Holding

A CGP qualifies only when captive users hold a minimum of 26% ownership and consume at least 51% of the generation, with proportional consumption for associations of persons, and an SPV is deemed an association of persons subject to the same criteria.

Summary

The Supreme Court examined the eligibility criteria for a Captive Generating Plant (CGP) under the Electricity Act, 2003 and the Electricity Rules, 2005 in the appeal filed by M/s. Dakshin Gujarat Vij Company Ltd. against M/s. Gayatri Shakti Paper and Board Ltd. The Court clarified that a CGP qualifies only if the captive user(s) hold at least 26% ownership and consume at least 51% of the electricity generated, with the consumption proportionate to ownership for associations of persons. It held that the ownership and consumption thresholds must be satisfied throughout the financial year, applying a weighted‑average method when shareholdings change. The Court further ruled that a Special Purpose Vehicle (SPV) is an "association of persons" and therefore subject to the same proportionality requirements, and that transfer of ownership does not strip a plant of its captive status. Consequently, the earlier order of the Appellate Tribunal was set aside and the appeal was allowed.

Issues considered

Whether the eligibility criteria of 26% ownership and 51% consumption under Rule 3(1)(a) of the Electricity Rules, 2005 are satisfied for a CGP.
Interpretation of the second proviso to Rule 3(1)(a) concerning the term "association of persons".
Whether a company set up as a Special Purpose Vehicle (SPV) for generating electricity qualifies as an "association of persons" and must meet the proportionality requirement.

Legislation cited

Companies Act, 2013s. 46, s. 87
Electricity Act, 2003s. 2(8), s. 38, s. 42, s. 9
Electricity Rules, 2005s. Rule 3

Subjects

Captive Generating PlantElectricity Act 2003Electricity Rules 2005Association of personsSpecial Purpose VehicleOwnership thresholdProportional consumptionCross‑subsidy surchargeOpen access

Judgment

[2023] 15 S.C.R. 344 : 2023 INSC 886

CASE DETAILS

M/S. DAKSHIN GUJARAT VIJ COMPANY LIMITED
v.
M/S. GAYATRI SHAKTI PAPER AND BOARD LIMITED AND
ANOTHER, ETC.
(Civil Appeal Nos. 8527-8529 of 2009)
OCTOBER 09, 2023
[SANJIV KHANNA AND M. M. SUNDRESH, JJ.]
HEADNOTES
Issue for consideration: Eligibility criteria for a Captive Generating
Plant (CGP)/captive user u/r.3(1)(a) of the Electricity Rules, 2005;
Interpretation of the second proviso u/r.3(1)(a) of the Rules and the words
“association of persons”; Whether a company set up as a Special Purpose
Vehicle for generating electricity is an, “association of persons”, in terms
of the second proviso to r.3(1)(a) of the Rules.
Electricity Act, 2003 – ss.2(8), 9 – Electricity Rules, 2005 – r.3 –
Interpretation – Captive Generating Plant (CGP) and use of electricity
by the captive users – Conﬂicting judgments of the APTEL:
Held: To qualify as a CGP u/s.9, r/w s.2(8) of the Act, the requirements
of paragraphs (i) and (ii) to r.3(1)(a) of the Rules have to be satisﬁed – The
deﬁnition of a CGP u/s.2(8) of the Act uses the words, “primarily for his
own use” – This expression has been given statutory grail vide r.3 of the
Rules – It incorporates two separate requirements- (i) 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
– Proviso to clause (b) to Explanation 1 to r.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 r.3 states
344
M/S. DAKSHIN GUJARAT VIJ COMPANY LTD. v. M/S. GAYATRI 345
SHAKTI PAPER AND BOARD LTD.

