ITAT Mumbai Allows KPMG Unbilled Revenue Write-off for AY 2015-16

KPMG India Pvt. Ltd. Vs DCIT (ITAT Mumbai)

Summary: The Mumbai Bench of the Income-tax Appellate Tribunal adjudicated cross appeals filed by KPMG India Pvt. Ltd. and the Revenue for Assessment Year 2015-16. The appeals arose from orders of the National Faceless Appeal Centre dated 09.01.2026 passed under section 250 of the Income-tax Act, 1961. The assessee’s appeal concerned disallowance relating to reversal of opening accrued/unbilled income and billing done in earlier years, while the Revenue challenged deletion of a disallowance under section 40(a)(i) concerning professional fees paid to non-resident KPMG member firms. The order was pronounced on 12.08.2026.

On the assessee’s appeal, KPMG India Pvt. Ltd. had filed its return on 29.11.2015 declaring total income of Rs.42,25,370/-. The case was selected for scrutiny under CASS and notice under section 143(2) was issued on 25.07.2017. The assessee rendered management consultancy services in Finance, Environment Audit, Investment and Information Technology. The assessment under section 143(3) was completed on 28.12.2018 determining total income at Rs.30,73,92,848/- after various additions and disallowances.

During assessment, the Assessing Officer noticed unbilled revenue of Rs.32,38,60,326/- as at 31.03.2015. The assessee explained that it followed a rational accounting method based on working hours and allocation of sales according to the total contract value, with billing being undertaken on achievement of milestones. It stated that unbilled revenue of Rs.2,22,16,683/- had been reversed without raising invoices on clients. The AO did not accept the explanation, observing that the assessee had not substantiated the basis for reversal or produced correspondence showing that clients would not pay the amounts. The AO accordingly added Rs.2,22,16,683/- to income. The CIT(A) sustained the disallowance.

Before the Tribunal, the assessee relied on the coordinate Bench decision in KPMG Advisory Services Private Limited for AYs 2012-13, 2015-16 and 2018-19 in ITA Nos. 5392 to 5396/Mum/2024. The Revenue’s Senior Departmental Representative supported the lower authorities but admitted that the issue was covered by that decision.

The Tribunal reproduced the relevant portion of the coordinate Bench’s decision concerning reversal of unbilled revenue. That decision recorded that revenue was recognised under the mercantile system on the basis of time spent and chargeable rates; unbilled revenue was offered as professional income in the year of accrual and shown as an asset until invoicing. It further recorded the assessee’s explanation that the written-off amount related to unbilled revenue already accounted for and offered to tax in an earlier year. The coordinate Bench found that the AO and CIT(A) had neither controverted the supporting material and detailed submissions nor demonstrated any deficiency or suppression of material facts. The disallowance was therefore held to be unjustified.

Following that decision, the Tribunal found the facts of KPMG India Pvt. Ltd.’s case to be similar and observed that the Senior Departmental Representative could not distinguish the earlier decision either on facts or in law. Grounds Nos. 1 and 2 of the assessee were accordingly allowed. Ground No. 3, concerning denial of opportunity of hearing, was not pressed and was dismissed as not pressed. The assessee’s appeal was therefore allowed.

The Revenue’s appeal concerned professional fees of Rs.4,03,12,726/- paid to non-residents without deduction of tax under section 195. The AO, after examining invoices, agreements and the nature of services, treated the payments as consideration for imparting technical, commercial or industrial knowledge and held them to constitute royalty under section 9(1)(vi) and Articles 12 and 13 of the applicable tax treaties. The assessee’s contention that the income was taxable as business profits in the absence of a permanent establishment was rejected by the AO. The entire amount was consequently disallowed under section 40(a)(i).

The payments comprised amounts paid to KPMG Advisory, Indonesia; KPMG Advisory N.V., Netherlands; KPMG Auditors & Consultores S.A., Mozambique; KPMG Australia; KPMG Dublin; KPMG LLP, United Kingdom; KPMG LLP, USA; KPMG S.A., France; KPMG Services Pte Ltd, Singapore; and KPMG Tax Services Ltd., Mauritius, aggregating to Rs.4,03,12,726/-.

The CIT(A), however, allowed the assessee’s appeal by following the ITAT’s orders in the assessee’s own case for AYs 1999-00, 2001-02 and 2007-08 dated 23.12.2015, holding that the nature of payments, services and factual pattern were identical and that TDS was not required because the concerned non-residents did not have permanent establishments in India.

Before the Tribunal, the Senior Departmental Representative supported the AO’s order but admitted that the issue was covered by the ITAT’s earlier decision in the assessee’s own case. The Tribunal examined the coordinate Bench’s order for AY 2007-08 in ITA No.4861/Mum/2013 dated 23.12.2015. That decision had held that the AO failed to establish that the payments were made for the use of copyright, literary, artistic or scientific work, patent, trademark, design, secret formula, process or information concerning industrial, commercial or scientific experience so as to constitute royalty under Article 12 of the Indo-US DTAA. It further noted the absence of any material difference in facts from the assessee’s earlier assessment years and held that the disallowance under section 40(a)(i) was not correct.

