Executive Overview & Quick Highlights: In the globalized architecture of cross-border merchandise trade, international supply chains frequently execute commercial transactions where physical goods either never enter Indian territorial waters or change legal ownership after departing the overseas port of origin but before crossing the customs barrier into domestic circulation. For Indian commodity trading conglomerates, industrial importers, indenting agents, and supply chain intermediaries, three distinct transactional archetypes dominate this space: (i) Merchanting Trade Transactions (MTT), also known as "out-and-out" sales, where goods are procured in one foreign country and delivered directly to another foreign country without touching Indian soil; (ii) High Sea Sales (HSS), where imported cargo is transferred to an Indian buyer while on the high seas via endorsement of the Bill of Lading prior to customs clearance; and (iii) In-Bond / Customs Warehouse Sales, where imported goods are deposited into a licensed public or private customs bonded warehouse under Section 59 of the Customs Act, 1962 and subsequently transferred to secondary buyers before the filing of the Ex-Bond Bill of Entry for home consumption.
In the formative phase of the Goods and Services Tax (GST) regime, these cross-border commercial transactions generated intense litigation, conflicting Advance Rulings, and double taxation disputes. State tax authorities frequently sought to levy Integrated GST (IGST) on merchanting transactions under Section 7(5)(a) of the IGST Act, or sought to tax High Sea Sales under domestic supply provisions before customs assessment. To permanently establish legislative clarity, Parliament enacted decisive structural amendments via the CGST (Amendment) Act, 2018 (effective February 1, 2019), inserting Paragraph 7, Paragraph 8(a), and Paragraph 8(b) into Schedule III of the Central Goods and Services Tax (CGST) Act, 2017. By statutory mandate, transactions falling within these paragraphs are deemed to be "neither a supply of goods nor a supply of services" (non-taxable transactions). Concurrently, Parliament inserted a vital Explanation to Section 17(3), ensuring that turnover from Schedule III activities (except real estate land/building sales under Paragraph 5) is excluded from the definition of "exempt supply"—thereby granting full statutory immunity against mandatory Input Tax Credit (ITC) reversals under Rule 42 and Rule 43! This definitive operational masterclass provides indirect tax practitioners, corporate customs managers, supply chain CFOs, and Chartered Accountants with an exhaustive technical guide to High Sea Sales, Merchanting Trade, and Bonded Warehouse transactions, dissecting statutory triggers, customs valuation rules, GSTR reporting, and automated reconciliation within the assureOffice ecosystem.
- Statutory Framework of Schedule III: Deconstructing Paragraphs 7, 8(a), and 8(b) and the legal principle of "neither a supply of goods nor a supply of services."
- Merchanting Trade Transactions (MTT) under Para 7: Out-and-out shipments from non-taxable territory to non-taxable territory, RBI Master Direction compliance, and zero domestic GST liability.
- High Sea Sales (HSS) Mechanics under Para 8(b): Transfer of documents of title (Bill of Lading endorsement) before clearance for home consumption, and single-point customs duty collection.
- Customs Bonded Warehouse Sales under Para 8(a): Into-bond (Yellow Bill) vs Ex-bond (Green Bill) procedures, transfer under Section 59/68 of Customs Act, and Section 3(7) of Customs Tariff Act.
- Section 17(3) Explanation & ITC Reversal Immunity: Proving why common input tax credit on corporate overheads (rent, IT, audit fees) is NOT required to be reversed against MTT/HSS turnover under Rule 42.
- Customs Valuation & Bill of Entry Interplay: How the ultimate buyer pays customs duty and IGST on the enhanced high-sea purchase value under Section 14 of Customs Act.
- GST Portal Reporting & Audit Trails: Step-by-step reporting in GSTR-1 (Table 8), GSTR-3B (Table 3.1(e)), GSTR-9 (Table 5F), and automated verification in assureTax.
1. Statutory Architecture: Schedule III Paragraphs 7 & 8
The charging section of GST—Section 9 of the CGST Act and Section 5 of the IGST Act—imposes tax on all intra-State and inter-State supplies of goods or services. However, Section 7(2)(a) of the CGST Act establishes an overriding negative list: activities or transactions specified in Schedule III shall be treated neither as a supply of goods nor as a supply of services. Consequently, transactions governed by Schedule III fall completely outside the GST net, meaning no CGST, SGST, or IGST can be levied on the transaction invoice.
