A tax dispute over payments for employees seconded by Ernst and Young U.S. LLP (EY US) to Indian affiliates is before India’s Supreme Court, Mint and LiveLaw reported Oct. 26.
The court sought the tax department’s response to EY US’s appeal against a June 18 Delhi High Court judgment. That judgment treated payments from the affiliates to the U.S. firm as fees for technical services taxable in India. It overturned an Income Tax Appellate Tribunal decision that had favored EY US on the secondment issue.
The dispute spans Indian assessment years 2018-19 through 2022-23. For 2019-20, an assessing officer proposed adding ₹509,938,561 in secondment payments to EY US’s taxable income, according to the High Court judgment. That figure is a disputed addition to income, not a tax bill.
EY US argued that its Indian affiliates directed the employees’ work and reimbursed their salary costs without a markup. The tax department argued that the payments compensated the U.S. firm for expertise supplied through the employees. The High Court found that the workers retained employment links and benefits with EY US while their assignments transferred technical knowledge to the Indian entities.
The legal dispute centers on Article 12 of the India-U.S. tax treaty. It covers certain “fees for included services” when technical knowledge or skills are made available to the recipient. In applying that test, the High Court relied on its earlier Centrica India Offshore ruling.
The High Court separately returned questions about services EY US performed in the United States for Indian clients to the tax tribunal. The tax department’s response to the Supreme Court notice is the next step reported in the secondment appeal.
