Every large-scale industrial unit requires uninterrupted supply of power so as to carry on its business activities. Historically, electricity has been generated and supplied by the State. A prudent business man would not stake an essential ingredient of his business on a single source, much less the State.  To reduce its dependability and become self-sufficient, many businesses choose to set up in-house power generation unit for constant supply of power. The State too wanted to shift its focus on governance, then assisting businesses. In order to incentivise the setting up of power generation plants by private businesses, one of the measures adopted by the State was to exempt the profits of power plants from income-tax for a certain period. However, since there is no actual movement of funds in case of inter-unit transfer of electricity in the case of a captive power plant, there is a dispute as to the determination of profits that are eligible for exemption from income-tax.


For any industry to flourish, the quality, consistency and cost of electricity is of utmost significance. Generally, it is preferred to undertake the supply from the local electricity distribution companies. However, in order to ensure reliable and cost-effective supply, the electricity-intensive industrial consumers opt for captive power plants for the generation of electricity. That is, the consumer sets up an in-house power generation plant primarily for self-consumption, hence becoming self-reliant and reducing its dependability on the grid.

In order to substantially increase the power generation capacity in the country [1], the Income-tax Act, 1961 (‘IT Act’) inter alia provides for deduction in respect of profits and gains of an undertaking set up for the generation or generation and distribution of power, at hundred percent for a certain period subject to fulfillment of the specified conditions. Since in the case of captive power plants, power generated is mainly transferred to another unit of the same assessee, the transfer is undertaken only by way of book entries, without an actual flow of consideration. Therefore, in order to determine the profits eligible for deduction under the provision, it also states that in case of transfer to a different unit of the same assessee, the consideration should correspond to the market value of the goods as on the date of the transfer.

In this regard, this article seeks to explore and analyze the jurisprudence on the subject matter to ascertain as to how the market value of the electricity generated by an assessee in its captive power plant and used by the same assessee in its other business unit is to be determined for the purposes of the deduction under the IT Act.

Tax holiday for undertakings engaged in power generation

Section 4 of the IT Act provides for levy of income-tax on income at any rate, in accordance with the provisions of the IT Act. Sub-clause (i) of Section 2(24) of the IT Act defines ‘income’ in an inclusive manner, to include profits and gains earned from any business carried on by an assessee.
Section 14 of the IT Act classifies the streams of income into five different heads, including profits or gains from business or profession. That is, while computing the total income of the assessee for the purposes of income-tax, the profits or gains earned by it from the business or profession carried on by it are taken into consideration.

Section 80-IA of the IT Act, however, provides for deduction in respect of profits and gains derived by an undertaking from the business set up in India for the generation or generation and distribution of power (‘eligible business’), if the undertaking begins to generate power between 1st April 1993 to 31st March 2017, amongst others. The profits eligible for deduction under the Section would have to be determined by drawing up separate books of accounts for the eligible undertaking, as if the eligible business is the only source of income of the assessee.

Section 80-IA(8) of the IT Act further states that if any goods manufactured by an undertaking eligible for deduction under the section are transferred for a consideration to any other business of the assessee itself, then the consideration should correspond to the market value of such goods as on the date of the transfer. The term “market value” has been defined vide an Explanation to the sub-section to mean as under:

  • the price that such goods would ordinarily fetch in the open market; or
  • the arm’s length price (‘ALP’) as defined in Section 92F(ii), where the transfer of such goods is a specified domestic transaction referred to in Section 92BA

Section 92BA of the IT Act defines “specified domestic transaction” to inter alia mean any transfer of goods referred to in section 80-IA(8) and where the aggregate of such transactions entered into by the assessee in the previous year exceeds a sum of twenty crore rupees.

Section 92F of the IT Act defines “arm’s length price” to mean a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions. The computation of ALP of a transaction has been prescribed under Section 92C of the IT Act. As per the section, the ALP shall be determined by any of the following methods, being the most appropriate method (‘MAM’) in the facts and circumstances of the case:

  • comparable uncontrolled price method (‘CUP’);
  • resale price method (‘RPM’);
  • cost plus method (‘CPM’);
  • profit split method (‘PSM’);
  • transactional net margin method (‘TNMM’);
  • such other method as may be prescribed by the Board

The manner in which the ALP would have to be computed under each of these methods is prescribed in Rule 10A, 10AB, 10B, 10C and 10CA of the Income-tax Rules, 1962 (‘IT Rules’).

