Supreme Court Takes Up EY US Challenge to Tax on Employee Secondment Reimbursements

Notice in a cross-border tax dispute

The Supreme Court has issued notice on a challenge by Ernst & Young U.S. LLP to a Delhi High Court ruling that treated amounts received from Indian group entities for deputed employees as fees for technical services. The case is Ernst & Young U.S. LLP v. Commissioner of Income Tax, SLP(C) No. 36320 of 2026. Notice means the Revenue is called upon to answer the challenge; the Supreme Court has not yet reversed the High Court or determined the final tax classification.

The dispute concerns employee secondment, in which personnel associated with the overseas firm work for Indian entities while the latter reimburse salary and related employment costs. The classification matters because a payment treated as a fee for technical services may be taxable in India under domestic law and the India–United States tax treaty, while a genuine pass-through salary reimbursement may be analysed differently. The facts of control, work performed, contractual obligations and tax withholding all matter.

The competing positions

The Income Tax Department treated the receipts of EY US as taxable technical-service fees. The Dispute Resolution Panel supported that assessment. EY US argued that the Indian entities bore the salary cost without a profit element, that the deputed personnel worked under their operational control and that tax had been deducted from their salaries in India. On that account, the payments were said to reimburse employment expense rather than purchase a separate service from the American firm.

The Income Tax Appellate Tribunal accepted EY US’s position on the secondment issue. It regarded the arrangements as cost-to-cost reimbursements and granted relief. The Revenue appealed. These prior decisions are relevant to the Supreme Court challenge because the case does not begin with a fresh tax demand; it follows competing conclusions by specialist and appellate bodies about the same transactions.

What the Delhi High Court held

On June 18, 2026, the Delhi High Court set aside the Tribunal’s favourable ruling on secondment. It examined the functions of the deputed employees and concluded that their work involved transfer of technical knowledge, skills or experience to Indian entities. In its view, this satisfied the “make available” condition in Article 12(4)(b) of the India–US Double Taxation Avoidance Agreement. The High Court’s reasoning went beyond the label “reimbursement” and considered the substance of the services performed.

The tax dispute covers five assessment years, from 2018–19 through 2022–23. The High Court separately sent questions concerning payments for professional services rendered from the United States to Indian clients back to the Tribunal in four appeals. That remand is a separate strand of the litigation and should not be mistaken for the secondment holding now under challenge.

The legal issue in the Supreme Court is whether the High Court correctly applied the treaty’s technical-services test to the secondment arrangement and how the salary reimbursement structure should be characterised. Section 9(1)(vii) of the Income-tax Act, 1961 is also part of the domestic-law framework considered in the High Court case. The treaty question is particularly significant where its conditions may narrow taxation compared with a general domestic description of technical services.

What the notice does and does not decide

The Supreme Court’s notice opens review of the High Court decision but supplies no final answer. Multinational businesses should not infer that all secondment reimbursements are now exempt, or that every such payment is taxable. A decision will depend on the Court’s assessment of the contracts, actual employment relationship and the legal meaning of “make available” in this treaty.

The parties may also address whether Indian salary withholding and absence of a profit margin change the character of the amount received by the foreign entity. Those facts are important to EY US’s argument, but they are not automatically conclusive. The Court may explain how to weigh the employee’s day-to-day control and the transfer of knowledge against the formal links to the overseas employer.

Until judgment, the practical development is procedural: the Revenue must respond and the High Court’s analysis is under Supreme Court scrutiny. The case has potential reach beyond one firm because secondment arrangements are common in international groups, but the Court has not announced a general rule for them.