The Supreme Court on Monday sought a response to a challenge by Ernst & Young US LLP to a Delhi High Court ruling that classified payments for employees deputed to its Indian entities as fees for technical services (FTS).
A Bench of Justices J B Pardiwala and K Vinod Chandran agreed to consider whether salary costs reimbursed to the US firm attract tax as FTS, despite the deputed employees working under the supervision and control of the Indian entities and tax being deducted from their salaries.
The dispute began when the Income Tax Department treated payments made by EY’s Indian entities to its US counterpart for seconded employees as taxable technical service fees. The Dispute Resolution Panel upheld the department’s position.
The Income Tax Appellate Tribunal (ITAT) subsequently ruled in favour of EY US, holding that the payments merely compensated the firm for salary expenses and did not contain any profit component. It, therefore, rejected their classification as FTS.
The Delhi High Court overturned the tribunal’s findings on the employee secondment issue. It held that the arrangement involved the transfer of technical knowledge and skills to the Indian entities, meeting the ‘make available’ condition under the India-US Double Taxation Avoidance Agreement (DTAA).
Under this condition, technical services are generally covered when they enable the recipient to acquire and independently apply the relevant technical knowledge or skills.
The High Court concluded that the services provided by EY US involved a transfer of skills and knowledge, bringing the payments within the scope of taxable FTS under the treaty.
Challenging this conclusion before the Supreme Court, EY US has questioned whether reimbursements for employees’ salaries can qualify as consideration for technical services when the employees operate under the control of the Indian entities.
The secondment-related dispute covers five assessment years, from 2018-19 to 2022-23.
In a separate part of its ruling, the Delhi High Court sent issues concerning payments for professional services provided from the US to Indian clients back to the ITAT for fresh examination in four appeals.