Captive Power Plant – Eligible for deduction?

Before delving into the determination of the market value of the electricity generated for self-consumption, it is imperative to note that a captive power plant is an eligible undertaking for claiming deduction under section 80-IA of the IT Act. Even the section [2] contemplates the fact that the power generated by an undertaking could be transferred to another undertaking of the same assessee and has provided for a mechanism for the determination of profits eligible for deduction in such a case.

The Delhi High Court in Orient Abrassive Ltd.[3] has held that ‘profit and gain’ from captive consumption of electricity supplied only to assessee by its own power plant will qualify for deduction under Section 80-IA. The Bench, inter alia, reasoned that sub-section (8) accepts and endorses that the eligible undertaking could transact or have business transactions with other business or units of the same assessee. It further noted that there was no need to prescribe and incorporate the sub-section in case the assessee could not have transacted and sold goods manufactured/produced by the eligible undertaking to another unit or business of the same assessee.

Computation of ‘profit’ eligible for deduction

As per Section 80-IA (8) of the IT Act, the consideration for the goods provided by the eligible business of an assessee to its another business should correspond with the market value of such goods. Commencing from Assessment Year 2013-14, when Explanation (ii) to Section 80-IA(8) was introduced, the market value of the goods transferred by the eligible business could either be (a) the price the goods would ordinarily fetch in the open market, or (b) the ALP as computed in the manner prescribed in the IT Act read with the IT Rules. The determination of the transfer price based on ALP would however apply only if the transfer is a specified domestic transaction, as defined in Section 92BA of the IT Act. Section 92BA of the IT Act treats the transfer of goods from an eligible business as referred to in Section 80-IA(8) to be specified domestic transaction only if the aggregate value of the transaction exceeds a sum of twenty crore rupees in an assessment year.
In other words, on a co-joint reading of Explanation to Section 80-IA(8) and Section 92BA, it is apparent that if the value of the goods transferred exceeds twenty crore rupees, then the market value of such services would be the ALP determined as per the transfer pricing provisions. If the value of the goods transferred does not exceed twenty crore rupees, then the value of such goods would be the price that such goods would ordinarily fetch in the open market.

Ascertaining the Meaning of Open Market

The expression “open market” has not been defined under the IT Act. Therefore, the same would have to be understood in the context of its common understanding and the jurisprudence on the same. In common parlance, it is understood as a price at which a seller is ready and willing to sell and a buyer ready and willing to buy in the ordinary course of business.

The Black’s Law Dictionary defines “market price” as the price actually given in current market dealings, and actual price at which given commodity is currently sold, or has recently been sold in open market, that is, not at forced sale, but in the usual and ordinary course of trade and competition between sellers and buyers equally free to bargain, as established by records of late sales. The Law Lexicon [5] defines “market price” as the price actually given in current market dealings, or the price at which the supply and demand are equal.

In Clay and Buchanan [6], it was observed that the market is to be open market, distinguished from an offer to a limited class only. The Lordships were of the view that ‘sold’ in the open market means ‘sold’ in such a way that anyone willing to purchase could do so, and a willing seller means the one who is prepared to sell provided a fair price is obtained. It cannot mean a seller who is prepared to sell at any price and on any terms and is actually at the time wishing to sell. In other words, it does not mean an anxious seller. In Kailash Chandra Mitra [7], it was observed that the market value is the price that the owner is willing and not obligated to sell at and might reasonably expect the same from a willing purchaser. In Ram Sarup [8], it was held that market price is the negotiated price which is acceptable to both, seller and buyer.

In other words, open market means such conditions whereby the price is determined by the market forces of demand and supply. A regulated price at which the seller is obligated to sell, or the buyer is required to purchase would not qualify as a price prevalent in the open market and hence, would not be the market value.

Arm’s Length Price– The most effective Method for Determining Transfer Pricing

As afore-mentioned, if the value of the transferred goods exceeds the threshold of twenty crore rupees, the market value would be the ALP determined as per the transfer pricing provisions. The transfer pricing provisions prescribe the methods by which ALP would have to be determined. Though five specific methods for the determination of ALP have been provided for, the statute requires determination of ALP based on the MAM. Internationally as well as in India, commentaries and courts have suggested that CUP would be the most preferable method for the determination of ALP if similar transactions are being undertaken by independent parties under similar circumstances.

