Captive power arm's length pricing may use distribution-licensee tariffs, alongside limits on capital write-backs and exempt-income disallowance.

For captive power supplied to a consuming unit in a specified domestic transaction, the distribution-licensee tariff paid by that unit may serve as a comparable uncontrolled price for arm's length pricing, rather than the generating-company sale rate. It explains that write-back of creditors relating to capital assets is not taxable as remission of a trading liability where the principal liability was not allowed as a deduction. It further states that disallowance for exempt-income investments is computed by reference only to investments that actually yielded exempt income, and that such disallowance does not automatically adjust book profit.

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Issues: (i) Whether the electricity tariff charged by the distribution licensee to the consuming unit is a valid comparable uncontrolled price for determining the arm's length price of power supplied by a captive power plant under section 80IA; (ii) Whether capital creditors written back in respect of capital assets are taxable under section 41(1); (iii) Whether disallowance under section 14A is to be computed only with reference to investments yielding exempt income; (iv) Whether disallowance computed under section 14A can be added to book profit under section 115JB.

Issue (i): Whether the electricity tariff charged by the distribution licensee to the consuming unit is a valid comparable uncontrolled price for determining the arm's length price of power supplied by a captive power plant under section 80IA.

Analysis: For a specified domestic transaction, the substituted explanation to section 80IA(8) requires determination of arm's length price under section 92F(ii). A captive power plant, established principally for captive consumption, is functionally distinct from a bulk generating company supplying a distribution licensee. The price paid by the consuming manufacturing unit to the distribution licensee represents the cost it would otherwise incur for electricity and has sufficient comparability for application of the comparable uncontrolled price method. The provisions of section 80A(6) do not require adoption of the rate at which a generating company sells power to a distribution licensee.

Conclusion: The distribution-licensee tariff paid by the consuming unit is a valid comparable uncontrolled price for determining the arm's length price of captive power supplied to that unit. The issue is decided in favour of the assessee.

Issue (ii): Whether capital creditors written back in respect of capital assets are taxable under section 41(1).

Analysis: Section 41(1) applies only where a trading liability, loss or expenditure allowed as a deduction has been remitted or ceased. Depreciation on a capital asset does not constitute an allowance of the principal capital liability incurred for acquiring that asset. The borrowing transaction and acquisition of the capital asset are independent, and waiver or write-back of a capital liability does not convert it into a trading liability.

Conclusion: Write-back of capital creditors relating to acquisition of capital assets is not taxable under section 41(1). The issue is decided in favour of the assessee.

Issue (iii): Whether disallowance under section 14A is to be computed only with reference to investments yielding exempt income.

Analysis: The disallowance under section 14A was required to be recomputed at 0.5% of the average value of investments that actually yielded exempt income during the relevant year.

Conclusion: Only investments yielding exempt income may be considered for the prescribed computation of disallowance. The issue is decided in favour of the assessee.

Issue (iv): Whether disallowance computed under section 14A can be added to book profit under section 115JB.

Analysis: The disallowance computed under section 14A under the normal provisions does not automatically constitute an adjustment to book profit under section 115JB.

Conclusion: The section 14A disallowance cannot be added while computing book profit under section 115JB. The issue is decided in favour of the assessee.

Final Conclusion: The relief granted in respect of captive-power pricing, capital-liability write-back, exempt-income disallowance and book-profit computation is sustained.

Ratio Decidendi: For captive power supplied to an assessee's own consuming unit in a specified domestic transaction, the tariff at which that unit purchases comparable electricity from a distribution licensee may constitute a valid comparable uncontrolled price for determining arm's length price.

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