Court upholds "make available" test for taxing secondment payments as Fees for Technical Services; remands professional services exemption issue for fresh ITAT adjudication
In a landmark judgment dated June 18, 2026, the Delhi High Court (Division Bench of Justices V. Kameswar Rao and Vinod Kumar) clarified the tax treatment of payments made by Indian associated enterprises to a foreign LLP (Ernst & Young U.S. LLP) for seconded employees working in India. The Court held that such payments constitute Fees for Technical Services (FTS) under Section 9(1)(vii) of the Income Tax Act, 1961, and Article 12 of the India-USA Double Taxation Avoidance Agreement (DTAA), provided the "make available" condition is satisfied. The decision significantly impacts the taxability of cross-border secondment arrangements prevalent in multinational professional services firms.
The case arose from appeals by the Commissioner of Income Tax (International Taxation)-1, New Delhi, challenging the Income Tax Appellate Tribunal’s (ITAT) orders that had set aside additions made by the Assessing Officer (AO) regarding income declared by Ernst & Young U.S. LLP (EY US) for assessment years 2018-19 through 2022-23. The AO had treated payments received by EY US from Indian associated entities for seconded employees as taxable FTS, while the ITAT had disagreed, treating the payments as mere cost-to-cost reimbursements and holding that the secondees were employees of the Indian entities.
The Court examined the deputation agreement which revealed that secondees retained employment liens with EY US, were paid by EY US though reimbursed by Indian entities, and returned to EY US after their secondment tenure of 2-3 years. The Indian entities exercised operational control but lacked authority to terminate the employment relationship with the secondees. The secondees also continued contributing to social security schemes in the US through EY US, underscoring continued employment linkage.
Applying the doctrine of substance over form, the Court rejected the ITAT’s approach that mere cost-to-cost reimbursements without markup negate FTS character. Relying on binding precedent from a coordinate Bench in Centrica India Offshore Pvt. Ltd., upheld by the Supreme Court, the Court held that the presence of secondees imparting technical knowledge, skill, and experience to the Indian entities satisfies the "make available" test under Article 12(4)(b) of the DTAA, making the payments taxable as FTS. The Court underscored that the technical services rendered result in enduring benefits to the Indian entities, enabling them to independently utilize the know-how post secondment.
On the issue of receipts by EY US for professional services rendered from the USA to Indian clients, the Court noted that the ITAT had granted exemption under Article 12(5)(e) of the DTAA by characterizing these as “professional services” under Article 15(2). However, the Court found the ITAT’s reasoning incomplete, as it failed to differentiate the services taxable as FTS from exempt professional services and remanded this issue back to the ITAT for fresh adjudication with detailed reasons.
The Court emphasized that the ITAT orders ignoring the binding precedent of Centrica India Offshore Pvt. Ltd. were per incuriam and set aside those orders, directing ITAT to reconsider the issues in light of the detailed legal analysis in the judgment.
This ruling clarifies that:
- Payments to foreign LLPs for secondees seconded to Indian associated entities are taxable as Fees for Technical Services under the India-USA DTAA if the secondees impart technical knowledge or skills that make available enduring benefits.
- The absence of markup in cost reimbursements does not prevent taxation if the substance of the transaction is provision of technical services.
- The employment relationship continuing with the foreign LLP and the secondees’ return after secondment are key factors in establishing FTS liability.
- Exemptions for professional services under Article 15(2) require careful scrutiny, and blanket denials or allowances without detailed factual analysis are impermissible.
Legal experts believe this judgment will influence tax assessments involving secondment and cross-border professional services, underscoring the importance of substance over form in tax treaties and domestic tax law.
Bottom line:-
Payments received by a foreign LLP on secondment of employees to Indian associated entities constitute Fees for Technical Services (FTS) under Section 9(1)(vii) of the Income Tax Act and Article 12 of the India-USA Double Taxation Avoidance Agreement (DTAA) if the "make available" condition is satisfied; reimbursements without markup do not negate the nature of such payments as FTS.
Statutory provision(s):
Income Tax Act, 1961 Section 9(1)(vii), Section 115A; India-USA Double Taxation Avoidance Agreement (DTAA) Articles 12 and 15; doctrine of substance over form; relevant precedents including Centrica India Offshore Pvt. Ltd. v. CIT (2014) DHC 2172-DB.
