Misha's explanation is correct - when using No PIA, methods returning object are treated as if they return dynamic in order to simulate the VBA semantics of COM Variants. Because the return value of sh.Cells is Object, sh.get_Range is dispatched dynamically, and the dynamic COM binder does not support the get_Range syntax exposed in C# before indexed properties were supported. We've tried to maintain backwards compatibility wherever possible when you turn on Embed Interop Types for a COM reference, but this is one place where some further tweaking is required.
The workaround you proposed will work - a cleaner workaround is the one Mike Rosenblum pointed out to use C# 4.0's new indexed properties syntax, which the dynamic COM binder does understand. You can then represent the operation with the following code:
Excel.Range r = sh.Range[sh.Cells[1, 1], sh.Cells[2, 2]];
See Also
get_Range method missing with embedded interop assembly