that captive user is the end user of the electricity – Captive user is the actual
consumer who uses electricity for his own use – The ﬁrst proviso to r.3(1)
(a) applies in case of a CGP set up by a registered cooperative society – In
such cases, the requirements under paragraphs (i) and (ii) to r.3(1)(a) are
treated as satisﬁed collectively by the members of the cooperative society
– The second proviso to r.3(1)(a) of the Rules applies in cases where the
captive user(s) is an, “association of persons” –Clause (c) to Explanation
1 to r.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 – “person”, as deﬁned
u/s.2(49) 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 – Interpretation and logic in Kadodara Power case of the APTEL
agreed with – 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 u/r.3 –
Dealing with the generation of electricity being vital for the economy of the
country, a narrow interpretation will ignore realities, leading to irrational
results – s.2(8) and s.9(2) to be read harmoniously with s.9(1) – A purposive
interpretation would include a subsequent owner of the CGP, who is an owner
as per clause (c) to Explanation 1 to r.3 – However, the holding by APTEL
in Tamil Nadu Power case, 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 is not agreed with – 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. [Paras 25, 27-29, 33, 35-37, 39]
Electricity Act, 2003 – s.2(8) – Electricity Rules, 2005 – r.3(1)
(a) – Plea that since s.2(8) uses the expression, “power plant set up by
any person”, the captive user u/r.3(1)(a) 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:
346 SUPREME COURT REPORTS [2023] 15 S.C.R.

Held: The expression, “set up” used in clause s.2(8) of the Act
should not to be read in a pedantic manner as referring to initial set up
– The practical reality should be recognised and the impractical asinine
consequences of this interpretation should not be ignored – s.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 s.9(1) the words used are, “construct, maintain or operate
a captive generating plant” – Thus, construction, maintenance or operation
of a CGP u/s.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 s.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 – r.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. [Para 32]
Electricity Act, 2003 – ss.9(2), 9(1) - “every person”; “a person may
construct, maintain or operate a captive generating plant”:
Held: In s.9(2) the words used are “every person, who has constructed
a captive generating plant and maintains and operates such plant” – “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 s.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 – Interpretation of Statutes. [Para 34]
Electricity Act, 2003 – Electricity Rules, 2005 – r.3 – Second proviso
u/r.3(1)(a); “association of persons” – Interpretation – Proportionality
Principle – Unitary qualifying ratio – Explained – Reasoning in Kadodara
M/S. DAKSHIN GUJARAT VIJ COMPANY LTD. v. M/S. GAYATRI 347
SHAKTI PAPER AND BOARD LTD.

Power w.r.t proportionality requirement agreed with, elaborated by
referring to the clariﬁcations and the illustrations provided on behalf
of the appellant – Interpretation given checks, “gaming”, by owners,
which would amount to misuse and abuse of the r.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. [Paras 42, 43 and 45]
Electricity Act, 2003 – s.2(8) – Categories of Captive Generating
Plants (CGPs) – Electricity Rules, 2005 – Proviso to r.3(1)(a) – Group
captive users which are not registered cooperative societies, to comply
with the test of proportionality:
Held: s.2(8) of the Act recognises two categories of CGPs, 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 r.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 r.3(1)
(a) of Rules – The second proviso to r.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 r.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) – Second proviso to r.3(1)(a) of the Rules is not case speciﬁc – It is to be
treated as corollary to the interpretation embedded under s. 2(8) of the Act,
that is, “primarily for its own use” – In order make the enactment under s.
2(8) of the Act workable in any instance where group captive users are not
registered cooperative societies, the rule of proportionality under the second
proviso to r.3(1)(a) of the Rules should be read as a mandatory condition
348 SUPREME COURT REPORTS [2023] 15 S.C.R.

– Second proviso to r.3(1)(a) of the Rules is in furtherance of s.2(8) of the
Act. [Paras 61-63]
Electricity Rules, 2005 – Second proviso to r.3(1)(a) – Change
in ownership or shareholding of the CGP, applicability of the second
proviso of r.3(1)(a):
Held: 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) – 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) – 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. [Paras 47, 48]
Electricity Rules, 2005 – r.3 – A company set up as a Special
Purpose Vehicle (SPV) for generating electricity if an “association of
persons”, in terms of the second proviso to r.3(1)(a) of the Rules and
meet the proportionality requirement speciﬁed therein:
Held: Reasoning given in Kadodara Power agreed with – r.3(1)(b)
of the Rules liberalises, gives ﬂexibility and an option when a generating
station owned by company, incorporated as a SPV, has multiple generating
units – r.3(1)(b) does not undo or override the eligibility criteria speciﬁed
under r.3(1)(a) read with second proviso – An association of companies
or body corporates are required to comply with r.3(1)(a) read with the
second proviso to r.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 r.3(1)(a) read with the
second proviso to r.3(1)(a) – A SPV in this regard may be company, but
it also is also an association of persons in terms of the second proviso
to r.3(1)(a) – Thus, SPVs which own, operate and maintain CGPs are
an “association of persons” in terms of the second proviso to r.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
M/S. DAKSHIN GUJARAT VIJ COMPANY LTD. v. M/S. GAYATRI 349
SHAKTI PAPER AND BOARD LTD.

