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Facts
The assessee, a non-resident Chinese company, filed its return of income for AY 2020-21. The Assessing Officer (AO) made an addition of Rs. 2,30,21,640 to the assessee's total income, representing receipts from offshore supplies of escalators and elevators to Indian entities DMRCL and MMRCL. The assessee argued that these were offshore supplies and not taxable in India as there was no permanent establishment.
Held
The Tribunal, following its own precedent in similar earlier cases for the same assessee, held that the income earned from offshore supplies of escalators and elevators to DMRCL and MMRCL is not taxable in India. The Tribunal noted that the title in the goods passed at the port of shipment outside India, and the transaction was on a CIF basis, indicating the completion of the sale outside India.
Key Issues
Whether income from offshore supply of escalators and elevators to Indian entities is taxable in India, considering the absence of a permanent establishment and the nature of the transaction (CIF basis).
Sections Cited
143(3), 144C(13), 144C(5), 9(1)(1)
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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI AMIT SHUKLA & SHRI AMARJIT SINGH,
आदेश / O R D E R Per Amarjit Singh (AM): This appeal filed by the assessee is directed against the order passed by the ACIT International Taxation, Circle 4(2)(1) Mumbai vide order u/s 143(3) r.w.s 144C(13) on 24.07.2023 in pursuance to directions issued by the Dispute Resolution Panel u/s 144C(5) of the Act vide order dated 28.06.2023 for A.Y. 2020-21. The assessee has raised the following grounds before us:
P a g e | Schindler China Elevator Company Ltd. Vs. The ACIT, IT, Circle 4(2)(1) “Ground No. 1: Addition of receipt emanating from offshore supplies of escalators and elevators to the total income of the Appellant:
1. 1. On the facts and circumstances of the case and in law, the Ld. AO erred in adding a sum of Rs.2,30,21,640/- out of receipts emanating from offshore supply of escalators and elevators to the total income of the Appellant.
2. The AO further inter alia erred in observing or commenting that the Appellant and SIPL constitute an AOP 3. In the absence of Permanent Establishment in India, under Article 7 of the India-China Double Taxation Avoidance Agreement ("DTAA") and in the absence of any business connection as envisaged u/s 9(1)(1) of the Act, the Appellant prays that the addition made by AO on aforesaid offshore supplies be deleted. Without Prejudice to above Ground No. 2: Non-consideration of Net Loss incurred by the Appellant on offshore supply of escalators and elevators to DMRCL and MMRCL: 1. On the facts and circumstances of the case and in law, the Ld. AO erred in making an addition of Rs. 2,30,21,640/- to the total income of the Appellant in India ignoring the act that the Appellant had incurred net loss on the offshore supply of escalators and elevators to DMRCL and MMRCL 2. The Appellant prays that the Ld. AO be directed to delete the addition of Rs.2,30,21,640/- or appropriately reduce the same, after considering the facts and loss, if any, incurred by the Appellant in respect of the above transaction. Ground No. 3: Non-receipt of refund granted by the AO: 1. On the facts and circumstances of the case, the Ld. AO erred in not issuing refund of Rs.6,19,67,772/- (including interest of Rs.43,23,330/-) as determined in the intimation issued u/s 143(1) of the Act.
2. The Appellants prays that the Ld. AO be directed to issue the refund of Rs.6,19,67,772/- General: 1. The Appellant craves leave to add, to amend, to alter and/ or to delete all or any of the above grounds of appeal.”
