The Delhi High Court has delivered a significant judgment in favour of Ernst & Young U.S. LLP (EY US), holding that reimbursements received from Indian EY entities towards seconded employees and receipts from certain professional services can be taxed in India as Fees for Technical Services (FTS) under the India–US Double Taxation Avoidance Agreement (DTAA).

The appeals arose from additions made by the Assessing Officer (AO) on two principal issues: first, whether reimbursements relating to employees deputed by EY US to Indian EY entities constituted taxable FTS; and second, whether receipts from professional services rendered by EY US to Indian clients were liable to tax in India under Article 12 of the India–US DTAA.

The respondent/assessee, EY US, a member of the global Ernst & Young network, provides assurance, tax, transaction and business advisory services worldwide, including services to Indian clients. The Revenue alleged that payments received by EY US in connection with seconded employees working in India and professional services rendered from the United States amounted to FTS taxable in India.

Across the five assessment years, the Department sought to tax substantial amounts, including reimbursements for seconded employees ranging from approximately ₹13.94 crore to ₹68.02 crore and professional service receipts ranging from approximately ₹3.72 crore to ₹97.79 crore.

The department argued that the seconded employees continued to remain employees of EY US despite their deputation to Indian entities. According to the Department, the employees retained a lien with the US entity, contributed to US social security schemes, and returned to EY US upon completion of their assignments. On this basis, it was contended that EY US was effectively providing technical and managerial expertise to Indian entities through these personnel.

The Department further relied upon the Delhi High Court’s earlier decision in Centrica India Offshore (P.) Ltd., arguing that reimbursements under secondment arrangements amounted to FTS irrespective of whether any markup was charged.

Regarding professional service receipts, the Revenue contended that the services did not qualify for exemption under Article 12(5)(e) of the India–US DTAA and that the “make available” requirement under Article 12(4)(b) stood satisfied because technical knowledge, expertise and skills were allegedly transferred to Indian entities.

EY US argued that under the deputation agreements, seconded personnel ceased to function as employees of EY US during the assignment period and became employees of the Indian EY entities. The agreements specifically provided that the Indian entities exercised complete control, supervision and disciplinary authority over the secondees and were solely responsible for their remuneration and employment obligations.

The assessee emphasized that salary payments made by EY US were merely for administrative convenience and were reimbursed by the Indian entities on a pure cost-to-cost basis without any markup. Tax was deducted at source under Section 192 of the Income-tax Act by the Indian entities and paid in India as salary income of the employees.

EY US also relied on judicial precedents including Boeing Limited and AP Moller Maersk AS to contend that pure reimbursements lacking any profit element cannot be characterized as taxable income.

A key aspect of the judgment was the Court’s analysis of the deputation agreements. The agreements expressly stated that the secondees would work exclusively under the control and supervision of the Indian EY entities, that EY US would not direct or control them during the assignment period, and that the Indian entities would bear all salary and related employment costs.

The Court noted that the reimbursement mechanism operated solely to recover actual salary and related costs paid by EY US on behalf of the Indian entities and that no additional consideration or markup was charged.

The Court also considered whether the services rendered satisfied the “make available” requirement contained in Article 12(4)(b) of the India–US DTAA. The assessee successfully argued that the services did not result in any transfer of technical knowledge, know-how, skill or processes enabling Indian entities to independently perform the same functions in future.

Consequently, the Tribunal’s findings that the “make available” condition was not fulfilled were upheld.

On the second issue, the Court examined whether receipts from professional services rendered by EY US fell within the exclusion contained in Article 12(5)(e) read with Article 15 of the India–US DTAA. EY US argued that services performed by professionals such as engineers, economists, consultants and other experts constituted “professional services” within the meaning of Article 15.

The Court took note of the assessee’s contention that professional services are not restricted only to members of statutory professional bodies and that the DTAA specifically includes various independent professional activities.

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