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

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.

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.

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.

(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.

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.

That the Appellant craves leave to add, amend, or alter any of the grounds of appeal.”

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- Page | 3 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.

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 income attributable to the PE in India and filing the returns of income in respect of the business profits of the branch office.

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:-

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 Page | 5

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 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.

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:-

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:-

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.”

Further we find that the Special Bench of Mumbai Tribunal in the case of Mashreq Bank Psc vs DCIT in for assessment year 2002-03 dated 06-02-2025 reported in 171 taxmann.com 230 (Mumbai-Trib) (SB) had held as under:-

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.”

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.

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 business profits of the PE in India. Accordingly, the grounds raised by the Assessee are allowed.

In the result, the appeal of the Assessee is allowed.