Fact in brief is that the assessee is a non-resident company incorporated in China and engaged in the business of supply of elevators and escalators which includes designs and manufacturing. The assessee is a part of Schindler Group of companies. The return of income for the assessment year 2020-21 was filed by the assessee on 15.02.2021 showing income of Rs.23,39,460/-. The return was subject to scrutiny assessment and notice u/s 143(2) of the Act was issued on P a g e | Schindler China Elevator Company Ltd. Vs. The ACIT, IT, Circle 4(2)(1) 29.06.2021. During the year under consideration the assessee has shown receipts from Delhi Metro Rail Corporation Limited (DMRCL) and Maharashtra Metro Rail Corporation Limited (MMRCL). The assessee was having contract with DMRCLAE-05R for Rs.50.57 crore for ‘Design, Manufacturing, Supply, Installation, Testing and Commissioning (including integrated testing and commissioning) of [escalators etc. The assessee was also having contract with MMRCL for Rs. 105.93 crores for Design, Manufacturing, Supply, Installation, Testing and Commissioning of Heavy Duty Machine Room etc. During the year under consideration the assessee has raised invoices amounting to Rs.39,99,47,528/- against MMRCL and Rs.6,04,85,280/- against DMRCL and both the receipts have been considered as non-taxable by the assessee. On query, the assessee explained that during the year it had supplied escalator to Delhi Metro Rail Corporation Limited (DMRCL) and Maharashtra Metro Rail Corporation Ltd. (MMRCL), therefore, the payment made by them to the assessee will be regarded as supply of goods and will be taxable as business income under Article 7 of the Indo-China DTAA. It was further submitted that according to Article 7 of the DTAA, only those profits which are attributable to permanent establishment of the enterprise in India are chargeable to tax in India. In absence of permanent establishment no profit can be said to be chargeable to tax in India. The assessee claimed that it did not have any permanent establishment in India, therefore, no part of the income earned by the assessee can be taxed in India by virtue of the provisions of Article 7 of DTAA. However, the assessing officer has not agreed with the submission of the assessee. He was of the view that income of the assessee was earned from India in respect of a composite contract having significant on-shore elements and the assessee had entered into an arrangement with its Indian Associate enterprise Schindler India Private Limited (SIPL) as its associate enterprise for P a g e | Schindler China Elevator Company Ltd. Vs. The ACIT, IT, Circle 4(2)(1) fulfilment of its obligation under the contract. AO further stated that assessee was having regular income from India from the contracts as well as the assessee has a clear cut business connection in India. Accordingly, a sum of Rs.2,30,21,640/- being 5% of total receipt of Rs.46,04,32,808/- was taxable as income from composite contract liable for taxation in India @ 40% (plus cess/surcharge).
The assessee filed objection before the Dispute Resolution Panel on 21.10.2022. The DRP vide order u/s 144C(5) of the Income Tax 1961 dated 28.06.2023 has rejected the objection of the assessee. In pursuance to the directions issued by the DRP, the AO has passed final assessment order u/s 143(3) r.w.s 144C(13) of the Act on 24.07.2023 after making addition of Rs.23,02,160/- as income of the assessee from composite contract as discussed above in this order.
During the course of appellate proceedings before us the ld. Counsel submitted that this is a recurring issue and identical issue on similar facts has been adjudicated by the coordinate bench of the ITAT in the case of the assessee itself vide for assessment year 2018-19 and vide ITA No. 2483/Mum/2022 for assessment year 2019-20 on 02.03.2023 in favour of the assessee. On the other hand, the ld. D.R could not controvert this undisputed fact that the issue in appeal is covered by the decision of the coordinate bench as referred above by the ld. Counsel.
