Valuation of Captive Power Consumption and Exempt Income Disallowance: A Comprehensive Analysis of the ITAT Chennai Ruling in India Cements Ltd. Vs DCIT

The intricate dynamics of transfer pricing adjustments in domestic transactions, particularly concerning captive power consumption, have long been a subject of intense litigation. The Income Tax Appellate Tribunal (ITAT), Chennai, recently pronounced a highly significant order on 08.04.2026 in the matter of India Cements Ltd. Vs DCIT. This ruling meticulously addresses two pivotal areas of corporate taxation: the appropriate benchmarking of electricity tariffs for claiming deductions under Section 80-IA of the Income Tax Act 1961, and the precise quantification of disallowances under Section 14A read with Rule 8D of the Income Tax Rules 1962.

The appeal, filed by the assessee, challenged the appellate order dated 25.08.2025 passed by the Commissioner of Income Tax (Appeals) [CIT(A)] for the Assessment Year (AY) 2020-21. By delving into established judicial precedents and the fundamental principles of arm's length pricing, the Tribunal has provided much-needed clarity for manufacturing entities operating captive power generating units.

Factual Matrix of the Dispute

The assessee, a prominent entity in the cement manufacturing sector, operates multiple thermal power plants situated in Shankarnagar Tamilnadu, Banswara Rajasthan, and Vishnupuram Telangana. These specific power-generating facilities were established to produce electricity exclusively for captive consumption by the assessee’s own cement manufacturing units. Under the statutory framework, these facilities were classified as eligible units engaged in the business of power generation, thereby qualifying for profit-linked deductions under Section 80-IA(4)(iv) of the Income Tax Act 1961.

The Contention Surrounding Section 80-IA

To compute the eligible profits for the Section 80-IA deduction, the assessee was required to determine the market value of the electricity transferred from its power-generating units to its cement manufacturing units. The assessee benchmarked this inter-unit transfer of power using the annual average landed cost at which the respective State Electricity Boards (SEBs) supplied power to industrial consumers. Based on this methodology, the assessee claimed a deduction amounting to Rs. 49,61,60,892.

However, during the transfer pricing assessment proceedings under Section 92CA(3) of the Income Tax Act 1961, the Transfer Pricing Officer (TPO) rejected the assessee's benchmarking approach. The TPO opined that the Arm’s Length Price (ALP) for the captively consumed electricity should be determined based on the tariff rates fixed by the regulatory authorities (such as the Tamil Nadu Electricity Regulatory Commission) for the purchase of electric power generated by thermal plants. In essence, the TPO applied the rate at which power generating companies sell electricity to the SEBs, rather than the rate at which SEBs supply electricity to end consumers.