Relief to EY: ITAT rules Reimbursement of Secondment Charges not FTS under Article 12 of India-USA DTAA [Read Order]

The Delhi bench of Income Tax Appellate Tribunal ( ITAT ) recently in a case ruled that reimbursement of secondment charges are not Fee For Technical Services ( FTS ) under Article 12 of India -USA Double Taxation Avoidance Agreement ( DTAA )

The assessee/ appellant, Ernst and Young U.S. LLP (EY)  is a Limited Liability Partnership (LLP) where various individual partners hold partnership shares.

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The assessee is a tax resident of the United States of America (USA) and is engaged in providing professional services in assurance, tax, transaction, and business advisory services to clients worldwide, including India.

The assessee is eligible for treaty benefits under the India-USA DTAA

The assessee received ₹18,28,95,723 as reimbursement of costs related to employees seconded to an Indian member firm and ₹65,20,12,778 from Indian clients for services performed in and from the USA.

During the relevant year, the assessee offered its income to tax as per Section 115A of the Income Tax Act, in conjunction with the provisions of the India-USA Tax Treaty.

During scrutiny, the Assessing Officer (AO) issued a show cause notice asking why the payments received on account of seconded employees amounting to ₹4,50,99,38,561 should not be taxed as “Fee for Technical Services” (FTS) as defined under article 12 of the India-USA DTAA or as  Independent Personal Services (IPS) as per article 15 of the DTAA provisions.

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The assessee responded with a detailed reply and documentary evidence, but the AO proposed to add the secondment costs to the returned income as taxable FTS under the DTAA, leading to a proposed assessed income of ₹51,32,12,181.

Aggrieved, the  assessee contested this before the Dispute Resolution Panel (DRP), but was unsuccessful.

Aggrieved again, the assessee appealed before the ITAT.

Before the tribunal, the assessee's counsel argued that the personnel, after being approved by EY India member firms, were seconded to these firms, released from obligations in the USA, and subsequently employed by the Indian firms.

The counsel referred to the deputation agreement, explaining that EY India member firms were solely responsible for the salary and costs of the personnel during the assignment, including performance appraisals.

The seconded employees were sent to EYGBS (India) Pvt. Ltd., EY Global Delivery Services India LLP (EYGDS) and Ernst & Young LLP.

The counsel further explained that the invoices raised by the assessee pertained to salary costs and other related expenses incurred on behalf of the Indian member firms for administrative convenience and did not constitute taxable income in India.

It was submitted that invoices were reimbursements without a profit element and did not fall under Article 12 FTS or Article 15 IPS of the India-USA tax treaty.

The invoices, according to the counsel, were for amounts already subjected to tax under Section 192 of the Indian tax legislature as income in the hands of the seconded personnel.

In contrast,the Revenue’s counsel supported the AO’s findings, relying on the Supreme Court's decision in the case of M/s Northern Operating Systems Pvt. Ltd. The counsel contended that the judgment confirmed the AO's view.

The bench of Mr BRR Kumar and Ms Madhumita Roy after carefully considering  both sides, reviewed the Supreme Court judgment.

The bench observed that the Supreme Court, in the judgment, discussed the nature of the relationship between the seconded employees and the assessee and the service provided by the overseas group company to the assessee.

It was noted that the Supreme Court observed that in the global economy, cross-border arrangements often involve seconding employees to meet specific business needs of the host entity (Indian associate), where the secondees work under the control and supervision of the Indian company.

Payroll and salary payments are retained by the foreign entity but reimbursed by the host entity.

The tribunal inferred that the crux of the issue was determining the real employer.

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If the Indian company was considered the employer, the payments were to be treated as reimbursements, which are not taxable in the hands of the overseas entity. If the overseas entity is considered the employer, the arrangement would be viewed as a service provided by the overseas entity and taxed accordingly.

The Tribunal also referenced a Delhi High Court decision affirming that in a similar case, the secondees were employees of the Indian entity, and the salary reimbursement by the Indian entity to the foreign entity did not constitute taxable income under the FTS or IPS articles of the tax treaty.

In light of the observations made, the tribunal allowed the assessee’s appeal, ruling that reimbursement of secondment charges does not constitute FTS under the India-USA DTTA.

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