Heard both the sides and perused the material on record. During the year under consideration the assessee was in receipt of Rs.46,04,32,808/- for design manufacture and supply of escalators/elevators to Delhi Metro Rail Corporation Ltd. and to Maharashtra metro Rail Corporation Ltd. (DMRCL) and (MMRCL). The assessee has claimed that the aforesaid receipt was not taxable in India on the ground that they pertained to off-shore supplies of equipment to P a g e | Schindler China Elevator Company Ltd. Vs. The ACIT, IT, Circle 4(2)(1) DMRCL and MMRCL. However, the AO has taken a view that the assessee entered into an arrangement with its Indian Associate Enterprise Schindler India Pvt. Ltd. (SIPL) for the fulfilment of its obligation under the contract and income of the assessee was earned from India in respect of composite contract. The assessing officer was of the view that the contract with DMRCL and MMRCL was composite and indivisible and could not be split up into supply and commissioning parts as stated by the assessee. The AO also stated that the said consortium was liable to be assessed as an Associate of Person (AOP) and the income from the transaction was chargeable to tax in India, as no benefit of India-China DTAA could be granted to the association. The assessee has referred the memorandum of understanding between the assessee and Schindler India Pvt. Ltd. (SIPL) its associate concern and explained that the role of the assessee was only confined to design, manufacture and supply of escalator and elevator. It was also explained that its associate enterprise SIPL was engaged for clearance of material after reaching at the port, its transportation, installation, testing, commissioning and maintenance of escalators/elevators. During the course of appellate proceedings before us the ld. Counsel submitted that similar issue on identical facts has been adjudicated by the coordinate bench of the ITAT for the earlier years as referred above. With the assistance of ld. Representative we have perused the decision of ITAT in the case of Schindler China Elevator Company Ltd. Vs. ACIT, IT, Circle 4(2)(1) vide ITA No. 1679/Mum/2022. The relevant operating part of the decision is reproduced as under: “10. We have considered the rival submissions and perused the material available on record. The assessee is a tax resident of China. The assessee along with SIPL formed a consortium for purpose of bidding to the tender floated by DMRCL for the design, manufacturing, supply, installation, testing, and commissioning of escalators for Noida-Greater Noida MRTS project. Similarly, the aforesaid consortium bid for the tender floated by MMRCL for the design, manufacturing, supply, installation, testing, and commissioning of heavy-duty machine room less elevators and escalators for NMRCL Project. The bids were P a g e | Schindler China Elevator Company Ltd. Vs. The ACIT, IT, Circle 4(2)(1) accepted by the DMRCL and MMRCL and letters of acceptance were issued. Subsequently, separate contract agreements were signed between the consortium and DMRCL, and the consortium and MMRCL. It is pertinent to note that the MOU entered into between the assessee and SIPL was made part of both the aforesaid contract agreements. From the perusal of the contract agreements, forming part of the paper book, we find that the consortium agreed to perform efficiently and faithfully all of the work under the agreement. It was also agreed that the consortium shall be jointly and severally liable for undertaking the contracts. Responsibility of each member of the consortium in respect of the contract is provided in the MOU entered between the assessee and SIPL. From the perusal of the MOU in respect of DMRCL, we find that the parties jointly bid for the project as a consortium with each party responsible for its own scope of work. It was further agreed that both parties shall be jointly and severally responsible for completing the project. As per Article 3 of the MOU, the assessee agreed to undertake the design, manufacturing, and supply of escalators, while SIPL‟s scope of work included clearance of material after reaching at port and transportation to the site as per contract conditions, installation, testing, commissioning and maintenance of escalators. We find similar terms in MOU in respect of contract with MMRCL. Firstly, from the above, it is evident that the scope of work of each of the parties in the consortium is separately defined and since the MOU forms part of the contract agreement, it cannot be denied that the same was not known to the DMRCL/MMRCL. Secondly, the work of SIPL can only start after the goods reach the port of destination. In Article 2 of the MOU, the parties specify the percentage of effort and time that is expected to be spent by them on the project. In this Article, it has been clarified that the said percentage does not, in any way, imply the share of profit or losses, and each party will bear its own losses and retain its own profits separately based on the contract price and invoices raised. In the MOU, it is also mentioned that separate invoices would be raised by each party on the DMRCL for the work performed by them under the contract and the consideration shall be paid by the DMRCL as per the terms of the contract and quoted price in respective currency to the concerned consortium member raising such an invoice. From clause 4 of the contract agreement entered with DMRCL, we find that the same mentions contract price of Rs.15,38,93,850.16 and USD 37,60,376. As per the assessee, the consideration in Indian currency was payable to SIPL and the consideration in USD was payable to the assessee.
