The Supreme Court on Monday issued notice on a plea filed by Ernst & Young U.S. LLP challenging a Delhi High Court ruling that payments received for employees deputed to its Indian entities are taxable as Fees for Technical Services (FTS) under the India-US Double Taxation Avoidance Agreement (DTAA).
A Bench of Justice J.B. Pardiwala and Justice K. Vinod Chandran agreed to examine whether reimbursements made towards the salaries and employment costs of seconded employees can attract tax as fees for technical services when the personnel work under the control of Indian entities and tax has already been deducted from their salaries.
The dispute concerns payments received by EY US from its Indian entities towards the costs of employees sent to work in India. The Income Tax Department treated these receipts as taxable technical service fees, a position upheld by the Dispute Resolution Panel.
The Income Tax Appellate Tribunal (ITAT) had earlier ruled in favour of EY US, accepting its contention that the amounts represented cost-to-cost reimbursements of salary expenses without any profit element. The Tribunal also recognised the Indian entities as the employers of the deputed personnel during their assignments.
The Delhi High Court, however, overturned the ITAT’s findings on the secondment issue in its June 18 judgment. It held that the arrangement involved the transfer of technical knowledge, skills and experience to the Indian entities, thereby satisfying the ‘make available’ requirement under Article 12(4)(b) of the India-US DTAA.
The High Court considered the functions performed by the seconded employees, including implementing group policies and processes, maintaining quality standards and enabling Indian personnel to independently apply the knowledge and practices imparted to them. It concluded that the arrangement went beyond a mere reimbursement of employment expenses.
EY US has now approached the Supreme Court, questioning the tax treatment of these payments. The central issue is whether salary reimbursements can be characterised as consideration for technical services when the deputed employees function within the Indian entities and the corresponding salary payments have already been subjected to tax deduction at source.
The case involves five assessment years, from 2018-19 to 2022-23.
Separately, the Delhi High Court remanded the issue concerning payments for professional services rendered from the United States to Indian clients to the ITAT for fresh consideration in four of the appeals.
The Supreme Court’s examination of the matter could have implications for cross-border employee secondment arrangements, particularly where multinational groups send personnel to Indian affiliates and recover the associated employment costs from those entities.
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