The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, 2017 (‘OECD Guidelines’) state that where it is possible to locate comparable uncontrolled transactions, the CUP method is the most direct and reliable way to apply the arm’s length principle. Consequently, in such cases, the CUP method is preferable over all other methods. [9] It has been further provided that the CUP method is a particularly reliable method where an independent enterprise sells the same product as is sold between two associated enterprises. [10] This view has also been endorsed by the Income-tax Appellate Tribunal in Epcos Ferrites Ltd. [11]

The CUP method compares the price charged for the goods transferred in a controlled transaction with that of uncontrolled transaction in comparable circumstances. An uncontrolled transaction is comparable to a controlled transaction if one of two conditions is met: [12]

  • none of the differences (if any) between the transactions being compared or between the enterprises undertaking those transactions could materially affect the price in the open market; or,
  • reasonably accurate adjustments can be made to eliminate the material effects of such differences

In the case of captive power plants, one unit of the assessee transmits the electricity generated to its another unit, say a manufacturing unit, for final consumption. In such a scenario, the most appropriate comparable transaction would be the one where the electricity is being sold for final consumption to industrial units. This price, i.e. the price at which electricity is finally sold to the industrial consumer, would be the price at which two independent parties would be willing to undertake a transaction. Given that the comparative price of the goods manufactured by the captive power plant would readily available, CUP is the MAM in determining the ALP of the transfer under consideration. It would also most appropriately depict the price that the goods would fetch in the open market, being the price willingly offered and accepted by the buyer and seller respectively.

Determination of “market value” – Judicial jurisprudence and Analysis

In the facts of ITC Ltd. [13], the assessee had installed a power generating plant for the purpose of supplying power to its manufacturing plant. One of the questions that arose was whether the benefit could be computed at the rate at which electricity was supplied by the State Electricity Board to the manufacturing unit. The Court was of the view that electricity could not be sold to the consumer because of specific prohibition in the erstwhile Electricity Act and as such the price to the consumer could not be taken into account. Therefore, in the open market, the buyer would either be a distribution company, or a company engaged in both, generation of electricity and its distribution. Accordingly, it was held that the assessee’s generating unit can claim benefit under Section 80-IA only on the basis of the rates fixed for sale of electricity by the generating companies.

Adopting the price regulated by a statute as the market price has been accepted by the Supreme Court in the context of determination of sale price of sugarcane, which is a regulated product. In Thiru Arooran Sugars Ltd. [14], the assessee-company was a manufacturer of sugar which purchased sugarcane from the market for crushing and also cultivated sugarcane on its field for factory consumption. Since the profit made by the assessee from the sale of sugar arose out of agricultural activities as well as manufacturing activities, the agricultural income had to be determined and for that purpose, the market value of the sugarcane consumed in its factory had to be determined. The Apex Court noted that the assessee-company actually bought sugarcane from a large number of growers, year after year in the ordinary course of business. The price at which it buys the sugarcane must be the market price and if the price was controlled, the controlled price will be taken as the market price, because it is at this price that a willing buyer and a willing seller are expected to transact business.

It is however to be noted that the judgment of ITC Ltd. (supra) was rendered while interpreting the IT Act as well as the regulations surrounding sale of electricity as they stood before 2003. After 2003, the laws relating to generation and sale of electricity have undergone significant amendments. The Indian Electricity Act, 1910 and Electricity (Supply) Act, 1948 which governed the generation and distribution of electricity provided that any person generating electricity cannot sell the electricity in the open market but would have to sell them to the persons who have been given a license under the Act at a price determined by the State Regulatory Commission. Therefore, until 2003, the price of electricity was controlled and there was no free market price for the products.

However, as per the provisions of the Electricity Act, 2003 and the regulations made thereunder, a power producer has been given the permission to sell electricity directly to end consumers at a price negotiated between them. Thus, post 2003, the regulatory framework relating to generation and supply of electricity as it stood during the years to which the case of ITC Ltd. pertains, has undergone a sea change. This distinction has been brought about and adopted by the Kolkata Tribunal in the case of Birla Corporation Ltd. [15] to hold that, in determining the market price of electricity for the purpose of Section 80-IA (8) post the introduction of the Electricity Act, 2003, the price charged by State Electricity Board from the industrial end consumers can be regarded as the market price of electricity. Therein, the Tribunal rejected the contention of the Revenue that the market price shall be the tariff rate fixed by the State Electricity Regulatory Commission, in view of an open market available to the assessee.