In big projects, it is a common practice that two or more companies with different expertise come together to form a consortium to bid for the project and jointly agree to undertake the project. In such a case, it cannot be said that the roles and responsibilities of one of the members can be performed by the other member. The purpose of the consortium is only to jointly bid for the project and win the mandate to perform the contract. Thereafter, each party is responsible for its own scope of work as agreed amongst them by way of MOU. The joint agreement can at best be for the purpose of completion of the contract for which the joint bid was made by the consortium. Due to the different expertise of the consortium members, the roles and responsibilities are also clearly demarcated, at the outset, at the time of bidding for the contract. Since multiple parties form part of the consortium, the members may choose a lead member amongst them for the purpose of representing the parties in such a contract and the same is only for administrative convenience and coordination. Therefore, for the purpose of taxation, it is relevant to take into consideration the roles/functions performed by each member of the consortium.
P a g e | Schindler China Elevator Company Ltd. Vs. The ACIT, IT, Circle 4(2)(1)
As per the assessee, the consideration received by SIPL in respect of its scope of work, i.e., clearance of material after reaching at port and transportation to the site as per contract conditions, installation, testing, commissioning, and maintenance of escalators, has already been offered for taxation in India. The Revenue has not brought any material to controvert the aforesaid submission of the assessee. In the present case, the consideration received from DMRCL and MMRCL was claimed as not taxable by the assessee on the basis that the same is in respect of the offshore supply of elevators and escalators. The distinct scope of work and separate responsibility of each member of the consortium, in the present case, was also accepted by DMRCL and MMRCL. The same is evident from the fact that the MOU forms part of the contract agreement and DMRCL/MMRCL also agreed to pay separate considerations and also in different currencies to both parties. As per the Revenue, since the contract with DMRCL/MMRCL is a composite contract with part of the contract being performed in India, therefore, the consideration received by the assessee is taxable in India. Though, the Assessing Officer vide draft assessment order treated the consortium as an AOP under the Act, however, proceeded to make the addition only in the hands of the assessee. The learned DRP did not go into the question of AOP and upheld the addition in the hands of the assessee on a substantive basis. On one hand, the Revenue treated the agreement with DMRCL and MMRCL as a composite contract, while on the other hand, it is an admitted fact that no separate assessment has been made in the hands of the consortium as an AOP. In coming to the aforesaid conclusion, the Revenue has placed heavy reliance on the scope of the contract, which is „design, manufacturing, supply, installing, testing, commissioning‟. However, we are of the considered view that the Revenue did not consider the other parts of the contract agreement with DMRCL and MMRCL, which clearly demarcates the description of work, the consideration, and the currency in which the same is to be paid to each of the consortium members. In Arosan Enterprises Ltd. v. UOI: (1999) 9 SCC 449, the Hon’ble Supreme Court held that the Agreement must be read as a whole with corresponding obligations of the parties so as to ascertain the true intent of the parties.
As per the assessee, the title in the goods i.e. escalators and elevators was transferred to DRMCL and MMRPL outside India and payment thereof was also received outside India, therefore the transaction cannot be taxed in India. It is the plea of the assessee that the goods were transferred on a CIF basis. In this regard, reference was made to the copy of sample invoices forming part of the paper book from pages no.239-243. From the perusal of the aforesaid invoices, it is evident that the same are in the name of DMRCL and MMRCL and the transaction is on a CIF basis. In the draft assessment order, it has been held that since the offshore supplies have been made by the assessee on an Indian port of disembarkation basis, therefore the delivery of the goods is to be taken as having been made in India. Thus, it has been held that the profit made by the assessee on a CIF basis is liable to be taxed in India on the basis that the sale is completed in India. We find that in a case, wherein the assessee made an offshore supply of equipment on a CIF basis at an Indian port, the coordinate bench of the Tribunal in JCIT vs Siemens Aktiengesellschaft, [2009] 34 SOT 16 (Mumbai) observed as under: “12. From the above clause of the contract it is patent that BPL acquired the absolute right in the property when it was delivered to the carrier at the port of shipment i.e., in Germany. The reference of the learned D.R.
