THE REIMBURSEMENT LABEL IS NOT ENOUGH FOR SECONDMENT CROSS-CHARGES WHICH TAX AUTHORITIES CONTINUE TO TAX AS FEES FOR TECHNICAL SERVICES

Ernst and Young U.S. LLP (EYUS), a United States limited liability partnership in the EY network, seconded personnel to Indian EY entities under secondment and deputation agreements and recovered the salary cost on a cost-to-cost basis. It treated those recoveries as pure reimbursements, not taxable under Article 12 of the India-USA double taxation avoidance agreement (DTAA).

The secondees kept a lien on their employment with EYUS, continued on United States social security through EYUS, and returned after two to three years; the Indian entities withheld tax on the salaries paid. Separately, EYUS received fees from Indian clients for advisory and consultancy work performed from the United States, which it claimed were exempt professional services under India US DTAA

The Hon’ble Delhi Hight Court again revived the vexed question of taxation with respect to secondment arrangement following its own decision in Centrica India Offshore, against which the special leave petition was dismissed to highlight that describing the payment as a reimbursement, and the absence of any mark-up, were not determinative of the character of the underlying arrangements and resultant payments.

It held that the secondees remained employees of EYUS, pointing to the lien on employment, the continuing social security coverage and the benefits provided:

1. The Court relied on the underlying findings that the secondee personnel had come to India to imbibe the culture of EY Group and implement its policies/standards on the Indian EY entities and once the process and policies are imbibed / retained, there is no need for the secondees personnel to work again with the EY India entities, as the employees of the EY India entities can apply the same by themselves.

2. Further, EY India entities could not have terminated the services of the secondees, and they only have the right to undertake legal or disciplinary action against misconduct, fraud, willful negligence or any illegal action of any international assignee and terminate the secondment, prior to the agreed period and relieve them from EY India entities to enable them join EY US which reflects that secondees never ceased to be the employees of EY US and that EY US retains an overarching control over them.

3. The Hon’ble High Court set aside the Tribunal orders for ignoring the binding Centrica precedent on the above aspect and also held that the Tribunal had failed to identify the actual services rendered thus remanding back the matter to Tribunal.

Conclusion:

The decision has a grave impact on non-residents operating in India and would warrant a relook at current secondment agreements against the real employer test since the pure cost-to-cost recovery with no mark-up will not, on its own, protect the arrangement. Further, client engagement letters would need to have clearly demarcated services by stream and qualification of people rendering each service for the professional services exclusion. The taxpayers may still continue to evaluate to distinguish the decision based on the underlying factual matrix guidance/respite from the Apex Court would be most awaited since the HC decision has been challenged before the Supreme Court.