M/S. IG INFOTECH (INDIA) PRIVATE LIMITED,BENGALURU vs. ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-3(1)(1), BENGALURU

IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH : BANGALORE BEFORE SHRI. CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(TP)A No. 751/Bang/2022 Assessment Year : 2018-19 M/s. IG Infotech (India) Pvt. Ltd., 2nd Floor, Infinity Building, Khata No. 436, The Assistant Survey No. 13/1B, 12/1B, Commissioner of Challagatta Village, Income Tax, Vs. Varthur Hobli, Circle – 3 (1) (1), Intermediate Ring Road, Bangalore. Domlur, Bengaluru – 560 071. PAN: AABCH4430K APPELLANT RESPONDENT

Assessee by : Shri Nageswar Rao, Advocate Revenue by : Ms. Neera Malhotra, CIT-DR

Date of Hearing : 13-06-2023 Date of Pronouncement : 10-07-2023 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against the final assessment order dated 28.06.2022 passed by the Ld.ACIT, Circle – 3(1)(1), Bangalore for A.Y. 2018-19 on following grounds of appeal:

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Page 5 IT(TP)A No. 751/Bang/2022 The Ld.TPO noted that assessee had selected following 7 comparables with average margin of 15.69%.

2.3 It thus treated its transaction with the AE to be at arms length. Dissatisfied with the criterias applied by the assessee while selecting comparables, the Ld.AO shortlisted set of 20 comparables with median of 23.6%, the details of which are as under:

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Page 8 IT(TP)A No. 751/Bang/2022 2.4 The Ld.TPO thus proposed an adjustment being shortfall at Rs.4,89,11,827/- in the hands of assessee. 2.4.1 On receipt of the transfer pricing order, the Ld.AO passed the draft assessment order by incorporating the proposed transfer pricing adjustment, and further disallowed sum of Rs.15,74,092/- under the head income from other sources in the hands of the assessee. 2.5 On receipt of the draft assessment order, the assessee filed objections before the DRP. Before the DRP the assessee objected for inclusion of certain comparables by the Ld.TPO. The DRP also denied working capital adjustment. The assessee had also suggested certain comparables for inclusion. The DRP directed the Ld.TPO to verify Sasken Technologies Ltd. and Aptus Software Labs Pvt. Ltd. for its inclusion / exclusion respectively. 2.5.1 On receipt of the DRP directions, the Ld.AO passed the impugned order by making addition in the hands of assessee in respect of the transfer pricing adjustment proposed at Rs.4,89,11,827/-. 2.6 Aggrieved by the order of the Ld.AO, assessee is in appeal before this Tribunal. 2.7 At the outset, the Ld.AR vide email dated 13.06.2023 made submissions which is scanned and reproduced as under:

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Page 11 IT(TP)A No. 751/Bang/2022 4. It is submitted that the assessee do not wish to press ground nos. 4.1 to 4.3 and 4.5 to 4.8. Accordingly, these grounds are dismissed as not pressed. 5. The Ld.AR submitted that, ground nos. 5, 5.1, 5.2 and 4.4 are in respect of inclusion / exclusion of comparables. The Ld.AR prayed that the inclusion of comparables sought in ground no. 5.1 may be kept open to be considered in an appropriate circumstances. Accordingly ground no. 5.1 need not be adjudicated and liberty is granted to assessee to raise these comparables for inclusion in appropriate circumstances. Ground no. 5.2 r.w. ground no. 4.4 6. He submitted that in ground no. 5.2, assessee is seeking exclusion of the following comparables being a) Cybage Software Pvt. Ltd. b) Exilant Technologies Pvt. Ltd. c) Infosys Ltd. d) Larsen & Toubro Infotech Ltd. e) Mindtree Ltd. f) Nihilent Ltd. g) Persistent Systems Ltd. h) Tata Elxsi i) Wipro Ltd. 7. He submitted that the turnover of the assessee for the year under consideration for software development service segment is Rs.48.48 crores and the above comparables has turnover more than 200 crores. He thus prayed for application of turnover filter of 1 to 200 crores for exclusion of the above comparables. In

Page 12 IT(TP)A No. 751/Bang/2022 support of this contention, he placed reliance on the decision of the Coordinate Bench of this Tribunal in assessee’s own case in ITA No. 204/Bang/2022 for A.Y. 2017-18 by order dated 01.11.2022, wherein L&T Infotech Ltd., Persistent Systems Ltd., Tata Elxsi Ltd., Infosys Ltd., Nihilent Ltd. and Cybage Software Pvt. Ltd. were excluded for having high turnover. 7.1 He submitted that Mindtree Ltd. and Wipro Ltd. were also exceeds turnover of more than 200 crores, by Coordinate Bench of this Tribunal in case of MWYN Tech Pvt. Ltd. vs. ITO in IT(TP)A No. 753/Bang/2022 by order dated 31.10.2022 for A.Y. 2018-19. He submitted all the above comparables were under consideration in the decision of MWYN Tech Pvt. Ltd. vs. ITO (supra) which is passed for Assessment Year 2018-19. 7.2 The Ld.AR also drew attention of this bench to a table wherein the turnover of the comparables were listed in the decision relied by him in case of MWYN Tech Pvt. Ltd. vs. ITO (supra) which is as under: Sl. Turnover Name of the Company No. (in crores) 1 Exilant Technologies Pvt. Ltd., 332.43 2 Larsen & Toubro Infotech Ltd., 6906.40 3 Mindtree Ltd., 5325.00 4 Nihilent Ltd., 280.06 5 Persistent Systems Ltd., 1732.00 6 Wipro Ltd., 44710.00 7 Tata Elxsi Ltd., 1386.29 8 Infosys Ltd. and 61941.00 9 Cybage Software Pvt. Ltd. 731.16 7.3 On the contrary, the Ld.DR placed reliance on orders passed by authorities below.

