KPMG ADVISORY SERVICES PRIVATE LIMITED,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX-CIRCLE-6(1)(2), MUMBAI

Fact in brief is that return of income declaring total income of Rs. 9,81,84,319/- was filed on 29.11.2011. The case was subject to scrutiny assessment and notice u/s 143(2) of the Act was issued on 07.08.2012. The assessee company is engaged in the business of consultancy in the field of strategy infrastructure, IT enabling technologies, system integration and software services. The assessment order u/s 143(3) of the Act was passed on to 5396/Mum/2024 KPMG Advisory Services Private Limited 12.12.2013 by assessing the total income at Rs. 13,81,19,629/-. The issue arised in the four ground of appeal filed by the assessee are pertained to disallowance made u/s 40A(2)(h) of the Act of 10% of financial cost, professional indemnity insurance, professional fees etc. paid by the assessee to its associate concern. Looking to the common basis of such disallowance all these disallowances are adjudicated together. During the course of assessment, the assessing officer noticed that assessee has paid facility costs of Rs. 12,80,63,741/- to KPMG, a partnership frim in which one of the shareholders is a partner. On query, the assessee explained that KASPL (assessee company) staffs operate from offices located at Mumbai, Gurgaon, Bangalore, Hyderabad, Pune and Kolkata. KPMG is a member firm of KPMG International a co-operative which is a mutual association of its members. KPMG incurs the cost on its behalf and on behalf of the sub-licensees and recover from sub-licensees their share or cost. The reimbursements of costs are termed as support service charges in the books of sub- licensees. The assessee has also given the break-up of facilities consisting of following items:

The assessee also submitted that the amount has been recovered on cost to cost basis and on the same basis as has been charged to other sub-licensees whose relationship with KPMG was not covered within the meaning of section 40A(2)(b) of the Act. The assessee has also given the break-up and justification of allocation of various expenses i.e. electricity and water expenses, to 5396/Mum/2024 KPMG Advisory Services Private Limited communication and technology expenses and consumable and others which have been reproduced at page 4 & 5 of the assessment order.

However, the AO has not agreed with the submission of the assessee and stated that assessee had failed to furnish any specific particulars which would throw light on the specific nature of work done by M/s. KPMG and the amount of charges paid to them on account of such work. The assessing officer concluded that assessee company has not furnished any verifiable specific details for the ascertainment of reasonableness of expenditure u/s 40A(2)(b) therefore, facility cost paid to KPMG was considered as excessive and unreasonable and 10% of the said facility cost to the amount of Rs. 1,28,06,374/- of the total facility costs paid to KPMG of Rs. 12,80,63,741/- was disallowed and added to the total income of the assessee.

Similarly, the assessing officer has noticed that assessee has reimbursed Rs. 91,81,397/- being its share of professional indemnity insurance to KPMG, a partnership firm in which one of the shareholder was a partner. The assessee was asked for justification of such payment under the provisions of section 40A(2)(b) of the Act. The assessee explained that KPMG has taken a policy to cover itself and all the sub-licensees and paid the insurance premium to the insurance company and thereafter it recovers the appropriate portion from all the sub-licensees based on their client revenues. Similar to the reasons as discussed above the assessing officer stated that assessee company has not filed to 5396/Mum/2024 KPMG Advisory Services Private Limited the specific particulars to ascertain the reasonableness of the payment made to its sister concern KPMG for the services rendered by them therefore 10% of the said facility cost of Rs. 9,18,140/- was disallowed u/s 40A(2)(b) of the Act and added to the total income of the assessee.

The AO has also noticed that assessee has paid professional fees of Rs. 18,48,51,932/- to KPMG. On query, the assessee explained that it has availed the services in the area of book keeping, treasury management, tax compliances, MIS reporting and other aspects like payable and receivable management etc. The detailed description of the services along with break-up submitted by the assessee has been reproduced at page no. 8, 9, 10 & 11 of the order of assessing officer. However, for the same reason as discussed (supra) in this order, the AO had not agreed with the submission of the assessee and stated that it is not ascertainable whether the payment made by the assessee company to KMG was excessive or not within the meaning of provisions of section 40A(2)(b) of the Act. Therefore, for the reason as referred above, the AO has disallowed 10% of the professional fees of Rs. 18,48,51,932/- (Rs. 33,48,51,932/- + 15,00,00,000/-) which comes to Rs. 18,48,51,932/-.