P a g e | Schindler China Elevator Company Ltd. Vs. The ACIT, IT, Circle 4(2)(1) to the invoice for depicting that it was on CIF basis at Bombay and hence the right of the buyer in the property should be construed as getting vested in Bombay, is not acceptable. The INCO Terms, 1990 explains various relevant terms. Page 755 of it mentions that :— "'Cost, Insurance and Freight' means that the seller has the same obligation as under CFR but with the addition that he has to procure marine insurance against the buyer's risk of loss of or damage to the goods during the carriage. The seller contracts for insurance and pays the insurance premium.
The buyer should note that under the CIF term the seller is only required to obtain insurance on minimum coverage. The CIF term requires the seller to clear the goods for export. CFR, in turn, has been explained as "Cost and Freight" means that the seller must pay the cost and freight necessary to bring the goods to the named port of destination but the risk of losses of or damage to the goods, as well as any additional costs due to events occurring after the time the goods have been delivered on board the vessel, is transferred from the seller to the buyer when the goods pass the ship's rail in the port of shipment. It has further been explained that in the case of CIF the seller must 'deliver the goods on board the vessel at the port of shipment on the date or within the period stipulated'. Clause A.5 also states that "Subject to the provisions of clause B.5, bear all risks of loss of or damage to the goods until such time as they have passed the ship's rail at the port of shipment." Clause B.5 in turn states that the buyer must 'bear all risks of loss of or damage to the goods from the time they have passed the ship's rail at the named port of shipment'."
14.As of the above it follows that in the case of CIF, the property in goods passes on to the buyer at the port of shipment. Though the Cost, Insurance and Freight etc. is met by the seller but the property in the goods gets transferred to the buyer at the port of shipment. The buyer incurs all risks of loss of or damage to the goods from the port of shipment. Therefore, it can be precisely seen that when the assessee made offshore supply of equipment to BPL on CIF Bombay basis against the stated consideration, the property in the equipment passed on to BPL on the port of Germany itself. It is trite law that income accrues at the place where the title to goods passes to the buyers on the payment of price. Our view is fortified by the judgment of the Hon'ble Supreme Court in Seth Pushalal Mansighka (P.) Ltd. v. CIT [1967] 66 ITR 159. As it is the case of offshore supply of equipment, it is axiomatic that this transaction got completed outside India. Thus no income accrued to the assessee in India towards this transaction.
Therefore, in the case of CIF, the property in goods passes on to the buyer at the port of shipment. Though the Cost, Insurance, and Freight, etc., are met by the seller but the property in the goods gets transferred to the buyer at the port of shipment. The buyer incurs all risks of loss of or damage to the goods from the port of shipment. Therefore, the title in property in the goods shipped by the assessee in the foreign port was transferred at the port of shipment itself.
P a g e | Schindler China Elevator Company Ltd. Vs. The ACIT, IT, Circle 4(2)(1) In Ishikawajma-Harima Heavy Industries Ltd. vs DIT, [2007] 288 ITR 408 (SC), the Hon’ble Supreme Court held that only such part of the income, as is attributable to the operations carried out in India can be taxed in India. It was further held that since all parts of the transactions in question, i.e. the transfer of property in goods as well as the payment, were carried out outside the Indian soil, the transaction cannot be taxed in India. Since, in the present case, the assessee did not carry out any operations in India in respect of its scope of work, therefore, we are of the considered opinion that the income earned by the assessee from the offshore supply of escalators and elevators to DMRCL and MMRCL is not taxable in India. Accordingly, we direct the Assessing Officer to delete the addition made in the hands of the assessee. As a result, ground No. 1 raised in assessee’s appeal is allowed.
In view of aforesaid findings, ground No. 2, raised in assessee‟s appeal on without prejudice basis is rendered academic and therefore, is dismissed as infructuous.
In the result, the appeal by the assessee is partly allowed.”