ITAT Mumbai: Income Earned from Offshore Supply of Escalators and Elevators is not Taxable in India

ITAT Mumbai: Income Earned from Offshore Supply of Escalators and Elevators is not Taxable in India

The Income Tax Appellate Tribunal (ITAT), Mumbai by its two-member bench of G.S. Pannu (President) and Sandeep Singh Karhail (Judicial Member) observed that income earned by the assessee from the offshore supply of escalators and elevators is not taxable in India.

In the present case the appellant/assessee- Schindler China Elevator Company Ltd. is a non-resident company incorporated in China and is engaged in the business of supplying elevators and escalators, which includes design and manufacturing. The assessee is a part of the Schindler Group of Companies.

According to the assessee, the title to the goods, i.e., escalators and elevators, were transferred to DRMCL and MMRPL outside India, and payment was also received outside India. Therefore, the transaction cannot be taxed in India. The assessee pleaded that the goods were transferred on a Cost, Insurance and Freight (CIF) basis.

Accordingly, the Assessing Officer proceeded to tax 5% of the total receipts of Rs.20,23,29,673 as income from composite contract liable for taxation in India. As per 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, the delivery of the goods is to be taken as having been made in India.

Thus, it was held that the profit made by the assessee on a CIF basis was liable to be taxed in India on the basis that the sale was completed in India.

The bench noted that the assessee along with SIPL had 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 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 MOU in respect of DMRCL, ITAT found that the parties jointly bid for the project as a consortium with each party responsible for its own scope of work.

The ITAT in this regard opined that 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.

“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,” added the bench.

Therefore, for the purpose of taxation, it is relevant to take into consideration the roles/functions performed by each member of the consortium, stated the bench.

Next, the ITAT referred the decision passed by the Supreme Court in Ishikawajma-Harima Heavy Industries Ltd. vs DIT, [2007], wherein it was 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.

Applying the same principle to the present case, the ITAT observed that since the assessee had not carried out any operations in India, in respect of its scope of work, therefore, the income earned by the assessee from the offshore supply of escalators and elevators to DMRCL and MMRCL was not taxable in India.

Accordingly, ITAT directed the Assessing Officer to delete the addition made in the hands of the assessee.