EaseValueWhat Happened?
The Karnataka High Court has recently upheld the validity of applying a ₹200 crore turnover filter when selecting comparable companies for transfer pricing (TP) analysis under the Income Tax Act, 2025. This ruling clarifies that taxpayers can exclude companies with turnover below ₹200 crore from their TP comparables database, making the TP study more focused and defensible before tax authorities during assessment.
This judgment is significant because it resolves a long-standing ambiguity in transfer pricing practice. Many TP professionals have been using this filter, but its legal sanctity was questioned by the Income Tax Department in several cases. The Karnataka HC ruling now provides judicial backing to this filtering methodology.
Background & Legal Context
Transfer Pricing Rules Under Income Tax Act, 2025:
Transfer pricing is governed by Section 92 to Section 92F of the Income Tax Act, 2025 (which replaced the 1961 Act). When an Indian company conducts international transactions with associated enterprises (AEs) — such as parent companies, subsidiaries, or sister concerns abroad — it must ensure that the prices charged are at 'arm's length' or what independent parties would charge under similar circumstances.
The primary method for determining arm's length price (ALP) is the Comparable Uncontrolled Price (CUP) method, which requires identifying comparable companies. Section 92(2) of the IT Act, 2025 mandates that the Central Government shall prescribe the transfer pricing regulations through the Board.
Why the ₹200 Crore Filter?
The Transfer Pricing Regulations prescribe detailed rules for selecting comparables. The key challenge is that India's corporate database contains thousands of companies. Not all are truly comparable — a small trader cannot be compared with a large multinational subsidiary.
The ₹200 crore turnover threshold acts as a proxy for:
- Financial capacity and operational complexity
- Access to international markets and pricing power
- Quality and reliability of financial data
- Similarity in business scale and scope
- Ability to negotiate pricing at arm's length
Before this Karnataka HC ruling, the Income Tax Department occasionally challenged this filter, arguing that it arbitrarily excluded potentially comparable companies. This created uncertainty in TP litigation.
The Karnataka HC Judgment:
The court held that applying a ₹200 crore turnover filter is a reasonable and justifiable screening mechanism that aligns with:
- The principle of functional similarity under TP regulations
- The need for financial comparability
- International best practices in TP analysis (OECD Transfer Pricing Guidelines)
- The practical requirements of conducting robust TP studies
The judgment reinforces that TP analysis is not purely mathematical but involves reasonable judgment in selecting data. The filter is not arbitrary discrimination but a logical screening tool.
What Does This Mean for You?
For Multinational Enterprises (MNEs):
If your company has international transactions — importing goods, outsourcing services, charging royalties, providing management fees — you must file a TP study with your tax return for AY 2026-27 and onwards. This ruling makes your TP defensibility stronger if you have used the ₹200 crore filter to select comparables.
You can now confidently:
- Exclude smaller companies from your comparable database
- Focus on financially robust and operationally similar businesses
- Present a more credible and focused TP analysis to the tax authorities
- Reduce the risk of TP adjustments by the Assessing Officer (AO)
- Defend your TP study during any scrutiny or audit
For Large Domestic Companies:
Even if you are a purely domestic business but have related-party transactions with group companies (such as management fees, inter-company loans, or shared services), you may need TP documentation. This ruling supports your position in using the ₹200 crore filter for such analysis.
For the Tax Department:
The AO cannot arbitrarily reject your TP study simply because you excluded companies below ₹200 crore. They must demonstrate that your filter is unreasonable or that specific excluded companies were truly comparable — a higher legal burden now.
For TP Practitioners and CA Firms:
This judgment provides judicial precedent when advising clients on TP methodology. You can confidently recommend the ₹200 crore filter and cite this Karnataka HC ruling if the Department questions it during audit or assessment proceedings.
What Should You Do Now?
Step 1: Review Your TP Documentation
If you have filed TP studies in the past (AY 2024-25 or AY 2025-26) without using the ₹200 crore filter, consider whether amending your return is beneficial. If the Department has issued a show-cause notice on TP, this ruling strengthens your defense.
Step 2: Update TP Policies for AY 2026-27
As you prepare TP documentation for the next assessment year, explicitly document that you are using the ₹200 crore turnover filter with the rationale based on:
- Functional similarity and financial comparability
- This Karnataka HC ruling
- International best practices
- Practical necessity for robust analysis
Step 3: Strengthen Your Benchmarking Study
Beyond the turnover filter, ensure your TP study includes:
- Clear documentation of comparable company selection criteria
- Details on why each comparable was selected or excluded
- Financial metrics analysis (margins, ratios, profitability)
- Functional analysis (functions performed, assets deployed, risks borne)
- Economic analysis of the industry and market conditions
Step 4: Maintain Clear Audit Trail
Keep records showing:
- The databases used to identify comparables
- The screening criteria applied (including the ₹200 crore filter)
- Companies screened out and why
- Final list of comparables selected with justification
This documentation will be valuable if the AO challenges your TP study during assessment or in case of any tax litigation.
Step 5: Consult Your TP Expert
If your company has significant international transactions, engage a qualified TP professional (CA or TP economist) to ensure your documentation aligns with this ruling and current regulations under the Income Tax Act, 2025.
Key Takeaways
- Ruling Clarity: Karnataka HC has validated the ₹200 crore turnover filter for selecting transfer pricing comparables, providing legal certainty for taxpayers using this methodology.
- Stronger Defense: If your TP study uses this filter, you now have judicial precedent to defend your position against Income Tax Department challenges during assessment or audit.
- Practical Impact: This ruling reduces TP litigation risk for MNEs and large domestic companies with related-party transactions who have adopted this filtering approach.
- Documentation Matters: Even with this ruling, ensure your TP study documents the rationale for using the ₹200 crore filter and maintains clear audit trails of comparables selected and excluded.
- Forward Planning: For AY 2026-27 onwards, you can confidently incorporate this filter in your TP methodology, supported by a court judgment and regulatory framework under the Income Tax Act, 2025.
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