comply with r.3(1)(a) of the Rules read with the second proviso of the
Rules. [Paras 51, 64, 66]
Words and Phrases – “association of persons” – Electricity Act,
2003 – Electricity Rules, 2005:
Held: 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 – 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 – 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 s.2(49) of the Act widens
the scope of a “person” to include both juridical and non-juridical persons.
[Paras 55, 56, 60]
LIST OF CITATIONS AND OTHER REFERENCES
Kadodara Power Pvt. Ltd. and Others v. Gujarat Electricity Regulatory
Commission and Another 2009 SCC OnLine APTEL 119 – approved.
SESA Sterilite Limited v. Orissa Electricity Regulatory Commission
and Others (2014) 8 SCC 444: [2014] 13 SCR 426 – distinguished.
Tamil Nadu Power Producers Association v. Tamil Nadu Electricity
Regulatory Commission 2021 SCC OnLine APTEL 19; Sai Wardha Power
Generation Limited and Others v. Maharashtra Electricity Regulatory
Commission 2021 SCC OnLine APTEL 78; Chhattisgarh State Power
Distribution Company Limited v. Chhattisgarh State Electricity Regulatory
Commission and Anr. (2022) SCC Online SC 604; Maharashtra State
Electricity Distribution Company Limited v. JSW Steel Limited and Ors.
(2022) 2 SCC 742; Global Energy Ltd. and Another v. Central Electricity
Regulatory Commission (2009) 15 SCC 570: [2009] 9 SCR 22; Ramanlal
Bhailal Patel and Others v. State of Gujarat (2008) 5 SCC 449: [2008] 2
350 SUPREME COURT REPORTS [2023] 15 S.C.R.

SCR 468; S. Sundaram Pillai and Others v. V.R. Pattabiraman and Others
(1985) 1 SCC 591: [1985] 2 SCR 643; Monnet Ispat & Energy Ltd. And
Others v. Union of India and Others C.A. No. 18506-18507 of 2017 -
referred to.
OTHER CASE DETAILS INCLUDING IMPUGNED
ORDER AND APPEARANCES
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 8527-8529
of 2009.
From the Judgment and Order dated 22.09.2009 of the Appellate
Tribunal for Electricity, New Delhi in Appeal Nos.10, 171 and 172 of 2008.
With
Civil Appeal Nos.1-2, 1693-1698 of 2010, 12282 of 2016, 1142, 1141,
4611-4624, 4532-4556, 4571 of 2022, Civil Appeal Diary No.10378 of 2022,
Civil Appeal Nos.3662, 4233 and 8738 of 2022
Appearances:
Balbir Singh, Sanjay Jain, ASGs., Basava Prabhu S. Patil, C.
A. Sundaram, Sanjay Sen, G. Umapathy, C. S. Vaidyanathan, M. G.
Ramachandran, Sajan Poovayya, Nakul Dewan, Jayant Bhushan, S. K.
Rungta, Jaideep Gupta, Sr. Advs., M/s. DSK Legal, G. Saikumar, Ravi
Prakash, Samir Malik, Ms. Nikita Choukse, Akash Lamba, Ms. Farha
Malik, Naman Tandan, Chandra Prakash, Ms. Ishita Jain, Anand Kumar
Shrivastava, Sudhir Nandrajog, Shivam Sinha, Ankit Bhandari, Geet Rajan
Ahuja, Matrugupta Mishra, Nipun Dave, Ms. Sharmila Upadhyay, Ms.
Rohini Musa, Zafar Inayat, Anand K. Ganesan, Pramod Dayal, Nikunj
Dayal, Ms. Kriti Soni, Rohit Singha, Ms. Tatini Basu, P. Vinod Kumar,
Ms. Shraddha Deshmukh, Ms. Supriya Juneja, Rohit K Singh, Mohit D.
Ram, Buddy Ranganathan, Gaurav Mitra, Ms. Monisha Handa, Anubhav
Sharma, Amey Nabar, Vishnu Sharma A. S., K. V. Mohan, Mrs. Srishti
Khidaria, K. V. Balakrishnan, Aneesh Bajaj, Ms. Dipali S. Sheth, Shubham
Mehta, Ms. Raksha Agrawal, Ms. Palash Maheshwari, M/s. Khaitan &
Co, Ms. Divya Chaturvedi, Saransh Shaw, B. Krishna Prasad, Pradhuman
Gohil, Mrs. Taruna Singh Gohil, Ms. Ranu Purohit, Alapati Sahithya
Krishna, Hasan Murtaza, Ms. Pratiti Rungta, Prashant Singh, Sumit Pragal,
M/S. DAKSHIN GUJARAT VIJ COMPANY LTD. v. M/S. GAYATRI 351
SHAKTI PAPER AND BOARD LTD.