The earlier order had also referred to and followed coordinate Bench decisions in the assessee’s own case for AY 2001-02 in ITA No.8824/Mum/2004 and for AY 1999-2000 in ITA No.8823/Mum/2004. The present Tribunal found the facts to be similar and held that the Revenue had failed to distinguish the earlier decision on facts or in law. Following the coordinate Bench findings, the Revenue’s grounds were dismissed.

Consequently, the Tribunal allowed the assessee’s appeal and dismissed the Revenue’s appeal. The combined result was that the assessee’s appeal was allowed and the Revenue’s appeal was dismissed.

Cases Discussed

• KPMG Advisory Services Private Limited, ITA Nos. 5392 to 5396/Mum/2024 — followed in relation to the reversal/write-off of unbilled revenue where the Tribunal found that the earlier accrued revenue had been accounted for and offered to tax and that the supporting material had not been controverted.
• KPMG India Pvt. Ltd., ITA No.4861/Mum/2013, dated 23.12.2015 — followed on the issue of professional fees paid to non-resident member firms and whether the payments constituted royalty attracting section 40(a)(i).
• KPMG India Pvt. Ltd., ITA No.8824/Mum/2004 etc., dated 08.06.2012 — referred to as the coordinate Bench decision upholding deletion of the section 40(a)(i) disallowance.
• KPMG India Pvt. Ltd., ITA No.8823/Mum/2004, dated 05.12.2012 — referred to as the subsequent coordinate Bench decision following the earlier decisions in the assessee’s own case.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

These cross appeals filed by the assessee and the revenue emanate from the order passed u/s250 of the Income-tax Act, 1961 (in short, ‘Act’) by the National Faceless Appeal Centre [in short, ‘CIT(A)’], both dated 09.01.2026 for the assessment year (AY) 2015-16.

2. The grounds of appeal raised by the assessee are as under:

“Ground No.1: On the facts and circumstances of the case and in law, the NFAC/CIT(A) erred in upholding the disallowance of write-off of Rs. 2,21,84,915/- from opening accrued income.

Ground No.2: On the facts and circumstances of the case and in law, the NFAC/CIT(A) erred in upholding the addition in respect of billing done in earlier years amounting to Rs.31,768/-.

Ground No.3: The NFAC/CIT(A) erred in upholding the disallowances without considering all the submissions of the Appellant and without giving an opportunity of being heard to the Appellant.”

3. The grounds of appeal raised by the revenue are as under:

“1. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the disallowance of Rs. 4,03,12,726/ made u/s 40(a)(i), failing to appreciate that the services rendered by the foreign member firms constitute ‘Fees for Technical Services’ or ‘Royalty’ under the Income Tax Act and the respective DTAAS, thereby attracting TDS obligations u/s 195.

2. Whether the Ld. CIT(A) erred in placing ultimate reliance on the Hon’ble ITAT’s orders for AYs 1999-00, 2001-02, and 2007-08, ignoring the fact that the Revenue has preferred a further appeal before the Hon’ble Bombay High Court on this identical issue for A.Y. 2009-10 (ITXA/1366/2022), and the matter has not reached finality.

3. Whether the Ld. CIT(A) erred in holding that no tax was deductible u/s 195, thereby overlooking the statutory mandate of Section 40(a)(i) which seeks to disallow payments made to non-residents where the assessee fails to fulfil its withholding tax obligations on income potentially chargeable to tax in India.

4. The Appellant (Revenue) craves leave to add, alter, amend, or rescind any ground(s) of appeal either before or during the course of the hearing of this appeal.”

ITA no.1414/Mum/2026

4. Facts of the case, in brief, are that assessee filed its return of income on 29.11.2015 declaring total income of Rs.42,25,370/-. The case was selected for scrutiny under CASS and notice u/s 143(2) of the Act was issued on 25.07.2017. The assessee renders management consultancy services in the fields of Finance, Environment Audit, Investment and Information Technology. The assessment order u/s 143(3) of the Act was passed on 28.12.2018 by assessing the total income at Rs.30,73,92,848/- by making various additions and disallowances. During the course of assessment proceedings, the AO noticed that assessee has disclosed Rs.32,38,60,326/- as unbilled revenue as on 31.03.2015. The assessee was asked to furnish project-wise and client-wise milestones achieved; and how the revenue was offered and rationale for unbilled revenue. The assessee explained that it followed a rational method of accounting by computing number of working hours and apportioning the sales according to the total value of contract. The billing was done on milestone basis and as and when the milestone was achieved, the bill was raised. The assessee also explained that is has reversed the unbilled revenue to the amount of Rs.2,22,16,683/- without raising any invoices on clients. However, the AO did not agree with the submission of the assessee and stated that assessee has failed to substantiate the basis of reversing the unbilled revenue. The AO further stated that assessee has not produced any communication or correspondence with its clients to indicate that they will not pay the amounts. The AO was of the view that assessee had no basis to reduce the income for the year by reversing sales without any documentary evidence; therefore, the aforesaid unbilled amount of Rs. 2,22,16,683/- was added to the total income of the assessee.

