NOVEMBER 17, 2017

By K Srinivasan, IRS

I find that the possible reasons for still some doubts lingering in the air despite the Government clarifying by its Circular 33/2017-Customs that high sea sales/supply will not be exigible to tax could be due to;

a) Some ambiguity in the wordings of Section 7(2) of the IGST Act read with Section 5(1) of the CGST Act implying that goods while being imported into India till reaching the Customs frontier may attract IGST meaning while on the high seas, and

b) Circulars and counter circulars issued on the customs side regarding the taxability of value additions to imports arising out of high seas sales/supply between 2004 and now.

Let me first take a you down the amended Articles of the Constitution as it stands now post the introduction of GST to establish the legislative intent behind the said high sea transaction and try to figure out if there is any significant pointer that gives rise to such notions of levability to tax of high sea sales/supply.

In the first place, Article 286 of the Constitution has not undergone any change except to the extent of substituting for the words "the sale or purchase of goods", the words "supply of goods or services or both".

Otherwise, there is no material or conceptual change in the said Article after the introduction of the 101st Constitutional Amendment Act, 2016.

Similarly, Article 269A inserted after Article 269 does not seek to add to Article 269 anything more than setting out under four sub clauses namely (1) to (4), the method of apportionment of taxes so levied and collected on the said goods or services or both during the course of inter-state trade or commerce under Article 246A(2) of the exclusive jurisdiction of the Centre.

In an explanation under the said Article 269A, an attempt has been made to deem the supply of goods or services in the course of import into the territory of India to supply of goods, or services or both in the course of inter-state trade or commerce in order to enable levy and collection of IGST on imports.

In fact, you would find the counterpart Article 286(1)(A) and (B) dealing with restrictions as to imposition of tax on the sale or purchase of goods by the state, worded some-what in a similar fashion but for the export part of goods or services or both out of the territory of India consequent to the Amendment Act,2016.

Concomitant provisions have been made in Section 3(7) of Customs Tariff Act, 1975 and Section 12 of the Customs Act,1962 to assimilate the above changes made in the Constitution into those Acts and to signify to the extent that IGST is leviable on Goods imported into the territory of India.

Therefore, one would not think that the wordings in the Section 7(2) of IGST Act read with proviso to Section 5(1) of the CGST Act, needs to be credited with any special meaning for the wordings that goods imported into the territory of India, till they cross the customs frontier will attract IGST.

However, a simple solution to amend Section 7(2) to substitute the words "imported goods" in place of the words used there as "goods imported" may do much good to dispel any possible doubt that it seeks to imply of any possible IGST levy on goods while imported into India till they cross the customs frontier.

Let me take you down the provisions of the Customs legislations to understand the position of taxability of high seas sales under customs Act and Customs Tariff Act and the surrounding concepts of valuation before and after GST.

As per Customs Laws, 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 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.

The Customs frontier of India , as per Section 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 Section2(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, pending payment of Customs duty and other port charges, is commonly known as docks.

Let me take down the IGST provisions in relation to the Customs Law as it stands post GST.

+ According to Section7(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 .

+ Section 5(1) of IGST Act provides for levy of IGST on all inter-State supplies of goods and Section 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 Section 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 under section 12 of the Customs Act, 1962.

+ Thus, very unambiguously, this proviso to Section 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 Section 3 of CTA.

A high sea sale of goods, therefore,becomes clearly a part of import transaction of those goods which are taxable in accordance with the provisions of section 3 of CTA.

Let us now turn to the valuation provisions of imports and the implications of it on high sea sales /supply before and after GST.

+ 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 Section 2(10) of IGST Act and Section 2(23) of the CA, as bringing into India from outside India. Further, India under Section 2(27) of the CA has been defined, as noted earlier, to include the territorial waters of India as well .

+ The transaction of import for the purposes of Section14 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 Section 2 of CTA.

This takes us finally to the  value for the levy of IGST , which is payable, on the value to be determined as per the provisions of Sections 3(8) of the CTA.

In terms of the above sub-section, 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.

Conclusion.

When the levy is on import and when Section 14 of the Customs Act, 1962 clearly stipulates that the transaction value relevant for customs valuation is the price actually paid or payable for delivery at the time and place of importation, it is difficult to understand as to why such type of clarification requiring levy of IGST on value addition in each such high sea sale is required to be separately mentioned to enable levy of IGST.

Earlier also, some Customs houses were requiring minimum 2% value addition as high sea sales charges to be added to the declared CIF value. Ultimately, the CBEC had to provide a clarification vide Circular No. 32/2004-Cus that high sea sale contract price paid by the last buyer would constitute the transaction value and inclusion of commission on notional basis may not be appropriate.

Now, with the fresh clarification vide Board's Circular No. 33/2017-Customs having been issued requiring IGST payment on each value addition, suitable explanations under the relevant provisions of the CA itself referred to above, will help the field officers to interpret such clarification in the right light of the relevant legislations discussed above and charge the intended measure of Customs duty and other attendant levies including IGST.

(The author is Assistant Commissioner, GST, Chennai and the views expressed are strictly personal.)