The following statutory comparison table outlines the legislative architecture of Paragraphs 7 and 8 of Schedule III, their effective dates, and their interface with the Customs Act, 1962:
| Schedule III Clause | Statutory Scope of Transaction | Effective Date | Customs Act / CTA 1975 Interplay | GST Charging Status |
|---|---|---|---|---|
| Paragraph 7 | Supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into India (Merchanting Trade). | 01-Feb-2019 (CGST Amendment Act, 2018) | Goods never enter Indian customs waters; no Bill of Entry is filed. Governed strictly by RBI FEMA MTT Directions. | Non-taxable. Treated as neither supply of goods nor services. No GST charged on commercial invoice. |
| Paragraph 8(a) | Supply of warehoused goods to any person before clearance for home consumption (In-Bond Warehouse Sales). | 01-Feb-2019 (CGST Amendment Act, 2018) | Goods deposited in warehouse under Section 59. IGST payable by ultimate buyer upon filing Ex-Bond Bill of Entry u/s 68. | Non-taxable. Transaction between first importer and warehouse buyer is outside GST. |
| Paragraph 8(b) | Supply of goods by the consignee to any other person, by endorsement of documents of title, after dispatch from foreign port but before clearance for home consumption (High Sea Sales). | 01-Feb-2019 (Circular 33/2017-Cus codified in statute) | Endorsement on Bill of Lading. Ultimate buyer files Bill of Entry u/s 46 and pays BCD + IGST on final enhanced value. | Non-taxable. Seller issues invoice without GST; tax collected at customs barrier under Section 3(7) of CTA. |
| Section 17(3) Explanation | Exclusion of Schedule III activities (except Para 5 real estate) from the definition of "exempt supply" for ITC reversal. | 01-Feb-2019 (CGST Amendment Act, 2018) | Directly insulates merchanting trade and high sea sales turnover from triggering Rule 42/43 ITC disallowances. | Zero ITC Reversal. Taxpayer enjoys full credit of common input tax on domestic administrative overheads. |
2. Deep-Dive Technical Mechanics: Three Core Supply Chains
2.1 Merchanting Trade Transactions (MTT) [Schedule III Para 7]
A Merchanting Trade Transaction (also known as an "out-and-out" trade) occurs when an Indian resident merchant trader procures goods from an overseas supplier (e.g., in Germany) and arranges for the physical shipment of those goods directly to an overseas customer (e.g., in Vietnam), without the cargo ever touching Indian territorial waters or crossing Indian customs stations.
Regulatory & Tax Characteristics:
- Absence of Territorial Nexus: Because the goods never cross into Indian customs waters, the location of goods at the time of delivery is outside India. Under Section 7(5)(a) of the IGST Act, the department initially argued that because the supplier was located in India, the transaction was an inter-State supply. However, Parliament inserted Paragraph 7 to settle this controversy, declaring that such transactions are neither supply of goods nor services.
- FEMA & RBI Compliance: Under RBI Master Direction on Merchanting Trade, both the import leg and export leg must involve physical movement of goods outside India; the entire trade cycle must be completed within nine (9) months; outlay of foreign exchange cannot exceed four (4) months; and transactions must be routed through the same Authorized Dealer (AD) Bank.
- No GST Levy on Outward Invoice: The Indian merchant issues an invoice to the overseas buyer in foreign currency (e.g., USD) with zero GST. The invoice must contain a clear declaration: "Supply covered under Paragraph 7 of Schedule III of the CGST Act, 2017 – Goods dispatched from Non-Taxable Territory to Non-Taxable Territory without entering India."
Corporate accounting teams can manage foreign inward and outward settlement ledgers and cross-reference AD bank bank realization certificates using assureFinancials.
