Cost-to-Cost Secondment Reimbursements Under Fresh Scrutiny – Delhi High Court Holds Substance Prevails Over Form

In a significant ruling, the Delhi High Court in the case of CIT(IT)-1 v. Ernst and Young U.S. LLP ITA 423, 424, 715, 753 & 760 OF 2025 has revisited the taxability of cross-border secondment arrangements and clarified that mere reimbursement of salary costs without any mark-up does not automatically escape taxation. The Court held that the true character of the payment must be determined by examining the underlying commercial substance, continuing employment relationship and whether technical knowledge or skills are made available to the Indian entity. The decision is likely to have far-reaching implications for multinational groups and Global Capability Centers (GCCs) operating employee secondment arrangements in India.

Brief Background

EY US seconded employees to various EY entities in India under secondment arrangements. During the secondment period, salaries and related employment costs were paid by EY US and recovered from the Indian entities on a cost-to-cost basis without any mark-up. The Indian entities deducted tax under section 192 and contended that the reimbursements were mere recovery of costs and not taxable in India.

The Assessing Officer, however, treated the reimbursements as Fees for Technical Services (FTS) under section 9(1)(vii) of the Income-tax Act and Fees for Included Services (FIS) under Article 12 of the India–USA DTAA. Although the Tribunal held that the Indian entities were the economic employers of the secondees, the Revenue challenged the decision before the Delhi High Court.

The High Court examined whether cost-to-cost salary reimbursements automatically qualified as non-taxable reimbursements, whether the Indian entities had become the economic employers, whether the overseas entity continued to retain the employment relationship, whether the secondment resulted in technical knowledge being “made available” under the DTAA and whether deduction of tax under section 192 dispensed with withholding obligations under section 195.

High Court’s Observations and Decision

The Delhi High Court reversed the Tribunal’s decision and held that merely describing a payment as a “reimbursement” or recovering it without a mark-up does not determine its tax character. The absence of a profit element only explains the quantification of the payment and is not conclusive of its taxability.

The Court observed that although the Indian entities exercised day-to-day supervision over the secondees, the overseas entity continued to retain the employment relationship, including employment lien and career progression. It further held that the secondees implemented EY’s global methodologies and specialized practices, thereby making available technical knowledge and operational capabilities to the Indian entities, satisfying the “make available” test under Article 12 of the India–USA DTAA. The Court also clarified that withholding tax under section 192 on salaries does not obviate the need to examine withholding obligations under section 195 on inter-company payments.

Accordingly, the High Court held that the secondment reimbursements constituted taxable FTS/FIS in India and allowed the Revenue’s appeal by reversing the Tribunal’s order.

Key Takeaways / Implications

This ruling reinforces that substance prevails over nomenclature in determining the taxability of secondment arrangements. Mere characterization of a payment as a reimbursement or the absence of a mark-up is not sufficient to establish non-taxability. Instead, taxability depends on factors such as the continuing employment relationship, employment lien, functional responsibilities of the secondees and whether technical knowledge or skills are made available to the Indian entity. The Court also clarified that compliance with section 192 does not dispense with withholding obligations under section 195.

Accordingly, multinational groups and GCCs should revisit their secondment arrangements, inter-company agreements and employment documentation to evaluate employment relationships, knowledge transfer and treaty implications. Maintaining robust documentation on the commercial purpose and nature of services will be critical to support the tax treatment of secondment reimbursements and mitigate future withholding tax disputes.