High Sea Sales- Procedure & Implications under GST & Customs

Background

The economy and the trade have grown to a greater extent as compared to the ancient period and people have come with many types of dealings and transactions over a period of time to either attract the customers, to reduce their costs or to make things easier for conducting their business. One such transaction is High Sea Sale.

In this article, we have provided the meaning and procedure of high sea sales, valuation, taxation and other aspects relating to high sea sales under GST.

What is high sea sale?

High Sea Sales [HSS] is a common trade practice within four corners of law whereby the original importer of goods sells the subject goods to a third person before the goods are entered for customs clearance.

HSS in general understanding is a sale where importer sells the goods to another buyer after the goods are loaded on a carrier such as ship, aircraft in exporter’s country while the goods are yet on high seas or in the air or sale of the goods after their dispatch from the port/ airport of export and before their arrival at the destination port/ airport.

For example, A located in Mumbai procures goods from vendor B of USA. The goods are exported from USA and when the goods are in transit, A enters into a contract with C of Nagpur, and sells these goods to C, before the goods crosses the customs frontier of India. The sale of goods by A of Mumbai to C of Nagpur, while they are in transit is called high sea sale.

There is no bar on same goods being sold more than once on high seas. The same consignment of goods in transit can be sold multiple times before such goods cross customs frontier and enter into territory of India.

Why high sea sales?

In the case of HSS, the end HSS buyer would be treated as importer. He clears the goods from customs on payment of applicable import duties. Further if there is any end user-based exemptions in respect of the goods, then such end HSS buyer who uses such goods, for specified purposes can claim such exemptions/concessional tax benefits when he presents the bill of entry for home consumption at customs.

For example, the goods imported by EOUs or SEZs are normally exempted from the payment of BCD and IGST on the import of goods. Where the HSS seller purchases the goods from outside India and enters into an HSS contract with an EOU or SEZ when such goods are in the transit, such EOU or SEZ would not be required to pay BCD and IGST when it files the bill of entry for home consumption.

Suppose such goods were cleared by the original importer from the customs area and then sold to the EOU instead of selling such goods on HSS basis, the original importer would be required to pay BCD when it imports the goods which would be a cost to him and which would be recovered from the EOU when the goods are sold subsequently.

Procedure for High sea sales-

• The HSS seller buys goods from an overseas supplier against POs received from its customer in India i.e., HSS buyer. That is, it will be a back to back PO. As against the PO given by the HSS seller, the overseas supplier will export the products. The export documents such as the bill of lading will show the HSS seller as the buyer of the goods.

• After the goods are dispatched from the port of the exporter country and before the goods reach/ cross the customs frontier of India and is entered for customs clearance, the goods will be sold by the HSS seller to its HSS customer by entering into HSS contract/ agreement.

• HSS contract should be entered on stamp paper, signed by both the HSS buyer and HSS seller and should be duly notarised. In the cases where the HSS Contract is not notarised, the same is required to be attested by the authorized signatory of bankers. The notarisation is required in order to determine the time of entering into HSS agreement or contract.

• The sale is to be effected by endorsing the bill of lading, invoice and packing list in favor of the HSS buyer. The endorsement should read "Transferred on High Sea Sales basis to M/S -------- for a sales consideration of Rupees --------". Such endorsement should be stamped and signed by the HSS seller. Sale invoice indicating the price at which goods are sold by the HSS seller to HSS buyer should be issued. [This is suggestible if the HSS seller does not mind disclosing original import values to HSS buyer.]

• In the example given above, A of Mumbai buys goods from the USA against POs received from B of Nagpur. After the goods are dispatched from USA and before the goods reach/ cross the customs frontier of India, the goods would be sold by A of Mumbai to B of Nagpur by entering into HSS contract/ agreement. A is called the HSS seller and B is called as HSS buyer.

Filing of IGM

• The Import General Manifest [IGM] is to be filed in the name of HSS buyer as the consignee of the goods by the shipping line if such shipping line is aware of the HSS contract before filing IGM. In such cases IGM is not required to be amended.
• Where the IGM is already generated by the shipping line and has mentioned the HSS seller as the consignee of the goods in the IGM, then the shipping line would be required to amend the IGM in order to change the consignee as the HSS buyer. The procedure to amend IGM by the shipping line is given below.​​​​​​​

Amendment of IGM

Circular 14/2017- Customs dated 11^th April 2017 provides the procedure for amending IGM. The shipper would be required to file an application for the amendment in the IGM in its letter head.

The following documents are required to be filed along with the application for the amendment in the IGM:

1. HSS contract signed by both the HSS buyer and HSS seller and duly notarised. In the cases where the HSS Contract is not notarised, the same is required to be attested by the authorized signatory of Bankers.
2. Non-negotiable copy of Bill of Lading in original. If same is not available, then a photocopy of such Bill of Lading duty authenticated by Shipping Line/ Steamer Agent/ Custom Broker;
3. HSS invoice and commercial invoice in original or a duly attested Copy thereof;
4. Authority letter for custom broker appointed by the HSS buyer or application from HSS buyer (if CB is not appointed) in original,
5. IEC copy of both the buyer and the seller.

Minor amendment: Where the HSS contract was entered and notarised or attested by the bankers before the date of the IGM then the IGM can be amended under minor amendment by the shipping line.

Major amendment: Where the HSS contract was entered and notarised or attested by the bankers after the date of the IGM, then the amendment would be dealt by the Customs as a major amendment.

Note: The amendment of IGM could be adjudicated if the Customs department contend that such major amendments involve fraudulent intention or substantial revenue implication arising from the amendments.

