Software Procurement Expense Allowed To Indian Branch| ITAT

Case Details: FCS Computer Systems S PTE Ltd. vs. ACIT, International Taxation - [2026] 182 taxmann.com 469 (Delhi - Trib.) 

Judiciary and Counsel Details

• Vimal Kumar, Judicial Member
•  M. Balaganesh, Accountant Member
• Ashwani Taneja, Shivam Kukreja, Divyansh Dubery & Ms. Ria Toyal, Advs. for the Appellant.
• Ms. Ekta Jain, CIT DR for the Respondent.

Facts of the Case

The assessee was a company incorporated and resident in Singapore. It was engaged in the business of providing hospitality guest service, software applications, and solution and design services for individual hotels, international chain hotels, and integrated resorts. The assessee had established a branch office in India to handle sales and distribution.

The assessee sold FCS software, a comprehensive solution for the hotel industry, to prominent hotel chains. It places orders with the Singapore head office, which sources the software from FCS Malaysia and supplies it to the branch without any markup. Additionally, maintenance services for FCS software are provided to customers in India by FCS Malaysia, with charges directed to the head office in Singapore. These expenses are then cross-charged to the branch office in India without any markup.

During the year, the branch office received a debit memo from the Head Office for the procurement of software products and software maintenance services, and for reimbursement of expenditure in connection with its operations in India. The assessee, being a Permanent Establishment (PE) in India, offered the income attributable to the PE in India and filed returns of income for the business profits of the branch office.

The AO issued a draft assessment order under Section 144C(1) by disallowing the expenses. The matter was referred to the Dispute Resolution Panel (DRP) and subsequently to the Tribunal.

High Court Held

The Tribunal held that the Special Bench of Mumbai Tribunal in the case of Mashreq Bank Psc v. DCIT [2025] 171 taxmann.com 230 (Mumbai – Trib.) (SB) had held that Article 7(3) of the Treaty, as it existed prior to its amendment, provides the mode of computation of the profit of PE. In that context, it says that, in determining the PE’s profits, all expenses incurred in the PE’s business, including executive and general administrative expenses, whether incurred in the State where the PE is located or elsewhere, must be allowed as deductions.

Therefore, Article 25(1) cannot be interpreted in a manner to say that it will influence the computation of business profits under Article 7(3) or thrust the restriction imposed under the domestic law for computing the business profits. Article 25(1) and Article 7(3) operate in different situations. While Article 25(1) addresses the reduction of double taxation, Article 7 addresses the taxability of business profits, and paragraph 3 of Article 7 sets out the mechanism for computing the business profits of a PE.

There are no restrictions/conditions imposed in Article 7(3) of the Treaty to limit the expenditure to a particular percentage. Therefore, in the absence of any restrictions/conditions expressly provided in Article 7(3), no such restrictions/conditions can either be imported or read between the lines. Accordingly, the assessee would be allowed to claim deductions for expenses while computing the business profits of the PE in India.

List of Cases Reviewed

• Hyatt International Southwest Asia Ltd v. ADIT [2025] 176 taxmann.com 783 /[2025] 306 Taxman 241 /[2025] 478 ITR 238 (SC)
• Mashreq Bank Psc v. DCIT [2025] 171 taxmann.com 230 /[2025] 211 ITD 511 (Mumbai – Trib.) (SB) (para 11) followed

List of Cases Referred to

• Hyatt International Southwest Asia Ltd. v. ADIT [2025] 176 taxmann.com 783 (SC)/[2025] 306 Taxman 241 (SC)/[2025] 478 ITR 238 (SC) (para 9)
• Mashreq Bank Psc v. Dy. CIT (International Taxation) [2025] 171 taxmann.com 230 (Mumbai – Trib.)/[2025] 211 ITD 511 (Mumbai – Trib.) (para 10).