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Delhi High Court FIS Ruling: Impact on Cross-Border Secondments & International Tax

Ernst and Young U.S. LLP, Economic Employer, FIS and the ‘Make Available’ Test Under Indian Tax Treaties

October 5, 2026

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Delhi High Court’s FIS Decision and Its Impact on International Tax Structures

Cross-border secondments commonly involve an Indian group company reimbursing an overseas group company for salary and related remuneration paid to employees temporarily assigned to India. The structure can preserve the secondaries’ employment continuity and social security benefits in their home jurisdiction. In many cases the reimbursement is made strictly on a cost-to-cost basis, without a profit element, while the employees themselves remain subject to Indian tax rules on their remuneration.

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The arrangement can nevertheless have separate Indian tax consequences for the overseas entity. Depending on the contracts and, importantly, the way the parties actually operate, reimbursement may contribute to a permanent establishment in India or may be treated as Fees for Technical Services (FTS) or Fees for Included Services (FIS) under a relevant tax treaty. The key question is therefore who is the real and economic employer during the assignment.

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1. The Delhi High Court’s Ernst and Young U.S. LLP Decision

In CIT v. Ernst and Young U.S. LLP, ITA 423/2025, decided on 18 June 2026, the Delhi High Court considered a cross-border secondment arrangement and held, on the facts before it, that reimbursement of the secondees’ salary costs on a cost-to-cost basis amounted to FIS under the India-USA tax treaty. The amount was consequently treated as taxable in the hands of the overseas entity.

The Court relied on the earlier decision in Centrica India Offshore (P.) Ltd. v. CIT and examined the substance of the employment relationship rather than simply the labels used in the agreements.

2. Indicators of the Foreign Entity Remaining the Economic Employer

The Court considered several factors relevant to determining whether the overseas entity continued to be the real and economic employer during the secondment.

The secondees continued to receive Social Security benefits from the foreign employer.
The employees retained an employment lien with the overseas entity during the secondment unless the Indian company permanently absorbed them.
The Indian entity did not have the power to terminate their employment or independently impose disciplinary or legal consequences for specified misconduct.
The Indian entity could not itself sever the employment relationship between the employees and the foreign company.
At the end of the secondment, the employees returned to the overseas employer, indicating continuing employment rights with that entity.

Taken collectively, these circumstances led the court to regard the overseas company as the continuing real and economic employer and as retaining overarching control over the secondees.

3. The ‘Make Available’ Requirement

The Court also concluded that the treaty’s ‘make available’ condition was satisfied. The employees had been sent to India to transfer the foreign group’s culture, policies, processes, and standards. Once those systems were understood and absorbed by the Indian personnel, the latter could use them independently without requiring the secondees to remain continuously present.

Training provided by the secondees was also significant. The Court considered the transfer of technical knowledge, experience, skills, or know-how sufficient to meet the treaty requirement.

This reasoning is notable because traditional treaty analysis generally distinguishes between merely providing skilled personnel and actually transferring knowledge in a way that enables the recipient to perform the relevant functions independently in the future. The Ernst and Young decision placed particular weight on organizational processes, business practices, and training.

4. Other Judicial Approaches

The decision sits alongside other authorities that recognize the commercial realities of multinational businesses. In PCIT v. Samsung Electronics Co. Ltd. (Delhi High Court, 15 January 2025), the Court considered whether seconded personnel were serving the business of the formal foreign employer or the Indian host. The fact that technically qualified personnel are seconded internationally was treated as a normal feature of global business.

The Karnataka High Court in DCIT v. Flipkart Internet (P.) Ltd. similarly recognized that international secondments may not display every conventional indicator of an employment relationship because regulatory, immigration, and social-security considerations can require some employment rights to remain with the overseas company.

These decisions show that retained formal employment rights do not automatically answer the economic-employer question. The commercial substance and actual allocation of control remain important.

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5. The Honda R&D Decision

The Delhi Bench of the Income-tax Appellate Tribunal considered a related question in Honda R&D Company Limited v. ACIT, ITA No. 548/Del/2025, decided on 27 May 2026. The tax authorities sought to characterize reimbursement of salary paid by an Indian company to a Japanese company as FTS under the India-Japan treaty.

After examining both the secondment arrangement and the employment contract, the ITAT found that the secondees had become employees of the Indian company during the relevant period. Unlike Centrica, the Indian entity had assumed the principal responsibility for their salary and employment-related costs. Because the reimbursement was cost-to-cost and related to employees of the Indian company, the ITAT held that it could not be characterized as FTS.

Key Contrast Between the Ernst and Young and Honda R&D Decisions

Issue	Ernst and Young U.S. LLP	Honda R&D
Economic employer	Overseas entity regarded as the continuing real and economic employer	Indian company found to have the substantive employment relationship
Salary reimbursement	Cost-to-cost reimbursement	Cost-to-cost reimbursement
Treaty issue	Reimbursement treated as FIS under the India-USA tax treaty	Reimbursement could not be characterized as FTS under the India-Japan treaty.
Employment relationship	The foreign entity retained overarching employment control	The Indian entity assumed principal responsibility for salary and employment-related costs.

6. Practical Implications for Employers

The cases demonstrate why companies should not rely on contractual terminology alone when structuring secondments. The actual distribution of employment rights, supervision, disciplinary authority, salary obligations, return arrangements, and day-to-day conduct can influence the tax characterization.

Keep the secondment agreement, employment agreement, and any master services agreement consistent with the intended allocation of responsibilities.
Clearly document who supervises the secondees and who controls significant employment decisions.
Preserve contemporaneous evidence such as timesheets, reporting lines, correspondence, and internal approvals.
Review whether the arrangement genuinely reflects the intended economic employer and not merely the formal employer named in the contract.
Reassess the treaty position where the secondees transfer know-how, processes, business practices, or training to Indian personnel.

Conclusion

The evolving jurisprudence demonstrates that cross-border secondments require careful tax and legal analysis. Ernst and Young U.S. LLP treated the overseas entity as the real and economic employer on the particular facts and regarded the salary reimbursement as FIS, while Honda R&D reached a different result because the Indian company had the substantive employment relationship with the secondees.

Accordingly, multinational groups should periodically review both the written structure and actual implementation of their secondment arrangements. Clear allocation of control, carefully drafted employment documentation, and strong contemporaneous records are central to supporting the intended tax position.