THE current India USA text treaty was finalised in the year 1989 and came into effect in the year 1990. This was the time when India's economy was going through difficult times and foreign exchange crisis made the Indian economy even more vulnerable. At that time, India was in desperate need to attract foreign investment and augment is its foreign exchange reserve. It was in this background that the India-US tax treaty came to be finalised. For India, the treaty was definitely an instrument of attracting foreign capital and for the USA, the vast Indian market was an opportunity for the American multinationals to explore and profit from. The context is important to remember as the treaty deviates from the standard Indian practice as also from the American Model treaty in some areas. One such deviation is the formulation relating to the article regarding fees for technical services.

India has been insisting on having a separate article on fee for technical services in its treaty negotiations with developed countries. That is apart from the Indian insistence at that time on having a tax sparing provision for preserving the incentives given by the government for different development purposes to foreign investors. India's tax treaty with Germany, for example, contains both a tax sparing provision and an article on fees for technical services that is almost at par with the domestic law provision of India relating to the same. Insofar as the treaty with the USA is concerned, India had to give up its demand for the tax sparing provision as that was against the American practice. India also had to concede to a more diluted provision of fee for technical services -called fee for included services in this tax treaty. It may be noted that even though the India USA text treaty finally came into effect in 1990, long back in 1959, a tax treaty was indeed signed between India and USA that was supposed to come into effect from 1960. Even that treaty also contained a provision for fees for technical services although in a much more rudimentary and restrictive form. In the end, that treaty never came into effect as the US Senate did not ratify the same. Instead, a renegotiated tax treaty as mentioned earlier came into effect from 1990 containing a combined article12 in respect of royalties and fees for included services.

But, despite having a restricted provision of FTS, and despite a long memorandum of understanding with the American penchant of examples, litigation relating to the interpretation of the article continues to fester. Recently, the Delhi High Court had to again examine and interpret the much talked about 'make available' clause in Article 12 that restricts the scope of the application of what can be taxed as fees for technical services under the said tax treaty. It is this judgement that has attracted quite a bit of controversy that we intend to examine here. The judgement also deals with the vexed issue of 'secondment' of personnel and cross charge of the expenses of the seconded personnel to the Indian entity and whether reimbursement of such cross charge extinguishes the liability of the service recipient from any withholding tax obligation and the nature of the services rendered by the secondees. Additionally, the case also deals with the nature of services rendered by personnel from abroad to certain entities in India.

Although not part of the judgement of the Delhi High court, it is seen that the Departmental Representative had also placed reliance on the decision of the Supreme Court delivered some years back on the treatment of the reimbursement cost of the seconded personnel from the point of view of chargeability under the service tax in the case of Northern Operating System - 2022-TIOL-48-SC-ST-LB . The Court in that case held that 'control' is not the sole determinative factor in determining if the seconded personnel were rendering service for the foreign company or the Indian company. Under the service tax law and subsequently under the GST, service rendered by an employee is not liable to service tax under the reverse charge mechanism. If the personnel were to be considered employees of the Indian arm of the multinational, then there is no charge to that tax while there will be chargeability if they are considered employees of the foreign enterprise. The Supreme Court in that case, relied heavily on the judgement of the Supreme Court in Morgan Stanley Income Tax case to ultimately hold that the seconded personnel were employees of the foreign enterprise in the facts of that case. Therefore, the DR had placed reliance on that case in support of his argument that the seconded personal could not be considered as employees of the Indian company. Nevertheless, issues may arise on the classification of the service for service tax/GST purposes.

At this point, it is necessary to note the facts of the case and the relevant legal provisions in brief. As stated by the Tribunal, Ernst and Young U.S. LLP is a limited liability partnership, tax resident of the USA and is engaged in the business of providing professional services in the field of assurance, tax, transaction and business advisory services etc. to its clients across the globe including in India. For one of the relevant years considered by the High court, E&Y LLP received an amount of over INR 18 crores claimed to be on account of reimbursement of costs with respect to its employees who were seconded to its Indian member firm, E&Y India as also amounts of about INR 65 crores from various India based clients for services performed in and from USA for such clients.

The essential question therefore was whether these two categories of services performed by the taxpayer are covered by the provisions of the Article relating to Fee for Included services in terms of Article 12 of India-USA DTAA or not and additionally, whether the second category of services rendered by the taxpayer from abroad is covered by the provision relating to independent personal services as contained in Article 15 of the India-USA DTAA.