The assessee filed appeal before the ld. CIT(A). The ld. CIT(A) has dismissed the appeal of the assessee reiterating the fact stated by the assessing officer. to 5396/Mum/2024 KPMG Advisory Services Private Limited 9. During the course of appellate proceedings before us, the ld. Counsel submitted that during the course of assessment proceedings, the assessee has provided the complete details cost of support services availed by the assessee company from the KPMG along with basis of recovery as per area occupied and headcount and also submitted the relevant detail of common expenses incurred under the different heads along with allocation made to the assessee company. He submitted that the AO has not specifically asked any information which is further required without disproving the relevant details and supporting material furnished by the assessee. The ld. Counsel also submitted that both the KPMG and assessee company are regularly assessed to income tax and filed their return of income at the same tax rate 30% and also attached copies of return of income filed alongwith copies of assessment order passed in their cases by the assessing officer. The ld. Counsel further submitted that the ld. CIT(A) has not given any specific finding and sustained the addition made by the assessing officer on assumption basis in unjustified manner. The ld. Counsel also placed reliance on the judicial pronouncements and the copies of the same placed in the paper book filed before us.

On the other hand, ld. DR relied upon the lower authorities.

Heard both the sides and perused the material on record. During the course of assessment proceedings, the assessing officer has disallowed 10% of the cost allocated by the KPMG to the assessee company from the common facilities shared by them on to 5396/Mum/2024 KPMG Advisory Services Private Limited the ground that assessee company has not furnished any verifiable specific details for the ascertainment of reasonableness of expenditure u/s 40A(2)(b) in respect of the allocation of various common costs i.e. facility cost, professional indemnity insurance, professional fees etc. as discussed (supra) in this order. However, from the perusal of the material on record, the assessee vide letter dated 18.12.2013 during the course of assessment has explained that it had the set up its offices at different locations at Mumbai, Gurgaon, Delhi, Bangalore, Hyderabad, Pune and Kolkata as sub- licensees of KPMG International and operated from same premises and used the common infrastructure, technology, communication, supplies and support personnel etc. The assessee has also given the basis of recovery of allocation of cost incurred by the KPMG on its behalf under the different heads as reproduced as under:

We find that assessing officer has neither specified any kind of further information and details required to be furnished by the to 5396/Mum/2024 KPMG Advisory Services Private Limited assessee nor brought any material on record to establish that the allocation and reimbursement of the cost incurred on behalf of the assessee by the KPMG was excessive or unreasonable as specified in section 40A(2)(b) of the Act. We have also perused the submission of the assessee that KPMG and assessee both are assessed to tax in India and during the A.Y. 2011-12 both have paid tax at the same tax rate of 30% on the income shown in the return of income as under:

Further, the assessee has explained along with the factual submission made before the AO that facility cost of rental office premises located at 10 locations in India comprised of office maintenance cost, securities charges, general insurance premium, utilities, IT infrastructure and maintenance, facility management expenses etc. and others costs were allocated based on area occupied and by headcount. Similarly, in respect of professional indemnity insurance cost it was explained that same was recovered on the basis of revenue earned by the sub-licensee. Further, professional fees paid to KPMG was comprised various internal services i.e. service charges maintenance of books of account, HR related services, accounts related services, information technology maintenance services and other services

We have also perused the judicial pronouncements as referred by the ld. Counsel. In the case of Coronation Flour Mills vs ACIT (2010) 188 taxman 257 (Guj), the Hon’ble High Court of Gujarat held that AO is required to record a finding as to whether expenditure is excessive or unreasonable in relation to any one of three requirements prescribed in section which are independent and alternative to each other for making disallowances.

