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 Supreme Court and ITAT precedents to hold that costs incurred by the Head Office for procuring software, when made available to the Branch Office/PE on a cost-to-cost basis for distribution, are allowable expenses of the PE as they were necessarily incurred for PE business purposes; prior acceptance of the same treatment by revenue for earlier assessment years reinforced the conclusion, and the taxpayers appeal was allowed.

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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).

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