The first transfer pricing update of 2026 takes us to India, where a recent Mumbai Tribunal decision involving Shell offers important guidance for multinational enterprises navigating complex transfer pricing regulations. The case addressed a fundamental question relevant to many controlled transactions: can highly specialized technical services be priced at cost, or must a mark-up always be applied under the arm’s length principle?
As the ruling confirms, the answer depends on the commercial, contractual, and regulatory context in which the intercompany transactions take place.
Background: At-Cost Pricing in Specialized Business Operations
Shell’s Indian subsidiary provided upstream oil and gas technical services, covering geological and reservoir engineering – to related group entities. These services were rendered under Production Sharing Contracts (PSCs) governing oil and gas exploration activities.
The PSC framework explicitly prohibited the inclusion of profit margins, requiring that such services be charged strictly at cost. Accordingly, Shell implemented an at-cost pricing model for these party transactions.
Importantly, this was not an isolated internal policy. Other consortium members, including unrelated party participants, followed the same at-cost approach when providing identical goods and services under the same PSC terms. This established a strong industry norm rooted in contractual and legal constraints rather than tax planning.
Indian Transfer Pricing Authority Challenge and Benchmarking Dispute
The Indian tax authorities rejected Shell’s approach and applied a 16.52% mark-up, treating the upstream technical services as comparable to routine IT/ITeS services. The adjustment relied on generic comparables without a proper comparability analysis of:
- the specialized nature of the services,
- the distinct functions, assets, and risks,
- the specific market conditions of upstream oil and gas operations, and
- the contractual prohibition on earning profits under the PSCs.
The Dispute Resolution Panel upheld the adjustment, citing consistency with prior years and the Revenue’s standard position, despite similar arrangements being accepted as arm’s length for other consortium participants.
Tribunal Ruling: Law, Contracts, and CUPs Matter
The Mumbai Tribunal ruled in favor of Shell and deleted the adjustment in full.
The Tribunal emphasized that transfer pricing methods must be applied in harmony with the commercial and legal framework governing the transaction. Where binding contracts and regulatory provisions prohibit profit, transfer pricing rules cannot be used to impose a notional return that contradicts those constraints.
Two points proved decisive:
1. Legal and Contractual Restrictions
The PSCs clearly disallowed mark-ups. The Tribunal held that transfer pricing rules do not override contractual obligations embedded in industry-specific regulatory frameworks.
2. Strong Comparable Evidence
Other consortium members, including unrelated parties, charged and received identical services at cost. This constituted a powerful internal benchmark, aligning with the Comparable Uncontrolled Price (CUP) concept and supporting Shell’s use of the “Other Method” under Indian rules.
The Tribunal also criticized the Revenue for failing to ensure consistency, noting that identical facts had been accepted as arm’s length in comparable situations involving other consortium members.
Indian Transfer Pricing Update: Key Takeaways for Multinational Corporations
This case highlights that transfer pricing risks cannot be assessed in isolation from business realities. While the arm’s length principle remains central to income tax compliance and the prevention of base erosion and profit shifting, it does not require taxpayers to ignore binding legal or contractual restrictions.
For multinational corporations, the decision reinforces several practical lessons:
- Not all services require a mark-up, particularly where profit is legally prohibited
- Third-party behavior is often decisive in comparability analysis
- Documentation must clearly explain why a pricing outcome reflects arm’s length behavior
- including the Master File, Local File, and alignment with country-by-country reporting (CbCR), are essential to avoid penalties
Many cases will not present such clear facts, but when they do, tribunals are willing to respect them.
Where Reptune Adds Value
Cases like this underscore the importance of documenting not just pricing outcomes, but the full commercial context of intercompany arrangements. Legal prohibitions, contractual terms, industry practices, and third-party behavior must all be clearly reflected in transfer pricing documentation.
Reptune supports multinational groups by centralizing data across business operations, ensuring consistency between the Master File, Local File, and CbCR, and embedding robust narratives that explain why specific transfer pricing methods were selected. This allows taxpayers to demonstrate alignment with transfer pricing regulations while maintaining defensible positions in complex, high-risk scenarios.
When disputes turn on nuance rather than formulas, having documentation that accurately reflects how the business operates, and why, can be the difference between sustained adjustments and successful defense.