Permanent establishment profit attribution allows business-linked head-office reimbursements as deductible PE expenses under the DTAA.

For computing profits attributable to a permanent establishment under the India-Singapore DTAA, expenses necessarily incurred for the PE's business must be allowed, and the PE is to be treated as a separate and independent enterprise for attribution purposes. Software procurement, maintenance and allied charges incurred through head-office debit memos were found to be integrally connected with the Indian branch's distribution activity and could not be denied merely because they were routed through the head office or represented reimbursements. The expenditure was therefore allowable in computing the business profits of the permanent establishment in India.

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Issues: Whether the disallowance of Rs. 1,69,10,832 incurred by the branch office through head-office debit memos for software procurement, maintenance and allied charges was sustainable in computing the profits attributable to the permanent establishment in India under the India-Singapore DTAA.

Analysis: The branch office was treated as a permanent establishment carrying on distribution and allied business in India. The impugned expenditure was found to be integrally connected with the business of the branch, being incurred for procurement of software and related operational support required for the Indian sales activity. Applying Article 7(2) and 7(3), the permanent establishment had to be viewed as a distinct and separate enterprise for attribution of profits, and only net profits attributable to the PE could be brought to tax. The reasoning also recognised that expenses incurred on a cost-to-cost basis for the PE's business cannot be denied merely because they were routed through the head office or represented reimbursements.

Conclusion: The disallowance was unsustainable and the expenditure of Rs. 1,69,10,832 was allowable as a deduction while computing the business profits of the permanent establishment in India.

Ratio Decidendi: For computing profits attributable to a permanent establishment under Article 7 of a DTAA, expenses necessarily incurred for the PE's business must be allowed, and the PE must be assessed on net attributable profits as a separate and independent taxable entity.

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