Transfer Pricing Turnover Filter 2026 | Karnataka HC Ruling

What Happened?

In September 2026, the Karnataka High Court delivered an important judgment on transfer pricing (TP) rules, upholding the ₹1–200 crore turnover filter for comparable company selection and excluding Bodhtree Innovations from the comparables set due to functional differences. This ruling provides clarity on how taxpayers must identify comparable companies when preparing transfer pricing documentation under the Income Tax Act, 2025.

Background & Legal Context

Transfer pricing is a critical compliance area governed by Chapter X of the Income Tax Act, 2025 (previously Chapter X-A under the 1961 Act). When Indian companies enter into international transactions with associated enterprises (related parties), they must follow the Arm's Length Principle (ALP) and document that their pricing is at an arm's length rate.

Key sections involved:

• Section 92(1) — Definition of international transaction and associated enterprise
• Section 92C(1) — Application of Arm's Length Principle
• Section 92C(5) — Transfer Pricing Officer (TPO) can reject benchmarking if comparable data is unreliable
• Section 92D — Transfer Pricing Documentation requirements (Form 3CEB and 3CEA)
• Section 92E — Safe Harbour provisions

One of the biggest challenges in transfer pricing is selecting comparable uncontrolled prices (CUPs) from similar companies. The Income Tax Department uses filters to narrow down comparables — one widely debated filter has been the ₹1–200 crore turnover/revenue range.

In this case, the taxpayer had selected Bodhtree Innovations as a comparable company, but the Karnataka High Court agreed with the Department's argument that Bodhtree should be excluded because it was functionally different — meaning it did not perform similar functions, bear similar risks, or use similar assets as the taxpayer.

What Does This Mean for You?

For IT-BPO, Software, and Consulting Firms:

• The ₹1–200 crore turnover filter is now validated by the High Court. If your comparable company falls outside this range, you risk rejection by the Transfer Pricing Officer.
• You cannot simply pick any company from the same industry. The company must be functionally similar — meaning it must perform the same type of work, face similar business risks, and use similar technology/assets.
• For AY 2025-26 and AY 2026-27 assessments, if your TP study relied on comparables outside the ₹1–200 crore range or included functionally dissimilar companies, you should be prepared for TPO challenges.

For Multinational Companies (MNCs) with India Operations:

• If you have parent-subsidiary transactions (e.g., charging management fees, royalties, or interest to Indian subsidiaries), this ruling reinforces the need for robust TP documentation.
• Your TP study must clearly explain why selected comparables are functionally equivalent. Generic industry peers may not pass scrutiny.

For Import-Export and Manufacturing Businesses:

• Similar logic applies if you conduct transfer pricing studies for related-party imports/exports or manufacturing arrangements.
• Revenue/turnover size is one filter, but function, risk, and assets (FRA analysis) is equally important and now legally validated.

Practical Impact on Complian ce:

• Higher rejection risk — TPOs can now cite this judgment to reject your comparables if they fall outside the ₹1–200 crore range or are functionally different.
• Increased transfer pricing adjustments — If comparables are rejected, TPOs may make secondary adjustments, leading to income additions and penalties under Section 271AAH.
• Advance Pricing Agreements (APAs) — Businesses with significant international transactions should consider filing APAs with the Central Board of Direct Taxes (CBDT) to pre-approve their TP methodology before assessment.
• Documentation burden — You must now document not just the turnover range of comparables, but detailed functional, risk, and asset analysis.

What Should You Do Now?

1. Review Your Current TP Study (AY 2025-26 & AY 2026-27)

• Check if your selected comparables fall within the ₹1–200 crore turnover range.
• Verify that each comparable company performs similar functions, faces similar business risks, and uses similar technology/assets as your company.
• If not, update your TP documentation immediately to exclude non-comparable companies or provide detailed justification for their inclusion.

2. Conduct Functional, Risk & Asset (FRA) Analysis

• Document the specific functions your company performs (e.g., development, marketing, distribution, risk-taking, investment).
• Compare these functions with each comparable company line-by-line.
• Highlight differences and explain why they do not make the comparable unsuitable.

3. File Form 3CEB and 3CEA Carefully

• Under Section 92D, transfer pricing documentation must include detailed TP studies.
• Ensure your chartered accountant clearly states the methodology, filters applied, and functional comparability analysis.
• Keep backend data (annual reports, financial statements of comparables) ready for scrutiny.

4. Consider Advance Pricing Agreements (APAs)

• If you have significant international transactions, filing an APA with CBDT (both unilateral and bilateral) can provide certainty and reduce assessment litigation.
• APAs are especially useful for large corporations with multiple transfer pricing issues.

5. Monitor Further High Court & Supreme Court Judgments

• This ruling may be challenged in the Supreme Court. Stay updated on further developments.
• Different High Courts may interpret the ₹1–200 crore filter differently based on facts of specific cases.

Key Takeaways

• Turnover Filter is Valid: The ₹1–200 crore revenue range for selecting comparable companies is now legally upheld by Karnataka HC, applicable to AY 2025-26 onwards.
• Functional Similarity is Mandatory: Mere turnover matching is insufficient; comparable companies must be functionally, risk-wise, and asset-wise similar to your business.
• Bodhtree Exclusion Sets Precedent: Even well-known companies can be excluded as comparables if they are functionally different; courts will not accept generic peer lists.
• Documentation is Critical: Your Form 3CEB and 3CEA must include detailed FRA analysis, not just financial metrics, to withstand TPO challenges during assessment for AY 2025-26 and beyond.
• Litigation Risk Increases: Businesses relying on weak or non-comparable companies in their TP studies face higher risk of TPO adjustments, penalties, and prolonged litigation under Sections 92C and 271AAH.

Bottom Line: This Karnataka HC judgment reinforces that transfer pricing is not a numbers game but a detailed functional and legal analysis. Whether you are an IT company, manufacturer, or MNC, your TP study must demonstrate that selected comparables are truly comparable. Prepare yourself for stricter scrutiny in the coming assessment years.

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