5. Aggrieved by the order AO, the assessee filed appeal before the CIT(A). The appeal of the assessee was dismissed by the CIT(A) stating that there was no rationale or basis or supporting evidence to substantiate the assessee’s contention.

6. Aggrieved by the order of CIT(A), the assessee filed appeal before the Tribunal. At the outset, Ld. AR for the assessee submitted that the issue is squarely covered in favour of the assessee by the decision of coordinate bench in the case of the assessee’s member firm, namely, KPMG Advisory Services Private Limited for AY 2012-13, AY 2015-16 and AY 2018-19 in ITA Nos. 5392 to 5396/Mum/2024 dated 13.03.2025. The Ld. AR has filed copy of the above decision in pages 1 to 22 of the paper book.

7. On the other hand, the Ld. Sr. DR supported the order of lower authorities. He, however, admitted that the issue is covered by the decision of the ITAT in case of KPMG Advisory Services Pvt. Ltd. (supra).

8. We have heard both sides and perused the materials on record. We have also carefully gone through the decision in case of KPMG Advisory Services Pvt. Ltd. (supra) relied upon by the Ld. AR. We find that similar issue had come up for consideration before the co-ordinate Bench in case of KPMG Advisory Services Pvt. Ltd. (supra), where the issue was decided in favour of the assessee. The relevant extract of the ITAT order for AY 2012-13 (ITA no.5394/Mum/2024) dated 13.02.2025 is reproduced below.

“22. Heard both the sides and perused the material on record. The assessee had disclosed Rs.40,86,45,393/- as unbilled Revenue as on 31.03.2012. However, the AO has disallowed the claim of written off from opening accrued income to the amount of Rs.1,88,00,034/-. The assessee explained that part of the opening accrued as accounted on 31.03.2011 as per the percentage completion method was written off during the year was Rs.1.88 crores which was only 0.99% of the total revenue of the assessee. The assessee has been consistently following mercantile system of accounting. Revenue is recognized as per IND-AS-9 Revenue Recognition (same as ICDS IV – Revenue Recognition). Revenue is recorded on the basis of the time spent and the chargeable rates. Unbilled revenue is offered as professional income in the year of accrual and shown as on asset in the balance sheet until invoicing is done to the client. The written off is in respect of unbilled revenue as on the 1st day of the financial year which amount has been accounted as closing unbilled Revenue in the previous financial year and offered to tax therein. The assessee explained with supporting details that there is no case where revenue can be written off without it being accounted and offered to tax in earlier year and it is similar to write off of bad debt written off.

23….

The Assesee explained that it recognises the revenue on mercantile basis and the unbilled revenue has already been shown as a part of income of the assessee during the F.Y. relevant to A.Y. The assessee explained that it recognised the revenue on the basis of time spent on acknowledgement in the P & L A/c without the billing made to the client in the case of unbilled revenue. It was also explained that accrued income get adjusted when billing was done subsequently to the client. The ld. CIT(A) in his finding at page no.6 of the order has mentioned that in its submission the assessee has provided party-wise break-up of the detail of accounting of revenue under various categories e.g. opening / closing unbilled revenue. It is also explained that vide letter dated 19.12.2019 full details of all the parties in respect of whom the accrued revenue was written off was provided to the assessing officer at the time of assessment stage. The assessee also explained that there was no case where revenue can be written off without it being accounted and offered to tax in the earlier years and therefore, the reversal of unbilled revenue was already account in the books of account of the assessee. After considering the materials available on record, we find that AO and ld. CIT(A) have neither controverted the supporting material and detailed submission made by the assessee as discussed nor demonstrated any deficiency and suppression of any material fact by the assessee. Therefore, we consider that decision of ld.CIT(A) in sustaining the disallowance of reversing unbilled revenue is not justified. Accordingly, ground no. 2 to 3 of the appeal of the assessee are allowed. Since we have allowed the ground no. 2 to 3 of appeal of the assessee therefore ground no.1 and 4 of the appeal become academic and not required adjudication. Therefore, appeal of the assessee is allowed.”

8.1 We find that the facts of the case are similar to those of the above decision. The ld. Sr. DR has not been able to distinguish the decision, either on facts or in law. Hence, following the findings of the Tribunal in the abovementioned case, grounds No. 1 and 2 of the assessee are allowed.

