Delhi High Court Rules Secondment Reimbursements to Ernst & Young US Taxable as FTS Under India-USA DTAA
Overview of the Ruling
In a significant pronouncement affecting multinational corporations and Global Capability Centres (GCCs) operating in India, the Delhi High Court in CIT Vs Ernst And Young U.S. LLP has determined that reimbursements paid by Indian EY entities to their US parent for seconded personnel amount to Fee for Technical Services (FTS) under Article 12 of the India–USA DTAA. The Bench concluded that the secondment structure met the "make available" threshold, since technical expertise and skills were transferred to Indian staff in a manner enabling them to independently carry out the work thereafter.
The Court further ruled that the US entity remained the genuine employer of the deputed staff, pointing to its retained authority to terminate them, their continued enrolment in US social security schemes, and their eventual repatriation to America. The argument that cost-to-cost reimbursement, coupled with TDS deduction by the Indian entity, should shield the transaction from tax was rejected — the Court clarified that absence of a markup does not automatically exempt such payments.
On whether the receipts could be classified as exempt "professional services" under Article 15 of the DTAA, the Court found that the ITAT had not sufficiently examined the character of services rendered, and remanded this specific question for fresh adjudication.
Relevance for Global Capability Centres and Multinational Groups
Cross-border secondment arrangements are a standard practice used by GCCs and multinational corporations to:
- Train Indian personnel in specialized technical domains
- Support technology rollouts and system implementation
- Deploy skilled staff for specific project delivery
- Maintain uniformity of global standards across Indian group entities
Factual Background
Ernst & Young U.S. L.L.P. ("EY US"), a US-based member firm of the global EY network, operates in India through three affiliated entities:
- EY GBS (India) Pvt Ltd.
- EY Global Delivery Services India LLP (EYGDS)
- Ernst & Young LLP
EY US deputed certain employees to the Indian entities to transfer technical know-how to local staff. The Indian entities reimbursed EY US on a cost-to-cost basis for these seconded personnel. Such assignments typically lasted 2-3 years, after which employees returned to EY US. For administrative convenience, salaries continued to be disbursed through US bank accounts, later reimbursed by the Indian entities — though formally the employees were shown on the Indian payroll, with TDS deducted under the Income Tax Act, 1961.
Core Questions Before the Court
Issue A: Does cost-to-cost reimbursement for secondment amount to FTS under Section 9(1)(vii) and Article 12 of the India-USA DTAA?
Issue B: Do the payments qualify as "professional services" exempted under Article 15 of the DTAA, thereby falling within the carve-out in Article 12(5)(e)?
Position Taken by Ernst & Young
The assessee contended: