ITA 423, 424, 715, 753 & 760 of 2025 | Judgment dated June 18, 2026
Background & Transaction Structure
This case arose from a cross-border secondment of employees to India, wherein EY US deputed personnel ('International Assignees') to three EY India entities for fixed tenures of two to three years under a Deputation Agreement. The dispute highlights tax implications that frequently arise in cross-border secondment arrangements and provides important guidance on salary reimbursement tax treatment for payments made by Indian entities to overseas group companies.
Under the Employee Secondment structure, EY US paid salaries in the US on behalf of the Indian entities as a matter of administrative convenience; the Indian entities reimbursed EY US at pure cost — no mark-up, no service fee. Independently, EY US also provided professional services to India-based clients from the US, for which it received fees.
EY US claimed: (a) cost-to-cost reimbursements were not taxable as Fees for Technical Services (FTS) since the employees on secondment had become employees of EY India; and (b) professional receipts were exempt from Indian tax under Article 12(5)(e) read with Article 15 of the India-USA DTAA. Both contentions were rejected by the AO and DRP. The ITAT ruled in favour for EY US. Revenue appealed to the Delhi High Court.
Issues Before the Court
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Issue A — Secondment of employees / FTS: Whether cost-to-cost reimbursements for seconded employee salaries constitute FTS under Section 9(1)(vii) of the Income-tax Act, 1961 and/or Article 12 of the India-USA DTAA. (Revenue succeeds)
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Issue B/C — Professional Receipts: Whether fees received by EY US from Indian clients for services rendered from the USA fall within the Article 12(5)(e) of India-USA DTAA exclusion (i.e., qualify as 'professional services' under Article 15 India-USA DTAA), thereby exempting them from Indian tax. (Remanded to ITAT)
Tax Positions of the Parties
Revenue's stand:
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Secondees retained a lien on EY US employment; social security and retirement benefits continued through EY US throughout the deputation period.
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EY India could terminate the secondment arrangement contract but could not terminate the underlying employment contract — making EY US the real employer.
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On 'make available clause': engagement letters showed EY US personnel delivered training, implemented EY methodologies, and embedded quality standards — building enduring in-house capabilities.
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On Article 15(2): economists, MBAs and data architects do not qualify as 'professionals' and hence cannot attract the Article 12(5)(e) exemption.
EY US's stand:
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The Deputation Agreement explicitly vested day-to-day direction and control with EY India; EY US bore no responsibility for secondees' work output.
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Salaries were legally the liability of EY India entities; EY US acted only as a paying agent. TDS was deducted under Section 192 by EY India and Form 16 was issued in India.
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The 'make available clause' condition was not met — relying on Bio-Rad Laboratories and RELX Inc. to argue that continuous service does not amount to targeted knowledge transfer.
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Article 15(2) uses the word 'includes', signalling an inclusive definition; CBDT notifications under Sections 194J and 44AA already recognise IT professionals, economists and others without requiring membership of a governing body.
Court's Analysis & Reasoning
On Issue A — Secondment / FTS:
The Court held that the ITAT orders were per incuriam and perverse for ignoring the binding coordinate bench decision in CIT v. Centrica India Offshore Pvt. Ltd. (2014: DHC:2172-DB), since confirmed by the Supreme Court (SLP (C) No.22295/2014, October 10, 2024).
Applying Centrica India Offshore case law, the Court looked through the contractual label to economic reality: (i) EY US retained a lien over home employment throughout; (ii) social security and retirement benefits ran continuously through EY US; (iii) EY India could only end the secondment — the employment contract with EY US was beyond its reach; and (iv) secondees invariably returned to EY US on completion. The absence of a mark-up was held irrelevant — cost-to-cost pricing does not convert a service into a non-taxable reimbursement.
On the 'make available clause' test, engagement letters demonstrated that EY US personnel trained end-clients, implemented group policies, and embedded quality standards — capabilities that would persist after the secondment ended. This met the De Beers standard: technical knowledge must remain with the recipient and be independently deployable. Issue A was answered in favour of Revenue across all five assessment years.
On Issue B/C — Professional Receipts:
The Court identified a critical lacuna in the ITAT's reasoning. The AO had not taxed all receipts from Indian clients: he had already granted the Article 12(5)(e) of India-USA DTAA exemption for services by lawyers and accountants (₹5.62 crore and ₹0.95 crore respectively for AY 2020-21). He retained as FTS only the residual ₹29.89 crore representing services by economists, MBAs, and data architects. The ITAT issued a blanket exemption for all professional receipts without engaging with the AO's service-by-service bifurcation. The Court declined to interpret Article 15(2) definitively and remanded Issue B/C to the ITAT for fresh consideration on full facts.
