The Bombay High Court ruled in favour of Shell's Indian unit, which was accused of under-pricing shares transferred to its parent firm by $2.5bn (Â£1.6bn) in February 2013.
Officials wanted tax on the interest that the firm would have earned.
But the Indian court ruled that the stock transfers were not taxable.
[The tax department] "clearly exceeded its jurisdiction", said Shell's India lawyer Mukesh Butani in a statement, referring to the country's share transfer provisions, which exempt taxation.
The ruling is a significant victory for Shell and other international companies operating in Asia's third largest economy, that have been targeted in tax disputes.
A series of high-profile tax claims on big international firms recently including IBM, Nokia Oyi, HSBC and AT&T has put negative attention on India's tax authorities and dented the country's reputation as a destination for foreign investment.
"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 on Wednesday.
In October, an Indian court also ruled in favour of the biggest foreign corporate investor in India, Vodafone, which was involved in a similar transfer pricing battle with a local tax department.
Forget the complexities of this case and look at the bigger picture.
Multinationals in India often complain that tax authorities seem out to get them with rulings that are - at best - unpredictable.
And that has done nothing to help India's reputation as a friendly place for foreign firms at a time when it desperately needs overseas investment - both for expertise in key industries and the cash.
Narendra Modi's new government has pledged to end the "tax terrorism" that is scaring companies away.
The courts are independent of the government and this case dates back years.
But, this Shell victory, on the back of a similar win by Vodafone, will be keenly watched by dozens of other multinationals involved in similar battles, including HSBC and AT&T.
Oil giant Royal Dutch Shell has won a long-running court battle against Indian authorities over a tax dispute involving billions of dollars.