M/S. DAKSHIN GUJARAT VIJ COMPANY LIMITED v. M/S. GAYATRI SHAKTI PAPER AND BOARD LIMITED

6. Section 2(8) of the Act defines a “captive generating plant” as a power plant set up by any person to generate electricity primarily for his own use. A power plant set up by co-operative society or associations of persons for generating electricity primarily for use of the members of the co-operative society or association is also a CGP.

7. Section 2(8) emphasises on the words, “primarily for his own use” and “primarily for use of the members of the co-operative society or association of persons”. Secondly, while specifically referring to a co-operative society and association of persons, the clause does not refer to a company. Section 2(49) defines the word, “person”, to include any company or body corporate or association or body of individuals, whether incorporated or not, or artificial juridical person.

8. On a conjoint reading of Section 2(8) and Section 2(49) of the Act, a CGP can be an individual, body corporate, association or body of individuals, whether incorporated or not, “primarily for his own use” and “primarily for use of the members of the co-operative society or association of persons”. An association of body corporates is permitted to set up a CGP.

9. Section 9 of the Act, a specific provision relating to captive generation, applies notwithstanding anything contained in any other provision of the Act. It states that any person may construct, maintain or operate a CGP and dedicated transmission lines. The second proviso to Section 9(1) states that no licence is required under the Act for supply of electricity generated from a CGP to any licensee in accordance with the provisions of the Act, rules and regulations made thereunder. However, supply to any consumer is subject to regulations made under Section 42(2) of the Act. The first proviso to Section 9 states that the supply of electricity from the CGP through the grid shall be regulated in the same manner as the generating station of a generating company.

10. Section 9(2) of the Act states that a person who has constructed a CGP and maintains and operates the CGP, shall have right to open access for the purpose of carrying electricity from his CGP to the destination of his use. The first proviso to Section 9(2) states that such open access shall be subject to the availability of adequate transmission facility and such availability of transmission facility shall be determined by the Central Transmission Utility or the State Transmission Utility, as the case may be. Any dispute regarding availability of transmission facility is to be adjudicated by the appropriate commission.

11. Therefore, in terms of Section 9(2) of the Act, a person who has constructed a CGP, and maintains and operates such plant,11 subject to availability constraints, can ask the distribution licensee to open access for the purpose of carrying electricity from his CGP to the destination of his use. This right under Section 9(2) to open access to the transmission facilities, must be contrasted with the right referred to in Section 9(1), which states that any person may construct, maintain or operate a CGP and use dedicated transmission lines for self-use.

12. The third aspect to be noticed with reference to Section 9(1) is that the second proviso permits a person who has constructed, maintains or operates a CGP, to supply electricity generated from a CGP to any licensee. However, as stated above, this supply is subject to the provisions of the Act, and rules and regulations made thereunder. Thus, the supply to any consumer, other than a captive user, is subject to regulations made under Section 42(2) of the Act.

11 As explained and elucidated below the word ‘and’ in Section 9(2) of the Act, when read harmoniously with Section 9(1) and on purposive interpretation would include a subsequent owner who maintains and operates a CGP. Captive generation as per Section 9 is not restricted to a person who constructs, maintains and operates a CGP. The provision does not bar or prohibit transfer of ownership rights by the person who has constructed or had originally set up the CGP. Equally, the first proviso permits supply of electricity from the CGP through the grid, in which case the supply is to be regulated in the same manner as in generating station of a generating company.

13. Section 9 read with the relevant provisions of the Act, therefore, postulates three situations. First, when the person who constructs, maintains or operates a CGP for their own use and supplies electricity to himself through dedicated transmission lines. Secondly, when the person who constructs, maintains or operates a CGP to supply electricity by exercising their right to open access for the purpose of carrying electricity from their CGP to the destination of their use. Thirdly, when the electricity generated from the CGP is supplied through the grid for any licensee or consumer. While no license is required for the supply of electricity to a licensee or consumer, the supply is subject to the regulations made under Section 42(2) of the Act.

14. Section 42(1) of the Act states that a distribution licensee has the duty to develop and maintain an efficient, coordinated, and economical distribution system in the area of his supply.12 A distribution licensee also owes duty to supply electricity in 12 “Section 42. (Duties of distribution licensee and open access): --- (1) It shall be the duty of a distribution licensee to develop and maintain an efficient, co-ordinated and economical distribution system in his area of supply and to supply electricity in accordance with the provisions contained in this Act.” accordance with the provisions of the Act. Section 42(2) states that open access shall be introduced by a State Commission in such phases, and subject to such conditions, including cross subsidies and other operational constraints.13 The sub-section permits the State Commission to specify the extent of open access in successive phases and determine charges for wheeling, which charges have to be determined having regard to all relevant factors, including cross subsidies and other operational constraints.14 The first proviso states that open access shall be allowed on payment of surcharge in addition to charges for wheeling as determined by the State Commission.15 Such surcharge, in terms of the second proviso, is to be utilised to meet the requirements of current level of cross subsidy within the area of supply of the distributing licensee.16 The third proviso provides that cross subsidy and surcharge shall be progressively reduced in the manner as may be specified by the 13 “42(2) The State Commission shall introduce open access in such phases and subject to such conditions, (including the cross subsidies, and other operational constraints) as may be specified within one year of the appointed date by it and in specifying the extent of open access in successive phases and in determining the charges for wheeling, it shall have due regard to all relevant factors including such cross-subsidies, and other operational constraints:”

