Delhi HC Holds Ernst and Young US Payments Taxable as Fees for Technical Services Under India-USA DTAA

On June 18, 2026, the Delhi High Court delivered a significant ruling in Commissioner of Income Tax (International Taxation)-1 v Ernst and Young US LLP (ITA 423/2025), setting aside ITAT orders and holding that payments by Indian entities to Ernst and Young US LLP for seconded employees and professional services were taxable as Fees for Technical Services (FTS). The decision carries implications for multinational firms deploying personnel to India under deputation or secondment arrangements, particularly where the foreign entity retains control over the employees.

Background: The Dispute Over Secondment Payments

The case arose from payments made by Indian group entities to EY US LLP under deputation and professional services agreements. The Revenue contended that these payments constituted FTS under Section 9(1)(vii) of the Income Tax Act, 1961, and were also taxable under Article 12 of the India-USA Double Taxation Avoidance Agreement (DTAA). The central question was whether payments characterised as cost-to-cost reimbursements for seconded employees could escape classification as FTS.

The ITAT had previously ruled in favour of EY US, holding that the cost-to-cost reimbursements did not amount to FTS. The Tribunal reasoned that since no profit element or markup was embedded in the payments, they represented genuine reimbursements rather than fees for services. The Revenue challenged this finding before the Delhi High Court.

The Legal Framework: Section 9(1)(vii) and Article 12 of the India-USA DTAA

Section 9(1)(vii) of the Income Tax Act deems income by way of fees for technical services to accrue or arise in India if payable by a resident, or by a non-resident for services utilised in a business carried on in India. The term covers consideration for rendering managerial, technical, or consultancy services.

Under the India-USA DTAA, Article 12 governs the taxation of FTS. Critically, Article 12(4)(b) introduces the "make available" test, which requires that services must "make available" technical knowledge, experience, skill, know-how, or processes to the recipient. This test is narrower than the domestic law definition: the recipient must be enabled to apply the technical knowledge independently, rather than merely benefiting from services performed by the provider. Understanding how tax treaties interact with domestic provisions is essential for businesses structuring cross-border transactions and GST obligations.

Delhi HC's Findings: Why the Payments Qualify as FTS

The Delhi High Court reversed the ITAT on multiple grounds, examining the substance of the deputation arrangements rather than their form. The Court's analysis rested on several key observations.

Lien retained by EY US: The Court found that EY US maintained a continuing lien over the seconded employees. They remained on the US entity's payroll, their performance evaluations were influenced by EY US, and repatriation was controlled by the foreign firm. This indicated the arrangement was not a genuine employment transfer but rather a service provision by EY US through its personnel.

Technical knowledge made available: The Court found that seconded employees imparted technical knowledge, specialised methodologies, and professional expertise to the Indian entities. This transfer of know-how satisfied the "make available" requirement under Article 12(4)(b), because the Indian entities were enabled to apply these techniques independently going forward.

Reliance on Centrica India Offshore: The Court relied on the earlier decision in Centrica India Offshore (P) Ltd v CIT (2014:DHC:2172-DB), which held that secondment arrangements where the foreign entity retains substantial control over employees point towards a service relationship rather than an employment relationship. The Centrica principle reinforces that the label given to an arrangement does not determine its taxability; the substance of the transaction governs.

Cost-to-cost reimbursement irrelevant: The ITAT's reasoning that the absence of a profit markup meant the payments were not FTS was rejected. The Delhi HC clarified that FTS characterisation does not depend on whether a markup is charged. Even a cost-to-cost reimbursement can constitute FTS if the underlying service involves technical, managerial, or consultancy services. Courts examining procedural fairness in tax proceedings have consistently emphasised substance over form in revenue matters.

Implications for Multinational Secondment Arrangements

This judgment carries practical consequences for multinational enterprises operating in India through secondment structures.

Broader Significance of the Ruling

This decision reinforces a broader trend in Indian tax jurisprudence favouring substance over form. Courts have increasingly looked beyond contractual labels on cross-border transactions to examine the true nature of the underlying arrangement. Tax authorities may examine whether a reimbursement arrangement is, in reality, a payment for services rendered.

The ruling also highlights the importance of understanding DTAA provisions alongside domestic law. While the India-USA DTAA provides a narrower FTS definition through the "make available" test, the finding that seconded employees transferring methodologies meet this threshold suggests companies cannot assume the DTAA will shield them simply because the secondment is on a cost-recovery basis.

This decision may be appealed. However, until a contrary ruling from a higher bench or the Supreme Court, it will serve as authoritative precedent for assessments involving similar secondment arrangements under the India-USA DTAA.

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