Ernst & Young U.S. LLP has approached the Supreme Court challenging a significant Delhi High Court ruling which held that amounts received by the US entity from its Indian affiliates towards the cost of employees seconded to India were taxable as Fees for Technical Services under the India–US Double Taxation Avoidance Agreement. The appeal places before the Supreme Court a recurring question in international taxation: when a multinational group temporarily places its overseas employees with an Indian group entity and the Indian entity reimburses the foreign entity for salary and related costs, does the payment remain a mere reimbursement of employment expenditure, or does the underlying arrangement amount to the provision of taxable technical services by the foreign enterprise?
The dispute is particularly significant because the Delhi High Court’s June 18, 2026 judgment did not decide the matter merely by looking at the accounting description of the payments. The Division Bench of Justices V. Kameswar Rao and Vinod Kumar examined the actual employment structure, the continuing relationship between the secondees and EY US, the control retained by the overseas entity, the nature of the work undertaken in India and the manner in which knowledge, processes and expertise were transferred to the Indian entities. On that factual foundation, the Court concluded that the payments represented consideration for technical services falling within Article 12 of the India–US DTAA.
The Supreme Court appeal arises from five assessment years, 2018–19 through 2022–23. The tax dispute is therefore not confined to a single isolated payment or accounting year. The assessment orders involved substantial amounts attributed to the secondment arrangements. For example, for assessment year 2019–20, the Assessing Officer had proposed an addition of approximately ₹50.99 crore in respect of payments relating to seconded employees. For assessment year 2020–21, the corresponding addition was approximately ₹68.02 crore. Other years involved additions of approximately ₹24.05 crore and ₹13.94 crore on the secondment issue.
At the centre of the controversy lies the distinction between reimbursement and consideration for services. EY US’s case before the tax authorities was that the Indian entities were bearing the actual employment cost of personnel working for them and that EY US was merely acting as the payroll and administrative conduit. The Indian entities had already treated the secondees as their employees for the duration of their assignments, and the salary income of the employees had been subjected to taxation in India. According to EY US, taxing the corresponding reimbursement again in the hands of the foreign entity would effectively transform an employment-cost arrangement into a service transaction without examining its real substance.
The Revenue took a fundamentally different view. Its case was that the employees did not completely sever their relationship with EY US during their Indian assignments. They remained connected with the US entity through their employment arrangements, retained a lien over their positions, continued to receive certain overseas social-security benefits and were ultimately required to return to the foreign entity after completion of the assignment. The Revenue therefore argued that EY US continued to provide its technical knowledge, expertise and business processes through those employees to the Indian entities.
The dispute consequently required the Court to look beyond the formal label of “secondment”. In international tax law, contractual terminology is relevant but not necessarily decisive. A secondment agreement may, depending upon its actual terms and implementation, result in the secondee becoming an employee of the host entity for the relevant period. Alternatively, the foreign employer may retain sufficient rights and responsibilities to make the arrangement one through which the overseas enterprise itself provides services in India. The tax consequences can be materially different in the two situations.
The Income Tax Appellate Tribunal had initially accepted EY US’s position. It found that the seconded personnel were effectively employees of the EY India entities and that the amounts paid to EY US were cost-to-cost reimbursements. The Tribunal also noted that the corresponding salary payments had been subjected to tax in India at the level of the employees. On that reasoning, it rejected the Revenue’s attempt to characterise the reimbursements as Fees for Technical Services.
The Delhi High Court, however, took a different view. It found that the employment relationship with EY US had not disappeared merely because the employees were physically working in India. The Court attached importance to the limited tenure of the assignments, the obligation of the employees to return to EY US, the continuing employment lien and the retention of overseas employment benefits. These factors, taken collectively, persuaded the Court that the secondees continued to represent and transmit the expertise of EY US while working with the Indian entities.
The High Court’s analysis was strongly influenced by its earlier decision in Centrica India Offshore Pvt. Ltd. v. CIT. That case involved employees seconded by overseas companies to an Indian entity. Although the secondees worked under the control and supervision of the Indian company, they continued to retain their foreign employment relationships and certain overseas benefits. The Delhi High Court had concluded that the substance of the arrangement indicated continuing involvement of the overseas entities and treated the payments accordingly for tax purposes. The Supreme Court subsequently dismissed the challenge to that decision in October 2024.