14 Supra note 11. 15 “Section 42. (Duties of distribution licensee and open access): --xx xx xx Provided that 12[such open access shall be allowed on payment of a surcharge] in addition to the charges for wheeling as may be determined by the State Commission:” 16 “Section 42. (Duties of distribution licensee and open access): --xx xx xx Provided further that such surcharge shall be utilised to meet the requirements of current level of crosssubsidy within the area of supply of the distribution licensee:” State Commission.17 What is important for our consideration is the fourth proviso which states that surcharge will not be leviable in case open access is provided to a person who has established a CGP for carrying electricity to the destination of his use. The fourth proviso reads:

In our opinion, the fourth proviso deals with the second situation elaborated by us above, that is, when the person who has established a CGP, invokes his right to open access for the purpose of carrying electricity from the CGP to the destination of his own use in terms of Section 9(2) of the Act. In such cases, no surcharge is leviable even if the right to open access is invoked. However, wheeling charges have to be paid to the distribution licensee for the use of his distribution system to supply electricity to the destination of his own use. 17 “Section 42. (Duties of distribution licensee and open access): --xx xx xx “Provided also that such surcharge and cross-subsidies shall be progressively reduced in the manner as may be specified by the State Commission:”

15. The aforesaid interpretation of Section 9 and Section 42 of the Act, respectfully follows the view expressed by this Court in Chhattisgarh State Power Distribution Company Limited v. Chhattisgarh State Electricity Regulatory Commission and Anr.18 and Maharashtra State Electricity Distribution Company Limited v. JSW Steel Limited and Ors.19

16. In Maharashtra State Electricity20, the specific question answered was whether captive consumers are liable to pay additional surcharge leviable under the Act. The answer in the negative, holds that levy of additional surcharge would be contrary to Section 42(2) of the Act read with the definition of “consumer” vide Section 2(15) of the Act21, which means a person who is supplied with electricity by the licensee or the government or any other person engaged in the business of supplying electricity to the public and includes a person whose premises for the time being are connected for the purpose of receiving electricity with the works of a licensee, government, or such other person, as the case may be. Apart from 18 (2022) SCC Online SC 604; for short, “Chhattisgarh State Power”. 19 (2022) 2 SCC 742; for short, “Maharashtra State Electricity”.

20 Supra note 19. 21 2. Definition.—In this Act, unless the context otherwise requires,— xx xx xx (15) ‘consumer’ means any person who is supplied with electricity for his own use by a licensee or the Government or by any other person engaged in the business of supplying electricity to the public under this Act or any other law for the time being in force and includes any person whose premises are for the time being connected for the purpose of receiving electricity with the works of a licensee, the Government or such other person, as the case may be;” the language of the sections, this Court highlighted that the captive consumers incur huge expenditure or invest substantial amounts for the purpose of construction, maintenance and operation of the CGP and sometimes on the dedicated transmission lines. Thus, captive consumers form a separate class different viz the, “consumers”, defined under Section 2(15).22 They are not be subjected and liable to pay the additional surcharge.

17. In Chhattisgarh State Power23, reference was made to the National Electricity Policy, 2005,24 notified by the Government of India in exercise of its powers under Section 3 of the Act on 12.02.2005. Clauses 5.2.24 to 5.2.26 of the Policy dealing with captive generation and use are relevant, and read: “Captive Generation 5.2.24 The liberal provision in the Electricity Act, 2003 with respect to setting up of captive power plant has been made with a view to not only securing reliable, quality and cost effective power but also to facilitate creation of employment opportunities through speedy and efficient growth of industry. 5.2.25 The provision relating to captive power plants to be set up by group of consumers is primarily aimed at enabling small and medium industries or other consumers that may not individually be in a position to set up plant of optimal size in a cost effective manner. It needs to be noted that efficient expansion of small and medium industries across the country would lead to creation of enormous employment opportunities.

24 For short, “Policy”. 5.2.26 A large number of captive and standby generating stations in India have surplus capacity that could be supplied to the grid continuously or during certain time periods. These plants offer a sizeable and potentially competitive capacity that could be harnessed for meeting demand for power. Under the Act, captive generators have access to licensees and would get access to consumers who are allowed open access. Grid inter-connections for captive generators shall be facilitated as per section 30 of the Act. This should be done on priority basis to enable captive generation to become available as distributed generation along the grid. Towards this end, nonconventional energy sources including co-generation could also play a role. Appropriate commercial arrangements would need to be instituted between licensees and the captive generators for harnessing of spare capacity energy from captive power plants. The appropriate Regulatory Commission shall exercise regulatory oversight on such commercial arrangements between captive generators and licensees and determine tariffs when a licensee is the off-taker of power from captive plant.”

18. This Court in Chhattisgarh State Power25 observes that the provisions of the Act which deal with captive generation and use have been made not only with the view to secure reliable, quality and cost-effective power, but also to felicitate creation of employment opportunities through speedy and efficient growth of industry. The policy states that provisions relating to the CGP, which can be set up by a group of consumers, are primarily made for enabling small and medium industries and other consumers, who may not be individually be in a position to set up a power plant

25 Supra note 18. of optimum size, in a cost-effective manner. Efficient expansion and growth of small and medium industries across the country leads to creation of employment opportunities. Lastly, the captive and standby generating stations in India can supply electricity continuously or during certain time periods. The policy which is issued under Section 3 of the Act, contains the statutory flavour. In case of ambiguity, an interpretation which advances the object and purpose of the Act as underlined and stated in the policy has to be preferred.

