New Delhi, October 26 — The Supreme Court on Monday (October 26) issued notice on a plea filed by Ernst & Young U.S. LLP (EY US) challenging a Delhi High Court judgment holding that payments received towards employees deputed (seconded) to Indian entities were taxable as Fees for Technical Services (FTS), Live Law reported.

Source: Live Law

A bench of Justice J.B. Pardiwala and Justice K. Vinod Chandran agreed to examine whether salary reimbursements to EY US can be taxed as FTS when the deputed employees work under the control of Indian entities and tax has already been deducted from their salaries, according to the report.

Source: Live Law

Bar and Bench, reporting EY US's appeal, said it challenges a June 18 judgment of a Delhi High Court Division Bench of Justices V. Kameswar Rao and Vinod Kumar, which ruled in favour of the Income Tax Department on the secondment issue. The judgment arose from five appeals concerning assessment years 2018-19 to 2022-23.

Source: Bar and Bench

The dispute arose after the Income Tax Department treated payments received by EY US from its Indian entities towards the costs of deputed employees as taxable FTS, and the Dispute Resolution Panel upheld the tax demand. The Income Tax Appellate Tribunal (ITAT) had earlier granted relief to EY US, holding that the payments were reimbursements of salary expenses without any profit element and could not be treated as FTS, Live Law reported.

The Delhi High Court, however, set aside the ITAT's orders in favour of EY US on the secondment issue. It held that the arrangement involved the transfer of technical knowledge and skills to the Indian entities, satisfying the 'make available' test under the India-US Double Taxation Avoidance Agreement (DTAA), and observed that the services rendered included technical services satisfying that test because there was a transfer of skill and knowledge.

Bar and Bench noted that the High Court had also recorded that the employees were seconded to India for limited periods of two to three years and returned to EY US after their assignments, and that they were involved in training employees, implementing EY Group policies and processes and maintaining quality standards in the Indian entities. EY US is now questioning before the Supreme Court whether reimbursements towards employees' salaries can be treated as consideration for technical services when the employees work under the control of the Indian entities.