Ernst & Young US LLP (EY US) has moved the Supreme Court challenging a Delhi High Court judgment concerning the taxability of payments received in relation to employees seconded to EY entities in India. [EY Vs Union of India]
The appeal challenges a June 18 judgment by a Division Bench of Justices V Kameswar Rao and Vinod Kumar, which ruled in favour of the Income Tax Department on the secondment issue. The judgment arose from five appeals concerning assessment years 2018-19 to 2022-23.
The principal issue before the High Court was whether payments received by EY US in connection with seconded employees could be taxed as fees for technical services (FTS) under Article 12 of the India-US Double Taxation Avoidance Agreement (DTAA).
The Income Tax Appellate Tribunal (ITAT) earlier ruled in favour of EY US and treated the payments as cost-to-cost reimbursements. It also held that the seconded personnel became employees of the Indian entities during the period of their secondment.
The High Court disagreed with the ITAT.
It noted that the employees were seconded to India for limited period of two to three years and returned to EY US once the assignment ended. The Court also found that the Indian entities could terminate the secondment but could not sever the employees' underlying relationship with EY US.
The Bench further examined the nature of the work performed by the secondees and found that they were involved in training employees, implementing EY Group policies and processes and maintaining quality standards in the Indian entities.
Therefore, the High Court held that the services satisfied the "make available" requirement under Article 12(4)(b) of the DTAA. Court said,
“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.”
The High Court also rejected EY US' argument that there was no transfer of technical know-how or expertise, observing that the scope of services showed that the seconded employees imparted training.
It added that EY US retained a lien over the seconded employees since they returned to the US entity after their Indian assignments.
Consequently, the Court set aside the ITAT orders in all five appeals and answered the question concerning secondment payments in favour of the Revenue and against EY US.
EY has now challenged the same before the apex court.
The dispute also involved payments received by EY US for professional services rendered to Indian clients from the United States. On that issue, however, the High Court did not give a final ruling.
It found that the ITAT had not adequately examined the nature of the services which the Assessing Officer had treated as taxable FTS. Therefore, it remanded those issues to the ITAT for reconsideration and directed it to pass a reasoned order after examining all relevant records.