19. At this stage, we must distinguish an earlier decision of this Court in SESA Sterilite Limited v. Orissa Electricity Regulatory Commission and Others.26 In this case the appellant industry had set up a unit in Special Economic Zone27, and was the developer of the SEZ. The appellant-industry had entered into a power purchase agreement with a third party. The contention raised by the appellant industry was that it was not drawing or utilising any electricity from the distribution licensee and, therefore, is not a consumer of the distribution licensee, and accordingly not liable to pay the crosssubsidy surcharge. This was not a case of a captive user. The contention of the appellant-industry was rejected by this Court 26 (2014) 8 SCC 444; for short, “SESA Sterlite”.

27 For short, “SEZ”. referring to the rationale behind cross-subsidy surcharge. Bulk consumers who avail of open access are burdened with relatively high rates, as this subsidises supply of electricity to marginalised and vulnerable sections of the society. Thus, the exit of consumers has an adverse effect on finances of the existing distribution licensee. Cross subsidy surcharge intends to compensate the existing distribution licensee in a two-fold manner: first, to compensate on the requirements of current levels of cross-subsidy, and secondly, to compensate for the fixed cost incurred by the distribution licensee as a part of its obligation to supply electricity to a consumer on demand, sometimes referred to as the stranded cost. Cross subsidy and surcharge are meant to compensate the distribution licensee on both counts. Thus, this decision does not deal with and decide the legal issue in question before us which relates to the definition of the CGP and use of electricity by the captive users.

20. In addition to the reasons given in Chhattisgarh State Power28 and Maharashtra State Electricity29, we will also like to refer to Section 38 of the Act30, which prescribes that the Central Government may

29 Supra note 19. 30 “38. Central Transmission Utility and functions.—(1) The Central Government may notify an Government company as the Central Transmission Utility: notify any Government company as the Central Transmission Utility31. The CTU cannot engage in business of generating and trading of electricity. Its functions under Section 38(2) includes the planning and coordination relating to inter-State transmission system and the development of efficient, coordinated and economical system of inter-State transmission lines for smooth flow of electricity from generating stations to the load centre and to Provided that the Central Transmission Utility shall not engage in the business of generation of electricity or trading in electricity: Provided further that the Central Government may transfer, and vest any property, interest in property, rights and liabilities connected with, and personnel involved in transmission of electricity of such Central Transmission Utility, to a company or companies to be incorporated under the Companies Act, 1956 (1 of 1956) to function as a transmission licensee, through a transfer scheme to be effected in the manner specified under Part XIII and such company or companies shall be deemed to be transmission licensees under this Act. (2) The functions of the Central Transmission Utility shall be— (a) to undertake transmission of electricity through inter-State transmission system; (b) to discharge all functions of planning and co-ordination relating to inter-State transmission system with—

(i) State Transmission Utilities;

(ii) Central Government;

(iii) State Governments;

(iv) generating companies;

(v) Regional Power Committees;

(vi) Authority;

(vii) licensees;

(viii) any other person notified by the Central Government in this behalf;

(c) to ensure development of an efficient, co-ordinated and economical system of inter-State transmission lines for smooth flow of electricity from generating stations to the load centres;

(d) to provide non-discriminatory open access to its transmission system for use by—

(i) any licensee or generating company on payment of the transmission charges; or

(ii) any consumer as and when such open access is provided by the State Commission under subsection (2) of Section 42, on payment of the transmission charges and a surcharge thereon, as may be specified by the Central Commission: Provided that such surcharge shall be utilised for the purpose of meeting the requirement of current level cross-subsidy: Provided further that such surcharge and cross subsidies shall be progressively reduced in the manner as may be specified by the Central Commission: Provided also that the manner of payment and utilisation of the surcharge shall be specified by the Central Commission: Provided also that such surcharge shall not be leviable in case open access is provided to a person who has established a captive generating plant for carrying the electricity to the destination of his own use.”

31 For short, “CTU”. provide non-discriminatory open access to its transmission system for use by a licensee or generating company on payment of transmission charges and by any consumer as and when open access is provided by the State Commission under Section 42(2), on payment of transmission charges or surcharge thereon. The fourth proviso to Section 38(2) reads: “38. Central Transmission Utility and functions. — xx xx xx Provided also that such surcharge shall not be leviable in case open access is provided to a person who has established a captive generating plant for carrying the electricity to the destination of his own use.” Thus, the Act prohibits levy of surcharge, cross or additional surcharge, even when open access is provided to a person who has established a CGP for carrying the electricity to the destination of their own use.

21. This brings us to the core issue which relates to interpretation of Rule 3 of the Rules. Three issues arise for our specific consideration in view of the conflicting judgments of the APTEL. These are:

I. Eligibility criteria for a CGP/captive user under Rule 3(1)(a) of the Rules.

II. Interpretation of the second proviso under Rule 3(1)(a) of the

III. Whether a company set up as a Special Purpose Vehicle32 for generating electricity is an, “association of persons”, in terms of the second proviso to Rule 3(1)(a) of the Rules. Issue I Eligibility criteria for a CGP/captive user specified under Rule 3(1)(a) of the Rules.

22. Rule 3(1)(a) of the Rules was interpreted by this Court in Chhattisgarh State Power33. In the said case, M/s. Shri Bajrang Power and Ispat Ltd.34 had established a CGP.

SBPIL had submitted a petition to provide open access for wheeling of power through the transmission system of Chhattisgarh State Power35, for the captive use by SBPIL’s sister concern, Shri Bajrang Metallics and Power Limited36.