It is now necessary to have a look at the provisions of the two articles (relevant portions only)

Article 12: Royalties and Fees for Included services

1.Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2. However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the royalties or fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed:

(…)

(b) (ii)during the subsequent years, 15 percent of the gross amount of royalties or fees for included services; and

(b) in the case of royalties referred to in sub-paragraph (b) of paragraph 3 and fees for included services as defined in this Article that are ancillary and subsidiary to the enjoyment of the property for which payment is received under paragraph 3 (b) of this Article, 10 per cent of the gross amount of the royalties or fees for included services.

4. 4. For purposes of this Article, "fees for included services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services:

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or

(b) make available technical knowledge, experience, skill, know- how, or processes, or consist of the development and transfer of a technical plan or technical design.

5. Notwithstanding paragraph 4, "fees for included services" does not include amounts paid: (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3 (a);

(b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic;

(c) for teaching in or by educational institutions;

(d) for services for the personal use of the individual or individuals making the payments; or

(e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 15 (Independent Personal Services)

ARTICLE 15 - Independent personal services –

1. Income derived by a person who is an individual or firm of individuals (other than a company) who is a resident of a Contracting State from the performance in the other Contracting State of professional services or other independent activities of a similar character shall be taxable only in the first-mentioned State except in the following circumstances when such income may also be taxed in the other Contracting State:

(a) if such person has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities; in that case, only so much of the income as is attributable to that fixed base may be taxed in that other State; or

(b) if the person's stay in the other Contracting State is for a period or periods amounting to or exceeding in the aggregate 90 days in the relevant taxable year.

2. The term "professional services" includes independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants.

Thus, the Tribunal had to decide on two issues-what is the nature of the reimbursement of costs in respect of secondees and what was the nature of the payments in respect of services rendered from abroad.

In so far as the first issue in concerned, the Tribunal merely followed and reproduced from the coordinate Bench's order for AY 2019-20, order dated 20.6.2023 (wrongly mentioned as 20.06.2026 in the Tribunal's order dated August 07, 2024!)

As can be seen Article 12 makes a carve out from the scope of included services in respect of professional services that come within the ambit of Article 15. In other words, professional services rendered by the employees of the taxpayer are excluded from the purview of fees for included service. Therefore, the efforts of the taxpayer were to prove that the relevant services were covered by Article 15 while the tax department's effort was to show that these services were not covered by Article 15. Besides, as we have noted earlier, if the personal involved in rendering the services are employees, there is no charge to service tax/GST.

In so far as secondment of personnel and reimbursement of the same by the Indian company is concerned, the facts in the present case are more or less similar to the case of Centrica India Offshore decided by the Delhi High Court way back in 2014 wherein the High Court held such reimbursement to be of the nature of fees for technical/included services in the context of India-UK and India-Canada tax treaties. Apparently, SLP against the said judgement has been dismissed by the Supreme Court. Nevertheless, the ITAT chose not to follow the same and was subsequently chastised by the High Court and the order of the ITAT was held to have been rendered per incuriam and perverse.

As noted by the High Court, In Centrica Offshore, examination of the different agreements showed that-

(i) the seconded employees retained their entitlement to participate in the overseas entities' retirement and social security plans and other benefits in terms of its applicable policies, and the salary was properly payable by the overseas entities, which claimed the money from the Indian subsidiary (CIOP)

(ii) The agreement did not reveal that CIOP could terminate the secondment agreement;

(iii) There is no entitlement or obligation, spelt out, whereby CIOP had to bear the salary / cost of these employees;

(iv) The secondees could not in fact sue CIOP for default in payment of their salary;

(v) All direct costs of such seconded employee's basic salary and other compensation, cost of participation in overseas entities' retirement and social security plans and other benefits in accordance with its applicable policies and other costs were ultimately paid by the overseas entities;

(vi) CIOP was given the right to terminate the secondment but the services of the secondee vis-à-vis the overseas entities - the original and subsisting employment relationship could not be terminated;

(vii) The employment relationship with the foreign entities remained independent and beyond the control of CIOP; and

(viii) Included service does not only mean formal transfer of intellectual property but also other techniques skills required for operation of a business- in words of the Court "soft intellectual property".