It was this precedent that became decisive in the EY litigation. The High Court expressly found that the facts before it were sufficiently similar to Centrica and criticised the ITAT for failing to adequately consider that binding precedent. The Division Bench went so far as to characterise the relevant ITAT orders as per incuriam and perverse because they had not properly engaged with the earlier High Court ruling.
The most important tax-law question, however, concerns the “make available” test under Article 12 of the India–US DTAA. Under the treaty, technical or consultancy services do not become taxable merely because technical expertise has been used while performing them. The relevant test asks whether the recipient has been enabled to independently apply the technical knowledge, skill, experience, know-how or processes made available through the service. The concept is therefore different from simply demonstrating that an expert performed work for the Indian entity.
The Delhi High Court concluded that this threshold was met because the seconded employees were not merely carrying out tasks for EY India. Their functions included implementing EY Group policies and processes, ensuring adherence to quality standards and transferring knowledge and techniques that could subsequently be used by the Indian entities independently. The Court reasoned that once the relevant processes and standards had been absorbed by the Indian entities, the secondees were no longer required for the Indian entity to apply that knowledge. In the Court’s assessment, that demonstrated the transfer of technical knowledge contemplated by the treaty.
This interpretation makes the Supreme Court appeal particularly important. The “make available” requirement is intended to distinguish a genuine transfer of technical capability from a situation in which a foreign professional merely performs a technical task for an Indian customer. If every deployment of skilled personnel were automatically treated as making technical knowledge available, the treaty limitation could become considerably narrower than its text suggests. Conversely, where personnel actually leave behind processes, systems, know-how or technical capability that the Indian entity can independently deploy, the treaty may permit taxation of the consideration.
The controversy therefore cannot be resolved merely by asking whether the employees possessed technical expertise. EY US undoubtedly operates in assurance, tax, transaction and business advisory fields. The more precise question is whether the Indian entities acquired an enduring ability to use the relevant technical knowledge independently because of the services performed by the secondees. The High Court answered that question in the affirmative; the Supreme Court will now have an opportunity to examine whether that conclusion correctly applies the treaty test to the contractual and factual record.
Another important aspect concerns the absence of a profit mark-up. EY’s position effectively treats the absence of any mark-up as evidence supporting the reimbursement theory. The Revenue, however, argued that a payment does not cease to constitute consideration for services merely because the recipient has recovered its costs without adding a profit margin. The High Court accepted this broader proposition, observing that technical-service provisions do not necessarily require a mark-up before a receipt can acquire the character of taxable consideration.
That reasoning raises an important conceptual point in cross-border taxation. Cost does not necessarily equal income, but the fact that a payment exactly corresponds to cost does not by itself establish that it is not income. The real inquiry is why the payment was made. If an Indian entity reimburses its foreign group company merely because the latter temporarily continued paying the employee’s salary on its behalf, the payment may have a different character from a payment made because the foreign enterprise supplied technical personnel and expertise to the Indian entity. Substance therefore remains central.
The High Court also considered the fact that the Indian entities could not permanently terminate the employment of the secondees. They could take disciplinary action in certain circumstances and terminate the secondment, but the employees’ underlying employment relationship with EY US continued. According to the Court, this retained relationship was an indication that the foreign entity continued to exercise an overarching employment connection over the personnel.
The significance of that finding extends beyond EY. Multinational enterprises frequently use secondment structures to move senior executives, technical specialists, compliance professionals, project managers and other skilled personnel between group entities. The legal documentation may state that the host entity exercises day-to-day supervision, while the parent entity retains rights relating to employment, compensation, mobility, benefits and repatriation. The tax consequences of such arrangements cannot therefore be predicted merely from the existence of day-to-day operational control in India.
The judgment also demonstrates the continuing importance of distinguishing employment control from economic and legal employment. An employee may work under the daily instructions of an Indian company while retaining significant contractual ties with a foreign employer. Conversely, day-to-day supervision, assumption of employment risk and responsibility for the employee’s output may support a conclusion that the Indian entity is the real employer for the relevant period. The answer is fact-sensitive and depends upon the actual arrangement rather than a single contractual clause.
EY had also relied upon decisions such as Boeing India, Bio-Rad Laboratories, RELX and Aecom Technical Services to contend that secondment arrangements in which the Indian entity becomes the real employer should not automatically produce a finding of taxable technical services. The High Court distinguished those authorities on the factual basis that the findings regarding the employment relationship in those cases were different. It considered the factual findings in EY’s own case closer to Centrica.
