India's High Court Rules Against EY US in Tax Case, Impacting MNCs

Multinational corporations in India face a new tax challenge following a High Court ruling against EY US. The court determined that payments for employees deputed to India constitute taxable 'foreign technical services' (FTS), not mere cost reimbursements. This decision could increase the cost of bringing in foreign expertise by up to 10%, prompting companies to re-evaluate their secondment arrangements and potential GST liabilities.

Mumbai: MNCs, global capability centres, leading consultancy houses including some of the Big4 firms, who routinely rope in experts from headquarters and other countries to work and train officials in India will have to navigate a new conflict with the tax authorities. This stems from a High Court ruling against EY US, a member firm of the Ernst & Young network, which deputed its employees to EY India under secondment arrangement.

Typically, in such cases Indian companies transfer funds to the overseas entity which in turn uses the amount to pay the salaries of employees. The foreign firms treat the money received from India as 'reimbursement of employee cost' and therefore not taxable here.

The court has questioned this by upholding the stand of the Income tax department. The department contended that such payments constitute fees for 'foreign technical services' (FTS) - thus, a tax of 10-15% (depending on the treaty with the jurisdiction) must be withheld before payment.

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If tax officials, chasing revenue targets, use the verdict as a benchmark, it could raise the cost of bringing in skilled hands by roughly 10%.

The tax office had moved the Delhi HC after a setback at the Appellate Tribunal.

The ruling is based on two key factors: first, the secondees never ceased to be employees of EY US; second, the services involved technical knowledge, experience, skill, and know-how and therefore should be taxable as FTS under the India-US treaty.

"This could have significant implications for MNCs operating in India as sending employees on deputation is a common practice. Many depute on a long-term basis. Typically, the deputed employees do retain some ties with their home office to ensure proper discharge of social security and other obligations. The ruling confirms that such an arrangement would not result in the deputed employee ceasing to be an employee of the overseas jurisdiction and by implication suggesting that the services rendered would constitute services rendered by the overseas entity," said Keyur Shah, MD, Alvarez and Marsal.

HC verdict classifying secondment payments as taxable could raise costs for global firms bringing in foreign talent

Indeed, the ruling may prompt multinational groups to revisit existing secondment structures, said chartered accountant Ashish Karundia. "Besides implications under I-T law, there would be reverse charge liability under GST in the hands of the Indian entity. It could reignite the debate around payments that multinational groups have traditionally treated as cost reimbursements. The court held that a mere recharge of costs, even on a no-markup basis, does not automatically qualify as a reimbursement and the real test lies in examining the underlying arrangement and determining whether the payment is, in substance, linked to the rendition of services," said Karundia.

EY had argued that tax has been deducted by EY India entities on the salary paid to secondees. However, what mattered before the court was the intrinsic nature of the service itself - and on that count it was FTS. In such circumstances, an additional withholding tax, over and above the TDS on salaries, should have been deducted before paying the overseas entity. Employees deputed are unwilling to be directly paid by the Indian firm as they do not want to sever links with the foreign employer, said an official of another MNC.