SBMPL held 27.6% equity shares in SBPIL. However, the judgement also states that SBMPL directly held 26.67% shares in the CGP.37 The petition was resisted by CSPDCL on the ground that the consumption of electricity by SBPIL and

37 The judgment states that, “It was contended by the appellant that SBPIL holds more than 72% of the shares of the company. However, its consumption would be limited only to 14.16% (13.22 MU), whereas the consumption of SBMPL holding 26.67% shares, would be 57.87%(54 MU). It was submitted that this was not proportionate to the ownership of the power plant”. Proviso to Explanation 1 to Rule 3 states that consumption by a holding or subsidiary of a company, which is a captive user, shall also be admissible as captive consumption.

SBMPL independently/individually was not in proportion to their respective ownership of the CGP. SBPIL, while holding 72% shares in the CGP, was to consume 14.16% of the electricity generated, whereas, SBMPL, which was holding 26.67% shares in the CGP, was to consume 57.87% of the electricity generated.

23. This Court did not agree with the plea and contention of the distribution licensee. The plant was held to be a CGP and SBMPL a captive user. The requirement under Rule 3(1)(a) of the Rules is twofold. First, the captive user should not hold less than 26% of the ownership in the CGP. Secondly, the captive user should consume not less than 51% of the aggregate electricity generated by such CGP. The second proviso to Rule 3(1)(a)(ii) of the Rules states that in case of an association of persons, the captive user(s) shall not hold less than 26% of ownership of the plant in aggregate and the captive user(s) shall not consume less than 51% of the electricity generated, determined on an annual basis, in proportion to their shares in ownership of the CGP within a variation not exceeding +10%. The decision holds that an association of corporate bodies can establish a power plant.

SBMPL held 27.6% equity shares in SBPIL and thus satisfied the ownership requirement of 26%. The second requirement with regard to consumption of electricity was satisfied as SBMPL and SBPIL, together, would be consuming more than 51% of the power generated.38

24. The ratio in the Chhattisgarh State Power39 requires clarification and elaboration. We have provided such clarification and elaboration in Issues I and II, on our interpretation of the rule of proportionality in terms of the second proviso to Rule 3(1)(a) of the Rules.

25. To qualify as a CGP under Section 9, read with Section 2(8) of the Act, the requirements of paragraphs (i) and (ii) to Rule 3(1)(a) of the Rules have to be satisfied. We have already referred to the definition of a CGP under Section 2(8) of the Act which uses the words, “primarily for his own use”. This expression has been given statutory grail vide Rule 3 of the Rules. Rule 3 as repeatedly noticed incorporates two separate requirements. The first requirement is that the captive user(s) should have not less than 26% of the ownership in the CGP. Lower limit or minimum of 26% ownership is prescribed. Upper limit of ownership is not prescribed. The second requirement relates to the minimum electricity consumption. 51% of aggregated or more of the generated electricity should be consumed by the user(s) who meets the ownership requirement.

26. The presence of the words, “not less than”, in paragraphs (i) and (ii) to Rule 3(1)(a) of the Rules reflects and shows that the stipulations with regard to 26% ownership and 51% consumption is the minimal or lowest threshold. Maximum is not prescribed. A captive user who owns 100% of the CGP and consumes 51% or more electricity generated from such plant would satisfy the parameters prescribed. Equally, a captive user who owns 26% of the CGP and consumes 51% or more of the electricity generated would qualify as a captive user. However, this can result in abuse or gaming where there are multiple owners with different shareholdings. In case of an association of persons, a situation which is covered by the first explanation. This aspect, when there are multiple owners, in a case of association of persons, is examined under Issue II.

27. Proviso to clause (b) to Explanation 1 to Rule 3 states that consumption by a subsidiary, or holding company as defined in the Companies Act, 2013, when one of them is a captive user, shall be also admissible as captive consumption by the captive user. Clause (b) to Explanation 1 to Rule 3 states that captive user is the end user of the electricity. Captive user is the actual consumer who uses electricity for his own use.

28. The first proviso to Rule 3(1)(a) of the Rules applies in case of a CGP set up by a registered cooperative society. In such cases, the requirements under paragraphs (i) and (ii) to Rule 3(1)(a) are treated as satisfied collectively by the members of the cooperative society. Therefore, if the members of the cooperative society consume more than 51% of the electricity generated collectively, the power plant is to be treated as a CGP and the members of the cooperative society as captive users. The cooperative society may supply 49% or less of the aggregate electricity generated to third parties. Any third party, who is not a member of the cooperative society, will be a non-captive user and a consumer, who will be liable to pay a cross-subsidy and an additional surcharge, as applicable. The members of the cooperative society when they collectively satisfy the consumption requirement will not be liable to pay cross-subsidy or additional surcharge, irrespective of whether they use dedicated transmission lines or exercise their right to open access using the distribution network of the distribution licensee. They will be liable to pay wheeling charges to the distribution licensee in case they use their distribution network.

29. The second proviso to Rule 3(1)(a) of the Rules applies in cases where the captive user(s) is an, “association of persons”. We will elaborate on the eligibility requirements for, “association of persons”, while interpreting the second proviso to Rule 3(1)(a) in Issue II.

30. Two secondary, but nevertheless important questions arise for our consideration.

31. First, a contention was raised before us that since Section 2(8) of the Act uses the expression, “power plant set up by any person”, the captive user under Rule 3(1)(a) of the Rules must be the person who had participated in setting up the plant. It is submitted that, “set up”, does not include the acquisition of shares/ownership after the power plant has already been set up. Therefore, transfer of captive status through transfer of ownership is prohibited under the Act.

