1. A Show Cause Notice bearing reference no. XXXXXXXX dated XX September 2023 (“SCN dated XX June 2024”) was issued to the Noticee by your good office (“Ld. Proper Officer”) proposing GST demand of Rs. XXXX/- (CGST and SGST each) along with interest amounting to Rs. XXXX/- (CGST and SGST each) under section 50 of the CGST Act,2017 (“the Act”) and penalty as applicable under Section 73 of the Act. on the sole allegation that while scrutinizing the annual return and financial statements filed by the Noticee for the period 20XX-20XX, it has been alleged by the Ld. Proper Officer that The Noticee has income classified as ‘High Sea Sales', which is exempt from tax. However, the Noticee failed to reverse the Input Tax Credit (ITC) as required under Rule 42/43 in relation to this exempt income.

2. In response to the allegation as set out in the SCN dated XX June 2024, the Noticee submits that the findings of the concerned authority are not in line with the legal matrix and factual positioning of the case.

 NOTICEE’S SUBMISSIONS

At the outset, the Noticee submits that the allegation made in SCN dated XX June 2024 is incorrect and unsustainable based on the following grounds and submissions which are independent and without prejudice to each other.

1. High sea sale is a sale transaction where the buyer of the goods sells the goods to another person while the goods are still in transit on the high seas. This means that the sale happens after the goods have been dispatched from the port of loading and before they reach the port of discharge, where they are cleared for customs. 

2. Further, High sea sale transactions are covered under clause (b) of paragraph 8 of Schedule III (Activities or transactions which shall be treated neither as a supply of goods nor a supply of services) of CGST Act, 2017, which says “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”. This entry is not taxable under the GST.

3. Further, as per Section 17(2) of CGST Act, ITC is restricted to taxable supplies only and any proportional ITC attributable to exempt supplies shall not be allowed. The relevant extract of section 17 (2) are as follows:

“Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.”

4. Now, as per explanation of section 17 (3) of CGST Act, 2017, High sea sale transactions are excluded from the value of exempt supply for ITC reversal calculation. The relevant extract are as follows:

 Explanation of Section 17 (3) of CGST Act-

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,-

(i) the value of activities or transactions specified in paragraph 5 of the said schedule; and

(ii) The value of such activities or transactions as may be prescribed in respect of clause (a) of paragraph 8 of the said Schedule.]

5. Based on the aforementioned point, it is evident that transactions falling under Schedule III of CGST Act are excluded from the ITC reversal process. The exemption of supplies for the ITC reversal includes only the sale of land, sale of building subject to clause (b) of paragraph 5 of Schedule II and the supply of warehoused goods to any person before clearance for home consumption as mentioned in the Schedule III of CGST Act. Therefore, all activities of Schedule III other than mentioned above are excluded from exempt supply for ITC reversal.

Conclusion

6. Therefore, the Noticee is not liable to reverse the common ITC on High sea sale transactions.

7. Accordingly, demand amounting to Rs. XXXX/- proposed vide Notice dated XX June 2024 upon the Noticee on this issue should be set aside as the same is not tenable in eyes of law. It is kindly submitted before the office of your goodself to drop the proceedings upon the Noticee.