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In a significant ruling with far-reaching implications for multinational corporations operating in India, the Delhi High Court has held that reimbursements received by a US-based professional services firm from its Indian affiliates for seconded employees are taxable in India as Fees for Technical Services (FTS) or Fees for Included Services (FIS).
The judgment overturns an earlier ruling by the Income Tax Appellate Tribunal (ITAT), which had held that the payments—made on a cost-to-cost reimbursement basis without any mark-up—were not taxable. The High Court concluded that the nature of the arrangement, rather than the structure of the payments, determines taxability.
The case involved a US limited liability partnership providing assurance, tax, transaction and business advisory services globally. Under deputation agreements with three Indian affiliates, the firm had seconded personnel to India for periods ranging from two to three years. The Indian entities reimbursed the US firm for salary costs incurred in relation to these employees.
Court Emphasizes Substance Over Form
At the heart of the dispute was whether the reimbursements represented mere salary cost recovery or consideration for technical services rendered by the US entity.
The Revenue argued that the seconded employees continued to remain employees of the US firm, which retained employment liens and continued making social security contributions on their behalf in the United States. According to tax authorities, the secondees were deployed not only to provide professional services but also to implement global policies, quality standards and operational processes across Indian affiliates.
The taxpayer, however, contended that during the period of secondment the employees came under the full administrative, disciplinary and operational control of the Indian entities. It argued that reimbursements were pure pass-through costs and therefore could not be characterized as income.
Rejecting this position, the High Court held that the secondees never completely severed their employment relationship with the US entity. The court noted that Indian affiliates lacked authority to terminate the employees and could only end the secondment arrangement, after which the employees would return to the US employer. Continued entitlement to overseas employment benefits and social security contributions further demonstrated the existence of an ongoing employer-employee relationship with the foreign entity.
‘Make Available’ Test Satisfied
A key aspect of the ruling concerns the interpretation of Article 12 of the India-US Double Taxation Avoidance Agreement (DTAA), particularly the “make available” requirement governing taxation of technical services.
The court observed that the seconded personnel were tasked with embedding the group’s culture, policies, quality standards and business processes within Indian affiliates. They also provided training and transferred technical knowledge, skills and experience that enabled Indian entities to independently apply those processes in future. As a result, the court concluded that the services satisfied the “make available” test under Article 12(4)(b) of the India-US DTAA.
Consequently, the court held that the reimbursements constituted taxable FTS/FIS under both Section 9(1)(vii) of the Income Tax Act and Article 12 of the India-US tax treaty.
Reliance on Centrica Precedent
The ruling reinforces principles established in the landmark case of Centrica India Offshore v. CIT, which has long served as a benchmark for determining taxability in cross-border secondment arrangements.
The High Court criticized the Tribunal for failing to adequately distinguish the facts of the present case from the Centrica precedent and for not providing sufficient reasoning for departing from an established judicial position.
Separate Issue Sent Back to Tribunal
The court also examined payments received by the US firm from Indian clients for services rendered from the United States.
While the Tribunal had granted a broad exemption under Article 12(5)(e) read with Article 15 of the India-US DTAA, the High Court found that it had not sufficiently analyzed the nature of the services involved. The court observed that tax authorities had already exempted certain professional services while taxing other receipts considered technical or consultancy in nature. It therefore remanded the matter to the Tribunal for fresh examination.
Implications for Multinational Companies
Tax experts say the decision could have significant implications for multinational groups that routinely deploy foreign personnel to Indian subsidiaries through secondment or deputation arrangements.
The judgment signals that tax authorities and courts will increasingly focus on the underlying employment relationship, the transfer of knowledge and the actual functions performed by secondees, rather than relying solely on contractual labels or reimbursement structures. Even where payments are made without any profit mark-up, they may still attract Indian taxation if the arrangement effectively results in the provision of technical services.
The ruling is expected to prompt multinational corporations to revisit inter-company agreements, employment structures and compliance frameworks to assess potential exposure to FTS or FIS taxation in India. Companies with substantial expatriate deployments may also need to reevaluate how secondment arrangements are documented and managed under both domestic tax law and treaty provisions.
With India continuing to tighten scrutiny of cross-border service arrangements, the judgment is likely to become a key reference point in future disputes involving employee secondments and international tax planning.
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