Cross-border secondments and the quest for the true employer

Background

Secondment arrangement is the most debated topic from taxation standpoint. For years, Indian courts and tribunals have grappled with the tax implications of cross-border employee secondments, pivoting continuously on whether the reimbursement of salary costs represents a taxable technical service or a mere fiscal pass-through.

A foundational pillar of Revenue's position can be said to have been established by the Delhi High Court in the Centrica India Offshore[1] case, where the court determined that the overseas seconding entity was the real employer because seconded employees maintained their employment relationship and social security benefits with it and held that overseas seconding entity was effectively rendering technical services through its personnel satisfying the make available test.

This rigid stance was later softened by taxpayer-favorable rulings such as Boeing India[2], Flipkart Internet Pvt. Ltd.[3] and AT&T Communication Services[4], where the fact that operational control over the employees was exercised by Indian entities and that the employees were carrying forward the business of Indian entity were considered as relevant factors for distinguishing Centrica ruling. Meanwhile, indirect tax landscape for secondment arrangements underwent a significant shift following the Supreme Court's Northern Operating Systems[5] decision, which categorized secondment services as manpower supply services provided by overseas seconding entity of the employees. The fact that employees continued to have lien on their employment with and on payrolls of the overseas seconding party was heavily relied upon.

EY US LLP – Relevant facts

It was in this intricate legal backdrop that the recent dispute involving Ernst & Young U.S. LLP[6] (‘EY US’) emerged, offering a factual matrix that closely mirrored the earlier discussed cases. EY US entered into a specific deputation agreement with three of its Indian network entities to second specialized personnel to India for fixed tenures of 2-3 years to ensure application of group policy/processes and standards. In this case, the seconded employees operated entirely under the day-to-day control, direction, and supervision of the Indian entities, who assumed full responsibility for their performance appraisals and operational costs. However, for administrative convenience, EY US continued to pay the salaries to employees which was reimbursed by EY India without any profit mark-up. The employees retained a formal lien on their employment with EY US and continued to receive social security overseas.

EY US LLP – Delhi HC decision

The Delhi High Court established that nomenclatures used in agreements, the description of payments as ‘reimbursements’, and the complete absence of a profit mark-up are legally incapable of altering the true commercial nature of the transaction. The core of the Court's conclusion rested on the fact that because the employees never severed their employment contracts with EY US, retained their employment liens, and remained outside the ultimate termination authority of the Indian entities, they never truly ceased to be employees of EY US.

Moreover, the court held that arrangement satisfied the contested ‘make available’ requirement given in the India-US DTAA. The High Court reasoned that the secondees were specifically brought to India to imbibe the global group’s corporate culture, processes, and quality standards. Through specialized training and the transfer of organizational know how, which the Court recognized as ‘soft intellectual property’, the personnel enabled the Indian entities to independently apply these processes in their future operations, thereby, satisfying the make available test.

The impact of Delhi HC ruling

EY US judgment echoed the reasoning adopted in Centrica to hold that secondees continue to be the employees of EY US even when Centrica has been factually distinguished in earlier judgments. The Court has not referred to the Supreme Court ruling in Northern Operating Systems that has held manpower supply arrangements to manpower supply services. Interestingly, there are judicial precedents in the context of income tax laws that pure manpower supply services are not in the nature of fee for technical services.

Nonetheless, taxpayers may still distinguish their cases by demonstrating that secondees did not transfer enduring technical knowhow capable of independent use by the Indian entity, particularly given the Court's observation that detailed arguments against the satisfaction of the ‘make available’ test were not advanced in EY US case.

Though, India-USA tax treaty provides a specific exclusion for fee for included services from the ambit of Service PE, the treaties that do not contain similar protections would pose significant Service PE risks.

It is also interesting to see the outcome in cases where the seconded employees perform stewardship /shareholder functions or professional services that qualify as Independent Personal Services.

Until the Supreme Court provides clearer guidance, cross-border secondment arrangements are likely to continue generating significant controversy and tax risk.

[The authors are Associate Director, Principal Associate and Associate, respectively, in Direct Tax practice at Lakshmikumaran & Sridharan Attorneys]

[1] Centrica India Offshore (P.) Ltd. v. Commissioner of Income-tax -I [[2014] 44 taxmann.com 300 (Delhi) SLP dismissed in Centrica India Offshore (P.) Ltd. v. Commissioner of Income-tax-I, New Delhi [2014] 51 taxmann.com 386 (SC)].

[2] Principal Commissioner of Income-tax v. Boeing India (P.) Ltd. [[2023] 146 taxmann.com 131 (Delhi)/[2023] 457 ITR 84 (Delhi) SLP dismissed in Principal Commissioner of Income-tax v. Boeing India (P.) Ltd. [2024] 158 taxmann.com 214 (SC)].

[3] Deputy Commissioner of Income-tax (International Taxation) v. Flipkart Internet (P.) Ltd. [[2025] 171 taxmann.com 693 (Karnataka)[12 February 2025]].

[4] AT & T Communication Services (India) (P.) Ltd. v. Deputy Commissioner of Income Tax [[2019] 101 taxmann.com 105 (Delhi ITAT)].

[5] C.C., C.E. & S.T., Bangalore v. Northern Operating Systems [(SC) Civil Appeal No. 2289-2293 of 2021].

[6] Commissioner of Income-tax (International Taxation)-1 v. Ernst and Young U.S. LLP [[2026] 187 taxmann.com 711 (Delhi) [18 June 2026]].