9. The appellant has not pressed ground No.3. Hence, the same is dismissed as not pressed.

10. In the result, the appeal of the assessee is allowed.

ITA no.2841/Mum/ 2026

11. The facts pertaining to the appeal of the revenue are that during the course of assessment proceedings, the AO observed that the assessee had paid professional fees to non-residents amounting to Rs.4,03,12,726/- without deduction of tax at source u/s 195 of the Act, despite such payments being chargeable to tax in India. Based on examination of invoices, agreements and nature of services, the AO held that the payments constituted consideration for imparting technical, commercial or industrial knowledge, thereby falling within the definition of royalty u/s 9(1)(vi) of the Act as well as under Articles 12 and 13 of the applicable tax treaties. The contention of the assessee regarding taxation under business profits in absence of permanent establishment was rejected on the grounds that the nature of income was royalty and not business income. Accordingly, the provisions of section 40(a)(i) of the Act were invoked; and the entire amount was disallowed for failure to deduct tax at source. The AO further concluded that such income was deemed to accrue or arise in India and was liable to withholding tax irrespective of the place of rendition of services. The AO disallowed the following payments of professional fees to the non-residents u/s 40(a)(i) of the IT Act.

12. In the appellate proceedings, the CIT(A) allowed the appeal of the assessee by following the ITAT order in the assessee’s own case for AYs 1999-00, 2001-02, and 2007-08 vide order dated 23.12.2015 and held that the nature of payments, nature of services and the factual pattern in AY 2015-16 are identical to these years. The CIT(A) held that the assessee need not deduct TDS as there is no permanent establishment in India of the non-residents to whom the payments were made.

13. On the other hand, the Ld. Sr. DR supported the order of AO. He, however, admitted that the issue is covered by the decision of the ITAT in case of KPMG India Pvt. Ltd. (supra).

14. We have heard both sides and perused the materials on record. We have also carefully gone through the decision in case of KPMG India Pvt. Ltd. (supra) relied upon by the Ld. AR. We find that similar issue had come up for consideration before the co-ordinate Bench in case of KPMG India Pvt. Ltd. (supra), where the issue was decided in favour of the assessee. The relevant extract of the ITAT order for AY 2007-08 (ITA no.4861/Mum/2013) dated 23.12.2015 is reproduced below.

“6. …..Further, on a perusal of the assessment order, it is clear that the Assessing Officer has failed to establish the fact that the payments were made for the use of any copyright, literary, artistic or scientific work including cinematography film or work on film tape or other means of production for use in connection with radio or television broadcasting any patent, trademark, design or model plan, secret formula or process, or for information concerning industrial, commercial or scientific experience including gains derived from the alienation of any such right or property which are contingent on productivity or disposition thereof so as to bring it within the term of “royalty” as provided under Article-12 of the Indo-US DTAA. Further, it is evident from record that the payment made by the assessee towards professional charges are akin or similar to the payment made to the overseas entities in assessment year 1999-2000 and 2001-00, decided by the Tribunal. As the learned Departmental Representative has failed to bring to our notice any material difference in facts between the preceding assessment years considered by the Tribunal and the impugned assessment year, which is discernable from record, we are unable to agree with him for restoring the matter back to the file of the Assessing Officer for deciding afresh. In our view, as the Assessing Officer has failed to establish that the payments made by the assessee towards professional charges to the non-resident are in the nature of royalty, as provided under Article-12 and 13 of the respective DTAA, the disallowance under Sec 40(a)(i) is not correct. For the sake of completeness, we may observe that the co-ordinate bench of the Tribunal in assessee’s own case in ITA no. 8824/Mum/2004 etc. dated 8th June 2012, while deciding Department’s appeal, has upheld the decision of the learned Commissioner (Appeals) in deleting the disallowance under Section 40(a)(i) held as under…..

7. The aforesaid decision of the co-ordinate Bench of the Tribunal was again followed in assessee’s own case for the assessment year 1999-2000 in ITA No.8823/Mum/2004 dated 05.12.2012 by holding as under:-

8. Respectfully following the decisions of the co-ordinate bench of the Tribunal in the assessee’s own case for the assessment year 1999-200 and 2001-02, we uphold the decision of the learned Commissioner (Appeals) on the issue by dismissing the grounds of the Department.”

14.1 We find that the facts of the case are similar to those of the above decision. The ld. Sr. DR has not been able to distinguish the decision, either on facts or in law. Hence, following the findings of the Tribunal in the abovementioned case, the grounds of the revenue are dismissed.

15. In the result, the appeal of the revenue is dismissed.

16. In combined result, the appeal of the assessee is allowed and the appeal of the revenue is dismissed.

Order is pronounced on 12.08.2026.