EY US and the unfinished business of India’s secondment doctrine

The characterisation of cross-border secondments has remained a contentious issue in India. The divergent jurisprudence has added to uncertainty regarding the taxability of secondment arrangements.

One view treats such payments as non-taxable pure reimbursements by treating the secondee as an employee of the Indian company. The contrary view holds them as taxable, either as fees for technical services (FTS) or because the secondee’s presence in India creates a service permanent establishment (PE) for the foreign company.

Recently, in Commissioner of Income Tax, New Delhi v Ernst and Young U.S. LLP, the Delhi High Court adopted the legal employer view, giving significant weight to indicators of legal employment in concluding that the foreign entity rendered services in India through the secondees.

Ernst and Young U.S. LLP (EY US) seconded personnel to EY India entities, who were stated to work “solely under the control, direction and supervision” and “exclusively” for EY India. EY US disclaimed responsibility for their work and retained no instructional control. Furthermore, EY US’s “privity and lien” over the secondees “would cease” during the secondment. EY India bore the salary costs, while EY US merely facilitated payment and received cost-to-cost reimbursement without mark-up. EY India could terminate the secondment, though not the underlying US employment.

On June 18 2026, the Delhi High Court held that EY US is the employer of the secondees and not EY India. It emphasised certain facts:

• EY US retained control over the secondees;

• The secondees maintained lien with EY US and were entitled to US social security benefits; and

• EY India could not terminate the employment; only the secondment.

Furthermore, the make-available test under Article 12(4)(b) of the India–US double taxation avoidance agreement was satisfied as the secondees imparted training to EY India employees and thereby transferred technical knowledge, for example, that could be deployed by the Indian entities independently.

The tax consequences of secondment arrangements depend on whether the secondee becomes an employee of the Indian entity (contract of service) or continues to perform services on behalf of the foreign entity (contract for services). This distinction drives service PE and FTS analyses.

A secondment will be a contract of service between an Indian company and a secondee if the secondee works exclusively for the Indian company, under its control, and for its business objectives, while bearing the related risks and rewards, with no implications for the foreign company. Conversely, it will be a contract for service where employees are deputed to fulfil the obligations of the foreign company under a service contract with the Indian company and the foreign company retains the associated risks and benefits.

However, the EY US ruling did not expressly engage with this analysis, despite it being central to determine the taxation of a secondment arrangement. This issue lies at the heart of service PE and FTS analyses and the OECD’s substance-over-form approach under Article 15 of the Model Tax Convention on Income and on Capital.

The OECD’s ‘real employer’ doctrine, developed in its 1983 report Taxation Issues Relating to International Hiring-Out of Labour and incorporated in the 1992 Commentary on Article 15 (Paragraph 8 of the Model Tax Convention on Income and on Capital), adopts a substance-over-form approach to determining the identity of the employer. It directed that the “employer” under Article 15 should be determined by “substance” rather than by the “formal contract”. It examines functional factors such as who directs and controls the employee, bears the economic cost of the remuneration, supplies the workplace, and possesses the authority to select, discipline, and remove the worker.

The same logic informs service PE analysis, which presupposes that the foreign enterprise furnishes services through its personnel. If the Indian entity is the real employer under Article 15, the foreign enterprise cannot simultaneously be regarded as rendering services through the same individual. Articles 5 and 15 are therefore mutually exclusive in the context of a genuine secondment. Accordingly, where the Indian entity is the real employer according to OECD principles, the arrangement should ordinarily give rise to neither service PE nor FTS exposure for the foreign enterprise.

Firstly, the OECD’s real-employer test is deliberately functional and economic in nature, so as to avoid abusive structures of secondment to claim a short-stay exemption under Article 15. By contrast, the court placed considerable weight on the Indian entities’ inability to terminate the underlying employment relationship. While termination rights are relevant, the OECD framework generally treats them as one factor among many rather than a decisive consideration.

Secondly, the judgment also appears difficult to reconcile with provisions in the secondment agreement stating that EY US’s lien and privity over the secondees would cease during the secondment period. The court’s conclusion that EY US retained employer status despite these provisions is not fully reconciled with the contractual language.

Thirdly, the court does not directly address the interaction between articles 5 and 15. If the functional facts point towards EY India being the real employer, then characterising EY US as simultaneously furnishing services through the same personnel creates conceptual tension. The judgment leaves this issue unresolved.

The judicial treatment of cross-border secondment arrangements in India has not evolved along a single doctrinal path.

In Carborandum Co. v Commissioner of Income Tax, Madras (Supreme Court, 1977), the deputation of foreign personnel did not result in the foreign company carrying on business in India because the personnel worked under the control and supervision of the Indian entity.

Similarly, in Principal Commissioner of Income Tax v Boeing India Pvt. Ltd. (Delhi High Court, 2023), the judgment of Centrica India Offshore Pvt. Ltd. v Commissioner of Income Tax-I (Delhi High Court, 2014) was distinguished, with the court emphasising that the Indian entity was the real employer.

Similar conclusions were reached in Flipkart Internet Private Limited v Deputy Commissioner of Income Tax (Karnataka High Court, 2022) and Director of Income Tax v Abbey Business Services India Pvt. Ltd. (Karnataka High Court, 2020).

The opposing line of authority, including EY US, stems largely from Centrica, which treated continuing employment links with the foreign entity, together with knowledge-transfer functions, as evidence that services were being rendered in India.

Thus, there are two divergent streams of rulings wherein one focuses on economic-employer principles, substantive control, and employment realities, whereas the other emphasises residual legal employment ties and service-oriented functions performed by secondees. EY US strengthens the latter approach but stops short of resolving the broader doctrinal conflict.

The decision underscores that courts will look beyond contractual labels and closely examine practical control, termination rights, ongoing employment links, and knowledge-transfer obligations. EY US sits within, rather than resolves, two live tensions in Indian secondment jurisprudence: between the Centrica and Boeing lines of domestic authority, and between India’s judicially entrenched approach to determining make available and the OECD’s substance-over-form architecture for identifying the real employer.

Until this controversy is settled by the Supreme Court, secondment structuring into India will continue to demand close attention to the internal consistency of deputation agreement clauses and to the factual record built at the assessment and appellate stages.