Page 13 IT(TP)A No. 751/Bang/2022 We have perused the submissions advanced by both sides in the light of records placed before us. 7.4 We note that the Ld.TPO erred in not applying a cap on upper limit on the turnover while selecting the companies comparable. In this regard, it is submitted that application of turnover filter is relevant criterion in choosing comparable companies. The difference in the scale of operations has a direct impact on the profitability. The concept of economies of scale wherein, an increase in the size and scale of the operations leads to a decrease in the long run average cost of each unit or each service project delivered. Therefore, the per unit fixed cost of a small-scale company would be much higher than that of a medium/large size organisation. 7.5 Further, it is submitted that medium/large size organisation operating in a particular industry also enjoys benefits of certain other market drivers and cost arbitrages. It is submitted that the turnover of the assessee under SWD services is Rs. 48.48 crores. This being so, the Ld.TPO ought to have applied upper turnover filter while selecting comparable in the present case. We draw support from the decision of this Tribunal in case of Autodesk India (P) Ltd. V. DCIT [Reported in (2018) 96 taxmann.com 263 (Bang Trib)]. On application of the turnover filter on 1-200 crores, the above 11 companies are to be excluded. Further reliance is placed on the decision of this Hon’ble Tribunal in ACI Worldwide Solutions Pvt. Ltd. v. ACIT (order dated 13.05.2022 passed in IT(TP)A No. 106/Bang/2022). 7.6 Considering the facts and respectfully following the decision of the Coordinate Bench of the Tribunal in the case of Autodesk

Page 14 IT(TP)A No. 751/Bang/2022 India Pvt Ltd., (supra), we hold that the above listed companies whose turnover in the current year is more than Rs.200 crores should be excluded from the list of comparable companies. Accordingly, ground nos. 4.4 and 5.2 stands partly allowed. 8. It is stated in the email that Ground no. 6 is not pressed with a request to keep the issue open. Accordingly the same is not decided and liberty is granted to the assessee to argue this issue in an appropriate circumstances. 9. Ground no. 7 – The Ld.AR submitted that, certain errors have crept in computing operating margins of comparable companies by Ld.TPO. The DRP had directed the Ld.AO to verify the same and recomputed the margin in para 2.10. The Ld.AR submitted that the Ld.TPO has however not complied with the directions. 9.1 We direct the Ld.TPO to comply with the directions of the DRP in para 2.10 and to compute the margins and the left over comparables by correcting the margins. Accordingly, this ground raised by assessee stands allowed for statistical purposes. 10. Ground no. 8 is in respect of non-granting of working capital adjustment. After hearing the contentions of both the sides, we are of the opinion that this issue is no longer resintegra as this issue is covered by the decision of Coordinate Bench of this Tribunal in case of Huawei Technologies India (P.) Ltd. v. Jt. CIT reported in (2019) 101 taxmann.com 313 wherein this Tribunal has held as under: “17. In the light of the above discussion we are of the view that the CIT(A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT(A) has not found any error in the TPO’s working of working capital adjustment, the working

Page 15 IT(TP)A No. 751/Bang/2022 capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the assessee and a copy of the same is at page 173 & 192 of the assessee’s paper book. No defect whatsoever has been pointed out in these working by the CIT(A). We may also further add that in terms of Rule 10B(1) (e)(iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is not the case of the CIT(A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT(A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Rules, which provides as follows:- “(3) an uncontrolled transaction shall be comparable to an international transaction if – (i) None of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged to paid in, or the profit arising from, such transactions in the open market; or (ii) Reasonably accurate adjustments can be made to eliminate the material effects of such differences.” 18. In such a scenario there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore, in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the assessee should be allowed. We hold and direct accordingly. 19. In the result, the appeal of the assessee is allowed.” 6.3 In view of the above order of the Tribunal, we inclined to remit the issue to the file of AO/TPO to determine the correct working capital adjustment.”

Page 16 IT(TP)A No. 751/Bang/2022 Accordingly, this ground raised by assessee stands allowed for statistical purposes. 11. Ground no. 9 is stated to be not pressed with the request to keep it open. Accordingly this ground is not decided and liberty is granted to assessee to contest this issue in an appropriate circumstances. 12. Ground nos. 10 & 11 are consequential in nature and therefore do not require adjudication. Accordingly, the appeal filed by the assessee stands partly allowed in respect of the grounds that has been contested by the Ld.AR as per the email sent dated 13.06.2023. In the result, the appeal filed by the assessee stands partly allowed. Order pronounced in the open court on 10th July, 2023.

Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 10th July, 2023. /MS / Copy to: 1. Appellant 4. DRP-1, Bangalore 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order

Assistant Registrar, ITAT, Bangalore