Shivankur Shukla, Ms. Amita Singh Kalkal, Ms. Hemantika Wahi, Ms. Jesal
Wahi, M.Y. Deshmukh, D. Kumanan, Mrs. Deepa S., Sheikh Fakhruddin
Kalia, Ms. Rachheta Chawla, Ms. Divya Singh, Ms. Bano Deswal, Rajeev
Maheshwaranand Roy, Gunjan Kumar, P. Srinivasan, Senthil Jagadeesan,
Sajal Jain, Ms. Sonakshi Malhan, Ms. Ishita Jain, Anand Kumar Shrivastava,
Shivam Sinha, Ankit Bhandari, Anil Kaushik, Abhishek Mishra, Mrs. Shashi
Sharma, Rajat Rana, Ms. Anju Kaushik, Ms. Arunima Dwivedi, Gurmeet
Singh Makker, Padmesh Mishra, Yuvraj Sharma, Digvijay Dam, Madhav
Sinhal, Dr. Arun Kumar Yadav, Anand Shankar Jha, Abhilekh Tiwari, T.
Sundar Ramanathan, Abir Roy, Vivek Pandey, Ms. Sukanya Viswanathan,
Ramakant Rai, Ashish Bhan, Ketan Gaur, Varun Kumar Tikmani, Ravin
Kapur, Somesh Srivastava, Kumar Gourav, Ms. Nooreen Sarna, Abhinav
Mukerji, Vinodh Kanna B., K. R. Sasiprabhu, Tushar Bhardwaj, Vinayak
Goel, Prakhar Agrawal, Advs. for the appearing parties
JUDGMENT / ORDER OF THE SUPREME COURT
JUDGMENT
SANJIV KHANNA, J.
This judgment interprets relevant provisions of the Electricity Act,
20031 and Rule 3 of the Electricity Rules, 20052, for being classiﬁed as a
Captive Generating Plant3 and a captive user.
2. We will be elucidating the legal position as per the statute, our intent
being to ﬁrst lay down the principles of law and then apply the principles
to the facts and circumstances of each case.
3. To decide the legal question, we will refer to two judgments of the
Appellate Tribunal for Electricity4.These are,Kadodara Power Pvt. Ltd. and
Others v. Gujarat Electricity Regulatory Commission and Another5, dated
22.09.2009, which decision was held to be per incuriam on several ﬁndings
in Tamil Nadu Power Producers Association v. Tamil Nadu Electricity

1 For short, “Act”.
2 For short, “Rules”.
3 For short, “CGP”.
4 For short, “APTEL”.
5 2009 SCC OnLine APTEL 119; for short, “Kadodara Power”.
352 SUPREME COURT REPORTS [2023] 15 S.C.R.

Regulatory Commission6, dated 07.06.2021. A third decision of the APTEL
in Sai Wardha Power Generation Limited and Othersv. Maharashtra
Electricity Regulatory Commission7 dated 26.11.2021, substantially agrees
with the view in Tamil Nadu Power8 . We shall refer to the reasons given
in the decisions and the explanation and grounds for our conclusion and
legal ﬁnding.
4. We begin by ﬁrst reproducing the relevant provisions of the Act 9:
“2. Deﬁnition.—In this Act, unless the context otherwise requires,—
×× ×× ××
(8) “Captive generating plant” means a power plant set up by any
person to generate electricity primarily for his own use and includes
a power plant set up by any cooperative society or association of
persons for generating electricity primarily for use of members of
such cooperative society or association;
×× ×× ××
(49) “person” shall include any company or body corporate or
association or body of individuals, whether incorporated or not, or
artiﬁcial juridical person;
×× ×× ××
9. Captive generation.— (1) Notwithstanding anything contained
in this Act, a person may construct, maintain or operate a captive
generating plant and dedicated transmission lines:
Provided that the supply of electricity from the captive generating
plant through the grid shall be regulated in the same manner as the
generating station of a generating company:
Provided further that no licence shall be required under this Act for
supply of electricity generated from a captive generating plan to any

