CIT Vs Ernst And Young U.S. LLP (Delhi High Court)
The Delhi High Court, in CIT Vs Ernst And Young U.S. LLP, held that reimbursements made by Indian EY entities to the US entity for seconded employees constituted Fee for Technical Services (FTS) under Article 12 of the India–USA DTAA, as the secondment arrangement satisfied the “make available” test by transferring technical knowledge and skills enabling Indian employees to perform the work independently. The Court also held that the foreign entity remained the real employer because it retained the power to terminate the employees, continued their social security coverage, and the employees returned to the US after the secondment. Rejecting the argument that cost-to-cost reimbursement or TDS deduction by the Indian entity prevented taxation, the Court ruled that the absence of a markup did not by itself exempt the payments from tax. On the question of whether the receipts qualified as exempt “professional services” under Article 15 of the DTAA, the Court found that the ITAT had not adequately examined the nature of the services and remanded the issue for fresh consideration. The ruling highlights that Global Capability Centres (GCCs) and multinational companies should carefully review secondment agreements, determine the real employer based on the substance of the arrangement, separately evaluate professional services under the DTAA, and consider the transfer pricing implications of payments to foreign related parties.
