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My opponent reported that German subs were able to draw supply from a neutral Italy.
I'm presumably 9 supply by being in a hex that is next to the port hex.

Is this as intended, or a bug?

This is not intended, however I'm not sure if it is a bug either and perhaps just a misunderstanding on the part of your opponent?

I just suggest this as I double checked and non fully mobilized majors will not provide supply to otherwise friendly countries. For example, perhaps his sub already had 9 supply as subs do not lose supply unless they raid or engage in combat.

Otherwise perhaps this is a mod and Italy is fully moblized but not yet at war?

Not a mod. Might have been the turn Italy jumped to 99% and prepared for war.