6 2021 SCC OnLine APTEL 19; for short, “Tamil Nadu Power”.
7 2021 SCC OnLine APTEL 78; for short, “Sai Wardha”.
8 Supra note 6.
9 As amended up to 31.08.2023.
M/S. DAKSHIN GUJARAT VIJ COMPANY LTD. v. M/S. GAYATRI 353
SHAKTI PAPER AND BOARD LTD. [SANJIV KHANNA, J.]

licensee in accordance with the provisions of this Act and the rules
and regulations made thereunder and to any consumer subject to the
regulations made under sub-section (2) of Section 42.
(2) Every person, who has constructed a captive generating plant and
maintains and operates such plant, shall have the right to open access
for the purposes of carrying electricity from his captive generating
plant to the destination of his use:
Provided that such open access shall be subject to 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:
Provided further that any dispute regarding the availability of
transmission facility shall be adjudicated upon by the Appropriate
Commission.”
5. We would also like to reproduce Rule 3 of the Rules10, interpretation
of which is pivotal for the decision:
“3. Requirements of Captive Generating Plant.—(1) No power
plant shall qualify as a ‘captive generating plant’ under Section 9 read
with clause (8) of Section 2 of the Act unless—
(a) in case of a power plant—
(i) not less than twenty-six per cent of the ownership is held by the
captive user(s); and
(ii) not less than ﬁfty-one per cent of the aggregate electricity generated
in such plant, determined on an annual basis, is consumed for the
captive use:
Provided that in case of power plant set up by registered cooperative
society, the conditions mentioned under paragraphs at (i) and (ii) above
shall be satisﬁed collectively by the members of the co-operative
society:

10 As amended upto 01.09.2023.
354 SUPREME COURT REPORTS [2023] 15 S.C.R.

Provided further that in case of association of persons, the captive
user(s) shall hold not less than twenty-six per cent of the ownership of
the plant in aggregate and such captive user(s) shall consume not less
than ﬁfty-one per cent of the electricity generated, determined on an
annual basis, in proportion to their shares in ownership of the power
plant within a variation not exceeding ten per cent;
(b) in case of a generating station owned by a company formed as
special purpose vehicle for such generating station, a unit or units of
such generating station identiﬁed for captive use and not the entire
generating station satisfy(ies) the conditions contained in paragraphs
(i) and (ii) of sub-clause (a) above including—
Explanation.—(1) The electricity required to be consumed by captive
users shall be determined with reference to such generating unit or
units in aggregate identiﬁed for captive use and not with reference to
generating station as a whole; and
(2) The equity shares to be held by the captive user(s) in the generating
station shall not be less than twenty-six per cent of the proportionate
of the equity of the company related to the generating unit or units
identiﬁed as the captive generating plant.
Illustration.—In a generating station with two units of 50 MW each
namely Units A and B, one unit of 50 MW namely Unit A may be
identiﬁed as the Captive Generating Plant. The captive users shall
hold not less than thirteen per cent of the equity shares in the company
(being the twenty-six per cent proportionate to Unit A of 50 MW) and
not less than ﬁfty-one per cent of the electricity generated in Unit A
determined on an annual basis is to be consumed by the captive users.
(2) It shall be the obligation of the captive users to ensure that the
consumption by the Captive Users at the percentages mentioned in
sub-clauses (a) and (b) of sub-rule (1) above is maintained and in case
the minimum percentage of captive use is not complied with in any
year, the entire electricity generated shall be treated as if it is a supply
of electricity by a generating company.
(3) The captive status of such generating plants, where captive
generating plant and its captive user(s) are located in more than one
M/S. DAKSHIN GUJARAT VIJ COMPANY LTD. v. M/S. GAYATRI 355
SHAKTI PAPER AND BOARD LTD. [SANJIV KHANNA, J.]

