Offshore supply of goods on CIF Basis cannot be regarded as onshore supply and chargeable to tax in India on the sole basis that cost of Insurance and Freight are borne by supplier.
Facts of the Case:
- Schindler China Elevator Company Ltd. (Assessee) is a non-resident company incorporated in China and is engaged in the business of supply of elevators and escalators. The Assessee along with its Indian associated enterprise Schindler India Private Limited (SIPL) formed a consortium for the purpose of bidding for the tender floated by Delhi Metro Rail Corporation Limited (DMRCL) and Mumbai Metro Rail Corporation Limited (MMRCL) for the design, manufacturing, supply, installation, testing, and commissioning of escalators.
- The Assessee and SIPL entered into a Memorandum of Understanding (MOU) to jointly bid for the project as a consortium. Such MOU clearly demarcated the scope of work of each party, wherein the Assessee agreed to undertake the design, manufacturing, and supply of escalators, while SIPL agreed for clearance of material from the port and transportation to the site, installation, testing, commissioning and maintenance of escalators. The MOU also specified that both the Assessee and SIPL will bear its own losses and retain its own share of profits based on the separate invoices raised by each party for their own scope of work.
- During AY 2018-19, the Assessee received the consideration from DMRCL and MMRCL (net of TDS) for supply of elevators and escalators and accordingly filed its return of income for claiming the TDS credit since the Assessee considered the receipts as not taxable in India on the reason that the supply of elevators and escalators is regarded as “supply of goods” and thus treated as business income. Further, in absence of a Permanent Establishment in India, such income will not be taxable in India. The Assessee also contended that the title of the goods passed outside India and payment thereof was also received outside India, therefore the transaction of sale was not taxable in India.
- However, the Assessing Officer (AO) disregarded the Assessee’s contention and held that contract with DMRCL and MMRCL was composite and indivisible and could not be split up into supply and commissioning of parts as sought to be done by the Assessee. Therefore, the income earned by the assessee from the supply of elevators and escalators are taxable in India. AO also held that since offshore supply are made on CIF basis, the transaction can be considered as complete only when it reaches the port in India.
- The Assessee then filed objections before DRP, however the same were rejected and the DRP upheld the view taken by the AO. Thus, the AO passed the final assessment order against which the Assessee preferred an appeal before the Hon’ble Income Tax Appellate Tribunal (ITAT).
Observation And Conclusion:
Hon’ble ITAT held that:
- The consortium was made only to bid jointly for the contract due to the different expertise held by the parties to the consortium. The scope of work of each party in the consortium was separately defined and each party was responsible for its own scope of work. Therefore, for the purpose of taxation, it is relevant to take into consideration the roles/functions performed by each member of the consortium.
- Further, in case of sale on CIF basis, even though the Cost, Insurance and Freight are borne by the seller, the ownership of the goods is transferred at the port of shipment and not at the port of delivery. Also, the payment is received outside India, therefore it can be said that no operations were carried out in India in respect of the Assessee’s scope of work. Therefore, the same cannot be held as chargeable to tax in India.
SW Point of View:
Where the ownership of the goods gets transferred at the time of shipment, then irrespective of the fact the seller is bearing the cost of freight and insurance, the offshore supply on CIF basis cannot be regarded as onshore supply.
Lakshay Prakash Jonwal, Direct Tax Associate, SW India
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