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Supreme Court to Review Delhi HC Ruling on EY's Tax Liability for Seconded Employees
Global consulting giant has escalated its tax dispute over cross-border employee secondments to the , challenging a ruling that classified payments made by Indian entities to for temporarily deputed employees as taxable fees for technical services rather than mere salary reimbursements. The appeal, filed on , brings into sharp focus the delicate line between cost recovery and taxable service provision under the . The outcome could reshape how multinational companies structure their intra-group arrangements, particularly for global capability centres, technology firms, and consulting practices that routinely move personnel across borders.
The Arrangement Under Scrutiny
The dispute spans and stems from a common corporate practice: . Under the arrangement that began in , sent employees to work in EY’s Indian entities for limited periods of two to three years. While working in India, these secondees remained on the payroll of , retained US benefits, and were expected to return to the US entity upon completion of their assignments. The Indian entities reimbursed for the actual salary costs incurred—without any markup or profit margin.
The , however, took the view that these payments were not simple reimbursements. It argued that the secondees were providing technical knowledge, skills, and expertise to the Indian entities, thereby falling within the definition of "fees for technical services" (FTS) under the India-US DTAA. For assessment year 2019–20, the assessing officer added approximately ₹50.99 crore to ’s taxable income, and similar additions were made for other years.
’s Interpretation
The matter initially went before the , which ruled in favour of on . The ITAT held that the payments were and did not qualify as FTS. The tax department then appealed to the .
In a detailed judgment on , a division bench of the High Court reversed the ITAT’s findings. The court examined the terms of the agreements and found that retained significant control over the employees. The secondees continued to have an underlying employment relationship with , could not be terminated by the Indian entities in a way that severed that relationship, and returned to the US after their assignments. Critically, the court analyzed the nature of the work performed: the secondees were involved in training employees, implementing EY Group policies and processes, and maintaining quality standards. On that basis, the court concluded that the services satisfied the "make available" test under Article 12(4)(b) of the DTAA.
As the court observed, “The services rendered by the assessee herein includes technical services which would satisfy the ‘make available’ test, for the reason that there is a .” This finding effectively transformed what EY described as a reimbursement into a taxable service payment.
The : A Key Threshold
defines "fees for included services" to include payments for technical services that "make available" technical knowledge, experience, skill, know-how, or processes. The "make available" test is a well-established principle in Indian tax jurisprudence—it requires that the service provider transfers technical knowledge or skills to the recipient, enabling the recipient to apply the knowledge independently in the future.
The applied this test and found that the secondees’ training and implementation roles constituted a transfer of skill and knowledge to the Indian entities. This reasoning distinguishes the case from mere secondments where employees perform routine tasks without imparting specialized knowledge. The court’s emphasis on the substance of the work over the form of the payment is a significant development for multinationals.
EY’s Supreme Court Appeal
In its appeal before the Supreme Court, EY argues that the payments to were pure devoid of any profit markup. The company contends that without a profit element, the remittances cannot be treated as income in the hands of , and therefore no obligation should arise.
, partner at , explained the core contention: “EY contends that the remittances to EY U.S. represent pure, devoid of any profit markup. On the other hand, the Income-tax Department is taking a stance that liability on is determined by the gross nature of the remittance, irrespective of whether the foreign entity realized a commercial profit.”
The Supreme Court’s review will therefore address whether the absence of a profit margin can negate the character of a payment as FTS, or whether the nature of the services provided—and the control exercised by the overseas entity—determines taxability irrespective of cost recovery.
Broader Implications for Multinationals
The case is being closely watched beyond EY because of its potential impact on thousands of similar arrangements across India’s multinational sector. Global capability centres, technology companies, and large consulting firms regularly bring overseas employees to India for specialized assignments and training. If the Supreme Court upholds the ’s interpretation, such companies may face significant tax liabilities and withholding obligations.
, partner at , noted that the High Court ruling places greater weight on the actual employment relationship and the nature of work performed than on how companies label payments. “The has held that what matters is what a seconded employee does in India, not what the payment is called. Where the overseas entity remains the real employer and its staff pass on skills and know-how to the Indian entity, the payment can be taxed as fees for technical services even if it is billed at cost,” he said.
Patel further warned that if the Supreme Court agrees, multinationals may need to deduct tax on payments to overseas entities and could face questions about whether those entities have a () in India. This could trigger additional compliance burdens, including GST implications, as highlighted by law firm in a post-judgment analysis.
What the Supreme Court Will Examine
The appeal is expected to focus on several key legal issues: the correct interpretation of the "make available" test in the context of employee secondments, the relevance of profit margin in characterizing payments as FTS, and the extent to which the overseas entity’s retention of control over employees affects tax treatment.
The Supreme Court’s decision will also clarify the interplay between the DTAA and domestic tax law provisions regarding on payments to non-residents. The ruling could either reinforce the position that governs tax characterization or provide clearer safe harbours for cost-based reimbursements that do not involve a service element.
Conclusion
The Supreme Court’s review of the EY case represents a watershed moment for international tax law in India. As multinational companies await clarity, the case underscores the importance of carefully structuring agreements and documenting the nature of work performed. The distinction between a reimbursement and a service payment may hinge on fine factual details—control, knowledge transfer, and the duration of assignment. For now, the legal community watches as the prepares to weigh in on one of the most contentious issues in cross-border taxation.
