The tax sleuth had added Rs 15,000 crore and Rs 3,000 crore respectively to the taxable income of Shell India Markets Pvt Ltd, the Indian subsidiary of Royal Dutch Shell Plc, for the FY 2007-08 and FY 2008-09 in two transfer pricing cases.
    
The judgement comes in the wake of two similar transfer pricing cases, which were ruled in favour of the Indian subsidiary of Vodafone Group Plc, in which the I-T department had sought adjustments of over Rs 4,500 crore last month.
    
The order in favour of Shell India was passed today by a bench of justices M S Sanklecha and S C Gupte on a petition filed by Shell India Markets.
    
Transfer pricing tax orders of Income Tax against Shell and Vodafone pertain to alleged undervaluation of shares issued by their domestic subsidiaries to the parent companies abroad.
    
Transfer pricing refers to the practice of arm's length pricing for transactions between group companies based in different countries to ensure that a fair price— one that would have been charged to an unrelated party— is levied.
    
Shell India had issued 870 million shares to Shell Gas BV in March 2009 at Rs 10 per share. However, the Income Tax department contended that the shares were grossly undervalued and it valued them at Rs 180 per share. The department then added the difference to the taxable income of Shell India.
    
In a separate development this year, the Income Tax department had issued a show-cause notice adding another Rs 3,100 crore to Shell India's income for FY 2009 in another transfer pricing case.
    
Being aggrieved, the company moved the Bombay High Court challenging the tax notice.
     
Funding a subsidiary by issuing shares is a common practice among multi-national companies which view this as a capital transaction and out of the transfer pricing bracket.
    
However, the tax department argues that such a deal is a transfer pricing arrangement by which the shares issued are undervalued and hence the company is liable to pay tax on the income generated out of it.
    
The high court did not agree with the department and quashed its order and show-cause notice against Shell India.

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