Please find our Newsflash analysing the Delhi High Court’s decision in Commissioner of Income Tax (International Taxation)-1, New Delhi v. Ernst & Young U.S. LLP. The decision examines the taxability of secondment reimbursements and receipts from services rendered by EY US to Indian clients under the Income-tax Act, 1961 and the India-US Tax Treaty.
EY US had seconded certain personnel to EY India for a specified period. Although EY India exercised operational supervision over their day-to-day activities, the Court observed that EY US continued to retain the underlying employment lien, social-security obligations, repatriation rights and overarching control over the secondees. EY India could terminate the secondment arrangement and relieve the personnel in specified circumstances, but it did not possess the authority to terminate or sever their underlying employment relationship with EY US.
Based on the terms and actual operation of the arrangement, the Delhi High Court held as follows:
• EY US continued to be the real and economic employer since the secondees never ceased to be its employees and were required to rejoin EY US upon completion of their assignments in India.
• The cost-to-cost reimbursements made by EY India to EY US constituted consideration for services rendered through the seconded personnel and were taxable as Fees for Technical Services/Fees for Included Services under Section 9(1)(vii) and Article 12 of the India-US Tax Treaty.
• The absence of a mark-up, by itself, does not determine the character of the payment; if the arrangement, in substance, involves the rendering of technical or consultancy services, the payment may still be taxable as FTS / FIS
• The secondees implemented EY Group policies and standards and transferred technical knowledge, experience, skills, know-how and processes that EY India could subsequently apply independently. Accordingly, the services satisfied the “make available” requirement under Article 12(4)(b) of the India-US Tax Treaty.
• In reaching its conclusion, the Court relied upon its earlier decision in Centrica India Offshore Pvt. Ltd. and observed that the ITAT had failed to consider this binding precedent.
• The case also involved receipts from services rendered by EY US to Indian clients from the USA. The Court observed that the ITAT had granted a blanket professional-services exclusion without adequately examining the nature of each service. Since the Assessing Officer had separately identified services qualifying for the exclusion and services considered technical or consultancy in nature, the matter was remanded to the ITAT for a service-wise examination.
Notably, It is pertinent to note that on a similar issue of reimbursement of salary expenditure, the Delhi Tribunal in Horiba India Private Limited (pronounced just shortly after the current ruling in the case of EY) has taken a contrary view and held that salary expenses reimbursed by Horiba India towards employees seconded by Horiba Japan were in the nature of mere reimbursement without any profit element embedded and thus, not liable to tax in India. As such, any arrangement and its tax implication would need to be reviewed on case-by-case basis.
Nevertheless, it would be important to review and examine all existing or proposed cross-border employee transfer (deputation / secondment) arrangement from an Indian tax perspective, with a view to identifying and mitigating potential tax risks and ensuring that such arrangements remain substantively compliant with the applicable regulatory framework.

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