The assessee is a wholly owned Indian subsidiary of Tractebel
S.A., Belgium ('TSA'). In India, TSA had entered into Joint
Venture ('JV') with Jindal Thermal Power Company Ltd
('Jindal group'). Further, TSA had also entered into two
agreements with the said JV for providing engineering assistance
and legal & financial assistance.
During the course of completion of project undertaken by the JV,
a dispute arose between partners of the JV i.e., TSA and Jindal
group. The warring JV partners reached a settlement whereby Jindal
group agreed to buyout the shares held by TSA in the JV and TSA
agreed to forgo the payments due to them on account of engineering
assistance and legal & financial assistance provided to the
The assessee was appointed to act as an intermediary for the
sale of shares held by TSA to Jindal group. As per the settlement
agreement, the assessee bought shares from TSA and sold them to
various companies identified by Jindal group. In its return of
income, the assessee declared long term capital gains from the
acquisition and sale of shares of the JV and claimed exemption
under section 10(23G) of the Act. The main contention of the
assessee was that since shares were acquired from parent company,
the cost of acquisition and holding period of shares would be taken
from the parent company (TSA in this case).
The Assessing Officer and CIT(A) did not agree with the
contention of the assessee and denied the assessee the benefits of
long term capital gain and exemption under section 10(23G) of the
Act. Further, the CIT(A) held that out of the total capital gain, a
part should be taxable as fees for technical services in lieu of
the amount forgone by TSA and such sum should be protectively
assessed in the hands of the assessee.
Aggrieved, the assessee filed an appeal with the Tribunal. After
hearing the rival contentions, the Tribunal observed that the
assessee merely played a limited role of an intermediary in the
entire transaction. At no point of time the assessee stood invested
in the said shares. This was also apparent from the fact that some
of the shares were sold immediately i.e., on the same date as per
the settlement agreement. According to the Tribunal, since the
assessee never acquired the shares as investment, the surplus
arising from transfer of the shares could not be considered as
capital gain. The Tribunal concluded that the surplus is nothing
but earning from an adventure in the nature of trade and should be
taxable as business profits. Thus, the matter was remanded back to
the Assessing Officer for a fresh look.
Since the matter has been remanded back to the Assessing Officer
it has not yet gained any finality. However, this decision has
rekindled the age old debate of the head under which surplus on
sale of shares should be taxable. Currently, there are no clear
guidelines in the Indian tax laws and even the Income Tax
Simplification Committee, headed by Justice R.V. Easwer,
recommended for clear guidance on this issue.
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Cummins Inc. is a foreign company, rendering services in respect of desktop/laptop software license and internet mail facilities to its Indian associated enterprises, i.e. CIL and CSSL which were paying IT charges provided by the taxpayer.
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