Captive power "market value" u/s80-IA(8): benchmark end-consumer tariff, not Board's regulated purchase price; deduction recomputed.

Whether "market value" for s.80-IA(8) in respect of electricity captively consumed/surplus supplied should be benchmarked to the tariff paid by the State Electricity Board under statutory regulations/contract or to the rate charged to industrial/end consumers was the dominant issue. The Tribunal held that a price unilaterally determined by the Board under regulatory tariff and contractual terms cannot represent "market value" for s.80-IA(8); applying SC authority, as well as subsequent HC rulings post-amendment, the appropriate arm's length/market value is the rate at which the Board supplies power to end consumers in the open market. Consequently, the AO was directed to recompute the ALP and s.80-IA deduction adopting the assessee's market-based rate.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether, for computing deduction under section 80-IA in respect of captively consumed electricity transferred from an eligible windmill unit to a non-eligible manufacturing unit, the "market value" under section 80-IA(8) is to be taken as the tariff at which the State Electricity Board supplies electricity to industrial consumers in the open market, rather than the tariff fixed for purchase of electricity from generators.

(ii) Whether, after the insertion of the Explanation to section 80-IA(8) (providing two alternatives for "market value"), the determination of "market value" for such inter-unit transfer must compulsorily be made only by adopting "arm's length price" under transfer pricing provisions for specified domestic transactions.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Correct benchmark for "market value" of captively consumed electricity under section 80-IA(8)

Legal framework (as discussed by the Court): The Court examined section 80-IA(8), which requires recomputation of eligible-business profits as if the inter-unit transfer was made at "market value" where recorded consideration does not correspond to market value. The Court treated the "market value" inquiry as focusing on the price ordinarily available in the open market for the consumer-side purchase of electricity.

Interpretation and reasoning: The Court held that where the assessee does not sell electricity to the State Electricity Board or third parties and instead consumes the entire generation captively, the relevant market benchmark is the price an industrial consumer would ordinarily pay in the open market to obtain electricity. The Court rejected the approach of valuing such transfer at the regulator-fixed purchase tariff for electricity procured from wind generators, because that rate reflects a regulated procurement arrangement and not the open-market price for consumer purchase. The Court also accepted that the presence or absence of third-party sales materially affects comparability: where there are no third-party sales, an internal comparable is unavailable, and the consumer tariff becomes the appropriate proxy for market value in the open market for captive consumption.

Conclusion: For captively consumed electricity transferred from the eligible unit to the non-eligible unit, the "market value"/ALP for section 80-IA(8) purposes is the rate at which the State Electricity Board supplies electricity to end industrial consumers in the open market (i.e., the rate adopted by the assessee), not the purchase tariff fixed for procurement from generators.

Issue (ii): Effect of the post-2013 Explanation to section 80-IA(8) and whether ALP under clause (ii) is mandatory for specified domestic transactions

Legal framework (as discussed by the Court): The Court considered the Explanation to section 80-IA(8), which defines "market value" as either (i) the price that goods or services would ordinarily fetch in the open market, or (ii) the arm's length price as defined under section 92F where the transfer is a specified domestic transaction referred to in section 92BA. The Court specifically analysed the significance of the word "or" separating clauses (i) and (ii).

Interpretation and reasoning: The Court rejected the revenue's contention that once the transaction is a specified domestic transaction, clause (ii) must be applied compulsorily and clause (i) becomes inapplicable. The Court reasoned that such an interpretation would make clause (i) redundant despite its continued presence in the statute. The Court accepted the interpretive approach that so long as open-market price is discernible under clause (i), that benchmark can be applied, and only where such open-market price is not available would recourse to clause (ii) be warranted. The Court further held that the Supreme Court's approach to equating "market value" with the consumer-side open-market rate remains applicable even after the amendment, because the concept and definition of "arm's length price" did not change; the amendment merely brought specified domestic transactions within the scope of clause (ii) as an available method, not as an exclusive mandate.

Conclusion: The amended Explanation to section 80-IA(8) does not compel valuation exclusively under clause (ii) (transfer pricing ALP) merely because the transfer may qualify as a specified domestic transaction. Where an open-market consumer tariff is available and reflects the price ordinarily fetched in the open market, clause (i) may be applied to determine "market value" for section 80-IA(8).

Final determination and operative direction

The Court upheld the approach of adopting the State Electricity Board's end-consumer industrial tariff (the rate used by the assessee) as the market value/ALP for the inter-unit transfer for section 80-IA computation, held the contrary procurement-tariff approach inapplicable on these facts, directed recomputation accordingly, and dismissed the revenue's appeals for both assessment years.

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