FCS COMPUTER SYSTEMS S PTE LTD,INDIA V. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE INT TAX 1(3)(1), INDIA

ITA 1034/DEL/2025

AI Insights

FCS Computer Systems S PTE Ltd, a Singaporean company with a branch office in India, appealed against the disallowance of certain expenses by the Assessing Officer (AO) under Section 143(3) read with Section 144C of the Income Tax Act, 1961. The expenses, totaling Rs 1,69,10,832/-, were related to the cost of goods sold and various operational expenses incurred by the branch office. The AO had disallowed these expenses, leading to the appeal. The Tribunal examined the nature of the expenses, the role of the branch office as a PE in India, and the provisions of the DTAA between India and Singapore. The Tribunal's decision emphasized that the branch office should be treated as a separate and independent entity for tax purposes, entitled to deductions for expenses incurred in its business operations.

• Counselvise Citation: [2026] 140 COUNSELVISE.COM (IT) 826955 (ITAT-DELHI)
• Duration Of Justice: 10 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-01-2026
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2022-2023
• Appeal Filed On: 24-02-2025
• Other Referred Cases: Hyatt International Southwest Asia Ltd vs ADIT, Mashreq Bank Psc vs DCIT
• Laws Referred To: Income-tax Act, 1961, DTAA between India and Singapore
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: EKTA JAIN
• Assessee Lawyers: ASHWANI TANEJA
• Keywords: Revised return; Principle of natural justice; Source of fund; Double taxation relief; Permanent establishment
• Section: 143(3); 142(1); 115JB; 37(1)

Judgement Text

"Page | 1 INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “D”: NEW DELHI BEFORE SHRI M. BALAGANESH, ACCOUNTANT MEMBER AND SHRI VIMAL KUMAR, JUDICIAL MEMBER ITA No. 1034/Del/2025 (Assessment Year: 2022-23) FCS Computer Systems S PTE Ltd, Office No. 07, 5th Floor, A-40, I- Thum Tower-C, Sector-62, UP Vs. ACIT, International Taxation- 1(3)(1), Delhi (Appellant) (Respondent) PAN: AAACF7319J Assessee by : Shri Ashwani Taneja, Adv Shri Divyansh Dubery, Adv Shri Shivam Kukreja, Adv Ms. Ria Toyal, Adv Revenue by: Ms. Ekta Jain, CIT DR Date of Hearing 04/12/2025 Date of pronouncement 09/01/2026 O R D E R PER M. BALAGANESH, A. M.: 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’). 2. The assessee has raised the following grounds of appeal before us:- Printed from counselvise.com ITA No. 1034/Del/2025 FCS Computer Systems S PTE Ltd Page | 2 “1. That having regard to the facts and circumstances of the case, the impugned order passed by the Ld. AO under Section 143(3) read with Section 144C of the Act is bad both in the eyes of law and on facts. 2. That having regard to the facts and circumstances of the case, Ld. AO has erred in making the disallowance of cost of goods sold and expenses aggregating to Rs. 1,69,10,832/- to the returned income of the appellant that too by disregarding clear directions of the Dispute Resolution Panel and therefore it is liable to be deleted. 3. That having regard to the facts and circumstances of the case, the Ld. AO has erred in law in making addition of Rs. 1,69,10,832/- ignoring the provisions of sections 37(1) of the Income Tax Act, 1961 as well as provisions of Article 7(2) and (3) of DTAA between India and Singapore and thus the disallowance/ addition being wholly erroneous on law and facts is liable to be deleted in toto. 4. That having regard to the facts and circumstances of the case, the findings arrived at by the Ld. AO is perverse and based on erroneous assumptions in as much as the Ld. AO failed to appreciate that the branch office is established and working since last many years as Branch Office in India, and nexus of the costs/ expenses being core part of the main activities of the Appellant, has always been well established and allowed in all the years and thus impugned assessment order passed on the basis of incorrect understanding of facts and law contained in the Income Tax Act, 1961 read with provisions of DTAA between India and Singapore is not sustainable under law on the face of it. 5. (i) That the Ld. AO has erred in not appreciating and disregarding well established fact that the cost/expenses of Rs. 1,69,10,832/- in the hands of Appellant were incurred wholly and exclusively for the purpose of its business of Indian Branch and the same was simply a reimbursement of the costs/expenses incurred by the Head Office for and on behalf of its Branch Office in India. (ii) That the Ld. AO has erred in not considering the documentary evidences placed on record by the Appellant in respect of the cost of the services incurred by the Head Office for the furtherance of the business of the Branch Office in India on actual Cost-to-Cost basis. 6. That Ld. AO has erred in passing the assessment order by recording incorrect facts and without opportunity of hearing and in violation of principles of natural justice. 