The Supreme Court will examine whether salary reimbursements for employees seconded to Indian EY entities amount to taxable fees for technical services under the India-US tax treaty.
The Supreme Court of India has agreed to examine an appeal by Ernst & Young U.S. LLP over whether payments linked to seconded staff in India should be treated as fees for technical services and taxed accordingly. A bench of Justices J.B. Pardiwala and K. Vinod Chandran will consider whether reimbursements for salaries paid to employees sent to Indian entities can be classified as taxable service income when those workers operate under the supervision of the Indian units and tax has already been deducted from their pay.
The dispute centres on payments made by EY’s Indian entities to the US partnership to cover the cost of deputed employees. The income tax department said those sums were taxable fees for technical services, a view that was upheld by the dispute resolution panel. EY, however, has argued that the money was simply a recovery of salary costs, with no profit element, and therefore fell outside the scope of such taxation.
The Income Tax Appellate Tribunal had initially sided with EY, finding that cost-to-cost reimbursements for seconded employees could not be treated as fees for technical services. But the Delhi High Court reversed that outcome, ruling that the arrangement involved the transfer of technical knowledge and specialised skills to the Indian entities and satisfied the “make available” test under the India-US tax treaty. In the court’s view, the services rendered by EY contained technical elements that amounted to a transfer of skill and knowledge.
The challenge before the Supreme Court covers five assessment years, from 2018-19 to 2022-23. According to reports on the case, the Delhi High Court has also remanded four separate appeals concerning professional services rendered from the US to Indian clients back to the tribunal for fresh consideration, adding another layer to the wider tax dispute.
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