the buyer is responsible for establishing a link between the first contracted price of the goods and the last transaction.
Sale of goods from Custom Bonded warehouse
Supply of goods from a place outside from Custom warehouse before clearance for home consumption is not taxable under the Goods and Services Tax Act, 2017, irrespective of the fact that the supplier and/or the recipient is located in India.
Clause 8 of schedule III of the Act specifies that 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 is excluded from the definition of supply in GST.
Custom Duty
The laws under the Custom Act, 1962 and the Goods and Services Tax Act, 2017 are applicable on goods imported into India and accordingly taxes namely the Basic Custom Duty (BCD), Integrated Goods and Service Tax (IGST) and Cess (Education Cess & Compensation Cess) is applicable on import of goods at applicable rates.
| Basic Custom Duty (BCD) is a type of duty or tax imposed at 10% under the Customs Act, 1962 on the import of goods. |
Applicability of BCD on High Sea Sale: Territorial water extends up to 12 nautical miles into the sea from the coast of India and so the liability to pay import duty commences as soon as goods enter the territorial waters of India. Thus, no duty is liable on goods which are in transit and accordingly a high sea sale transaction is NOT subject to BCD.
Documents required for High Sea Sales
- Commercial Invoice: Sale invoice for a sales transaction in foreign currency, specifying quantities and rates of the items between the original seller and original buyer (HSS Seller).
- High Sea Sale Agreement (HSS agreement): It is a contract regarding the delivery of goods after they clear the customs between the original buyer/importer and the HSS buyer.
- HSS Invoice: It reflects the transaction amount agreement between the HSS seller and HSS Buyer.
- Certificate of Origin: A certificate stating the original destination of the items needed for quality certification, custom duty, sanctions, and other necessary aspects.
- Insurance Certificate: The primary buyer’s insurance of the goods being imported. This can be transferred to the next buyer during HSS transactions.
- Bill of Lading: The document that states who is the owner and holds the title of goods during HSS.
Procedure of High Sea Sales
Step 1: High Seas Buyer needs to obtain an Import Export Code (IEC) certificate to be able to sell the goods to another buyer (the same can be obtained by applying at
www.dgft.gov.in).
Step 2: High Sea Seller Enters into an Agreement of Sale (High Sea Sale Agreement) with High Sea buyer after the movement of goods from the territorial border of exporter but before arrival of goods at the territorial border of India.
| This agreement must be drafted on a stamp paper and notarized by the relevant authority in India. |
Step 3: The Bill of Lading is endorsed by the actual buyer/importer of the goods, who transfers the title of the goods to the HSS buyer.
Step 4: The primary buyer shall create an invoice to the new buyer in Indian Rupees (INR). The primary buyer/importer shall provide the new buyer with the original draft of the Bill of Lading, invoice in INR accompanied by the import invoice, packing list, their certificate of origin, certificate of insurance and other relevant documents for import clearance purposes. The exporter also holds a copy of all the documents that have been provided by the HSS seller to the HSS buyer.
Step 5: HSS Buyer files Bill of entry (for home consumption) along with all the import documents delivered by HSS Seller with customs authorities. The former shall be responsible for clearing any customs clearance costs, if applicable. If the HSS seller does not want to reveal the actual price mentioned in the contract between them and the exporter to the HSS buyer, they can choose to undertake the responsibility for customs clearance and delivery. In such instances, the HSS seller shall file all the necessary documents on behalf of the HSS buyer.
Step 6: After completing the import customs clearance process, the HSS buyer shall send a copy of the Bill of Entry to the HSS seller. The HSS seller shall, thereafter, submit this bill along with other documents relevant to the HSS to the bank.
Key Case Laws
M/s. BASF India Ltd. [Authority for Advance Ruling – Maharashtra]
Question 1
A buyer purchases goods from a foreign exporter relying upon the orders they received from their customers. Such goods were sold to the customers before it was cleared by customs in India. The question asked was if Integrated Goods and Services Tax (IGST) would be applicable on such sales to customers who the buyer knew about when placing an order with their foreign exporter.
Ruling 1
The answer was ‘no,’ meaning that such sales would not be charged with any IGST. The main point of concern is the fact that the goods were sold to such customers before the items entered the customs frontier of India.
| However, it is important to note that IGST will be levied at the time of import into India by the final customer to whom the sale was made by M/S BASF India Ltd. |
Question 2
The application also questioned that considering IGST was not levied on the above-mentioned transaction, would they need to reverse Input Tax Credit (ITC) on input services, inputs and common input services used in relation to such sale of goods. This was asked after considering it as an exempted supply under Section 17 of the Central Goods and Services Tax (CGST) Act, 2017.
Ruling 2
The answer to this was ‘yes,’ which meant that ITC needs to be reversed in instances where the transaction is considered as an exempted supply.
Conclusion
High sea sales involve sale of goods by the individual who primarily bought it from the foreign exporter to a third-party in the territory of India before the said goods enter the customs frontier of India. As such, it is imperative to make sure the transaction takes place after the goods have left the exporter’s country and before the same reaches its destination in India.
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