7. That the order passed by the Ld. AO and additions/ disallowances made therein are not sustainable on various factual and legal grounds and deserve to be quashed. Printed from counselvise.com ITA No. 1034/Del/2025 FCS Computer Systems S PTE Ltd Page | 3 8. (i) That having regard to the facts and circumstances of the case, the Ld. AO has erred in law in failing to consider the deeming fiction created in Article 7(2) treating the permanent establishment in India as a separate and independent entity for the purpose of determining the profits attributable to the said Permanent Establishment as per Article 26 of DTAA between India and Singapore, hence claimed cost/expenses cannot be disallowed in view of provisions of Article 7(2) and (3) of DTAA between India and Singapore. (ii) That the AO has erred in ignoring and mis-appreciating Article 7 of DTAA between India and Singapore which clearly postulates that only the profit attributable to the PE shall be taxable in India. (iii) That the AO has erred in making disallowance of cost/expenses since payment on account of reimbursement was part and parcel of service provided which is mandatory in character of the business line of the branch office in India. 9. That having regard to the facts and in law, the Ld. AO has erred in not following the directions of Hon'ble DRP and thereby violating the provisions of Section 144C (10) thereby rendering the assessment proceedings bad and invalid in law. 10. That the Appellant craves leave to add, amend, or alter any of the grounds of appeal.” 3. We have heard the rival submissions and perused the materials available on record. The Assessee is a company incorporated in Singapore and resident of Singapore and part of the Planet One group. It was submitted that the Assessee is 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 for looking after the sales and distribution business in India. The Assessee is a comprehensive hospitality technology solutions and service provider with an extensive portfolio of integrated products used by more than 5,000 hotels with over 8,000 installations in 32 countries. The Assessee provides a comprehensive suite of hospitality operations and management solutions consisting of e-housekeeping, e-engineering, e-connect, e- Printed from counselvise.com ITA No. 1034/Del/2025 FCS Computer Systems S PTE Ltd Page | 4 concierge, e-recovery and e-laundry, each designed to maximize back- office operations and guest-facing services. These applications can integrate with a hotel's PMS and other third-party systems via FCS Gateway and FCS Voice, or can seamlessly function alongside CosmoPMS, Assessee’s own innovative PMS solution. With the Assessee’s analytics, hoteliers can maximize both revenues and property reputation with streamlined access to business analytics and operations performance intelligence. 4. With a view to cater to the needs of the hospitality industry in India, FCS Computer Systems (S) Pte Ltd (Head Office), established its branch office in India on 4-3-2002 with the approval granted by the Reserve Bank of India (RBI). The branch office in India is duly registered with the Ministry of Corporate Affairs, Government of India and holds the Foreign Company Registration Number F02731. The Assessee provides hotel operations software to hospitality and enterprise customers across India as well as support and maintenance services for the FCS software products through its branch office in India. The Indian branch identifies the customers in India and sells the software to the end customers. The branch office in India has two types of sources of income, namely - sale of FCS products and income from other ancillary services. Sale of product includes FCS software, ancillary hardware and installation charges and income from services includes software maintenance. The branch office raises invoices in Indian rupees on the Indian customers with the applicable Goods and Services Tax (GST) included. Payments are received in Indian rupees with customers deducting the applicable tax deducted at source before remitting the payment to the branch office. The branch being a Permanent Establishment (PE) in India as per Article 5 of the India - Singapore Double Taxation Avoidance Agreement (DTAA), the Assessee has been offering the Printed from counselvise.com ITA No. 1034/Del/2025 FCS Computer Systems S PTE Ltd Page | 5 income attributable to the PE in India and filing the returns of income in respect of the business profits of the branch office. 5. The return of income for the assessment year 2022-23 was filed by the Assessee on 31-10-2022 and a revised return on 30-12-2022, declaring total income at Rs. Nil under normal provisions of the Act and book profit of Rs. 4,87,969/- under Section 115JB of the Act. Various notices under Section 142(1) of the Act issued by the Learned AO calling for various details and documents were duly complied with by the Assessee by filing the requisite details. During the year, the branch office had received the debit memo from the Head Office and accounted the same for Rs. 1,69,10,832/- towards procurement of software products, software maintenance services and reimbursement of expenditure in connection with its operations in India. The Learned AO, without considering the fact that the expenditure is attributable to the business of the branch in India, issued a draft assessment order under Section 144C(1) of the Act on 24- 03-2024 by disallowing the following expenses:- a) Cost of goods sold – software product – Rs. 50,26,062 b) Cost of goods sold – software maintenance – Rs. 69,56,790 c) Call centre charges -Rs 34,73,868 d) Reimbursement of support charges –Rs. 14,18,621 e) Reimbursement of courier charges – Rs. 35,491 Total disallowance – Rs. 1,69,10,832 6. The nature of each of the aforesaid expenditure is as under:- Payment towards purchase of software – Rs 50,26,062/- The branch office in India sells FCS software, a comprehensive solution for the hotel industry, to prominent hotel chains. It places Printed from counselvise.com ITA No. 1034/Del/2025 FCS Computer Systems S PTE Ltd Page | 6 orders with the Singapore head office, which sources the software from FCS Malaysia and supplies it to the branch without markup. Payment towards software maintenance – Rs 69,56,790/- In addition to software sales, 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. Call Centre Charges – Rs 34,73,868/- FCS Group operates a global call center in the Philippines through FedSoft Philippines Inc., where customers can resolve software- related issues. The call center cost is charged to FCS Malaysia with a 10% markup, and FCS Malaysia allocates these costs globally to group entities. For India, the call center costs are billed to the head office, which then charges the branch office without any markup. Reimbursement of Support charges – Rs 14,18,621/- and Courier Charges – Rs 35,491/- The head office incurred subscription and courier charges on behalf of the branch, which were recharged without markup. 7. The Assessee filed objections before Learned Dispute Resolution Panel (DRP) against the proposed disallowance of expense in the draft assessment order referred to Supra. The Learned DRP issued directions under section 144C(5) of the Act to the Learned AO directing that if the present case is being purely based on payments of reimbursements, the ‘principle of mutuality’ does not apply. Therefore, the panel directed the Learned AO to pass the final order accordingly in the light of the observations. In the light of the directions of Learned DRP, the Learned AO Printed from counselvise.com ITA No. 1034/Del/2025 FCS Computer Systems S PTE Ltd Page | 7 passed the final assessment order on 9-1-2025 making the disallowance of expense of Rs 1,69,10,832/- based on the presumption that expenses cannot be allowed in the hands of the branch office that is PE in this case , as purchase is from the same person. 8. The Learned AR submitted before us that the Learned AO failed to acknowledge that expenses allocated to head office were in the nature of reimbursement for cost of procurement of software from other parties and the same were an integral part of the distribution business of the branch office / PE in India. Therefore, the gross receipts in the hands of the branch office cannot be taxed without allowing the deduction of expenses in furtherance of the actual product. It was submitted that the branch office /PE in India is a separate / independent taxable entity and accordingly the activities of the Permanent Establishment are liable to be independently evaluated and ascertained in the light of the plain language in which Article 7 of the DTAA stands couched. It was submitted that the fact that PE is conceived to be an independent taxable entity cannot possibly be doubted or questioned. It was submitted that Article 7 para 2 of the India Singapore Treaty has envisaged the similar situation which reads as under:- “2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. In any case where the correct amount of profits attributable to a permanent establishment is incapable of determination or the determination thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estimated on a reasonable basis.” Printed from counselvise.com ITA No. 1034/Del/2025 FCS Computer Systems S PTE Ltd Page | 8 9. It is not in dispute that the branch office is engaged in the business of sale of products, among others in India. The sale of software products had been carried out pursuant to the purchase of the said software products from its head office. This purchase had been effected by way of a debit memo raised by head office on the branch office. Without the said purchase, the sale could not have been effected by the branch office in India. Since the branch office is construed as a separate independent taxable entity by considering it as a PE in India, it would be entitled for deduction for cost of procurement of goods and services together with reimbursement of all expenses in order to determine the profits earned by the said PE in India. Logically, only the profits earned by the PE in India could be brought to tax and not the gross revenues. The deduction in the sum of Rs 1,69,10,832/- claimed by the Assessee is only to ensure that only the profits attributed to the PE in India is brought to tax. If such deduction is denied, then the gross receipts would get taxed which would result in gross injustice and which would be against Article 7 Para 2 of the India- Singapore DTAA. We find that the reliance has been rightly placed by the Learned AR on the decision of the Hon’ble Supreme Court in the case of Hyatt International Southwest Asia Ltd vs ADIT in Civil Appeal No. 9766 of 2025 dated 24-7-2025 reported in 176 taxmann.com 783 (SC) wherein it was held as under:- 23. At this juncture, we also note the reference made to a Larger Bench of the Delhi High Court in Hyatt International Southwest Asia Ltd v. Addl. DIT [2024] 166 taxmann.com 466/[2025] 472 ITR 53 (Delhi), where it was held that profit attribution to a PE in India is permissible even if the overall foreign enterprise has incurred losses. Accordingly, the question no.