Since identical issue on same fact, we have adjudicated vide as (supra) wherein the similar grounds of appeal of the assessee are allowed therefore, applying the same finding mutatis mutandis the ground of appeal of the assessee 1 to 4 are allowed. Accordingly, the appeal of the assessee is allowed. and and ITA No. 5394/M/2024 are based on common issue on identical facts therefore, all these appeal are adjudicated together by taking the ITA No. 5394/M/2024 as a lead case and its findings will be applied to the other two appeals wherever applicable.

Fact in brief is that return of income declaring total income of Rs. 4,45,93,640/- was filed on 30.11.2011. The assessment u/s 143(3) of the Act was completed on 14.03.2016 determining total income at Rs. 11,05,06,690/-. Subsequently, the ld. PCIT has passed order u/s 263 of the Act on 26.12.2017 holding that the AO had not made enquiry in respect of unbilled Revenue and set aside the assessment order dated 14.03.2018 passed u/s 143 of the Act to the file of the AO for passing a fresh order. Subsequently, during the course of assessment proceedings u/s 143(3) r.w.s. 263 of the Act, the AO has noticed that assessee has disclosed Rs. 40,86,45,393/- as unbilled revenue as on 31.03.2012. The assessee was asked to furnish project wise, client wise mile stones achieved and how the revenue was offered and also asked rational 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 to 5396/Mum/2024 KPMG Advisory Services Private Limited 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 has also explained that it has reversed the unbilled revenue to the amount of Rs. 1,88,00,034/- without raising any invoices on client. However, the AO has not agreed 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 assessing officer 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 reversed amount of Rs. 1,88,00,034/- was added to the total income of the assessee.

The assessee filed appeal before the ld. CIT(A). The ld. CIT(A) has dismissed the appeal of the assessee.

During the course of appellate proceedings before us, the ld. Counsel submitted that the assessee had explained in detail to the AO that Revenue is recognized on the basis of time spent with the clients. He also submitted that party-wise break-up of accounting of revenue under various categories comprising of opening / closing, unbilled revenue etc. were provided to the AO. He also submitted that unbilled revenue was already offered as professional income in the year of accrual and shown as an asset in the balance sheet until invoice was raised on the clients. The ld. Counsel has also explained the method of recording the journal to 5396/Mum/2024 KPMG Advisory Services Private Limited entries in the books of account pertaining to the unbilled revenue. He further submitted that assessee has accounted unbilled revenue in the previous F.Y. and offered to tax on the basis of time spent with the client. The ld. Counsel also referred the Audited Accounting Financial Statement and other detail like party wise break up submitted before the lower authorities.

On the other hand, ld. DR supported the order of lower authorities.

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 to 5396/Mum/2024 KPMG Advisory Services Private Limited 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. We have also perused the Schedule 19 of the Audited Financial Statement for the year ended 31.03.2012 with opening unbilled revenue as on 01.04.2011 and closing unbilled revenue as on 31.03.2012 as reproduced below: to 5396/Mum/2024 KPMG Advisory Services Private Limited 23. We have also perused the copies of various documents filed before the AO by the assessee on 19.12.2019 under the following categories:

We have adjudicated the identical issue on common fact as per ground of appeal no. 2 to 3 filed by the Revenue for the A.Y. 2012-13 vide ITA 5394/M/2024 as supra in favour of the to 5396/Mum/2024 KPMG Advisory Services Private Limited assessee. Applying the same findings, the grounds of appeal no. 1 to 2 of the appeal are allowed. The Ground No. 3 become academic not required any adjudication.

The issue in the appeal are similar to the issue which have been adjudicated for A.Y. 2012-13 and A.Y. 2015-16 vide and in favour of the assessee as supra in this order. Applying the same findings to this appeal the grounds of appeal no. 1 to 4 are allowed. The ground no. 5 become academic not required adjudication.

In the result, all the appeals of the assessee are allowed.