Employee Secondment Payments To EY US Satisfy 'Make Available' Test, Taxable As FTS: Delhi High Court

The Delhi High Court on thursday held that payments made by Indian entities to a foreign company for the secondment of employees can be taxed as Fees for Technical Services (FTS) under the India-US Double Taxation Avoidance Agreement (DTAA) if the arrangement satisfies the "make available" test by transferring technical knowledge, skill, or experience to the Indian entity.

A Division Bench of Justices V. Kameswar Rao and Vinod Kumar allowed appeals filed by the Revenue against Ernst & Young U.S. LLP, holding that the Income Tax Appellate Tribunal (ITAT) erred in concluding that the secondment arrangement did not satisfy the "make available" requirement under Article 12(4)(b) of the India-US DTAA.

The Court noted that the Assessing Officer had found the secondees were deputed to implement EY Group policies and standards, and that once those processes were imbibed, employees of the Indian entities could apply them independently. It held that this amounted to a transfer of technical knowledge, skill and experience, thereby satisfying the "make available" test.

“There is a transfer of technical knowledge, skill and experience in the provision of services by EY US to EY India entities,” the Court said.

The dispute arose from a batch of appeals challenging ITAT orders which had held that reimbursements received by EY US on account of secondment of employees and certain professional services rendered to Indian entities were not taxable as FTS under Article 12 of the India-US DTAA.

Revenue argued that the seconded personnel transferred technical knowledge, experience, skill and processes to EY India entities, bringing the payments within Article 12(4)(b). It further contended that the exemption under Article 12(5)(e) for professional services was unavailable because the services in question were technical in nature.

EY US on the other hand, contended that the payments represented mere cost-to-cost reimbursements and that the "make available" condition was not fulfilled. It also argued that certain receipts were for professional services excluded from Article 12 by virtue of Article 12(5)(e).

Rejecting the assessee's submissions on the secondment issue, the High Court relied on its earlier decision in Centrica India Offshore Pvt. Ltd. v. v. CIT (2014) and observed that the secondees continued to remain employees of EY US throughout the deputation period.

The Indian entities had no authority to terminate their employment; they could merely end the secondment and the employees would revert to EY US. This demonstrated that the overseas entity retained a lien over the employees.

The Bench further noted that the scope of work expressly contemplated training by the seconded employees. Consequently, there was an element of transfer of technical knowledge, experience and skill.

The Court found it difficult to accept the ITAT's conclusion that the "make available" test was not satisfied when the agreements themselves envisaged such knowledge transfer.

Referring to the Karnataka High Court's decision in CIT v. De Beers India Minerals Pvt. Ltd. (2012), the Court reiterated that technical services qualify as FTS only when the recipient is enabled to apply the acquired technical knowledge independently in future without the service provider's assistance.

Applying this principle, it held that the secondees enabled EY India entities to independently implement EY Group processes and standards after the deputation ended.

The Court also faulted the ITAT for failing to engage with the Assessing Officer's detailed findings on the engagement letters and training obligations.

It observed that the Tribunal had set aside those findings without adequate reasons and had overlooked the binding precedent in Centrica India Offshore (supra). Accordingly, it held that the impugned ITAT orders were per incuriam and perverse.

Accordingly, the High Court allowed the Revenue's appeals and held that the secondment payments received by EY US were taxable as Fees for Technical Services under the India-US DTAA as the "make available" test stood satisfied.

For Appellant: Senior Standing Counsel Puneet Rai, Advocate Ashvini Kr., Advocate Rishabh Nangia, Junior Standing Counsel Gibran.

For Respondent: Senior Advocate S. Ganesh, Advocate Ananya Kapoor.