Shell had challenged the largest ever claim in an Indian tax case related to transfer pricing -- the value at which companies trade products, services or assets between units across borders, a regular part of doing business for a multinational.

A rash of high-value tax claims on foreign firms including IBM Corp and Nokia Oyj in the past year has sparked criticism that overly zealous tax authorities could undermine foreign investment in India.

In the Shell case, the tax office alleged in February last year that the company's Indian unit under-priced shares transferred to the parent by about USD 2.5 billion, demanding tax on the interest the Anglo-Dutch oil company would have earned.

It did not disclose the value of the claim. The Bombay High Court favoured Shell on the grounds that issuance of shares by an Indian company to its foreign parent was not taxable under the transfer pricing provisions, said Mukesh Butani, a lawyer for Shell India in the case.

The court felt the tax department "clearly exceeded its jurisdiction", Butani, who is managing partner of Indian law firm BMR Legal, said in a statement.

Tax department officials in Mumbai were not immediately available for a comment on the court verdict. It was not immediately known if the department would approach a higher court to challenge the verdict.

Shell India welcomed the Bombay High Court decision. "This is a positive outcome which should provide a further boost to the Indian government's initiatives to improve the country's investment climate," Shell's Indian unit said in a statement.

Last month, an Indian court ruled in favour of Vodafone Group Plc, the biggest foreign corporate investor in India, in a long-running transfer pricing dispute with the local tax department.

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