• The bill of entry should be filed by the HSS buyer who will discharge the applicable duties of customs and IGST on the imported goods and will clear the goods for home consumption/ warehousing, as the case maybe.
• The delivery from customs is on account of HSS buyer. He is liable to pay BCD and IGST on the import of HSS goods and take the credit of IGST paid on such imports in GSTR-3B based on the bill of entry, if used for effecting taxable supplies and exports in the course or furtherance of business.​​​​​​​

Procedure in the case of multiple HSS:

• There is no bar on same goods being sold more than once on high seas [as discussed above]. That is, the same goods which are in high seas sold by A of Mumbai to B of Nagpur can be sold by C of Solapur and so on.
• In such cases, the bill of entry is to be filed by the end HSS customer. The last HSS agreement should give an indication of previous title transfers. The last HSS buyer should also obtain copies of previous HSS agreement.

• The ultimate HSS buyer would be required to furnish the entire chain of documents, such as original Invoice, HSS contract, details of service charges/ commission paid etc, to establish a link between the first contracted price of the goods and the last transaction which is required for the determining value of imported goods.

Determination of value of imported goods: Circular No. 32/2004-Cus., dated 11-5-2004 provided the clarification relating to the valuation of imported goods for the determination of customs duty payable.

• It is clarified that the actual HSS contract price paid by the HSS buyer would constitute the transaction value under Rule 4 of Customs Valuation Rules. Hon’ble Supreme Court, in the case of M/s. Hyderabad Industries Limited [2000 (115) E.L.T. 593 (S.C)] has upheld that the service charges/ HSS commission (‘actuals) are includable in the CIF value of imported goods.

• The HSS seller will normally sell at a price higher than the price paid by HSS seller to his overseas vendor. The HSS price is to be considered for the determination of value of imported goods even if such price is lower than the price paid by HSS seller to his overseas vendor. The price paid by HSS seller to his overseas vendor cannot be a basis for determination of transaction value. Held in Excel Glasses Ltd. Vs Commissioner of Customs, Trichy- 2004 (166) E.L.T. 496 (Tri. - Bang.).

• Where the same goods are being sold more than once on high seas the last HSS value is to be considered for the payment of BCD and IGST.

• HSS goods are entitled to classification, rates of duty and all notification benefits as would be applicable to similar import goods or normal sale.

• However, the customs can call for the original import invoice, in which case the HSS seller may have to part with this information. Where the HSS seller is not ready to disclose the details of the goods procured by it, the HSS seller should take on the responsibility of customs clearance and site delivery.

• After customs clearance, the HSS seller could withdraw import invoices and only hand over clearance documents with HSS agreement to the HSS buyer. The customs bill of entry does not indicate original import value and is prepared on HSS value.

• In case of a doubt regarding the truth or accuracy of the declared value, the department may reject the declared transaction value and determination the price of the imported goods as provided in the Customs Valuation rules.​​​​​​​

Whether GST is applicable on the HSS-

• IGST on the imported goods is levied and collected in accordance with the Customs. Since, BCD is not payable on the HSS, even IGST is not payable on HSS.
• Circular No. 33/2017-Cus., dated 1-8-2017 has clarified that IGST on HSS 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.

• The CGST amendment act, 2018 has amended Schedule III to include 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 i.e., HSS. The above amendment act has included HSS in the activities which are not to be treated as supply under GST. This amendment is effective from 01^st February 2019.

Difference between HSS and bond sales: The imported goods are at times stored in the warehouses before filing the bill of entry for home consumption in the name of buyer. The storing is commonly referred to as bonding of goods or stored in the bonded warehouse as the customs duty on such goods is assessed and paid only on the date of clearance of goods from the customs authority. Such goods are thereafter sold ex-bond to the buyer.

Bond sales i.e., sale of warehoused goods is not similar to the case of HSS since the sale/ transfer of imported goods after warehousing cannot be considered to have been made in the course of international trade. Sometime HSS buyers buy goods after their arrival. Such sales are also not HSS.

Reversal of ITC as attributable to HSS

The Authority for Advance Ruling under GST, Maharashtra in the case of Basf India Limited- 2018-TIOL-82-AAR-GST dated 21st May 2018 has held that goods sold on HSS by the HSS seller is a supply which is not taxable under GST [i.e., non-taxable supply] and is exempt supply. Input tax credit of common inputs, capital goods and input services to the extent related to HSS is required to be reversed by the HSS seller.

Based on the above ruling, a view might arise that the common credits to the extent relating to HSS is required to be reversed by the HSS seller. However, this might not be correct as the sales effected outside India cannot be treated as covered under the scope of supply under GST.

However, the above advance ruling does not have much persuasive value. These rulings are not applicable and cannot be relied upon by any person other than the applicant of the ruling.

As discussed above, the amendment act has included HSS in the activities which are not to be treated as supply under GST effective from 01^st February 2019. Since, the amendment is beneficial to the assessee, the amendment may be of retrospective effect. Since HSS is not a supply only, it cannot be treated as exempt supply and accordingly the ITC relating to HSS is not required to be reversed.

Conclusion:

HSS, though has several benefits as discussed above, is required to be practiced and complied with utmost care and diligence with proper documentation. Where the HSS seller or buyer is not in a position to prove that the title of the goods in high seas was transferred before such goods enter the customs area, the possibilities are that there could be excess payment of BCD and IGST. The government has clarified the position of high sea sales under GST in favor of the assessee that it would not be taxable under GST by treating it as an activity which is not a supply.

Hope our article was helpful to you.

The authors can be reached at ramya@hiregange.com and raghunandan@hiregange.com.