May 29, 2018

By K Srinivasan, IRS

THE taxable event under the Customs Act, 1962 is import of goods into India.

As India includes territorial waters, it was contended that the 'import' is complete as soon as goods entered the territorial waters.

However, the Supreme Court, in the case of Garden Silk Mills Ltd. vs. UOI - 2002-TIOL-19-SC-CUS-LB has held that the import commences when the goods enter into territorial waters but continues and is completed when they cross the customs barrier and bill of entry for home consumption is filed.

If we apply the above ratio of the judgment in the context of the provision of Section 7(2) of the IGST Act, it would become self-contradicting as it attempts to tax goods even as it enters the territorial waters of India.

Goods imported, till they cross the customs frontiers, cannot be said to be imported into India, in terms of the above judgment.

However, Proviso to Section 5(1) of the IGST Act, 2017 comes to the rescue in the above situation by specifying that the integrated tax, on goods imported into India shall be levied and collected in accordance with the provisions of section 3 of the Customs Tariff Act, 1975.

It will be on the value as determined under the said CTA at the point when duties of customs are levied on the said goods under section 12 of the Customs Act, 1962.

It is possible for one to beg the question as to when are Customs duties to be levied then?

The answer to that question would be when the Import is said to be completed.

Which means what? That is again like a dog chasing its tail.

Import  implies bringing into India from a place outside India.

India, as per Section2 (27) ibid, includes territorial waters of India  which extend up to 12 nautical miles into the sea.

Then?

The moment a vessel, carrying any goods from outside India, enters such waters, the goods are deemed to have been imported into India.

Government has issued a Circular bearing no. 33/2017-Customs, to clarify the position with respect to applicability of IGST on high sea sales.

The said Circular suffered from a number of infirmities.

To name a few -

+ The circular was issued under the Customs laws while it sought to clarify the leviability of IGST on high sea sales which is not governed by the Customs law.

+ It need not be reiterated here that under the customs laws, IGST is leviable only in respect of transactions involving actual importation of goods when the bill of entry for home consumption is filed and not in respect of the high sea sales which is the transaction preceding such importation of goods.

+ Even if we ignore this for the moment and go by the purported intention of the Circular, the same was vague and absurd inasmuch as on the one hand, it clarifies that the high sea sales are akin to inter-state transactions but on the other hand, it clarifies that the same is not exigible.

+ Section 3(7) or for that matter Section 3(12) of the CTA can only deal with the cases of actual importation of goods under the Customs law and the same cannot provide for the levy/non-levy of IGST on supplies effected before bill of entry for home consumption is filed

+ Further, the Circular was completely silent about the application/scope of Section 7(2) of the IGST Act and accordingly, the same can, in no case, be relied upon to examine the scope of Section 7(2) of the IGST Act.

It was decided by the GST Council that IGST on high sea sale transaction of imported goods shall be levied and collected at the time of importation i.e. when import declarations are filed for the customs clearance and reference is made to Section 3(12) of the CTA for the governing provisions in the said regard.

For ease of understanding, the provision contained under Section 3(12) of the CTA is reproduced hereunder:

Now, it would be very clear that said provision has applicability only in respect of duties leviable under Section 3 of the CTA i.e. inter alia in respect of IGST leviable on actual importation of goods.

When levy of IGST on high sea sale is not at all guided by Section 3 of the CTA, how Section 3 (12) can give effect to the levy, is the question.

When is the levy on import then?

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 high sea sale was required to be separately mentioned in a circular that too, would appear, beyond anyone's imagination.

Earlier also, some Custom houses were requiring minimum 2% value addition as high sea sales charges to be added to the declared CIF value.

This kind of notional arrangements have even the approval of the Customs Valuation rules at times, i.e. when it comes to computation of loading, unloading and handling charges associated with the delivery of the imported goods at the place of importation, it is to be reckoned notionally @ 1 % of the Free on Board Price.

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.

All these unorthodox and extra legislative measures to gross up margins earned on high seas transactions by traders before the cargo reached the custom station could not legitimize the actions of the Government until perhaps some core changes made by it, in the Customs Statute itself in the Union Budget 2018.

To this effect that such margins can be factored for valuation purposes under section 14 and as also for purposes customs duties and local taxes such as IGST, changes were brought about vide clause 100 of the Finance Bill,2018 by inserting a new Section 3(8A) in the Customs Tariff Act, 1975 (since enacted).

Accordingly, the value at which the warehoused goods are sold, or the transaction value determined as per Section 14 of the CA including customs duty, shall be the value on which IGST will be charged.

In case where the whole of warehoused goods or any part thereof are sold more than once before such clearance for home consumption, then the transaction value for the purpose of tax shall be the value at which such warehoused goods are, last sold.

Now, we have done one full circle if you have observed that the Government has literally written the content of the aforementioned 2004 Customs circular into the Customs Tariff Act read with the Customs Act, respectively; Section 3(8A) of the CTA and Section 14(1) of the CA, to finally put an end to the valuation of the high seas sale controversy.

The story of high seas sale valuation ends here…hopefully!

(The author is Assistant Commissioner, GST, Chennai & Master Trainer, GST.  The views expressed are strictly personal.)