Reversal of Unbilled Revenue Offered to Tax and Non-Royalty

Reversal of Unbilled Revenue Offered to Tax and Non-Royalty Payments to Non-Residents Are Deductible

Issue

Whether the reversal/write-off of opening unbilled revenue that was already offered to tax in preceding assessment years is allowable as business expenditure under Section 37(1).
Whether payments made to non-residents, in the absence of evidence showing use of copyright, patent, or technical knowledge under Article 12 of the DTAA, can be disallowed as royalty under Section 40(a)(i).

Facts

Assessee is a management consultancy firm following the mercantile system of accounting and IND-AS-9 for revenue recognition based on time spent and chargeable rates.
Unbilled revenue was recognized and offered to tax as professional income in earlier years, recorded as an asset until final invoicing.
Due to non-raising of invoices on certain clients, the assessee reversed/wrote off a portion of the opening accrued unbilled revenue during AY 2015-16.
The Assessing Officer (AO) disallowed this write-off from opening accrued income and made an addition.
Assessee furnished complete party-wise details during assessment, proving all written-off amounts were previously taxed.
Additionally, the AO made a disallowance under Section 40(a)(i) treating payments to non-residents as “Royalty”, without proving the use of any copyright, patent, trademark, secret process, or commercial experience under Article 12 of the Indo-US DTAA.

Decision

Reversal of Unbilled Revenue: Held in favour of the assessee. Since the unbilled revenue was previously offered to tax, its subsequent write-off is akin to a bad debt and constitutes an allowable business expenditure under Section 37(1).
Disallowance under Section 40(a)(i): Held in favour of the assessee. The AO failed to establish that the payments triggered the definition of “Royalty” under Article 12 of the Indo-US DTAA, making the Section 40(a)(i) disallowance unsustainable.

Key Takeaways

Taxed Income Write-offs are Allowable: If an amount has been previously recognized as income and subjected to tax, its subsequent reversal due to non-realization qualifies as a valid business loss/expenditure.
Burden on Revenue for DTAA Characterization: The Revenue must specifically prove that payments fit the technical definition of “Royalty” under the governing DTAA before invoking Section 40(a)(i) disallowances.

IN THE ITAT MUMBAI BENCH ‘I’

KPMG India (P.) Ltd.

Deputy Commissioner of Income-tax

SAKTIJIT DEY, Vice President
and BIJAYANANDA PRUSETH, Accountant Member

IT Appeal Nos.1414 and 2841 (MUM) OF 2026
[Assessment years 2015-16]

AUGUST 12, 2026

Ajit Jain and Siddhesh Chougule for the Appellant. Sridhar G. Menon, Sr. DR for the Respondent.

ORDER

Bijyananda Pruseth, Accountant Member. – 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 KPMG Advisory Services (P.) Ltd. v. Dy. CIT [IT Appeal Nos. 5392 to 5396 (Mum.) of 2024, dated 13.02.2025]. 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 (P.) 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 (P.) 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 (P.) 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 ICDSIV- 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 1^st 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.

Sr. No.	Paid to	Amount (Rs.)
1	KPMG Advisory, Indonesia	11,82,984
2	KPMG Advisory N.V., Netherlands	19,09,999
3	KPMG Auditors & Consultores S.A., Mozambique	18,68,930
4	KPMG Australia	20,73,849
5	KPMG Dublin	11,35,018
6	KPMG LLP, United Kingdom	56,65,535
7	KPMG LLP, USA	2,30,94,742
8	KPMG S.A., France	14,74,667
9	KPMG Services Pte Ltd, Singapore	16,33,649
10	KPMG Tax Services Ltd., Mauritius	2,73,353
	Total	4,03,12,726

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 (P.) 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 (P.) 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 (P.) 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 200100, 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 nonresident 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 8^th 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.