32. We should not accept this plea for several reasons. The expression, “set up” used in clause Section 2(8) of the Act should not to be read in a pedantic manner as referring to initial set up. We should recognise the practical reality and not ignore the impractical asinine consequences of this interpretation. Section 2(8) of the Act should not be read as impliedly incorporating a prohibition to transfer of ownership once the CGP has been set up. This bar is not specifically stated and mentioned, though the legislature could have stated this in simple words. Rather, in Section 9(1) the words used are, “construct, maintain or operate a captive generating plant”. Thus, construction, maintenance or operation of a CGP under Section 9(1) of the Act can be read disjunctively. This emanates from the use of the word, “or”, with reference to “construct, maintain or operate” in Section 9(1). This would be rational and reasonable interpretation in consonance with the legislative intent. It is not necessary that the person who maintains and operates the CGP must have also constructed the CGP. Construction, maintenance or operation can be by different persons. This is brought out in Rule 3 of the Rules which specifies the eligibility criteria for captive users. Rule 3 refers to the percentage of ownership of the captive user in the CGP, and use/consumption by the captive user in the financial year.

33. Clause (c) to Explanation 1 to Rule 3 states that ownership in relation to the generating station or power plant set up by a company or body corporate means the equity capital with voting rights. In other cases, ownership means proprietary interest and control over the generating station or power plant.

34. Section 9(2) the words used are “every person, who has constructed a captive generating plant and maintains and operates such plant”. The expression, “every person” can refer to a person who maintains and operates a CGP while not having constructed the CGP, which meaning and interpretation gains affirmation from the language of Section 9(1) which states that a, “a person may construct, maintain or operate a captive generating plant”. In case of ambiguity, it is useful to apply the purpose and object rule of interpretation. A practical interpretation is preferable, so as not to over-ride the legislative intent. It is legitimate for the court to assume that the legislature knows the reality and supports and enacts practicable laws which encourages and promotes business activities.

35. The expression, “person”, as defined under Section 2(49) of the Act, includes, inter alia, body corporates and association or body of individuals, whether incorporated or not. Transfer of ownership in case of companies and association of persons is a normal occurrence and incidence of business.

36. This issue was examined in Kadodara Power40 and it has been observed: “Can the ownership of the CGP be transferred after its set up?: xx xx xx

21. It is submitted that the words "set up" here are important and that the person who has set up the plant alone can own captive generating plant and not the person(s) who is transferee from the original owner(s).

40 Supra note 5. This proposition has not been accepted by the Commission in the impugned order. Nor does this proposition appeal to us. The Act nowhere prescribes that once set up by a person(s) a captive generating plant cannot be transferred to another owner. Nor does the Act say that on transfer of ownership the captive generating plant will lose its character of being captive despite fulfillment of all other conditions requiring it to be so. Section 9 of the Act which permits captive generation begins with the following words: notwithstanding anything contained in this Act, the person may construct, maintain or operate a captive generating plant and dedicated transmission lines". Obviously the owner of a captive generating plant need not be one who constructs. Set up defined in section 2(8) has been made equal to "construct, maintain or operate'' by the use of these words in section 9. As we view it a captive generating plant does not lose its character by transfer of the ownership or any part of the ownership provided the generating plant produces power primarily for the use of its owner(s). The Regulation quoted above lays down further restrictions on the user of the power generated by a CGP. If all the provisions of the Act and Regulations governing captive generation and consumption from the CGP are specified a plant will be a CGP notwithstanding the fact that the plant at present is not owned by the person who originally set up the plant.” We agree with the said interpretation and logic. A CGP does not lose its captive status due to transfer of its ownership or any part of its ownership, provided that the transferee, that is, a new captive user, complies with eligibility criteria specified under Rule 3 of the Rules.

37. This Court in Global Energy Ltd. and Another v. Central Electricity Regulatory Commission41, while holding that 41 (2009) 15 SCC 570. Regulation 6-A of the Central Electricity Regulatory Commission (Procedure, Terms and Conditions for Grant of Trading Licence and Other Related Matters), Regulations, 2004 was intra vires the Act and the Constitution of India, had reasoned:

Dealing with the generation of electricity being vital for the economy of the country, a narrow interpretation will ignore realities, leading to irrational results. Section 2(8) and Section 9(2) are required to be read harmoniously with Section 9(1) of the Act. A purposive interpretation would include a subsequent owner of the CGP, who is an owner as per clause (c) to Explanation 1 to Rule 3 of the Rules.

38. In Tamil Nadu Power42, the APTEL had held that the minimum ownership and consumption criteria for captive users are required to be satisfied only on the last day of the financial year, that is, 31st

42 Supra note 6. March. This, the APTEL in Tamil Nadu Power43 observes, will account for any change in shareholding of the CGP, and consequent captive status, throughout the financial year. It is observed:

39. We do not agree. The minimum threshold of ownership, which is 26%, is to be met and satisfied throughout the year and not at the end of the financial year alone. The reasoning in Tamil Nadu Power44 ignores that there is a connect between paragraph (i) and

(ii) of Rule 3(1)(a) of the Rules. Paragraph (ii) which refers to minimum electricity that is required to be consumed by captive users is with reference to the minimum ownership specified in

44 Supra note 6. paragraph (i) of the said Rule. Thus, the minimum ownership requirement is required to be maintained continuously, throughout the financial year, that is, from 1st April of a year to 31st March of the next year, along with the minimum electricity consumption requirement. This is also the mandate of Explanation (2) to Rule 3(1)(b) of the Rules, which casts obligation on the captive users to ensure compliance of clauses (a) and (b) to sub-rule (1) to Rule 3 of the Rules.