(iv) referred was answered in the affirmative, reinforcing the principle that taxability is based on business presence and not the global profitability of the enterprise. The relevant paragraph is profitably reproduced below: \"66. On an overall consideration of the above, we come to the firm conclusion that the submission of global income being determinative of the question which stood referred, is wholly unsustainable. The Printed from counselvise.com ITA No. 1034/Del/2025 FCS Computer Systems S PTE Ltd Page | 9 activities of a permanent establishment are liable to be independently evaluated and ascertained in the light of the plain language in which article 7 stands couched. The fact that a permanent establishment is conceived to be an independent taxable entity cannot possibly be doubted or questioned. The wealth of authority referred to hereinabove clearly negates the contention to the contrary and which was commended for our consideration by the appellants. Bearing in mind the well-established rule of source which applies and informs the underlying theory of taxation, we find ourselves unable to countenance the submission of the source State being deprived of tis right to tax a permanent establishment or that right being dependent upon the overall and global financials of an entity. The Division Bench in these appeals rightly doubted the correctness of taxation being dependent upon profits or income being earned at the \"entity level\". The decision of the Special Bench in Motorola Inc. v. Dy. CIT 2005 SCC OnLine ITAT 1 : (2005) 95 ITD 269 (Delhi) has clearly been misconstrued and it, in any case, acannot be viewed to be an authority for the proposition which was canvassed on behalf of the appellants. Article 7 cannot possibly be viewed as restricting the right of the source State to allocate or attribute income to the permanent establishment based on the global income or loss that may have been earned or incurred by a cross border entity.\" 24. In view of the foregoing analysis, we affirm the findings of the High Court that the appellant has a fixed place PE in India within the meaning of Article 5(1) of the DTAA, and that, the income received under the SOSA is attributable to such PE and is therefore taxable in India.” 10. Further we find that the Special Bench of Mumbai Tribunal in the case of Mashreq Bank Psc vs DCIT in ITA No. 1342/Mum/2006 for assessment year 2002-03 dated 06-02-2025 reported in 171 taxmann.com 230 (Mumbai-Trib) (SB) had held as under:- “20. Article 7 of India-UAE treaty deals with taxability of business profits. Paragraph 3 of Article 7 provides the mode of computation of profit of PE. In that context, it says that while determining the profits of the PE, all expenses incurred for the business of the PE, including executive and general administrative expenses, whether incurred in the State where PE is located or elsewhere, has to be allowed as deduction. 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 Printed from counselvise.com ITA No. 1034/Del/2025 FCS Computer Systems S PTE Ltd Page | 10 25(1) and Article 7(3) operate in different situations. While Article 25(1) deals with elimination of double taxation, Article 7 deals with taxability of business profits and paragraph 3 of Article 7 lays down the mechanism of computation of business profit of PE. Therefore, while computing the business profit PE under Article 7(3) of the Treaty, the language used/employed therein has to be seen. 21. On a careful reading of Article 7(3) of the Treaty, as it existed prior to its amendment, it becomes very much clear that while determining the profit of a PE, all deductions and expenses attributable to the PE have to be allowed. There are no restrictions/conditions imposed in Article 7(3) of the Treaty to limit the expenditure to a particular percentage. Therefore, in absence of any restrictions/conditions expressly provided in Article 7(3), no such restrictions/conditions can either be imported or read between the lines.” 11. Respectfully following the aforesaid decision of Hon’ble Supreme Court and the decision of Special Bench of Mumbai Tribunal referred supra, 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. Further we find that similar treatment given by the Branch Office / PE in India had been accepted by the revenue in the past commencing from Assessment Years 2012-13 to 2021-22 which is evident from the one page chart provided by the Learned 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. 12. In view of the aforesaid observations, we hold that the Assessee would be entitled for deduction of Rs 1,69,10,832/- while computing the Printed from counselvise.com ITA No. 1034/Del/2025 FCS Computer Systems S PTE Ltd Page | 11 business profits of the PE in India. Accordingly, the grounds raised by the Assessee are allowed. 13. In the result, the appeal of the Assessee is allowed. Order pronounced in the open court on 09/01/2026. -Sd/- -Sd/- (VIMAL KUMAR) (M. BALAGANESH) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 09/01/2026 A K Keot Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi Printed from counselvise.com "