Key Legal Principles Crystallised
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Principle |
Rule Crystallised |
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Substance over Form |
A Deputation Agreement that contractually designates the Indian entity as employer in an employer-employee relationship in secondment will be ignored if the economic reality reveals a retained lien, continuing social security obligations, and an indefeasible return-to-origin commitment. |
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No Mark-Up ≠ No Tax |
Taxability turns on the nature of what is provided, not the pricing model. Cost-to-cost recovery does not transform a service payment into a non-taxable reimbursement. |
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'Make Available' — Enduring Benefit |
Training, quality-standard roll-outs, and policy implementation that build independently deployable capabilities satisfy the De Beers / Centrica standard under Article 12(4)(b) of India-USA DTAA. |
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AP Moller principle Not Universal |
Cost-to-cost reimbursement is not a universal tax shield; its protective effect is contingent on there being no service in the first place. |
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Granular Article 12(5)(e) Analysis |
Blanket Article 12(5)(e) of India-USA DTAA exemptions are impermissible; tribunals must examine individual service categories against the AO's service-by-service bifurcation. |
Practical Implications for Taxpayers
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Review all Deputation Agreements: lien retention, US social security contributions, or a mandatory return obligation will be treated as conclusive evidence of the foreign entity as real employer in an employer-employee relationship in secondment — irrespective of contractual wording.
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Re-examine TDS/withholding positions under Section 195: Indian entities reimbursing foreign parents for secondee costs must assess withholding tax exposure. Reliance on earlier ITAT orders provides no cover.
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Professional receipts line-by-line classification mandatory: each service category must be individually mapped against Article 15(2) of DTAA between USA and India; blanket claims of professional services exemption will not survive judicial scrutiny.
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Transfer pricing and FTS are independent inquiries: a cost-based secondment of employees that passes TP scrutiny at arm's length does not settle the FTS characterisation question.
FREQUENTLY ASKED QUESTIONS
Yes. Post the June 2026 Delhi High Court ruling, tax authorities emphasise the substance of the transaction over its form. If the seconded employee is providing technical or consultancy services to the Indian entity, the absence of a profit mark-up does not automatically exempt the salary reimbursement from being characterised as FTS.
Tax authorities heavily scrutinise ISAs for clauses suggesting the foreign entity is providing a service rather than simply deputing staff. Key risk triggers include:
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Right of Recall or Replacement: The overseas entity retaining authority to recall or swap the secondee at its discretion.
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Continuing Employment Ties: The secondee remaining integrated into the foreign entity's global performance appraisals, social security, and benefit systems.
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Service Deliverables: Clauses outlining specific technical milestones or business deliverables, rather than standard employment duties.
Under tax treaties such as the India-US or India-UK DTAAs, the 'make available' clause is triggered when seconded personnel transfer technical knowledge, skills, or processes to the Indian entity's team. If the local staff is equipped to perform these tasks independently after the secondment ends, the service is deemed to have been 'made available'.
An employer's lien means the overseas company retains the legal right to the employee's position upon return. A strong lien indicates that the economic employer-employee relationship never fully shifted to the Indian entity, allowing tax authorities to argue that the foreign entity is actively providing technical services thereby increasing FTS risk.
Not automatically, but the risk profile escalates significantly. If the foreign entity's personnel remain in India beyond the duration thresholds specified in the applicable tax treaty, a Service PE may be triggered — potentially exposing the foreign entity to net-basis corporate tax in India.
GCCs can no longer rely solely on the 'no-markup' defence. Organisations must proactively review cross-border salary recharge policies, reassess withholding tax positions under Section 195, and prepare for heightened scrutiny on traditional secondment structures.
MNCs should ensure that the Indian entity is the genuine employer in both form and substance during the assignment. Employment arrangements, contractual terms, and day-to-day operations should be aligned to reflect the intended commercial and tax position.
Dual employment contracts — where an expatriate holds an Indian contract for local duties and an offshore contract for global roles — are increasingly scrutinised by Indian direct tax and GST authorities. Unless there is robust documentation proving that offshore duties are entirely distinct and performed strictly outside India, authorities may treat the arrangement as an artificial split and seek to tax the global salary in India.