The Chhattisgarh High Court in Godawari Power & Ispat Ltd. [16], the Gujarat High Court in Gujarat Alkalies & Chemicals Ltd. [17] and the Mumbai Tribunal in Reliance Industries Ltd. [18] have taken a similar view. The Tribunal’s order in Reliance Industries (supra) has also been affirmed by the High Court of Bombay . In fact, applying principle laid down by the Supreme court in Thiru Arooran Sugars (supra), the Tribunal noted that when there is only a single consumer for the electricity generated by the captive generation power, which is the assessee himself and the assessee also buys electricity from State Electricity Board, the price charged by the State Electricity Board from the assessee should be adopted as market price.


While the IT Act clearly indicates that the profits and gains of a captive power plant business are eligible for deduction under Section 80-IA, the determination of the same has been a bone of contention in the past years. More so, when the Revenue contends the adoption of tariff rate regulated by the Electricity Commissions as the market price by placing reliance of erstwhile electricity laws and judicial interpretation rendered in that context, when under the existing law governing generation and distribution of electricity clearly provides for an open market. Recently, however, the Courts and the Tribunals have highlighted the difference the scheme of erstwhile and the existing electricity laws and distinguished the judgment rendered thereinunder, to hold that the rate at which the State Electricity Boards or the generation/generation and distribution companies sell power to the industrial end consumers should be adopted as the open market value/ arm’s length price so as to determine the “market value” of the electricity transferred. Thus, this seems to be an appropriate and balanced approach that needs to be adopted the Electricity Board in order to resolve this problem.

About the Author

Neha Sharma is a Senior Associate at Lakshmikumaran & Sridharan, New Delhi.

Editorial Team

Managing Editor: Naman Anand

Editors-in-Chief: Akanksha Goel and Aakaansha Arya

Senior Editor: Gaurang Mandavkar

Associate Editor: Gunjan Shrivastav

Junior Editor: Vidhi Saxena

Preferred Method of Citation 

Neha Sharma, “Determining Profits from Inter-Unit Power Transfer: An Income-Tax Perspective” (IJPIEL, 29 June 2021)



[1] Memorandum Explaining the Provisions of the Finance Bill, 1993; CBDT Circular No. 657 dated 30-8-1993 – Tax holiday for the power sector.

[2] The Information Technology Act, 2000, § 80-IA (8).

[3] Commissioner of Income Tax v. M/s. Orient Abrassive Ltd, (2014) 271 CTR (DEL) 626; Commissioner of Income v. M/S. ITC Ltd., (2016) 286 CTR (CAL) 400.

[4]Henry Campbell Black, M. A., Black’s Law Dictionary, (4 ed., West Publishing Co. 1968).

[5] P Ramanatha Aiyar, Shakil Ahmad Khan, P Ramanatha Aiyar’s Advanced Law Lexicon – The Encyclopaedic Law Dictionary with Words & Phrases, Legal Maxims & Latin Terms (5 ed., Lexis Nexis 2016).

[6] IRC v. Clay and Buchanan (1914) 3 KB 466.

[7] Kailash Chandra Mitra v. Secretary of State for India (1910) 17 CLJ 34.

[8] State of U.P. v Ram Swarup AIR 1974 SC 1570.

[9] The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017 (“The OECD Guidelines”), https://doi.org/10.1787/tpg-2017-en, pg. 101.

[10] Id. at 105.

[11] DCIT v. Epcos Ferrites Ltd, (2019) 102 taxmann.com 422 (Kolkata – Trib.).

[12] The OECD Guidelines, supra note 9.

[13] CIT v. ITC Ltd., (2016) 286 CTR 400 (Calcutta).

[14] Thiru Arooran Sugars Ltd. v. CIT, (1997) 142 CTR SC 9.

[15] Birla Corporation Ltd. v. DCIT, ITA Nos. 686 and 1101/Kol/2014 and Order dated 13.09.2017.

[16] CIT vGodawari Power & Ispat Ltd. (2014) 223 Taxman 234 (Chhattisgarh).

[17] Pr. CIT v. Gujarat Alkalies & Chemicals Ltd. (2017) 395 ITR 247 (Guj.).

[18] ACIT v. Reliance Industries Ltd., ITA Nos. 4361/Mum/2012, 4379/Mum/2012, 796/Mum/2013,

815/Mum/2013, 5770/Mum/2013, 1892/Mum/2014 and 2549/Mum/2014 and Order dated 12.04.2017.

[19] CIT v. Reliance Industries Ltd., (2019) 261 Taxman 358 (Bom.).

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