Is ever answering "No Basis for Judgement" on a reference request a red-flag

Usually you can supply context either as comments on the form or as a separate letter. This is where you can explain you “no basis for judgement”. It is not uncommon (although maybe so for this specific question): you may simply not have the historical pool of students to make an informed comparison.

You can use comments or a letter to simply restate what you just included in your post, and this should be enough to justify an honest opinion AND provide useful additional information for a committee.

I think that this is common enough that it won't raise any flags. But if you have a chance to explain why then it would be better.

Of course, logically, for this particular question, because of the specific wording, Top 1% is actually accurate. But it is a bit misleading.

I think either is honest and that an explanation is warranted if possible.