40. The issue of computation of consumption of electricity and change of shareholding of captive users, when a CGP has more than one captive user and the application of the proportionality principle in terms of second proviso to Rule 3(1)(a) has been dealt by us in Issue II. Issue II Application of the second proviso to Rule 3(1)(a) of the Rules.

41. The second proviso provides an additional eligibility requirement where the captive users are “an association of persons”. At the outset, we must record that the proviso is ambiguous and confusing. It states that in case of association of persons being the captive user(s), the captive user(s) shall hold not less than 26% of the ownership of the plant in aggregate and such captive user(s) shall not consume less than 51% of the electricity generated on an annual basis. To this extent, it is an exact replica of paragraphs (i) and (ii) of Rule 3(1)(a). Thereafter, the suffix in the last portion, states that the proportion of the shares held by the captive user(s) must be in proportion to the consumption of electricity generated within a variation not exceeding 10 percent.

42. In Kadodara Power45, referring to proportionality requirement, it is held: “How proportionality of consumption has to be assessed:

17. The Electricity Rules 2005 have set down that not less than 51% of the aggregate electricity generated by a CGP, determined on an annual basis is consumed for captive use. However, in case there are more than one owner then there is a further rule of proportionality in consumption. In case the power plant is set up by a cooperative society the condition of use of 51% can be satisfied collectively by the members of the cooperative society. However, if it is an 'association of persons' then the captive users are required to hold not less than 26% of the ownership of the plant and such captive users are required to consume not less than 51% of electricity generated determined on an annual basis in proportion to the share of the ownership of the power plant within a variation not exceeding + 10%. For example, if a CGP produces 10,000 kWh of electricity, 5100 kWh need to be consumed by the owners of CGP. In case there are three owners holding equal share, each one must consume 1/3rd of the 5100 kWh within a variation of + 10% i.e. between 1530 kWh to 1870 kWh. It will not be proper to assess the proportionality of the consumption on 100% of the generation. The Commission, however, appears to have calculated the proportion of use to 100% of the total consumption which may be more than 51% of generation….”

45 Supra note 5. We agree with the said reasoning in Kadodara Power46 But we would like to elaborate on the said reasoning by referring to the clarifications and the illustrations provided by Mr. M.G. Ramachandran, learned Senior Advocate appearing on behalf of the appellant – Dakshin Gujarat Vij Company Limited.

43. The last portion of the second proviso to Rule 3(1)(a) of the Rules, that is, the proportionality principle, specifies an unitary qualifying ratio. The unitary qualifying ratio is the consumption requirement divided by the shareholding requirement, that is, 51% divided by 26%. This means that the owner of every 1% shareholding of the CGP should have minimum consumption of 1.96% of the electricity generated by the CGP, with a variation of +10% being permissible. Therefore, the unitary qualifying ratio has to be within a range of 1.764% to 2.156%. In other words, we do not take into consideration 100% of the electricity generated. Instead, we apply the shareholding requirement, which should not be less than 26% in aggregate, to the electricity consumed, which should not be less than 51%, and thereby compute whether the ownership criteria and the proportionate consumption criteria is satisfied. Benefit of variation by 10% either way is to be a given.

44. For clarity, the illustrations provided Mr. M.G. Ramachandran, Senior Advocate, are reproduced below: Total Generation 100% Unitary Qualifying Ratio is Consumption Requirement divided by Shareholding Requirement (with a variation of 10%) i.e. 51% divided by 26% which equals to 1.96% consumption by a captive user for every 1% shareholding Consumption Requirement (Not less than) 51% Shareholding Requirement (Not less than) 26% Shareholder Actual Consumption Actual Shareholding Unitary Ratio Achieved Remarks Result Illustration 1 A 20 10.[2] 1.96 A, B, C, D, and E (all) consume not less than 1.96% for 1% shareholding and therefore all qualify as captive users. All collectively own more than 26% shareholding. A to E qualify as captive users B 20 10.[2] 1.96 C 20 10.[2] 1.96 D 20 10.[2] 1.96 E 20 10.[2] 1.96 Others 0 49 0 Illustration 2 A 15 7 2.14 A, B, C, D, and E (all) consume more than 1.96% for 1% shareholding and therefore all qualify as captive users. All collectively own 26% shareholding. A to E captive users B 15 6 2.[5] C 15 5 3 D 15 4 3.75 E 15 4 3.75 Others 25 74 - Illustration 3 A 30 10 3 A, B and C qualify the captive consumption qua their shareholding in the ratio of not less than 1.96% of 1% shareholding. The ratio of D is not above 1.96, yet it qualifies on account of its ratio being within the permissible limit of 10% variation. E does not qualify as unitary consumption is 1.67% only, i.e. less than 1.96% per 1% shareholding and the same does not fall within 10% variation. Excluding E, the shareholding held by A, B, C and D is 33% i.e. not less than 26%. Hence A, B, C and D qualify as Captive users. The disqualification of E will not affect A, B, D and D as they cumulatively consume more than 51% and hold 33% i.e. not less than 26%. A to D captive users. E is not a captive user. B 30 10 3 C 20 10 2 D 5.75 3 1.92 E 5 3 1.67 Others 9.25 64 - Illustration 4 A 25 6 4.17 A, B, C and D qualify the captive consumption qua their shareholding in the ratio of not less than 1.96% for 1% shareholding. E does not qualify as unitary consumption is 1% only, i.e. less than 1.96% per 1% shareholding. Excluding E, the shareholding held by A, B, C and D however is only 21%. Since cumulatively A, B, C, and D do not hold not less than 26%, by virtue of Rule 3(2) of Electricity Rules, 2005, they cannot claim captive user status. No one qualifies as captive user B 20 5 4 C 15 5 3 D 10 5 2 E 5 5 1 Others 25 74 - Illustration 5 A 30 1 30 Neither of A or B qualify as captive user even though they collectively satisfy the requirements of minimum shareholding of not less than 26% and minimum consumption of not less than 51%. B does not qualify as unitary consumption is less than 1.95% and not within the 10% variation. A or B independently do not satisfy the shareholding and consumption requirements. By virtue of Rule 3(2) of No one qualifies as captive user B 21 25 0.84 Others 49 74 - Electricity Rules, 2005, they cannot claim captive user status Once the above standard is met and satisfied, the person satisfying the requirement will be treated as a member of the group captive users.

