Case Number: ITA 2332/DEL/2022
Appellant: Ernst & Young U.S. LLP, New Jersey, USA
Respondent: ACIT, Circle International Taxation 1(2)(2), New Delhi
Assessment Year: 2019-20
Case Filed on: 2022-09-23
Order Type: Final Tribunal Order
Date of Order: 2023-06-20
Pronounced on: 2023-06-20
The case involves Ernst & Young U.S. LLP’s challenge against the disallowance of cost-to-cost reimbursements by Indian tax authorities for the secondment of employees under the India-USA Double Taxation Avoidance Agreement (DTAA).
Ernst & Young U.S. LLP filed an appeal against the assessment year 2019-20 concerning significant disallowances made by the Income Tax Officer under Section 143(3) read with section 144C(13) of the Income-tax Act, 1961. The primary contention revolved around Rs. 50,99,38,561/- being treated as Fees for Technical Services (FTS) instead of reimbursements.
The appellant argued that the reimbursements were purely for costs incurred without any profit element, related to the salary and expenses of employees seconded to Indian member firms. The dispute centered on whether these reimbursements constituted FTS as per Article 12 of the DTAA or were merely salary costs that should not be taxed additionally.
The Tribunal examined various agreements and evidence presented by Ernst & Young and concluded that the arrangement did not constitute the provision of services but rather the facilitation of employee secondment. It was determined that the seconded employees were under the control and supervision of Indian firms, aligning with the DTAA provisions that prevent double taxation on the same income.
The Tribunal’s decision to allow the appeal in part clarifies the interpretation of DTAA provisions concerning employee secondment and reimbursement of costs. It highlights the necessity for clear documentation and agreement terms to avoid misclassification of such transactions under tax laws. This case sets a precedent for how multinational corporations should handle cross-border employee secondments and the associated financial arrangements.
Order pronounced in open court on June 20, 2023.
Ernst & Young U.S. LLP’s Reimbursement Dispute for AY 2019-20 – ITA 2332/DEL/2022
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