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On the high seas

S. Murlidharan

IN THE context of taxation, I often come across the term `high seas sale' being bandied about. What is it all about? Is it a tax avoidance technique? -- Joseph Victor, NOIDA

`High seas sale' perhaps conjures up visions of something done hush-hush in the placid waters of ocean, a la our films. Which is why you have instinctively raised doubts about its bona fides and legality. Let me assure you, `high seas sale' is a perfect ly legal transaction though the term might have a sinister ring to it.

Under the Central Sales Tax (CST) Act, sales tax is payable when goods are sold inter-State. Suppose a producer in Delhi needs a raw material which, if imported, would be more economical for him. But he cannot directly import, as the volumes simply do no t justify such direct effort. He, therefore, decides to buy them from trading houses in this country whose main business is import/export.

Suppose further that the trading house is in Mumbai where it normally unloads the goods imported. The Delhi trader now will have to pay CST, as the transaction is evidently an inter-State sale. You may note that the trading house would have already paid the import duty on the same goods. `High seas sale' enables one to avoid the second dose of taxation. In the example on hand, the Delhi party could have approached the trading house much before the goods reached the Mumbai port. In other words, the tradi ng house could have sold the goods to the Delhi party while the goods were in the `high seas'. This is possible by suitable endorsement to the document of title to the goods.

The goods having been sold in high seas, the Delhi party becomes the importer. It now has to pay the Customs duty which it would have paid in any case even had it bought the goods from the trading house after they had landed at Mumbai, as the trading hou se would have passed on the duty liability to it. But now it does not have to pay the CST as the movement of goods from Mumbai to Delhi is not on account of inter-State sale but on account of stock transfer, that is, from one location to another of the s ame person without involving any sale. The rationale behind the whole exercise, therefore, is to knock of the sales tax liability. The technique of high seas sale comes handy even where both the trading house and the manufacturer are located in the same State because what is successfully and legally avoided in this case is the local sales tax which often is much steeper than the rate of CST.

Property tax

I HAVE a residential house. It is under my own occupation. I am a salaried man. I pay property tax to the municipal authorities in respect of my house evidently out of my salary income as I have no other source of income. Since I pay this tax out of my s alary income, I demanded that the same be allowed as a deduction from my taxable salary. But my assessing officer (AO) says the law does not permit this. Please advise.-- S. V. Shanker, Chennai

>I am afraid what your AO says is right though in all fairness and equity your contention ought to be accepted. But one has to enforce the law as it stands. Till the assessment year (AY) 2001-2002 property tax paid to the municipality was deductible in computing the `annual value' only if the said property was in the occupation of a tenant. In other words, till that year the deductibility of property tax was linked to the question of whether the property was let out or not. If it was let out, it was de ductible from the rental income or the fair rent whichever was higher.

From the AY 2002-2003, the deductibility of municipal taxes has been delinked from the question of whether the property has been let out or not. But this is not going to help you in any way because even now the deduction of municipal tax is not from the annual value but in determining the annual value. In your case, this residential house is tax-free in that it is self-occupied and presumably you have not claimed the exemption for self-occupation in respect of any other house.

As the `annual value' is deemed to be nil in respect of this house, there is no scope for deducting the municipal tax in determining the annual value. You cannot deduct this from the nil annual value so as to report a loss from house property for set off against your salary income nor can you claim the property tax as a deduction from your salary income. In the event, you -- in common with thousands of other taxpayers -- do not get any income-tax benefit in respect of the property tax paid on the self-o ccupied residential house, though, as conceded earlier, in all fairness you deserve it.

Proxy parley

I AND several other persons in my neighbourhood have invested in the equity shares of a public company which has not paid dividend ever since its inception some 10 years back. We want to ask several questions of the management. We have an advocate friend who not only has the gift of the gab but also feels strongly about good corporate governance. Unfortunately, he is not a shareholder of this company. I am told he may be appointed as a proxy but he will not be allowed to speak. Now, the very purpose of appointing him as our proxy is that he would be able to better articulate our views. What shall we do? -- Raghav Reddy, Secunderabad

It is true that Section 176 of the Companies Act prohibits a proxy from speaking at the meeting. And unless the articles of association of this company permits, he cannot vote on show of hands. In the event, the only utility of appointing a proxy is that he can demand a poll and also vote therein.

In the none-too-distant past, proxies were sent to lap up the gifts offered by companies at general meetings but with the Department of Company Affairs (DCA) clamping down on gifts at general meetings, proxies have lost utility on this score. But a momen t's reflection will show that the bar on speaking by proxy can be easily overcome. The gameplan lies in asking your advocate friend to become a shareholder in this company by acquiring shares (if the shares are in the demat mode, even a single share can be acquired) in the company. Now he will be speaking not in the capacity of a proxy but in the capacity of a shareholder. Nobody can stop him.

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