The transaction was related to the 2020–21 assessment year of Shell India Markets Private Limited, an Indian subsidiary of the Shell Group. During the year, the company entered into several international transactions with associated enterprises. These included the provision of upstream technical services relating to oil and gas exploration and production under Production Sharing Contracts; the provision of IT and IT-enabled services; the allocation of centralised group costs for downstream support functions; and the recovery of salary costs relating to seconded employees. The upstream technical services were charged at cost, strictly in accordance with the terms of the Production Sharing Contracts.
However, the tax authorities rejected this pricing method and applied a mark-up, treating the transaction as comparable to routine service arrangements. They also determined the arm’s length price of certain downstream cost allocations to be nil, citing a lack of evidence of benefit. Further adjustments were made in respect of IT and IT-enabled services, as well as employee cost recoveries. These adjustments were largely confirmed by the Dispute Resolution Panel on the grounds of consistency with earlier years and the Revenue’s stance.
Shell India Markets challenged the assessment before the Income Tax Appellate Tribunal. The company argued that upstream technical services were subject to sovereign restrictions under Production Sharing Contracts, which prohibited any profit element. It also claimed that similar services were provided at cost by other consortium members and that this model satisfied the arm’s length principle, taking into account industry practice, OECD guidance and expert opinion. Shell India Markets also contended that setting an arm’s length price of zero for downstream cost allocations without applying a recognised transfer pricing method was contrary to the law, and that the authorities had improperly questioned commercial expediency.
Judgment
The Income Tax Appellate Tribunal upheld the ‘at cost’ transfer pricing model for upstream technical services and deleted the entire adjustment relating to these services. The Tribunal held that the Production Sharing Contract framework, industry practice and expert evidence supported ‘arm’s length’ pricing at cost. Regarding other transactions, including downstream cost allocations, IT and IT-enabled services, and employee cost recoveries, the Tribunal set aside the adjustments and referred those issues to the Assessing Officer and Transfer Pricing Officer for re-determination in accordance with recognised transfer pricing methods, following a thorough examination of the evidence.