The High Court’s decision also involved another category of receipts payments received by EY US for professional services rendered from the United States to Indian clients. That issue was treated separately from the employee-secondment controversy. The High Court found that the ITAT had not adequately examined certain aspects of those receipts and remanded the relevant questions for fresh consideration. Thus, the entire dispute was not resolved by treating every receipt received by EY US from India as taxable. The secondment issue and the US-performed-services issue involved distinct statutory and treaty questions.
This distinction is important because cross-border tax disputes often involve multiple streams of revenue within the same multinational relationship. The tax character of one payment cannot automatically determine the character of another. A reimbursement relating to personnel physically working in India raises questions of employment, service provision and treaty nexus. A professional service performed entirely from the United States may involve a different treaty exemption and different source-of-income analysis.
The appeal before the Supreme Court consequently has the potential to clarify several issues that extend beyond the immediate dispute. At its core is the question of whether a continuing foreign employment relationship is sufficient, when combined with knowledge transfer and group-policy implementation, to transform a secondment reimbursement into Fees for Technical Services under Article 12. Closely connected is the question whether the “make available” test is satisfied by institutional transfer of processes and expertise through secondees, even when the host entity exercises substantial operational control over their day-to-day work.
There is also a significant treaty-policy dimension. Double Taxation Avoidance Agreements are designed to allocate taxing rights between jurisdictions while preventing the same income from being taxed twice. The India–US treaty does not simply ask whether a foreign enterprise has earned money from an Indian entity; it establishes specific categories and conditions under which India may exercise taxing jurisdiction. Courts therefore have to maintain the distinction between domestic-law charging provisions such as Section 9(1)(vii) of the Income Tax Act and the treaty limitation contained in Article 12. Where the treaty applies, the assessee is entitled to rely upon the more beneficial provision.
The case also highlights a practical issue for multinational groups: the architecture of the secondment agreement can have tax consequences far beyond employment law. Provisions relating to repatriation, employment lien, payroll, social-security contributions, disciplinary authority, termination, assumption of risk, reimbursement, intellectual property and supervision can collectively determine whether an arrangement is perceived as a genuine transfer of employees or a continuing provision of services by the foreign enterprise.
The Supreme Court’s consideration will therefore be watched closely by companies operating shared-service centres, global professional networks, technology enterprises, financial institutions and other multinational groups that routinely deploy employees across jurisdictions. A ruling that focuses heavily on retained foreign employment rights could make many conventional secondment models more vulnerable to FTS characterisation. A ruling that places greater emphasis on the host entity’s substantive employment control could reinforce the distinction between personnel transfer and service provision.
At the same time, the eventual decision will have to account for the danger of converting ordinary intra-group employee mobility into taxable technical services merely because specialised employees possess transferable expertise. The “make available” test exists precisely to prevent the treaty category from becoming indistinguishable from every professional or technical service supplied by a foreign enterprise. The decisive issue should therefore remain whether the Indian recipient has acquired an independently usable technical capability, not simply whether an employee with specialist knowledge performed work in India.
The Supreme Court appeal is presently a challenge to the Delhi High Court’s ruling; it should not be treated as an indication that the Supreme Court has accepted either side’s interpretation. The High Court judgment remains the decision under challenge, while the precise questions of law will be considered in the appellate proceedings. The filing itself nevertheless marks the next stage in a dispute that has already exposed the tension between commercial substance, employment structures and treaty-based taxation.
Ultimately, the EY dispute is not simply about whether salary costs were reimbursed from India to the United States. It concerns the legal identity of the transaction itself. Was EY US merely recovering employment expenditure incurred while its personnel temporarily worked for Indian group companies, or was it commercially supplying specialised knowledge and expertise through those personnel? The Delhi High Court answered that question in favour of the Revenue by looking at the continuing foreign employment relationship and the transfer of technical capability. The Supreme Court will now have the opportunity to test whether that approach correctly applies the India–US treaty to the realities of modern multinational employment structures.
The case thus brings into sharp relief a principle increasingly relevant to international taxation: in cross-border arrangements, the tax consequence often turns less upon what the parties call a payment and more upon what the underlying transaction actually accomplishes. Whether that principle should lead to taxation in the EY secondment structure is now a question for the Supreme Court, with implications well beyond the particular assessment years and amounts involved in the present litigation.
