Karnataka High Court Upholds Applying 15 Percent Related Party Filter In Transfer Pricing

The High Court of Karnataka has validated the use of a 15% related party transaction (RPT) filter to select or exclude comparable companies while computing arm's length pricing for cross-border dealings. The court determined that businesses whose controlled transactions exceed this benchmark cannot serve as unbiased market indicators. In transfer pricing audits, taxpayers and revenue authorities compare the profit margins of independent domestic entities against those of the assessed entity.

Applying an upper threshold of 15% for related party transactions filters out companies influenced by group relationships, preserving true market comparability under the Income-tax Act. Transfer pricing practitioners and multinational corporations should audit their comparability searches to verify that selected companies fall strictly within the 15% RPT tolerance limit. Documenting related party revenue and expense breakdowns systematically will help defend transfer pricing study reports against tax adjustments during scrutiny.

Adhering to this judicial benchmark prevents protracted transfer pricing litigation across appellate forums.