The Delhi High Court has held that where seconded employees retain lien with the overseas entity, continue to be entitled to social security and related benefits through that entity, are deputed for a limited tenure, and are deployed to implement group policies/processes and quality standards while imparting training and expertise, the arrangement is akin to deputation and the overseas entity is rendering services through those employees. In such circumstances, the reimbursement received on account of secondment is taxable as FTS/FIS under Section 9(1)(vii) of the Income Tax Act and Article 12 of the India–USA DTAA, and the absence of markup or use of the term “reimbursement” does not alter the nature of the transaction.
The Court further held that the “make available” test stands satisfied where the services rendered include training and transfer of technical knowledge, experience, skill, know-how, or processes, such that the recipient can use the same in future. On receipts from Indian clients for services rendered in and from the USA, the Court held that the ITAT’s conclusion that all such receipts were covered by Article 12(5)(e) read with Article 15 was unsustainable because the ITAT failed to examine the nature and break-up of the receipts already segregated by the AO between exempt professional services and taxable technical/consultancy services, and also failed to address the AO’s finding that the services in question satisfied the “make available” requirement.
The Division Bench comprising Justice V. Kameswar Rao and Justice Vinod Kumar observed that the AO and DRP had consistently found that the seconded employees were deployed for limited periods, returned to EY US upon completion of tenure, retained lien with EY US, and came to India to imbibe EY group culture and ensure application of EY group policies/processes and quality standards. The Bench observed that these features showed that the secondees never ceased to be employees of EY US and that EY US retained an overarching control over them. It further observed that EY India entities could only relieve the secondees from assignment and could not sever their relationship with EY US.
On the “make available” requirement, the Bench relied on the AO’s analysis of the scope of work and held that the services of the secondees included training and implementation-related functions, and therefore involved transfer of technical knowledge, experience, skill, or know-how. The Bench observed that once the processes and policies were imbibed/retained, the Indian entities could apply the same by themselves in future, and therefore the services satisfied the “make available” test. The Bench found that the ITAT had failed to give cogent reasons for rejecting the detailed findings of the AO and DRP on this aspect.
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The Bench considered the decision of Centrica India Offshore Pvt Ltd. vs CIT [2014:DHC:2172-DB] as squarely applicable and held that the facts in the present case were similar, especially because the secondees retained lien with the overseas employer, continued to enjoy social security and related benefits, and the foreign entity retained the substantive employment relationship. The Bench held that the ITAT had made no reference to this binding precedent while examining the nature of the services and, in that sense, the impugned orders were per incuriam and perverse. However, the Bench distinguished CIT v. Bio-Rad Laboratories (Singapore) Pte Ltd [(2023) 459 ITR 5 (Del)], CIT v. RELX Inc [160 taxmann.com 1090] and Aecom Techinal Services Inc. vs ITO [174 taxmann.com 1173] on facts, holding that those cases did not govern a situation where secondees transferred techniques and skills required for the operation of business and thereby made available “soft intellectual property”.
As regards the receipts from Indian clients for services rendered in and from the USA, the Bench observed that the ITAT had not properly dealt with two material aspects: first, the AO’s factual finding that training and other service elements satisfied the “make available” test; and second, the fact that the AO had already granted the benefit of Article 12(5)(e) to those receipts that qualified as professional services, while taxing only the remaining receipts found to be technical/consultancy in nature. The Bench held that the ITAT had returned a blanket finding without examining the break-up, nature, and scope of the services that remained chargeable as FTS.
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Briefly, the multinational Ernst & Young (respondent/ assessee) relied on the deputation agreement to contend that the secondees ceased to be employees of EY US during the assignment period and became employees of EY India entities, which had control, supervision, disciplinary authority, and salary liability; EY US merely made salary payments for administrative convenience and was reimbursed on an actual cost basis without markup. The Revenue, however, contended that the secondees retained lien with EY US, were repatriated after tenure, continued to receive social security-linked benefits through EY US, and came to India to ensure implementation of EY group policies, processes, and quality standards, thereby making available technical knowledge, experience, skill and know-how to the Indian entities.
In relation to receipts from services rendered in and from the USA, the AO examined the engagement letters and scope of work and found that the services included project management, organisational change management, training, technical infrastructure, data conversion, and similar technical/consultancy functions. The AO held that these services included training and therefore provided enduring benefit to the recipient, satisfying the “make available” test under Article 12(4)(b). The DRP also held that only those services specifically falling within Article 15(2) qualified as “professional services”, and the balance receipts were taxable as FTS/FIS. The ITAT, however, held that the “make available” requirement was not satisfied and that “professional services” in Article 15(2) was an inclusive expression not confined to persons governed by statutory professional bodies.
