The assessee established captive power plants exclusively to safeguard its core manufacturing units against power supply disruptions and to save on the heavy operational expenses associated with purchasing grid electricity from State Electricity Boards (SEBs). For the purpose of claiming a deduction under section 80-IA, the assessee benchmarked the internal supply of electricity from its captive plants to its non-eligible units by adopting the average annual landed cost of power that an industrial consumer would pay to buy power directly from the SEB. The transfer pricing authorities resisted this methodology, calculating the arm’s length price by extracting the lower, wholesale grid-purchase rates at which independent power plants sell massive bulks of electricity back to distribution companies or SEBs. The Tribunal reversed the revenue’s adjustments.

Upholding the Tribunal’s view and dismissing the revenue’s appeal, the High Court held that since the assessee’s business model was not built around generating commercial energy to supply public grids or distribution networks, its captive transactions could not be compared to wholesale grid rates. The real economic value of the power generated and internally directed to the manufacturing units must be seen from the lens of a consumer saving on retail power costs. In an open, unregulated market transaction, a consumer naturally evaluates a purchase price against the local SEB consumer tariff. Therefore, the retail consumer rate of the SEB represents the true market value of electricity for section 80-IA(8) computations, and matching it against wholesale supplier-to-grid rates is factually and legally impermissible. Followed, CIT v. Jindal Steel & Power Ltd. [2023] 335 CTR 1017  (SC).(AY. 2017-18 to 2019-20)