Direct Tax Quarterly Milestones (April-June 2026)

The Income Tax Appellate Tribunal (ITAT) Delhi, in Horiba India Private Limited,¹ held that cost-to-cost salary reimbursements for seconded employees were not taxable as fees for technical services (FTS). The ruling was delivered just a day after the Delhi High Court’s decision in Ernst & Young U.S. LLP (EY US),² where similar reimbursements were held taxable as FTS. (To read our detailed analysis of the EY US ruling, click here.)

While the ITAT did not have the opportunity to consider EY US, the two rulings, read together, underscore that the tax characterisation of secondment arrangements is highly fact-specific and depends on the contractual terms, actual conduct and precise role performed by the secondees.

Certain employees were seconded to Horiba India Private Limited (Horiba India) by group entities based in Japan and France. Part of their salary was payable in India while the balance was payable by overseas group affiliates for administrative convenience and later reimbursed by Horiba India. The tax officer characterised the reimbursements as FTS and disallowed the same on account of non-withholding of tax.

Horiba India submitted that the secondees were recruited for day-to-day operations, such as sales and accounting, and did not possess any specialised technical skills. It also contended that it was both the legal and economic employer of the secondees and had deducted tax at source under section 192 of the (Indian) Income Tax Act, 1961 (ITA) on their entire salaries, including the portion paid overseas. Accordingly, the entire salary had already been subjected to tax in India.

Accepting these submissions, the ITAT held that the secondees were performing routine business functions rather than rendering technical services on behalf of the affiliates. As the reimbursements were made on a cost-to-cost basis without any profit element, no amount was chargeable to tax and, consequently, no tax withholding obligation arose.

The contrast between the Horiba and EY US rulings is instructive. In Horiba, the secondees were deployed for routine business functions. In EY US, the Court was concerned with the implementation of group policies, quality standards, and training, treating these functions as evidence of institutional knowledge transfer that satisfied the ‘make available’³ test under the India-US tax treaty.  

Neither ruling fully explains where the line lies between a secondee applying existing experience while performing a role in India and transferring technical knowledge that enables the Indian entity to apply that experience independently in the future. That distinction is likely to assume greater significance in future disputes, particularly under treaties containing a ‘make available’ clause.

Therefore, multinational groups should ensure that secondment arrangements are supported by clear guardrails and robust documentation aligned with the intended tax position. The documentation should clearly distinguish routine operational deployment from arrangements involving training, process implementation or transfer of enduring technical capability.

The Mumbai ITAT, in Sterling Holiday Resorts Limited,⁴ considered whether accumulated business losses and unabsorbed depreciation could be carried forward and set off following a court-approved demerger in which the undertaking was transferred to a wholly owned subsidiary, while shares were issued by the parent company. Adopting a strict reading of the relevant provisions, the ITAT denied the benefit of carrying forward of losses.

The court-approved scheme of arrangement involved three entities: (i) Sterling Holiday Resorts India Ltd. (SHRIL); (ii) Sterling Holiday Resorts Limited (formerly Thomas Cook Insurance Services Ltd., (TCISL)), i.e., the taxpayer; and (iii) Thomas Cook (India) Ltd. (TCIL), TCISL’s holding company. Under the scheme, SHRIL’s resorts and time-share undertaking was demerged into TCISL on a going-concern basis, while its remaining business was amalgamated into TCIL, following which SHRIL ceased to exist.

Critically, it was TCIL (the holding company) and not TCISL (which received the demerged undertaking) that issued shares to the shareholders of SHRIL in consideration of the demerger.

TCISL argued that both it (as the recipient of the demerged undertaking) and TCIL (as the holding company issuing shares) together satisfied the definition of a ‘resulting company’ under section 2(41A)⁵ of the ITA. Since TCIL had issued shares to the SHRIL’s shareholders, TCISL contented that the conditions under section 2(19AA)(iv)⁶ stood fulfilled. It further submitted that the phrase ‘including a wholly owned subsidiary thereof’ in section 2(41A) must be given independent meaning and should permit such a structure.

The tax authorities opposed this interpretation, contending that sections 2(19AA) and 2(41A), clearly require the resulting company, i.e., the entity receiving the demerged undertaking, to issue shares directly to the shareholders of the demerged company. Since the shares were instead issued by TCIL, the holding company, the statutory conditions for a qualifying demerger were not satisfied, preventing TCISL from carrying forward the accumulated losses and unabsorbed depreciation.

The ITAT upheld the tax department’s view. Relying on the settled principle of strict interpretation of taxation statutes, the ITAT held that sections 2(19AA) and 2(41A) of the ITA were unambiguous and left no room for any other interpretation.

Applying these provisions to the facts, the ITAT held that TCISL did not satisfy the statutory conditions because it had not itself issued shares to SHRIL’s shareholders. The ITAT emphasised that a holding company and its subsidiary are separate, independent legal entities, and cannot discharge the statutory obligations of the other.

Accordingly, the ITAT confirmed the disallowance of the set-off of the brought forward unabsorbed depreciation and carry forward of business losses.

As increasingly complex restructuring models continue to emerge, the ruling is a reminder that corporate law approval alone does not secure the intended tax consequences. Groups contemplating demergers should therefore ensure that the share issuance mechanics comply strictly with sections 2(19AA) and 2(41A) of the ITA if they intend to preserve tax neutrality and the carry forward of losses.