2.2 High Sea Sales (HSS) [Schedule III Para 8(b)]
A High Sea Sale occurs when an original Indian importer (the consignee) agrees to sell imported goods to a secondary buyer (the high sea buyer) while the vessel carrying the goods is in transit on the high seas—specifically, after the goods have been dispatched from the foreign port of loading but before a Bill of Entry for home consumption is presented to Indian Customs under Section 46 of the Customs Act, 1962.
Operational Mechanics & Documentation Trail:
- High Sea Sale Agreement: The original importer and high sea buyer execute a formal High Sea Sale Agreement on non-judicial stamp paper dated prior to the vessel's arrival at the Indian port or prior to customs clearance.
- Endorsement of Bill of Lading: The original importer signs an endorsement on the reverse of the original Bill of Lading transferring title of the consignment to the high sea buyer: "Please deliver to the order of [High Sea Buyer]."
- Customs Valuation & Bill of Entry: The high sea buyer files the Bill of Entry for Home Consumption as the ultimate importer. Under Customs Circular No. 33/2017-Customs, the customs value for assessment of Basic Customs Duty (BCD) and Integrated GST (IGST) is the actual high sea sale contract price paid by the buyer (which includes the original CIF cost + seller's profit margin).
- Prevention of Double Taxation: Because IGST is collected by Customs at the time of clearance under Section 3(7) of the Customs Tariff Act, 1975 on the final elevated value, the transaction between the original importer and the high sea buyer is statutorily exempted from GST under Paragraph 8(b) of Schedule III.
2.3 Customs Bonded Warehouse Sales [Schedule III Para 8(a)]
Under Chapter IX of the Customs Act, 1962, an importer may import goods and, instead of clearing them immediately for home consumption, deposit them into a licensed public bonded warehouse (Section 57), private bonded warehouse (Section 58), or special warehouse (Section 58A) by executing a bond and filing a "Yellow Bill of Entry" (Into-Bond Bill of Entry) under Section 59.
While the goods are stored in the warehouse, the owner may sell the goods to another domestic party. Prior to February 1, 2019, tax authorities argued that such in-bond sales were liable to IGST under Section 7(2) of the IGST Act, while Customs levied IGST again when the goods were cleared for home consumption. Paragraph 8(a) of Schedule III definitively resolved this friction:
- The sale of warehoused goods by the original importer to the subsequent buyer while the goods remain in the bonded warehouse is neither a supply of goods nor services. No GST is charged on the in-bond sales invoice.
- When the ultimate buyer files an "Ex-Bond Bill of Entry" (Green Bill of Entry) under Section 68 to clear the goods for domestic use, Indian Customs assesses customs duties and levies IGST under Section 3(7) of the Customs Tariff Act, 1975 based on the higher of the transaction value between the original importer and subsequent buyer or the original imported value.
- The ultimate buyer pays the integrated tax at the customs barrier and claims 100% Input Tax Credit in GSTR-3B Table 4(A)(1) based on ICEGATE data.
3. Input Tax Credit (ITC) Reversal Immunity under Section 17(3) Explanation
One of the most consequential battlegrounds during GST audits of merchanting trade and high-sea sales entities was the demand for proportionate reversal of input tax credit. Under Section 17(2) of the CGST Act, where goods or services are used by a registered person partly for effecting taxable supplies and partly for effecting exempt supplies, the credit attributable to exempt supplies must be reversed in accordance with Rule 42 (inputs and input services) and Rule 43 (capital goods).
Audit officers routinely argued that since merchanting trade (Para 7) and high sea sales (Para 8) are non-taxable, they constitute "exempt supply" under Section 2(47), necessitating a massive reversal of common input tax credits incurred on office rent, director remuneration, SAP enterprise licenses, legal and audit fees, and telephone bills.
The Legislative Shield: Parliament enacted an explicit Explanation to Section 17(3) (via Section 9 of the CGST (Amendment) Act, 2018), which mandates:
"Explanation.—For the purposes of this sub-section, the expression 'value of exempt supply' shall not include the value of activities or transactions specified in Schedule III, except those specified in paragraph 5 of the said Schedule."
This statutory provision provides absolute immunity:
- Because Paragraphs 7, 8(a), and 8(b) are part of Schedule III and are not Paragraph 5 (sale of land and building), the turnover of Merchanting Trade, In-Bond Warehouse Sales, and High Sea Sales CANNOT be included in the value of exempt supplies.