45. The aforesaid interpretation checks, “gaming”, by owners, which would amount to misuse and abuse of the Rule 3(1)(a) of the Rules. Instances of gaming are where a 1% or an insignificant shareholder of the CGP disproportionately uses the electricity generated, in which case he should not be treated as a group captive user and, therefore, should be denied the benefits that are given under the Act to the captive users. Gaming or misuse should be checked to protect interests of the Distribution Licensee.

46. This brings us to the question of applicability of the second proviso of Rule 3(1)(a) in cases where there is a change in ownership or shareholding of the CGP. An issue arises with respect to calculation of proportional consumption of electricity under the second proviso to Rule 3(1)(a) of the Rules when an existing captive user exits/transfers their shareholding/ownership to a new captive user. It may happen in multiple situations. The APTEL in Tamil Nadu Power47 had postulated that such issue would be resolved if the minimum consumption and shareholding requirements are verified only at the end of the financial year. However, we have held that the minimum consumption and shareholding requirement are required to be maintained continuously and not just at the end of the year. It is only with respect to determining the ownership proportionate to consumption of electricity that requires our attention, with respect to the second proviso to Rule 3(1)(a) of the Rules.

47. In case of change of ownership, shareholding, or consumption, the principle of weighted average should be applied to ensure compliance of the proportional electricity consumption requirement stipulated under the second proviso to Rule 3(1)(a). For instance, if a captive consumer exits or drops out in the middle of the year, transferring its shareholding to another or new captive user, it would be fair to hold that the captive user who has become a shareholder in the middle of the year, is required to consume proportionately to the electricity generated. In a given case, existing captive users taking advantage of the variation, may enhance their consumption. The concept of weighted average shareholding comes in aid to calculate the relevant average shareholding of the captive user in

47 Supra note 6. the year and the proportionate electricity required to be consumed by him. To borrow from the illustrations provided by learned Senior Advocate Mr. Basava Prabhu Patil, appearing on behalf of Tata Power Company Limited, this comes in aid in instances where the shareholding of a captive user in a CGP fluctuates, provided that the minimum ownership requirement of 26% in aggregate is not being breached. Further, a shareholder may hold 30% of shares of the CGP for 3 months, 40% of shares for 4 months, and 50% of the shares for the balance 12 months. The weighted average shareholding method is applied by taking average shareholding held by particular shareholder for the year for the purpose of calculating proportionate electricity required to be consumed by it in terms of the second proviso of Rule 3(1)(a).

48. We agree with the reasoning and logic, that weighted shareholding and proportionate consumption of electricity is the fair, equitable and the correct method to determine whether the essential requirements of the second proviso to Rule 3(1)(a) are satisfied. Issue III Whether a company set up as a Special Purpose Vehicle48 for generating electricity is an ‘association of persons’ which must meet the proportionality requirement specified in the second proviso to Rule 3(1)(a) of the Rules.

49. This brings us to the last issue and question – whether a company set up as a SPV, in view of clause Rule 3(1)(b) of the Rules, is absolved from meeting the eligibility criteria specified in paragraphs

(i) and (ii) of Rule 3(1)(a) of the Rules read with second proviso to

Rule 3(1)(a) of the Rules. This argument was raised and accepted in Tamil Nadu Power49 on the following grounds:

52. It was submitted before us that since a SPV was an incorporated company, it could not be equated with an association of persons, which is usually understood to mean a recognised taxable entity and not as an incorporated entity. Reliance was placed on the interpretation by this Court in Ramanlal Bhailal Patel and Others v. State of Gujarat52, to contend that whenever an inclusive definition is provided for a term, an extended statutory interpretation of such term may be adopted. Section 2(49) of the Act uses the word “includes”, in the expression, “‘person’ shall include” to define a “person” with respect to the Act. Thus such extended statutory interpretation for the term, “association of persons”, it is submitted is importable from statutes like the Income Tax Act, 1961. We do not agree with the said contention. 52 (2008) 5 SCC 449; for short, “Ramanlal Bhailal Patel”.

53. This Court in Ramanlal Bhailal Patel53, while interpreting the meaning of an, “association of persons”, has held that an association of persons is one where two or more persons join in a common purpose and common action to achieve some common benefit. Further, such common purpose, action or benefit may vary based on the particular context of a statute. The relevant paragraph reads:

54. Further, in Ramanlal Bhailal Patel54, while elaborating on the notion of an association of persons, the Court held that co-owners of a property do not automatically become an association of persons. Where such co-owners lack a common purpose and pursue co-ownership not by their own volition, each of such coowners would constitute a different person instead of being referred to as single person, as an association of persons/body of individuals. The reasoning is reproduced:

55. Thus, the connotation of the expression, “association of persons”, may vary in different statutes based on the particular context in which an association of persons is used in that statute. It needs to be examined whether such association of persons is pursuing a common action to achieve a benefit under the said statute.

