FCS Computer Systems S PTE Ltd. Vs ACIT (ITAT Delhi)
Branch Office as PE Entitled to Full Cost Deduction — ITAT Allows ₹1.69 Crore Reimbursement under India–Singapore DTAA
The Delhi Bench of the ITAT allowed the appeal of FCS Computer Systems (S) Pte Ltd., Singapore for AY 2022-23, deleting the disallowance of ₹1.69 crore relating to cost of goods sold and reimbursements charged by the Head Office to its Indian Branch (Permanent Establishment).
The assessee’s Indian branch, treated as a PE under Article 5 of the India–Singapore DTAA, was engaged in sale of hospitality software and related maintenance services in India. During the year, the branch had debited expenses towards software procurement, maintenance services, call centre charges and reimbursements, all cross-charged by the Head Office on a cost-to-cost basis without markup. The AO disallowed the entire expenditure in the final order passed under section 144C, despite DRP directions, on the premise that expenses paid to the “same entity” cannot be allowed.
The ITAT rejected this approach and held that:
- Under Article 7(2) and 7(3) of the DTAA, a PE must be treated as a distinct and independent enterprise, and only profits attributable to the PE can be taxed in India;
- Denial of cost reimbursement would result in taxation of gross receipts, which is impermissible under treaty principles;
- All expenses incurred for the business of the PE, whether incurred in India or abroad, are mandatorily allowable;
- The issue was squarely covered by the Supreme Court ruling in Hyatt International Southwest Asia Ltd. and the Mumbai Special Bench decision in Mashreq Bank PSC;
- Identical treatment had been consistently accepted by the Revenue in earlier years, and no change in facts was demonstrated.
Accordingly, the Tribunal held that the assessee was entitled to deduction of ₹1.69 crore while computing profits of the Indian PE, allowed all grounds raised by the assessee, and allowed the appeal in full.
FULL TEXT OF THE ORDER OF ITAT DELHI
1. The appeal in ITA No. 1034/Del/2025 for AY 2012-13, arise out of the order of the Commissioner of Income Tax (Appeals)-42, New Delhi [hereinafter referred to as ‘ld. CIT(A)’, in short] in Appeal No. 24/15-16/CIT(A)-42 A.Y. 2012-13 dated 24.10.2016 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 26.05.2015 by the Assessing Officer, ACIT, Circle-1(3)(1), International Taxation, New Delhi (hereinafter referred to as ‘ld. AO’).