- The ratio of exempt supplies to total turnover under Rule 42 remains unaffected by merchanting or high sea sales turnover.
- The taxpayer is entitled to retain 100% full input tax credit on all common administrative and operational overheads!
Taxpayers facing erroneous audit notices proposing Rule 42 reversals on merchanting turnover can generate automated statutory defense responses using the legal drafting engine of assureNotice.
4. Portal Reporting Architecture: GSTR-1, GSTR-3B & GSTR-9
To avoid triggering automated scrutiny algorithms on the GST Common Portal, transactions under Schedule III Paragraphs 7 and 8 must be reported in specific tables across monthly and annual returns:
| GST Return | Specific Table / Field | Reporting Description & Protocol | Common Practitioner Error to Avoid |
|---|---|---|---|
| Form GSTR-1 | Table 8 (Nil Rated, Exempted & Non-GST Outward Supplies) | Report aggregate turnover under line item "Non-GST Outward Supplies". Do NOT report in Table 6A (Exports), because goods do not cross customs barrier from India. | Reporting in Table 6A causes mismatch with ICEGATE shipping bills, generating automated notices. |
| Form GSTR-3B | Table 3.1(e) (Non-GST Outward Supplies) | Enter the gross value of Merchanting Trade, High Sea Sales, and Bonded Warehouse sales in the single turnover column. | Entering figures in Table 3.1(c) (Other Exempt Supplies) can distort the automated Rule 42 calculation. |
| Form GSTR-9 (Annual Return) | Table 5F (Non-GST supply including "no supply") | Disclose the annual cumulative turnover of all Schedule III Paragraph 7 & 8 transactions. | Omitting from Table 5F results in unreconciled variance in Table 5R and Form GSTR-9C reconciliation. |
| Form GSTR-9C (Reconciliation) | Table 7B (Value of Exempted, Nil Rated, Non-GST supplies) | Ensure audited financial statement turnover matches Table 5F of GSTR-9 with zero unexplained variance. | Failing to provide auditor's footnote citing Schedule III Paragraph 7/8 statutory exclusion. |
Tax controllers can automate monthly GSTR-1 vs GSTR-3B reconciliation and auto-populate Table 5F of GSTR-9 using assureTax.
5. Deep-Dive Practical Challenges & Worked Case Studies
Case Study 1: High Sea Sale of Industrial Chemicals with Price Escalation
Factual Matrix: Sterling Petrochem Ltd (Consignee) imported 1,000 MT of Orthoxylene from Singapore at a CIF value of $800,000 (exchange rate: ₹84/$, total CIF: ₹6,72,00,000). While the cargo vessel was sailing in the Indian Ocean en route to Kandla port, Sterling executed a High Sea Sale Agreement on stamp paper with Gujarat Polymers LLP, selling the consignment for $860,000 (₹7,22,40,000), earning a trading margin of ₹50,40,000. Sterling endorsed the original Bill of Lading in favor of Gujarat Polymers. Gujarat Polymers filed the Bill of Entry for Home Consumption at Kandla Customs.
Customs Duty & GST Computation:
| Duty / Tax Component | Statutory Basis & Valuation | Assessed Amount (INR) |
|---|---|---|
| Assessable Value for Customs | High Sea Sale invoice value paid by ultimate buyer (₹7,22,40,000) | ₹7,22,40,000 |
| Basic Customs Duty (BCD) @ 7.5% | 7.5% on Assessable Value | ₹54,18,000 |
| Social Welfare Surcharge (SWS) @ 10% | 10% on BCD (10% of ₹54,18,000) | ₹5,41,800 |
| Total Value for IGST Calculation | Assessable Value + BCD + SWS (₹7,22,40,000 + ₹54,18,000 + ₹5,41,800) | ₹7,81,99,800 |
| Integrated GST (IGST) @ 18% | 18% under Section 3(7) of Customs Tariff Act, 1975 | ₹1,40,75,964 |
| Total Customs & IGST Payable by Buyer | BCD + SWS + IGST | ₹2,00,35,764 |
| GST on Sterling's Invoice to Buyer | Exempt under Schedule III Paragraph 8(b) | ₹0 (Zero GST) |
Outcome: Sterling issues an invoice of ₹7,22,40,000 with zero GST, declaring Schedule III Para 8(b). Gujarat Polymers pays ₹1,40,75,964 IGST at the customs barrier and avails 100% ITC in GSTR-3B Table 4(A)(1). Sterling reports ₹7,22,40,000 in Table 8 of GSTR-1 as Non-GST supply with zero ITC reversal under Section 17(3).
