Supreme Court Issues Notice On EY US Plea Against Tax On Salary Reimbursements For Employees Seconded To India

The Supreme Court on Monday (October 26) issued notice on a plea filed by Ernst & Young U.S. LLP challenging a Delhi High Court judgment holding that payments received towards employees deputed (seconded) to Indian entities were taxable as Fees for Technical Services (FTS).

A bench of Justice J.B. Pardiwala and Justice K. Vinod Chandran agreed to examine whether salary reimbursements to EY US can be taxed as FTS when the deputed employees work under the control of Indian entities and tax has already been deducted from their salaries.

The dispute arose after the Income Tax Department treated payments received by EY US from its Indian entities towards the costs of deputed employees as taxable FTS. The Dispute Resolution Panel upheld the tax demand.

The Income Tax Appellate Tribunal (ITAT), however, granted relief to EY US. It held that the payments were reimbursements of salary expenses without any profit element and could not be treated as FTS.

The Delhi High Court subsequently set aside the ITAT's orders in favour of EY US on the secondment issue. It held that the arrangement involved the transfer of technical knowledge and skills to the Indian entities, satisfying the 'make available' test under the India-US Double Taxation Avoidance Agreement (DTAA).

The High 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 transfer of skill/knowledge.”

EY US has challenged this finding before the Supreme Court. It is questioning whether reimbursements towards employees' salaries can be treated as consideration for technical services when the employees work under the control of the Indian entities.

The dispute over employee secondment concerns five assessment years, from 2018-19 to 2022-23.

Separately, the Delhi High Court remanded issues concerning payments for professional services rendered from the US to Indian clients to the ITAT for fresh consideration in four of the appeals before it.