Calcutta High Court clarifies inclusion of electricity duty in valuation of captive power for tax deduction purposes

 Recently, the Hon’ble Calcutta High Court in Graphite India Ltd. v. Commissioner of Income-tax ruled in favour of the taxpayer and put to rest the controversy regarding valuation of captively consumed electricity for tax deduction purposes. The Hon’ble Court clarified that while electricity duty may not be separately payable on power consumed internally, the same would nevertheless form part of the market value of power when computing the eligible deduction on captive power undertakings.

In the present case, the assessee company operated captive power plants for its manufacturing units and claimed deduction by valuing the electricity consumed internally at the tariff charged by the State Electricity Board to industrial consumers. The tax authorities, however, reduced such value by excluding the electricity duty component on the ground that no duty was separately payable when electricity was consumed captively. As a result, the eligible deduction claimed by the company was sought to be curtailed.

The matter ultimately travelled before the Hon’ble Calcutta High Court. The Hon’ble Court, after examining the facts and relying upon the Hon’ble Supreme Court’s decision in Jindal Steel & Power Ltd., ruled in favour of the assessee and made the following key observations:

• The market value of power should be determined based on the rate charged by the State Electricity Board to industrial consumers in the open market.
• Such tariff represents the actual consumer price and includes all components embedded in that rate, including electricity duty.
• The lower rate at which surplus power may be sold back to the Electricity Board cannot be adopted as the benchmark for determining market value.
• Merely because the power was consumed captively does not justify exclusion of components that ordinarily form part of the market tariff.
• Once the prevailing industrial tariff is accepted as the benchmark, it must be considered in full and cannot be selectively reduced.

Accordingly, the Hon’ble High Court upheld the assessee’s claim and held that electricity duty cannot be excluded while calculating the market value of captively consumed power.

This ruling is a significant affirmation for companies operating captive power units, particularly in the manufacturing and infrastructure sectors. The Hon’ble Court has clarified that where tax benefits are linked to the market value of internally consumed power, the benchmark should be the full tariff payable by industrial consumers, including embedded levies such as electricity duty. The decision provides useful certainty to taxpayers and reinforces that valuation principles should reflect commercial reality rather than artificial reductions.