Case Study 2: Merchanting Trade Transaction (Germany to Vietnam via India Trader)
Factual Matrix: Indo-Global Machinery Ltd, a Mumbai-based trading house, procured a precision laser cutting system from a manufacturer in Stuttgart, Germany for €500,000. Indo-Global sold the machinery to a manufacturing facility in Ho Chi Minh City, Vietnam for €580,000. The machinery was shipped directly from Hamburg to Da Nang port. Indo-Global received the inward remittance of €580,000 via its AD Bank in Mumbai and made the outward payment of €500,000 to the German supplier within 60 days. A local GST audit team issued a show-cause notice demanding 18% IGST on the trade margin of €80,000 (₹72,00,000), alleging an "intermediary service" rendered from India.
Statutory Defense & Legal Analysis:
- Principal-to-Principal Trade: Indo-Global acted as a principal buyer and principal seller on its own account, taking title to goods under international incoterms (FOB Hamburg / CIF Da Nang). It did not act as a broker or agent. Therefore, it does not fall under the definition of an "intermediary" under Section 2(13) of the IGST Act.
- Paragraph 7 Immunity: The physical goods moved from Germany (non-taxable territory) to Vietnam (non-taxable territory) without entering India. Under Schedule III Paragraph 7, this transaction is neither a supply of goods nor services.
- Jurisdiction: No GST can be levied on the transaction value or the gross margin. The notice was quashed relying on Schedule III Para 7 and CBIC Circular No. 3/1/2018-IGST.
Case Study 3: Customs Bonded Warehouse In-Bond Transfer & Ex-Bond Clearance
Factual Matrix: Dynamic Solar Infra Ltd imported high-efficiency photovoltaic solar cells worth CIF ₹5,00,00,000 at Nhava Sheva port. Rather than clearing for home consumption, Dynamic filed an Into-Bond Yellow Bill of Entry and transferred the cargo into a Public Customs Bonded Warehouse in Panvel. Three months later, Dynamic sold the entire warehoused consignment to a solar park developer, SunPower Energy Ltd, for ₹5,60,00,000. SunPower subsequently cleared the goods for home consumption by filing an Ex-Bond Green Bill of Entry.
Compliance Matrix:
- Transaction 1 (In-Bond Sale): The sale from Dynamic to SunPower occurred while the goods were in the bonded warehouse. Under Schedule III Paragraph 8(a), this transaction is neither a supply of goods nor services. Dynamic issues a commercial invoice of ₹5,60,00,000 with zero GST, endorsing the warehousing bond license.
- Transaction 2 (Ex-Bond Clearance): SunPower files the Ex-Bond Bill of Entry under Section 68 of the Customs Act. Customs determines assessable value as ₹5,60,00,000 (the price paid by SunPower), assessing BCD and levying IGST at 12% on ₹5,60,00,000 plus applicable customs duties.
- ITC Claim: SunPower pays the customs IGST and takes credit in GSTR-3B. Dynamic has zero GST liability and zero Rule 42 ITC reversal.
Case Study 4: Multi-Tier High Sea Sales Chain (Importer -> Buyer 1 -> Buyer 2)
Factual Matrix: An importer, Alpha Minerals Ltd, imported 50,000 MT of Indonesian steam coal at CIF ₹20,00,00,000. On the high seas, Alpha sold the shipment to Beta Coal Trading Pvt Ltd for ₹21,50,00,000. Two days later, while the vessel was still outside Indian port limits, Beta sold the consignment to Gamma Power Generation Ltd for ₹22,80,00,000. Gamma filed the Bill of Entry at Paradip port.
