Offshore supplies on CIF basis to Indian ports not taxable, SIPL not permanent establishment

ITAT Mumbai ruled in favor of the assessee regarding taxability of offshore supplies made on CIF basis to Indian ports. The tribunal held that SIPL was not the assessee's permanent establishment in India, rejecting revenue's arguments for taxation. The assessee was assessed individually rather than as an Association of Persons with consortium partners. Following consistent decisions in earlier assessment years 2018-19, 2019-20, and 2020-21, the tribunal directed deletion of impugned additions for AY 2021-22, maintaining that profits from such supplies are not taxable in India.

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Issues Involved:

1. Taxability of receipts from offshore supplies of escalators and elevators in India.
2. Consideration of net loss incurred by the assessee on offshore supplies.
3. Treatment of the consortium as an Association of Persons (AOP) for tax purposes.

Issue-wise Detailed Analysis:

1. Taxability of Receipts from Offshore Supplies:

The primary issue was whether the receipts from offshore supplies of escalators and elevators to Delhi Metro Rail Corporation Limited (DMRCL) and Maharashtra Metro Rail Corporation Limited (MMRCL) are taxable in India. The assessee, a non-resident company incorporated in China, argued that the supplies were made on a Cost, Insurance, and Freight (CIF) basis, with the title and risk passing outside India, thus not taxable under Article 7 of the Indo-China Double Taxation Avoidance Agreement (DTAA) due to the absence of a Permanent Establishment (PE) in India. The Assessing Officer (AO), however, contended that the income was taxable under Section 9(1)(i) of the Income Tax Act, considering the contract as composite and indivisible, with significant onshore elements, and treated the consortium with Schindler India Private Limited (SIPL) as an AOP, thus denying DTAA benefits. The Dispute Resolution Panel (DRP) upheld the AO's view, emphasizing the indivisibility of the contract and the artificial segregation to avoid tax. The Tribunal, however, relying on its previous rulings in the assessee's favor for earlier years, held that the offshore supplies were not taxable in India, as the contract delineated separate responsibilities for the consortium members, and the title passed outside India.

2. Consideration of Net Loss Incurred:

The second issue was the AO's addition of 5% of the total receipts as taxable income, ignoring the net loss claimed by the assessee on the offshore supply of escalators and elevators. The assessee argued that it had incurred a net loss of 2.38% on the supplies and had requested additional time to submit an India-specific Audited Profitability Statement. The AO's reliance on Rule 10 of the Income-tax Rules, 1962, to estimate profits was challenged by the assessee, which argued that the AO's presumptions were baseless and not supported by evidence. The Tribunal, following its decision on the first issue, deemed the ground regarding net loss consideration as academic and dismissed it as infructuous, given the offshore supplies were not taxable.

3. Treatment as an Association of Persons (AOP):

The AO treated the consortium of the assessee and SIPL as an AOP, arguing that the contract with DMRCL and MMRCL was composite and indivisible, thus taxable in India. The DRP supported this view, suggesting the arrangement aimed to avoid tax liabilities. The assessee contended that SIPL was not its permanent establishment and that the consortium was merely for administrative convenience, with each party bearing its own profits and losses. The Tribunal found the AO's approach inconsistent, as no separate assessment was made for the AOP, and upheld the assessee's argument, emphasizing the distinct scope of work and responsibilities outlined in the Memorandum of Understanding (MOU) between the consortium members. Consequently, the Tribunal directed the deletion of additions made on this basis.

In conclusion, the Tribunal ruled in favor of the assessee, directing the deletion of additions made by the AO for the assessment year 2021-22, consistent with its earlier decisions for previous years, and dismissed the grounds related to net loss and AOP treatment as infructuous.

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