Captive power valuation uses industrial consumer grid tariffs as market value; genuine third-party quotations support treated-water benchmarking.

Captive electricity transferred to manufacturing units for deduction purposes is valued by reference to the rate charged by State Electricity Boards to industrial consumers, as that reflects the available open-market and arm's length price rather than the distinct rate charged by generators to electricity boards. Steam transferred within an integrated generation process should not be assigned nil value. Common head-office expenses may be attributed to eligible units only where they have a direct and proximate nexus; turnover is not an appropriate allocation basis, and specified expenses may instead be apportioned reasonably on manpower. Under the Other Method, a genuine independent third-party quotation can establish the arm's length price of treated-water services without requiring multiple quotations.

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Issues: (i) Whether the transfer price of electricity supplied by captive power plants to the assessee's manufacturing units was required to be benchmarked at the rate charged by power-generating companies to State Electricity Boards, or at the rate charged by State Electricity Boards to industrial consumers for computing deduction under section 80-IA; (ii) whether the transfer of steam could be valued at nil for purposes of the deduction under section 80-IA; (iii) whether head-office and common expenses could be allocated to eligible units on a turnover basis; and (iv) whether third-party quotations could be used under the Other Method for benchmarking transfer of treated water by effluent treatment plants.

Issue (i): Whether the assessee's captive power transfer was correctly benchmarked using the rates at which State Electricity Boards supplied electricity to industrial consumers.

Analysis: Section 80-IA permits computation by reference to the market value of goods or services, while sections 80A(6), 92BA and 92F apply the arm's length standard to specified domestic transactions. The Tribunal held that the open-market rate available to the consuming industrial units is the relevant comparable rate. The rate charged by generating companies to State Electricity Boards reflects a different market level and regulated transaction, and is not comparable to the rate at which the manufacturing units could obtain electricity from the grid. The post-amendment transfer-pricing provisions did not displace this principle. The rate charged by State Electricity Boards to industrial consumers therefore represented both market value and arm's length price.

Conclusion: The disallowance of deduction under section 80-IA relating to captive power plants was deleted in favour of the assessee.

Issue (ii): Whether the deduction under section 80-IA relating to generation and transfer of steam could be disallowed by treating the arm's length price of steam as nil.

Analysis: The transfer of steam was considered as part of the assessee's integrated generation process and the issue was governed by the consistent decisions in the assessee's earlier years. The treatment of the arm's length price of steam as nil was not sustained.

Conclusion: The disallowance relating to transfer of steam was deleted in favour of the assessee.

Issue (iii): Whether common head-office expenses could be apportioned to eligible units on a turnover basis while computing the deduction under section 80-IA.

Analysis: Only expenses having a direct and proximate nexus with the eligible undertaking may be attributed for computing its profits. Turnover alone was not an appropriate basis for allocating general head-office and common expenses. Consistent with earlier decisions, the matter was directed to be recomputed by restricting the allocation to specified expenses, including director's fees, auditor's fees and charitable donations, on a reasonable manpower-based basis.

Conclusion: The turnover-based allocation was rejected, but the issue was remitted for limited recomputation of the permissible allocation.

Issue (iv): Whether an authentic third-party quotation could be used under Rule 10AB for determining the arm's length price of treated-water services supplied by effluent treatment plants.

Analysis: Rule 10AB permits use of a method based on the price charged or that would have been charged in the same or a similar uncontrolled transaction under similar circumstances. The quotation from an independent vendor was not found to be unreliable or inauthentic, and the law did not require multiple quotations for applying the Other Method. The rejection of the quotation solely because it was a single quotation was therefore unjustified.

Conclusion: The transfer-pricing adjustment relating to effluent treatment plants was deleted in favour of the assessee.

Final Conclusion: The substantive disallowances concerning captive power, steam and effluent treatment plants were removed, while the head-office expense issue was confined to a fresh and limited recomputation on a reasonable basis.

Ratio Decidendi: For computing deduction under section 80-IA, electricity transferred by a captive power plant to industrial consuming units is appropriately valued by reference to the rate charged by State Electricity Boards to industrial consumers where that rate represents the open-market and arm's length value. A genuine third-party quotation may also be used under the Other Method to determine arm's length price where it reflects a comparable uncontrolled transaction.

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