Verification of Multi-Tier Documents:
- Both sales (Alpha to Beta, and Beta to Gamma) took place prior to the filing of the Bill of Entry. Both qualify under Schedule III Paragraph 8(b).
- Alpha endorses the Bill of Lading to Beta; Beta makes a subsequent endorsement to Gamma.
- Gamma submits both High Sea Sale agreements and the double-endorsed Bill of Lading to Customs.
- Paradip Customs assesses customs duties and IGST on the final purchase price of ₹22,80,00,000.
- Neither Alpha nor Beta charges GST on their respective commercial invoices. Both report non-GST outward supplies in Table 8 of GSTR-1.
Case Study 5: The Common ITC Reversal Audit Dispute under Rule 42
Factual Matrix: Trident Global Trade LLP achieved an annual turnover of ₹150 Crore in FY 2024-25, consisting of: (i) Domestic taxable supply: ₹50 Crore (GST collected: ₹9 Crore); (ii) Merchanting trade turnover under Para 7: ₹75 Crore; (iii) High Sea Sales under Para 8(b): ₹25 Crore. Total input tax credit incurred on corporate head-office rent, software subscriptions, consulting fees, and audit fees stood at ₹36,00,000. During statutory tax audit, the auditor proposed reversing ₹24,00,000 of ITC (representing two-thirds of common credit attributable to the ₹100 Crore merchanting/HSS turnover) under Rule 42.
Mathematical Demonstration of Section 17(3) Immunity:
| Computation Head | Auditor's Erroneous Approach | Statutory Correct Approach (with Explanation) |
|---|---|---|
| Taxable Turnover (A) | ₹50,00,00,000 | ₹50,00,00,000 |
| Merchanting & HSS Turnover (B) | ₹100,00,00,000 (Treated as Exempt) | ₹100,00,00,000 (Schedule III non-taxable) |
| Total Turnover (A + B) | ₹150,00,00,000 | ₹150,00,00,000 |
| Value of "Exempt Supply" u/s 17(3) | ₹100,00,00,000 | ₹0 (Excluded by Explanation to Section 17(3)) |
| Ratio of Exempt to Total Turnover | 100 Cr / 150 Cr = 66.67% | 0 Cr / 150 Cr = 0.00% |
| Mandatory ITC Reversal under Rule 42 | ₹24,00,000 (66.67% of ₹36 Lakh) | ₹0 (Zero Reversal Required) |
| Allowable Common Input Tax Credit | ₹12,00,00,000 | ₹36,00,000 (Full 100% Credit Retained) |
Conclusion: The auditor's proposed disallowance is statutorily invalid. The firm retains the entire ₹36,00,000 credit.
Case Study 6: Treatment of Commercial Advances for High Sea Sales
Factual Matrix: Horizon Metals Ltd received an advance of ₹3,00,00,000 on February 10, 2025 from a domestic buyer towards an agreed High Sea Sale of prime steel coils expected to arrive in March 2025. The company's junior accountant issued a GST receipt voucher and paid 18% IGST (₹54,00,000) on the advance under Section 12(2) of the CGST Act.
Correction & Remedy:
- Under Notification No. 66/2017-Central Tax, all registered persons are exempt from paying GST on advances received for the supply of goods.
- More fundamentally, because High Sea Sales are governed by Schedule III Paragraph 8(b), the underlying transaction is not a taxable supply. No GST could ever apply to advances received for a non-taxable transaction!
- The tax was paid in error. Horizon must file an application for refund of tax paid under Section 54 of the CGST Act under the category "Excess payment of tax" supported by the High Sea Sale agreement and import invoices using assureTax.
Case Study 7: High Sea Sale Contract Cancellation & Demurrage Charges
Factual Matrix: Oceanic Agro Importers sold a consignment of Brazilian raw sugar on high seas to a domestic refiner. Due to a sudden market crash, the refiner refused to accept delivery and dishonored the agreement. The vessel arrived at Tuticorin port, incurring ₹45,00,000 in shipping line container demurrage. Oceanic stepped in, cancelled the high sea agreement, cleared the goods for home consumption, and filed a civil suit against the buyer.
