₹200 Crore Turnover Filter TP Comparables Valid 2025-26

What Happened?

The Karnataka High Court has upheld the validity of applying a ₹200 crore upper turnover filter when identifying comparable companies for transfer pricing (TP) purposes. The court specifically ruled that excluding high-turnover software comparables—particularly multinational software giants—is legally permissible under transfer pricing regulations. This decision aligns with the precedent set in the SAP Labs India case and provides much-needed clarity for taxpayers preparing their TP studies for Assessment Year 2025-26 and beyond.

Background & Legal Context

Transfer pricing is governed by Chapter X of the Income Tax Act 2025 (previously Chapter X-A of the 1961 Act), specifically Section 92 and related sections (92A, 92B, 92C, 92CA, 92CB, 92CC). The core principle is that transactions between associated enterprises must be priced at an arm's length price (ALP)—the price that would be charged between unrelated parties under comparable circumstances.

When determining ALP, taxpayers must identify comparable uncontrolled prices or use the Comparable Uncontrolled Price (CUP) method. This requires selecting comparable companies from the market. However, comparability is not absolute. The Income Tax Act 2025 and the Transfer Pricing Rules allow for functional adjustments and filters based on factors such as:

• Business functions performed
• Assets employed
• Risks assumed
• Contractual terms
• Economic circumstances
• Business strategies

The turnover filter of ₹200 crore has been a contentious issue for years. The Assessing Officer (AO) and Transfer Pricing Officer (TPO) often challenge TP studies arguing that excluding large comparables distorts the analysis. Software companies, in particular, face scrutiny because they may claim that smaller software firms are not truly comparable to large multinational software companies.

The Karnataka High Court's judgment validates the TPO's discretion to apply objective filters that exclude comparables that are materially dissimilar in size. A company with ₹200 crore turnover versus one with ₹5,000+ crore turnover operates under significantly different economic circumstances, cost structures, and negotiating power—making them genuinely non-comparable.

What Does This Mean for You?

For Software Companies & IT Service Providers:

• You can now confidently exclude large multinational software comparables (like TCS benchmarks with ₹50,000+ crore turnover) from your TP studies if your company's turnover is substantially lower.
• Your TP documentation will have stronger legal backing when you apply the ₹200 crore filter during AY 2025-26 assessments.
• This reduces the risk of TP adjustment challenges by the TPO, potentially saving you from protracted litigation and interest/penalties.

For All Businesses with Related-Party Transactions:

• If your business involves transactions with associated enterprises (parent, subsidiary, sister concern), you should apply size-based filters when selecting comparables.
• The ruling reinforces that qualitative and quantitative filters are legally valid under Section 92(1B) and the Transfer Pricing Rules.
• Your TP study will be more defensible if you document your rationale for excluding comparables based on turnover size.

Practical Impact for Assessment Year 2025-26:

• If you're currently under TP scrutiny or facing proposed adjustments, this judgment provides valuable precedent to challenge the TPO's rejection of your filters.
• When filing your ITR for AY 2025-26, ensure your TP documentation clearly states the filters applied and their rationale.
• If the TPO proposes an alternative set of comparables (with higher turnovers), you have legal authority to demand justification and challenge it.

What Should You Do Now?

Immediate Actions:

• Review Your Current TP Study: If you've already filed returns for AY 2025-26 or are in the process of preparing them, verify whether you've applied a turnover filter. If yes, ensure your documentation is robust and cites size-based comparability principles.
• Update Your TP Documentation: For any ongoing assessments or pending TP audits, reference this Karnataka HC judgment in your TP report addendum or during proceedings with the TPO. Request that the TPO apply consistent filters based on business size.
• Strengthen Your Comparables Search: When selecting comparables, use multiple databases (CMIE, Bloomberg, stock exchange disclosures) to identify peers within your turnover band. Document why comparables outside this band were excluded.

For Taxpayers Under Audit or Assessment:

• If the TPO has already proposed a TP adjustment, file a detailed response citing this ruling. Emphasize that excluding high-turnover comparables is not arbitrary but economically justified.
• Request the TPO to provide written justification for including comparables outside the ₹200 crore filter. If they cannot provide sound reasoning, challenge it under Section 92(2) of the IT Act 2025.
• If necessary, prepare to file an appeal before the ITAT using this precedent.

For Future TP Planning:

• Establish a TP policy that clearly defines your comparables search methodology, including size-based filters. This proactive approach reduces audit risk.
• Maintain contemporaneous documentation of your benchmarking exercise, including rejected comparables and reasons for rejection.
• Consider engaging a TP specialist to prepare your study, as courts expect professional rigor in TP analysis.

Key Takeaways

• ₹200 Crore Turnover Filter is Valid: The Karnataka HC has confirmed that applying an upper turnover limit of ₹200 crore when selecting transfer pricing comparables is legally sound and follows established TP principles.
• Size-Based Filters Are Justified: Companies of vastly different sizes operate under different economic circumstances. Excluding disproportionately large comparables is not arbitrary; it's economically rational.
• Applies to All Industries: While the judgment involves software companies, the principle applies to all industries—manufacturing, services, trading—wherever related-party transactions exist.
• Reduces TP Litigation Risk: For AY 2025-26 and onwards, using this filter significantly strengthens your defense against TPO challenges, reducing the likelihood of costly disputes.
• Documentation is Critical: The judgment's validity hinges on proper documentation. Ensure your TP report explicitly states your filter criteria, the economic rationale, and the comparables analyzed.

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