2026 (1) TMI 748 - AT - Income Tax

Profit attribution to Permanent Establishment for software procurement costs upheld and deduction allowed under Article 7(3) India-Singapore DTAA

Determination of profit of a Permanent Establishment arising from software procurement: ITAT applied Article 7(3) of the India-Singapore DTAA and followed ... Branch Office / PE in India - determining the profit of a PE - cost incurred for the procurement of software by Head Office from other parties - computing the business profit PE under Article 7(3) of the Treaty - India-Singapore DTAA - HELD THAT:- Respectfully following the decision of HYATT INTERNATIONAL SOUTHWEST ASIA LTD [2025 (7) TMI 1759 - SUPREME COURT] and MASHREQ BANK PSC [2025 (2) TMI 332 - ITAT MUMBAI] we hold that cost incurred for the procurement of software by Head Office from other parties shall be allowable as expenses in the hands of the Branch Office / PE in India for making it available on the cost to cost basis in view of the fact that the Branch Office / PE in India was solely established for the distribution of the procured software to the premium hotels in India and consequentially such expenses had to be mandatorily incurred by the Branch Office / PE for its business purposes and hence allowable as deduction. We find that similar treatment given by the Branch Office / PE in India had been accepted by the revenue in the past commencing from AYs 2012-13 to 2021-22 which is evident from the one page chart provided by the AR. There is no reason for the revenue to take a divergent stand during the year under consideration when the primary facts remain the same. We hold that the Assessee would be entitled for deduction while computing the business profits of the PE in India. Appeal of the Assessee is allowed. Issues: Whether the disallowance of Rs. 1,69,10,832 (comprising cost of goods sold, software maintenance, call centre charges and reimbursements) made by the Assessing Officer in the hands of the Indian branch (permanent establishment) is legally unsustainable and whether those amounts are allowable deductions in computing profits attributable to the PE under Article 7 of the IndiaSingapore DTAA and the Income-tax Act, 1961.Analysis: The Tribunal examined whether the branch office constituted a permanent establishment and, if so, whether Article 7(2)(3) of the IndiaSingapore DTAA requires that profits attributable to the PE be computed as if the PE were a distinct and separate enterprise, allowing deductions for expenses incurred for the PE's business including expenses incurred elsewhere but attributable to the PE. The Tribunal considered the nature of the debited amounts (purchase of software, software maintenance, call centre and support/courier reimbursements), the head office debit memos recharging costs on a cost-to-cost basis without markup, earlier acceptance of similar treatment in prior assessment years, and authoritative decisions including the Supreme Court and Special Bench precedents addressing profit attribution and allowance of expenses while computing PE profits. The Tribunal found that the reassessed disallowance ignored the separate-entity fiction under Article 7 and disallowed expenses that were integral, mandatory and attributable to the PE's distribution business in India; it also noted the DRP's directions and the legal principles on computation of PE profits permitting deductions for expenses attributable to the PE.Conclusion: The disallowance of Rs. 1,69,10,832 is not sustainable; the amounts are allowable as deductions in computing the business profits attributable to the PE and the assessee's appeal is allowed in respect of these grounds (in favour of the assessee).