Tax Treatment:
- Because the buyer backed out prior to customs clearance, the endorsement on the Bill of Lading was cancelled.
- Oceanic filed the Bill of Entry as the original importer, paying BCD and IGST on the original CIF value.
- Demurrage charges paid to the foreign shipping line before customs clearance form part of the customs valuation if included in freight; post-arrival domestic container detention charges are liable to 18% GST under forward charge or reverse charge depending on the shipping line's registration.
6. Step-by-Step Audit & Compliance Verification Checklist Table
Indirect tax audit teams and corporate controllers should execute the following 10-step audit program for all cross-border merchandise transactions:
| Step No. | Audit Procedure & Scope of Inquiry | Primary Source Documents | Risk Area & Verification Test | Workflow Integration |
|---|---|---|---|---|
| 1 | Transactional Classification Review: Categorize transactions into Merchanting Trade (Para 7), Bonded Warehouse (Para 8(a)), or High Sea Sales (Para 8(b)). | Commercial Contracts, Purchase Orders, Incoterms Specifications | Ensure transactions satisfy physical movement criteria outside domestic tariff area. | assurePractice Supply Chain Screener |
| 2 | High Sea Sale Agreement Execution Audit: Check dates of High Sea Sale Agreements against vessel arrival dates. | Notarized HSS Agreements, Stamp Duty Receipts, Port Entry (IGM) Dates | Verify agreement is executed before vessel arrival and before Bill of Entry filing. | assurePractice Contract Vault |
| 3 | Bill of Lading Endorsement Verification: Inspect original physical Bill of Lading for title endorsement to ultimate buyer. | Original Bill of Lading (front and back), Shipping Line Transfer Delivery Order | Confirm proper endorsement signature and seal of authorized signatory. | assureFinancials Document Auditor |
| 4 | Customs Valuation & Bill of Entry Check: Reconcile high sea sale contract price with Assessable Value in Bill of Entry. | Bill of Entry for Home Consumption, ICEGATE Assessment Sheet | Ensure customs duty and IGST are assessed on the full enhanced buyer price. | assureTax ICEGATE Reconciler |
| 5 | In-Bond Warehouse Yellow & Green Bill Audit: Match Yellow Bill of Entry (Into-Bond) with Green Bill of Entry (Ex-Bond). | Yellow Bill u/s 59, Warehouse Register, Green Bill u/s 68, Bond Form | Verify in-bond sales occur within bonded warehouse tenure before home clearance. | assureFinancials Inventory Module |
| 6 | FEMA Merchanting Trade (MTT) Compliance: Verify RBI 9-month overall cycle and 4-month foreign exchange outlay limits. | AD Bank MTT Dossier, Swift Messages (MT103), Inward BRC | Ensure import and export legs are routed through the same AD Category-I bank. | assureFinancials Forex Ledger |
| 7 | Section 17(3) ITC Reversal Verification: Verify that Schedule III Para 7 & 8 turnover is excluded from Rule 42 calculations. | Trial Balance, GSTR-3B Table 4(B) computations, Rule 42 Working Sheet | Confirm no common ITC on administrative expenses has been erroneously reversed. | assureTax ITC Optimizer |
| 8 | GSTR-1 Table 8 Reporting Audit: Cross-check commercial turnover against "Non-GST Outward Supplies" in GSTR-1. | Sales Register, GSTR-1 JSON Payload, Table 8 Summary | Ensure no merchanting or high sea sales turnover is misreported in Table 6A. | assureTax GSTR-1 Validator |
| 9 | GSTR-3B Table 3.1(e) Alignment: Verify monthly alignment between GSTR-1 Table 8 and GSTR-3B Table 3.1(e). | Monthly GSTR-3B Filed Copies, Tax Computation Ledger | Prevent automated mismatch notices between GSTR-1 and GSTR-3B. | assureTax Return Reconciler |
| 10 | GSTR-9 & GSTR-9C Annual Reconciliation: Report cumulative annual turnover in Table 5F of GSTR-9 and reconcile in 9C. | Audited Financial Statements, GSTR-9 Table 5F, GSTR-9C Table 7B | Include auditor's footnote citing Schedule III statutory immunity. | assureTax Annual Audit Suite |
7. Practitioner FAQs on High Sea Sales & Merchanting Trade under GST
- Is GST applicable on High Sea Sales in India?