56. In the context of the Act and Rules, companies or body corporates may come together and set up another company as a SPV, with a common purpose to achieve the common benefit of becoming captive user(s) under the Act and Rules, thereby enjoy the advantages provided to captive users such as waiver of paying cross subsidy or additional surcharge, as applicable.

57. Further, explanation 1(d) to Rule 3 of the Rules, defines a SPV to mean a legal entity owning, operating, and maintaining a generating station with no other business or activity to be engaged in by the legal entity. Thus, SPVs have a single purpose as envisaged under the Rules, that is, owning, operating and maintaining a generating station. A SPV cannot consume the electricity generated by the CGP by itself, that is, it cannot be a captive user since its only purpose is to own, operate and maintain a generating station. Thus, the purpose and objective of companies or body corporates in setting up an SPV, which cannot enjoy the benefits provided to captive users itself, would be for such body corporates, companies, or other persons to enjoy the common benefit of becoming captive users.

58. Our reasoning is in consonance with section 2(8) of the Act, which defines a CGP, and as noticed above categorises CGPs into two categories: i) Single User CGP – the first part of Section 2(8) refers to a power plant set up by any person to generate electricity primarily for his own use; and ii) Group User CGP – the second part of Section 2(8) states that the power plant set up by any person to generate electricity primarily for their own use includes a power plant set up by any cooperative society or association of persons for generating electricity primarily for the use of members of such cooperative society or association. No other category of CGP is recognised under Section 2(8) of the Act.

59. The term “person”, as defined in Section 2(49) of the Act, covers a wide category of users, including, any company or body corporate or association or body of individuals, whether incorporated or not, or artificial juridical person.

60. The term, “association of persons”, has not been specifically defined in the Act. Conversely, the expression, “association or body of individuals, whether incorporated or not”, used in the definition of “person” under Section 2(49) of the Act widens the scope of a “person” to include both juridical and non-juridical persons.

61. To reiterate, Section 2(8) of the Act recognises two categories of CGPs, that is, single captive users and group captive users. For group captive users, only two categories of users are recognised, that is, a cooperative society and association of persons. The first proviso to Rule 3(1)(a) of the Rules creates an exception for cooperative societies. It requires members of the cooperative society to only collectively satisfy the minimum ownership and electricity consumption requirements specified under paragraphs (i) and (ii) of Rule 3(1)(a) of Rules. The second proviso to Rule 3(1)(a), which refers to association of persons, requires such captive users to satisfy the minimum ownership and electricity consumption requirements specified under paragraphs (i) and (ii) of Rule 3(1)(a) of Rules. Additionally, it also requires such captive users to consume electricity generated by the CGP, which shall not be less than 51%, in proportion to their individual shares in the ownership of the CGP, which shall not be less than 26%. Thus, under the Rules, all group captive users which are not registered cooperative societies are required to comply with the test of proportionality specified in the second proviso to Rule 3(1)(a).

62. This Court in S. Sundaram Pillai and Others v. V.R. Pattabiraman and Others55 has held that a proviso serves four different purposes, as stated below:

63. This Court in Monnet Ispat & Energy Ltd. And Others v. Union of India and Others56 held that the minimum electricity consumption requirement under paragraph (ii) to Rule 3(1)(a) of the Rules conforms with the requirement under Section 2(8) of the Act, that electricity generated by the CGP should be “primarily for its 56 C.A. No. 18506-18507 of 2017; for short, “Monnet Ispat”. own use”. Thus it held that Rule 3(1)(a) of the Rules cannot be said to be against the purposes of the Act. This Court in Monnet Ispat57 observes:

Similarly, the second proviso to Rule 3(1)(a) of the Rules is in furtherance of Section 2(8) of the Act.

64. An association of companies or body corporates thus are required to comply with Rule 3(1)(a) read with the second proviso to Rule 3(1)(a). Equally, an association of companies, body corporates, or other persons that set up a SPV which owns, maintains, and operates a CGP is required to comply with Rule 3(1)(a) read with the second proviso to Rule 3(1)(a). A SPV in this regard may be

65. We cannot, in any manner, read Rule 3(1)(b) as overriding or prevailing over Rule 3(1)(a) of the Rules. To accept this argument would, in fact, be accepting that “gaming”, as described above, is permissible if a company is formed as a SPV for the purpose of generating and supplying electricity to its shareholders or other body corporates. For instance, a generating company established as an independent power producer being a shareholder of 98% shares in a plant can camouflage as a CGP by giving 2% shares to group captive users and allowing them to consume 98% of the electricity generated. The independent power producer may consume only 2% of the electricity generated despite holding 98% of the shares in the plant. This would be clearly contrary to Section 2(8), which uses the expression, “primarily for its own use”. To accept this submission would also be contrary to the object and purpose behind giving benefit to captive users who spend their money and invest in setting up a CGP. While interpreting a provision which is ambiguous or debatable, the court or the adjudicator must keep in mind the intent of the legislature and read the words in a manner that the object and purpose is promoted, rather than accepting an interpretation which would result in misuse or abuse.

66. In view of the aforesaid reasoning, we hold that SPVs which own, operate and maintain CGPs are an “association of persons” in terms of the second proviso to Rule 3(1)(a) of the Rules. Companies, body corporates and other persons, who are shareholders and captive users of a CGP set up by a SPV, are required to comply with Rule 3(1)(a) of the Rules read with the second proviso of the Rules.

67. We accordingly answer the three issues ....................................... J. (SANJIV KHANNA) ...................................... J. (M.M. SUNDRESH) NEW DELHI; OCTOBER 09, 2023.