One very important observation in Centrica highlighted by the court is important to note- that the employment relationship between the overseas entities and CIOP from which the former's independent obligation to pay the secondees arises - continues to hold, as there is no obligation to use money arising from the payment by CIOP to pay the secondees. The implication here is that the overseas entity could keep the money taken from the subsidiary and pay the secondees from its own sources. The court held that the overseas entities' obligation to pay the secondees arises under a separate agreement, based on independent conditions, in relation to CIOP's obligation to pay the overseas entity.

As recapitulated by the High Court, in the present case, from the terms of the deputation agreements, it transpired that the secondees were working in EY India entities, during the period of assignment but continued to maintain their lien with the overseas entity. In fact, the secondees were entitled to all available benefits including social security from their employer. This made the assignment of the secondees, akin to a deputation from the taxpayer to EY India entities, to enable the secondees use their expertise of technical knowledge/ know how and make available the same to EY India entities, for the Indian entities to then use the same for their working in future. The agreement between the taxpayer and EY India entities was described as deputation agreement as different from a letter of appointment or transfer. Moreover, EY India entities could not have terminated the services of the secondees, and they only had the right to undertake legal or disciplinary action against misconduct, fraud, wilful negligence or any illegal action of any international assignee and terminate the secondment, prior to the agreed period and relieve them from EY India entities to enable them join EY US. This goes to show that the secondees never ceased to be the employees of EY US and that EY US retained an overarching control over them.

As for the professional services rendered from abroad, the facts as stated in the orders, however, seem to be all jumbled up. As we have seen from the Article on FTS, professional services within the meaning of Article 15 are specifically excluded from its ambit. It seems that the tax department took the view that not all such services rendered would come within the ambit of Article 15 and the AO excluded some services while giving the benefit in respect of some others.

The ITAT took the view that definition of 'professional services' given in Article 15(2) is inclusive and not exhaustive and cannot be circumscribed by including only those people belonging to any governing professional body. Apparently, the services also involved imparting of training which comes squarely within the definition of included services, an aspect that the ITAT did not look into. In fact, the High Court pointed out that in terms of the Order of the DRP, the AO had given a breakup of the services that he considered as professional services and those that were not as follows:

The High Court pointed out that the ITAT in its combined order for different assessment years held that the definition of "professional services" is inclusive and contemplates services other than those specifically mentioned in Article 15(2). However, the ITAT has not delineated the actual services provided by the taxpayer to its Indian clients or discussed whether such services could be included in the definition. It merely noted the qualifications of the employees and held that they would come within the ambit of the definition of professional services provided under Article 15(2). The merit and effect of the finding of fact by the AO that the services were in the nature of technical services and consultancy were neither discussed nor distinguished by the ITAT.

In the end, the High Court allowed fully the appeal of the department for one year on both the points and remanded the issue of the services rendered from abroad to the ITAT in respect of other years to be decided in line of observations of the High Court.

In respect of the services rendered by the secondees, the High Court noted the argument of the AO that the secondee personnel had come to India to imbibe the culture of EY Group and implement its policies/standards on the Indian EY entities and that once the process and policies are imbibed / retained, there is no need for the secondees to work again with the EY India entities, as the employees of the EY India entities can apply the same by themselves. The High Court noted that the said submission has not been challenged before it and though the taxpayer's representative had argued that there was no transfer of any technical know-how or expertise, that argument is negated by the terms of the scope of service, which demonstrate that certain training was also imparted by the seconded employees of EY US. In such circumstances, the court held that there was an element of transfer of technical knowledge, experience, skill, or know-how. In so far as services rendered from the USA to Indian clients, the High Court has reproduced the statement of work and details of the scope of work to be done by different employees that shows that there was an element of training to be imparted by the said personnel thereby satisfying the make available test.

While that may be true, it is difficult to understand why the AO excluded certain services as given in the table above in respect of so-called professional services. The exclusion as given in Article 12(5) (e) is available to any individual or firm of individuals (other than a company) for professional services as defined in Article 15. Article 15 is applicable in respect of professional services to be rendered (in this case) by an American resident for services performed in India or vice versa. It does not apply at all to a situation where services are rendered in the USA. This is an aspect that has not been discussed in any of the appellate orders. To this extent it seems to me that the understanding of the tax department was not in order.