In a decision with far-reaching implications for the energy sector and transfer pricing jurisprudence, the Income Tax Appellate Tribunal (ITAT) Mumbai has delivered a resounding victory for Shell India Markets Pvt. Ltd. The ruling in *ITA No. 4828/Mum/2024* (November 2025) not only deletes massive additions but also reinforces critical principles of contract sanctity, appropriate benchmarking, and methodological rigor in transfer pricing.
Case Snapshot: A Multi-Transaction Dispute
The dispute for Assessment Year 2020-21 centered on multiple international transactions:
E&P Technical Services: Shell India provided technical services to its Exploration & Production (E&P) associates strictly at cost, as mandated by governing Production Sharing Contracts (PSCs) that explicitly prohibit profit margins on such support.
Other Transactions: The scope also included non-E&P technical services, IT/ITeS, employee cost recoveries, and inbound cost allocations from associated enterprises (AEs).
The Revenue's Aggressive Stance
The Transfer Pricing Officer (TPO) took an aggressive approach, leading to a staggering adjustment exceeding ₹5,000 Crore:
E&P Services: Ignored the binding PSC terms and imposed a 16.52% profit margin using mismatched ITeS comparables.
IT/ITeS Benchmarking: Rejected Shell's analysis, applied outdated data, and used arbitrary filters like a 1/10th to 10x turnover band.
Cost Allocations: Unilaterally set the Arm's Length Price (ALP) at nil without reviewing evidence or applying any prescribed transfer pricing method.
Employee Cost Recoveries: Re-characterized them as service transactions and applied the Transactional Net Margin Method (TNMM) without a proper Functions, Assets, and Risks (FAR) analysis.
The Dispute Resolution Panel (DRP) upheld the TPO's order, escalating the matter to the ITAT.
ITAT's Groundbreaking Rulings: A Masterclass in TP Principles
The ITAT's bench meticulously dissected each issue, delivering clear and principled directives:
E&P Services at Cost UPHELD via "Other Method": This is the cornerstone of the ruling. The tribunal accepted Shell's use of Rule 10AB—the "Other Method." It recognized that:
The at-cost charging was contractually obligated under the PSCs.
This aligns with global industry practices within consortium arrangements.
It is consistent with OECD Transfer Pricing Guidelines for unique, contractually constrained transactions.
Expert opinions supported the commercial reality. Consequently, the entire adjustment on this transaction was deleted.
IT/ITeS Benchmarking Remanded: Criticizing the TPO's approach, the ITAT demanded a fresh, current-year search with rational filters and proper FAR alignment. It directed the assessing officer to consider the taxpayer's updated analysis, emphasizing contemporaneous data and commercial logic.
Cost Allocations: Nil ALP Rejected: The tribunal held that setting ALP at nil without applying any method or verifying the receipt of services/benefits and the allocation keys is legally untenable. The matter was remanded for proper verification and methodological application.
Employee Cost Recoveries: FAR is Key: The ITAT ordered a re-examination of the true nature of these transactions. The focus must be on a detailed FAR analysis before determining the applicable pricing method, rejecting automatic re-characterization.
Key Implications for Transfer Pricing Professionals
The Shell India ruling is a landmark with several critical takeaways:
Rule 10AB is a Potent Tool: The judgment powerfully validates the use of the "Other Method" under Rule 10AB for transactions where traditional benchmarking fails. It provides a clear roadmap: strong contractual evidence, industry practice, and expert validation can justify arm's length pricing where comparables are absent.
Contractual Terms Matter: Tax authorities cannot disregard specific, binding commercial contracts like PSCs while determining ALP. The economic and regulatory context is paramount.
Benchmarking Must Be Principled: The decision strikes a blow against arbitrary filters, use of outdated data, and forcing square-peg transactions into round-hole comparables. It mandates a logical, current-year, and FAR-driven approach.
Methodology Cannot Be Ignored: The ruling reinforces that the ALP determination process must follow the prescribed legal architecture—arbitrary assumptions like nil ALP without method application are illegal.
Understanding the "Other Method" (Rule 10AB)
This case turns the spotlight on Rule 10AB of the Income Tax Rules. It is the "Other Method" applied when none of the five standard methods (CUP, Resale Price, Cost Plus, TNMM, Profit Split) are suitable.
When Does It Apply?
When reliable comparables are unavailable (e.g., unique, contractually-driven services like Shell's E&P support).
In transactions involving unique intangibles, highly integrated operations, or residual profit splits where standard methods would distort the ALP.
The Shell Precedent: The tribunal has demonstrated that with robust documentation—contracts, industry studies, and expert reports—Rule 10AB can be successfully invoked to reflect the true arm's length nature of complex, specialized transactions.
Conclusion
The ITAT Mumbai's decision is a significant correction, ensuring that transfer pricing assessments are rooted in legal principles, contractual realities, and sound economic reasoning. For multinationals, especially in sectors like oil & gas with joint operations and complex contracts, it offers a vital precedent to defend commercially justified pricing structures. For professionals, it reiterates the importance of building comprehensive, context-rich documentation that goes beyond mere comparable searches.
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