No. Under Paragraph 8(b) of Schedule III to the CGST Act, 2017, High Sea Sales are treated as neither a supply of goods nor a supply of services. No GST is charged on the seller's commercial invoice. - Who pays IGST on a High Sea Sale transaction?
The ultimate high sea buyer pays Integrated GST (IGST) to Indian Customs under Section 3(7) of the Customs Tariff Act, 1975 at the time of filing the Bill of Entry for Home Consumption. - What is the assessable value for customs duty in a High Sea Sale?
Under Customs Circular No. 33/2017-Customs, the assessable value is the actual transaction value paid by the ultimate high sea buyer, which includes the original CIF value plus the high sea seller's profit margin. - Does an Indian merchant trader have to pay GST on Merchanting Trade Transactions (MTT)?
No. Under Paragraph 7 of Schedule III, the supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without entering India is non-taxable. - Is Input Tax Credit (ITC) reversal under Rule 42 required for Merchanting Trade or High Sea Sales?
No. Under the Explanation to Section 17(3) of the CGST Act, transactions covered by Schedule III (except Paragraph 5 real estate) are excluded from the definition of "exempt supply". No common ITC reversal is required. - Can an Indian company claim export refund / LUT benefits on Merchanting Trade?
No. Under Section 2(5) of the IGST Act, "export of goods" requires taking goods out of India to a place outside India. Since goods in MTT never enter or leave India, MTT does not qualify as an export, and no refund under Section 54 can be claimed. - Where should High Sea Sales turnover be reported in Form GSTR-1?
High Sea Sales turnover must be reported in Table 8 of Form GSTR-1 under the column "Non-GST Outward Supplies". - Where should Merchanting Trade turnover be reported in Form GSTR-3B?
It must be reported in Table 3.1(e) ("Non-GST outward supplies") of Form GSTR-3B. - What documents are mandatory to establish a valid High Sea Sale?
A stamped High Sea Sale Agreement dated prior to customs clearance, endorsed original Bill of Lading, invoice without GST, Certificate of Origin, and the Bill of Entry filed by the buyer. - What is the maximum time allowed by the RBI to complete a Merchanting Trade cycle?
Under RBI Master Directions, the entire merchanting trade cycle (outward procurement and inward sale realization) must be completed within nine (9) months. - How are sales of goods within a Customs Bonded Warehouse treated under GST?
Under Paragraph 8(a) of Schedule III, sales of warehoused goods before clearance for home consumption are non-taxable. IGST is collected by Customs when the ultimate buyer files the Ex-Bond Bill of Entry. - What happens if the High Sea Sale agreement is executed after the vessel arrives at the Indian port?
As long as the agreement is executed and the Bill of Lading is endorsed before the Bill of Entry for Home Consumption is filed and assessed, the transaction qualifies as a High Sea Sale under customs and GST law. - Can the high sea buyer claim Input Tax Credit of the IGST paid to Customs?
Yes. The high sea buyer can claim 100% ITC of the IGST paid on the Bill of Entry in Table 4(A)(1) of GSTR-3B, subject to Section 16 conditions and ICEGATE auto-population in GSTR-2B. - Is e-Invoicing mandatory for High Sea Sales or Merchanting Trade?
Because Schedule III transactions are neither supply of goods nor services, they are not supplies under Section 9. However, under Rule 48(4), if an entity is subject to e-invoicing, standard practice is to issue commercial invoices without IRN, or generate an IRN under category "Non-GST" if mandated by specific ERP configurations. - How should High Sea Sales be reported in the Annual Return (Form GSTR-9)?
High Sea Sales turnover must be disclosed in Table 5F ("Non-GST supply including 'no supply'") of Form GSTR-9. - How does assureOffice assist with cross-border supply chain compliance?
assureTax automatically reconciles ICEGATE Bills of Entry with GSTR-2B, verifies Section 17(3) ITC immunity calculations, and pre-populates Table 8 of GSTR-1 and Table 5F of GSTR-9 seamlessly.