The Delhi Bench of the Income-tax Appellate Tribunal (ITAT) has ruled that operational costs incurred by a foreign head office (HO) and cross-charged to its Indian branch (permanent establishment, PE) are deductible in computing the PE’s taxable profits in India, provided such costs are attributable to the PE’s business and charged on a cost-to-cost basis.
The decision arose in FCS Computer Systems S Pte Ltd v. ACIT, involving a Singapore-resident company providing hospitality technology solutions through an Indian branch. The Indian PE was cross-charged by the HO for software procurement, maintenance services, group call centre support, subscriptions and courier expenses. These costs were originally incurred by other group entities and reallocated without markup. The Revenue disallowed the deductions, arguing that a branch and HO are the same legal person and cannot transact with themselves.
Rejecting this position, the ITAT held that under Article 7(2) of the India–Singapore tax treaty, a PE must be treated as a “distinct and separate enterprise” for profit attribution. Denial of genuine operational expenses would effectively result in taxation of gross receipts rather than net business profits, contrary to treaty principles. The Tribunal relied on recent Supreme Court and Special Bench precedents confirming that treaty provisions override domestic law restrictions in determining PE profits.
Practical implications and issues:
For multinational groups operating in India through branches, the ruling provides support for deductibility of HO recharges where they are directly linked to Indian operations. However, taxpayers must ensure robust documentation, including clear cost allocation methodologies, evidence that charges are reimbursement-only with no embedded markup, and demonstrable nexus between costs incurred and revenues earned by the Indian PE. Inadequate support may still invite disputes, particularly in transfer pricing and attribution audits.
Overall, the ruling reinforces a net-basis approach to PE taxation but places a high compliance burden on taxpayers to substantiate cross-border cost allocations.
Source: SCTP, 16 January 2026.