The Delhi High Court (HC)^[1], on June 18, 2026, in Ernst & Young U.S. LLP (EY US) has, inter alia, ruled that in the given facts, EY US retained ‘lien’ over seconded employees in India and cost-to-cost reimbursements of such seconded employees were taxable as Fees for Technical Services (FTS) under both Section 9(1)(vii) of the 1961 (Act), and Article 12 of the India–US Tax Treaty (Tax Treaty).

Background

Ernst and Young U.S. LLP (EY US), the taxpayer, is a limited liability partnership (LLP) based in the

EY US filed its tax returns in India offering to tax certain Indian receipts and claimed the following receipts as not taxable in India as they did not qualify as Fees for Technical Services (FTS) under Article 12 of the Tax Treaty:

1. Reimbursement of costs with respect to employees seconded to its Indian Member firms; and
2. Receipts from India-based clients for services performed in and from USA for such clients.

The Tax Officer in the draft assessment order made an addition for the entire reimbursement of cost of the seconded employees treating it as FTS. Further, the Tax Officer also made addition for a portion of the receipts from India-based clients, re-characterizing them as FTS instead of professional fees. The additions made by the Tax Officer were upheld by the Dispute Resolution Panel (DRP).

Income Tax Appellate Tribunal (ITAT) Ruling

On appeal to the ITAT, the ITAT, after considering the facts and deputation agreements, accepted EY US’ arguments and held that the cost-to-cost reimbursement on account of secondment of employees could not be treated as FTS under Article 12 of the Tax Treaty. The seconded personnel were employees of the India entities whose income has been taxed as salary in their respective hands. Therefore, the very same amount could not, in law, be subject to tax twice: firstly, in the hands of the seconded employees working in India, and secondly again in the hands of EY US.

With regard to the receipts from the India clients, the ITAT held that the services rendered by EY US did not satisfy the make available clause under Article 12(4) of the Tax Treaty. Further, they agreed with EY US’ contention and also held that the services were professional services as envisaged under Article 15 of the Tax Treaty (Independent Personal Services). Hence, the receipts were not in the nature of FTS due to the specific carve-out provided under Article 12(5)(e) of the Tax Treaty for amounts paid to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 15 of the Tax Treaty.

Questions Before the High Court

In light of the above, the following substantial questions of law arose before the HC:

• Whether the payments for the seconded employees were merely reimbursements (not taxable) or consideration for services (FTS);
• Whether the receipts for services rendered to the India-based clients are taxable as FTS; and
• Whether the services rendered by the taxpayer to the India-based clients qualify as professional services and therefore, not FTS due to the specific exemption under Article 12(5)(e) of the Tax Treaty.

High Court Findings

• Relying heavily on the Supreme Court ruling in the case of Centrica India Private Limited (Centrica Ruling), the HC observed that given EY US continued to retain ‘lien’ over the employees sent to India and Indian entities did not have the termination right over these employees, these employees never ceased being employees of EY US.
• Given that the seconded employees were imparting know-how and technical expertise to the employees of the Indian entities, the services constituted FTS.
• With respect to services rendered by EY US from overseas, the HC observed that these needed further factual evaluation and remanded the matter back to the ITAT.

Key Takeaways

• Secondment arrangements, wherein foreign employees are sent to work for the Indian entity, have always been a matter of great concern post , and required clear determination of the real/economic employer, based on who benefits from and exercises control and supervision on the work performed by the secondees, who bears the salary cost and retains the right of termination.
• This ruling has re-emphasized the principle laid down in the Centrica Ruling that, inter alia, payment of salary by overseas entity, retention of lien on employment with the overseas entity, and no right of termination with the Indian entity, evidence overarching control by the overseas entity and thereby continuation as their employees while in India.
• Training, implementation of group policies, and transfer of processes which enable entities to independently apply such knowledge could trigger the “make available” requirement under the tax treaties. Therefore, finalization of tax position requires critical analysis of the scope of services and the substance of the arrangement and actual conduct. Each service must be examined separately to determine whether it qualifies as FTS or qualifies as professional services.
• Cost-to-cost reimbursement models with the absence of markup is not determinative of the nature of services, and hence does not preclude FTS characterization, particularly where services are in the broad category of technical/consultancy.

Way forward

It has been a long-standing practice in many industries with a global footprint to second employees on a long-term basis to bring specific technical, managerial, or operational expertise to India, to ensure alignment with global standards and provide career development opportunities. In most cases, the employees cease to work for the overseas entities temporarily and work for and under the control/supervision of the India entities.

However, to protect/continue their social security and retirement benefits in the home country, for administrative reasons and family maintenance, the employees continue to receive money in their home country from their deputing entity, which is then recharged to the India entity.

Both Centrica and this ruling raise serious concerns to such historic arrangements, on issues such as applicability of withholding tax on recharge of salary cost, rendition of services resulting into taxability as FTS, creation of permanent establishment (PE), etc.

Specifically, the ruling does also raise an interesting question: if the overseas employer does retain a ‘lien’ over the person sent to India and the nature of services does not constitute FTS, then would it result in the overseas employer having a service PE in India?

The ruling therefore necessitates a reassessment of historic tax positions, particularly where obligations may shift from potential to probable in relation to withholding tax, ongoing litigations, and related matters. In this context, developing a robust defence strategy also becomes critical.

Businesses should therefore proactively review secondment arrangements, assess the nature of services rendered, and evaluate whether knowledge transfer (including through training) is taking place. They should also evaluate any PE and GST risk arising on account of the secondment arrangements. It would be equally important to ensure that documentation accurately reflects actual conduct, thereby enabling a proper determination of Indian tax exposure.

Disclaimer: This article is based on publicly available information and the authors’ professional experience and market analysis. For questions regarding the underlying sources or analytical methodologies, please reach out to the author directly. The analysis reflects market trends and observations and is intended for general informational purposes only. It does not constitute investment, legal, or financial advice.

Sources

[1] https://delhihighcourt.nic.in/app/showFileJudgment/VKR18062026ITA4232025_124552.pdf