In the present paper, reflection and transmission phenomena of water waves due to undulating permeable bottom in a two-layer fluid system are investigated using two-dimensional linearized theory. The effect of surface tension on the free surface is included in this work. In two-layer fluid system, there exist waves with two different wave numbers (modes). When a wave of a particular wave number encounters the undulating bottom, reflection and transmission phenomena occur in both the layers. The reflection and transmission coefficients in both layers due to incident waves of both modes are analyzed with the aid of perturbation analysis along with Fourier transform technique. It is found that these coefficients are obtained in terms of integrals which depend on the shape function of the undulating bottom. Two different kinds of undulating bottoms are considered to determine these coefficients. For a particular undulating bottom, namely sinusoidal bottom undulation the effect of various physical parameters such as number of ripples, surface tension and porous effect parameters are demonstrated graphically. The study further elaborates the energy balance relations associated with the reflection and transmission coefficients to ascertain the correctness of all the computed results.