The Supreme Court has agreed to examine EY US’s challenge to the Delhi High Court ruling treating employee secondment salary reimbursements as Fees for Technical Services under the India-US DTAA.
Introduction
The Supreme Court of India has agreed to examine an important international taxation dispute involving Ernst & Young U.S. LLP (EY US) and the Income Tax Department. The case concerns whether amounts reimbursed by Indian group entities to a foreign company towards the salaries and related costs of employees deputed to India can be taxed as Fees for Technical Services (FTS).
On October 26, 2026, the Supreme Court issued notice on EY US’s challenge to a Delhi High Court judgment that had ruled against the company on the employee secondment issue. The dispute has significant implications for multinational corporations, global capability centres, consulting firms and Indian businesses employing personnel under international secondment arrangements.
Case reference: Ernst & Young U.S. LLP v. Commissioner of Income Tax, Special Leave Petition (C) No. 36320/2026.
Background of the Case
EY US deputed employees to its Indian group entities under an arrangement governed by a deputation agreement dated October 4, 2017. The Indian entities reimbursed EY US for expenses associated with these employees.
According to EY US, the payments represented reimbursements of employee-related costs rather than consideration for independent technical services rendered by the overseas company. The employees worked for the Indian entities, and their salary income was subject to Indian tax withholding.
The Income Tax Department, however, adopted a different position. It treated the amounts received by EY US as consideration for technical services and sought to tax them as FTS. The Dispute Resolution Panel upheld the department’s approach.
The dispute covered five assessment years, from AY 2018–19 to AY 2022–23.
Key Legal Issue
The central question is whether salary reimbursements arising from employee secondment arrangements constitute taxable FTS under the Income-tax Act, 1961, read with Article 12 of the India-US Double Taxation Avoidance Agreement (DTAA).
Two competing interpretations emerged:
- EY US’s position: The payments were cost-to-cost reimbursements of salary expenses, without any profit element. They should not be characterised as fees for technical services merely because the employees possessed specialised knowledge or professional expertise.
- Income Tax Department’s position: The arrangement involved the provision of technical expertise and the transfer of knowledge and skills to the Indian entities, making the payments taxable as FTS under the applicable tax treaty.
A particularly important consideration is the DTAA’s “make available” requirement. In general, this test examines whether technical knowledge, experience, skill or know-how is made available to the recipient so that it can be applied independently in the future.
Decision of the ITAT
The Income Tax Appellate Tribunal (ITAT) initially ruled in favour of EY US on the secondment issue. It accepted the company’s contention that the amounts represented reimbursement of salary-related expenses on a cost-to-cost basis, without a profit component.
The Tribunal did not accept the department’s attempt to characterise these payments as FTS. Its decision provided relief to EY US and became the basis for the subsequent litigation before the Delhi High Court.
The Tribunal’s approach placed emphasis on the nature of the payments and the actual employment arrangement rather than treating the reimbursement itself as conclusive evidence of a technical service transaction.
Delhi High Court’s Ruling
On June 18, 2026, the Delhi High Court overturned the ITAT’s favourable findings on the secondment issue.
The High Court considered the nature of the arrangement, the continuing employment relationship with EY US and the technical knowledge and expertise associated with the employees’ work. It concluded that the services involved the transfer of technical skills and knowledge to the Indian entities.
The Court consequently held that the payments fell within the scope of FTS under the India-US DTAA. The ruling reinforced the principle that the character of a payment must be assessed by examining the substance of the arrangement and the services involved, rather than relying solely on its description as a reimbursement.
The High Court also remanded certain separate issues relating to professional services performed from the United States for fresh consideration by the ITAT.
Supreme Court Proceedings
EY US challenged the High Court’s ruling before the Supreme Court. On October 26, 2026, the Court issued notice to the Income Tax Department and agreed to examine the challenge.
The Supreme Court will consider whether salary-related reimbursements can be taxed as FTS when the deputed employees work under the control of the Indian entities and tax has already been deducted from their salaries.
At this stage, the Supreme Court has not delivered a final judgment on the merits. The High Court’s ruling remains the subject of challenge, and the ultimate legal position will depend on the Supreme Court’s decision.
Implications for Multinational Companies
The Supreme Court’s eventual decision may influence the tax treatment of cross-border employee secondment arrangements in India.
The principal implications include:
a) Withholding tax compliance: Indian entities should evaluate whether payments to overseas group companies attract withholding tax under Section 195 of the Income-tax Act, 1961.
b) Secondment agreement review: Agreements should clearly establish employment responsibilities, supervision, remuneration, reimbursement obligations and the rights retained by the overseas entity.
c) Documentation of reimbursements: Salary records, payroll statements, expense schedules and intercompany invoices should demonstrate the actual nature and calculation of the amounts recovered.
d) DTAA analysis: Businesses must assess whether the services satisfy the applicable treaty’s definition of technical services and the relevant “make available” condition.
e) Potential tax exposure: Incorrect classification may result in additional tax demands, interest and possible withholding-tax consequences.
The Delhi High Court’s decision demonstrates that describing a payment as a reimbursement, or establishing that it contains no profit margin, may not by itself determine its tax treatment. The contractual terms and actual conduct of the parties remain important considerations. The Supreme Court’s eventual ruling will be particularly relevant to businesses with international employee mobility arrangements.
Practical Lessons for Taxpayers
Companies using overseas personnel should conduct a tax review of their existing secondment arrangements rather than relying exclusively on standard group policies.
The review should examine whether the Indian entity exercises day-to-day supervision, who retains formal employment rights, how salaries and social security contributions are paid, and whether technical knowledge is transferred in a manner satisfying the applicable treaty provisions.
Taxpayers should also distinguish between reimbursement of employee expenses and consideration for a separate technical service. These arrangements require a fact-specific assessment, and no single contractual label or accounting treatment can conclusively establish the tax outcome.
Conclusion
The EY US litigation raises a significant question in international taxation: can salary reimbursements relating to employees deputed to India be treated as Fees for Technical Services when the Indian entities use the employees’ services and the associated salary income is subject to tax withholding?
The ITAT accepted EY US’s reimbursement argument, while the Delhi High Court adopted the Revenue’s position after examining the arrangement and the transfer of technical expertise. The Supreme Court has now agreed to examine EY US’s challenge.
The matter remains pending, and the final outcome may clarify the application of the India-US DTAA to employee secondment arrangements. Until then, multinational companies should carefully review their contracts, tax withholding obligations and supporting documentation.
Disclaimer: This article is intended for general legal and tax awareness and should not be construed as professional advice. The tax treatment of individual secondment arrangements depends on the applicable law, treaty provisions and facts of each case.