ITAT Mumbai Reaffirms ‘At-Cost’ Principle for Upstream Technical Services, Remands Multiple TP Issues for Fresh Evaluation
Shell India Markets Pvt Ltd vs Assessment Unit/Income Tax department, National Faceless Assessment Centre (NFAC), Delhi - ITA No. 4828/Mum/2024 | AY 2020-21
The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has delivered an important ruling in the case of Shell India Markets Pvt Ltd (Shell India), addressing multiple transfer pricing and corporate tax issues. The Tribunal offered clear guidance on contemporaneous benchmarking, industry-driven cost-sharing models, and the limits of the TPO’s powers.
Facts
Shell India, a subsidiary of the Shell Group headquartered in Netherlands, provides IT services, shared service center support, specialized upstream technical services under Production Sharing Contracts (PSCs), and participates in global cost-allocation structures. It is engaged in downstream oil operations, including retail sale of petroleum products, supply of lubricants and bitumen, as well as activities relating to a liquefied natural gas receiving terminal, a technology center and a financial shared services unit. The assessee filed its return of income on 29 January 2021 declaring total income of INR 2,158,020,615/-. The case was selected for scrutiny and statutory notices were issued.
For AY 2020-21, the TPO, after examining the transfer pricing documentation and carrying out his analysis, passed an order dated 29 July 2023 under Section 92CA(3), proposing a transfer pricing adjustment exceeding INR 5.36 billion, which the DRP upheld in full. The break-up of the adjustment, as summarized below:
| TP Issue | Adjustment (INR) |
|---|---|
| Provision of SBO IT Services | 1,099.4 million |
| Provision of SBO Shared Services | 1,025.6 million |
| Provision of Technical Services (Upstream E&P) | 486.2 million |
| Cost Allocation Charges | 2,690.1 million |
| Mark-up on Recoveries | 66.1 million |
Shell India challenged this before the ITAT.
ITAT Observations
- A consistent finding across several segments was the TPO’s failure to use current-year comparable data, instead relying entirely on comparable sets drawn from earlier assessment years i.e. AY 2017-18 and AY 2018-19. The Tribunal emphasized that transfer pricing is an annual and contemporaneous exercise, and Rule 10B(5) requires use of current-year financials unless unavailable. The TPO’s “copy-paste” approach, in the Tribunal’s view, rendered the benchmarking unsustainable.
- In relation to the SBO IT services and SBO shared services segments, the Tribunal observed that Shell India operated as a low-risk, routine captive service provider, whereas the TPO included high-end companies with diversified operations, brand intangibles, and superior functional profiles. The use of an arbitrary “1/10 to 10x turnover band” was also rejected.
- Shell India’s fresh benchmarking analysis, based on contemporaneous data and presented before the Tribunal, was deemed appropriate for reassessment. Both service segments were remanded back to the TPO for a de novo benchmarking study using proper filters, current-year data, and a robust FAR analysis.
- A major highlight of the ruling is the treatment of technical services provided under the upstream E&P segment. Shell India demonstrated that under PSCs, co-venturers including independent parties, are contractually required to share technical services strictly on an ‘at-cost’ basis, a model widely accepted in the global petroleum industry. The assessee supported this with independent expert opinion, evidence from non-AE transactions, and a history of acceptance by the Revenue in earlier years. The TPO, however, benchmarked the transaction using routine ITeS comparables, ignoring the specific regulatory framework of PSCs. The Tribunal categorically held that such an approach was flawed and inconsistent with real-world industry practice. Reaffirming that transfer pricing cannot override legally binding commercial constructs, the ITAT deleted the entire adjustment, upholding the at-cost model as arm’s length.
- On global cost allocation charges, the Tribunal noted that the TPO determined the ALP at NIL without applying any prescribed transfer pricing method, which is contrary to law. Since Shell India submitted additional evidence explaining the allocation framework and benefits, the Tribunal remanded the matter for fresh examination, directing the authorities to consider the new documentation objectively.
- Regarding salary and other cost recoveries, the Tribunal found that the TPO did not at first determine whether these were true pass-through costs or service transactions requiring a mark-up. The matter was sent back for a fresh FAR analysis and proper characterization.
Summary of observations
Overall, the decision reinforces several important principles:
- Contemporaneous data is mandatory for benchmarking and merely relying on past years’ data is not acceptable in law.
- Arbitrary filters, such as turnover bands without rationale, are unsustainable.
- Industry-specific commercial arrangements, especially those mandated under regulatory frameworks such as PSCs, must be respected for transfer pricing purposes.
- The TPO cannot determine ALP at NIL without applying an approved method or question the commercial expediency of a transaction.
- Additional documentation submitted at appellate stages must be considered if relevant.
Our Comments
In conclusion, the Shell India ruling reinforces the central principle that transfer pricing must reflect commercial reality, industry practice, and methodological discipline, not mechanical or retrospective analysis.
For industries operating under PSCs or global shared-service arrangements, the ruling provides valuable clarity and strong jurisprudence supporting at-cost models, proper FAR analysis, and methodological discipline in TP reviews.
The ruling underscores the importance of contemporaneous data, industry context, and proper FAR analysis in transfer pricing assessments.
For taxpayers, this decision provides persuasive jurisprudence supporting well-documented cost-sharing arrangements and low-risk captive service models, while reminding authorities that TP assessments cannot override legitimate commercial constructs or industry-specific frameworks.