The Delhi High Court [TS-903-HC-2026(DEL)] held that payments from Indian EY entities to EY US towards seconded employees are taxable as ‘fees for technical services / fees for included services’ (FTS/FIS) under section 9(1)(vii) and Article 12 of the India–US DTAA and that they are not mere non‑taxable reimbursements. 

Key facts on secondment

EY US seconded personnel to EY India entities under a “deputation agreement. EY India was to “employ” them and bear salary and local costs, while EY US could pay salaries “for administrative convenience” and get reimbursed at cost, with no mark‑up. The secondment was typically for a period of 2–3 years, on completion of which secondees reverted to EY US without cessation of employment, keeping entitlement to US social security and other EY US benefits.  EY India could end only the assignment, but not the underlying EY US employment.

Revenue vs taxpayer positions on secondment

Taxpayer arguments: During secondment, secondees became employees of EY India (operational control, Indian payroll/TDS, deputation language); EY US was just reimbursed on a cost‑to‑cost basis with no income element, so no FTS/FIS could arise at EY US level.

Revenue arguments - Secondees never ceased to be EY US employees – they retained lien, US social‑security and global benefits, and had to return to EY US after the tenure; EY India had only day‑to‑day control, while employment remained with EY US. The secondees came to “imbibe the culture of the EY Group and ensure the application of the EY group policies / processes and other quality standards in the EY India entities,” and imparted training; once policies/processes were embedded, EY India staff could apply them on their own – this satisfied the “make available” test under Article 12.

Court’s findings on secondment and make available

Real employer and lien test: EY India could only terminate the assignment and “relieve” them to re‑join EY US; it had no power to sever the relationship between the seconded employees and EY US.  The secondees never ceased to be the employees of EY US and that EY US retains an overarching control over them.  Secondees’ were entitled to US social‑security and other EY US benefits.   EY US had a lien on the employees and the employees had a lien on their employment with EY US.   The ruling in the case of Centrica was held squarely applicable on facts.

Nature of services provided: The AO/DRP had found that secondees came to India “to imbibe the culture of the group and ensure the application of the EY group policies / processes and other quality standards in EY India,” and that training was part of their role.  Once the  processes / policies were imbibed, there is no need for the secondees to work again and EY India entities can apply the same by themselves.

As per terms of engagement, there is a transfer of technical knowledge, skill and experience in the provision of services by EY US to EY India entities. The assignment of secondees was like a deputation to enable the secondees to use their expertise and ‘make available’ the same to EY India entities for future use.  

Comparison with Northern Operating Systems (NOS) ruling

While the Supreme Court ruling [TS-216-SC-2022-ST] in the case of NOS in service tax context was referred by the DRP in its order, the Delhi High court has not specifically considered this ruling.  The Court heavily relied upon its earlier ruling in the case of Centrica India Offshore, wherein the SLP has been dismissed by the Supreme Court.  The Centrica ruling and the earlier Supreme Court ruling in the case of Morgan Stanley have emphasized the ‘lien on employment’ as a critical criteria to determine the real employer. 

In NOS case, the Supreme Court analysed all the relevant agreements, considered the various tests of employment laid out by the Courts and ultimately applied the ‘substance over form’ test to determine the real employer.  The key facts considered in NOS include (i) deputation of highly skilled employees having expertise and specialization for specified duration, (ii) terms of employment and substantial amounts of salary based on policy of overseas employer, (iii) continuity in payroll of overseas employer with entitlement to social security benefits, (iv) repatriation to overseas employer on cessation of employment as per global repatriation policy. While the term ‘lien on employment’ was not used as such by the Supreme Court, yet the lien test was also applied to conclude that the overseas entity was the real employer.

Many of the secondment terms considered to determine the real employer are similar in NOS and the EY ruling.  The NOS ruling also considered a vital fact of the Indian entity’s business of exporting services back to the overseas entity and the deputation of the seconded employees for use of expertise in such business.    While in the NOS ruling the category of service has been upheld as ‘manpower supply’, the EY ruling holds this as FTS/FIS in Income tax context.

In summary

The EY ruling following Centrica has categorically concluded based on the ‘lien test’ that the overseas entity is the real employer.  This is likely to impact pending matters with similar fact pattern and could also result in initiation of fresh proceedings.  The NOS ruling is sought to be distinguished on facts by various taxpayers to defend the reverse charge liability in service tax/GST and a similar issue is pending before Supreme Court in the case of Komatsu.   The ‘lien on employment’ is critical and is expected to be applied as the conclusive test by the tax authorities under the direct and indirect tax laws in all secondment arrangements.  While the tax payers may continue to strive to distinguish their facts in appropriate cases, the line of distinction is becoming thinner.  Apart from secondment, there are various other transactions wherein companies need to adopt a unified approach to determine their nature and characterization, for both tax (direct and indirect) laws, while there could be specific considerations for taxability under these laws warranting differential treatment. 

The views of the author are personal.