state, shall be veriﬁed by the Central Electricity Authority as per the
procedure issued by the Authority with the approval of the Central
Government.
Explanation.—(1) For the purpose of this rule,—
(a) ‘Annual Basis’ shall be determined based on a ﬁnancial year;
(b) ‘captive user’ shall mean the end user of the electricity generated
in a Captive Generating Plantand the term “captive use” shall be
construed accordingly:
Provided that the consumption of electricity by the captive user may
be either directly or through Energy Storage System:
Provided further that the consumption by a subsidiary company as
deﬁned in clause (87) of Section 2 of the Companies Act, 2013 (18
of 2013) or the holding company as deﬁned in clause (46) of Section
2 of the Companies Act, 2013 (18 of 2013), of a company which is a
captive user, shall also be admissible as captive consumption by the
captive user;
(c) ‘Ownership’ in relation to a generating station or power plant set
up by a company or any other body corporate shall mean the equity
share capital with voting rights. In other cases ownership shall mean
proprietary interest and control over the generating station or power
plant;
(d) ‘Special Purpose Vehicle’ shall mean a legal entity owning,
operating and maintaining a generating station and with no other
business or activity to be engaged in by the legal entity.”
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-
356 SUPREME COURT REPORTS [2023] 15 S.C.R.

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

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
M/S. DAKSHIN GUJARAT VIJ COMPANY LTD. v. M/S. GAYATRI 357
SHAKTI PAPER AND BOARD LTD. [SANJIV KHANNA, J.]

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. 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

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.
358 SUPREME COURT REPORTS [2023] 15 S.C.R.

distribution system in the area of his supply.12 A distribution licensee also
owes duty to supply electricity in 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 State Commission.17 What
is important for our consideration is the fourth proviso which states that

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.”
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): ---
×× ×× ××
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): ---
×× ×× ××
Provided further that such surcharge shall be utilised to meet the requirements of
current level of cross-subsidy within the area of supply of the distribution licensee:”
17 “Section 42. (Duties of distribution licensee and open access): ---
×× ×× ××
“Provided also that such surcharge and cross-subsidies shall be progressively reduced
in the manner as may be speciﬁed by the State Commission:”
M/S. DAKSHIN GUJARAT VIJ COMPANY LTD. v. M/S. GAYATRI 359
SHAKTI PAPER AND BOARD LTD. [SANJIV KHANNA, J.]

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:
“42.Duties of distribution licensee and open access.—
×× ×× ××
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:”
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.
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

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,—
×× ×× ××
(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
360 SUPREME COURT REPORTS [2023] 15 S.C.R.

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 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).22They 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.

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;”
22 Supra note 21.
23 Supra note 18.
24 For short, “Policy”.
M/S. DAKSHIN GUJARAT VIJ COMPANY LTD. v. M/S. GAYATRI 361
SHAKTI PAPER AND BOARD LTD. [SANJIV KHANNA, J.]

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, non-
conventional 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 Power25observes 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 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.

25 Supra note 18.
362 SUPREME COURT REPORTS [2023] 15 S.C.R.

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 cross-subsidy surcharge. This was not a case of a captive user. The
contention of the appellant-industry was rejected by this Court 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 notify

26 (2014) 8 SCC 444; for short, “SESA Sterlite”.
27 For short, “SEZ”.
28 Supra note 18.
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:
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
M/S. DAKSHIN GUJARAT VIJ COMPANY LTD. v. M/S. GAYATRI 363
SHAKTI PAPER AND BOARD LTD. [SANJIV KHANNA, J.]

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 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

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 sub-section (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”.
364 SUPREME COURT REPORTS [2023] 15 S.C.R.

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.—
×× ×× ××
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
Rules and in particular the words “association of persons”.
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

32 For short, “SPV”.
33 Supra note 18.
34 For short, “SBIPL”.
M/S. DAKSHIN GUJARAT VIJ COMPANY LTD. v. M/S. GAYATRI 365
SHAKTI PAPER AND BOARD LTD. [SANJIV KHANNA, J.]

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
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

35 For short, CSPDCL.
36 For short, “SBMPL”.
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.
38 See footnote 37.
366 SUPREME COURT REPORTS [2023] 15 S.C.R.

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

39 Supra note 18.
M/S. DAKSHIN GUJARAT VIJ COMPANY LTD. v. M/S. GAYATRI 367
SHAKTI PAPER AND BOARD LTD. [SANJIV KHANNA, J.]

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.
368 SUPREME COURT REPORTS [2023] 15 S.C.R.

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.
M/S. DAKSHIN GUJARAT VIJ COMPANY LTD. v. M/S. GAYATRI 369
SHAKTI PAPER AND BOARD LTD. [SANJIV KHANNA, J.]

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 Power40and it has been
observed:
“Can the ownership of the CGP be transferred after its set up?:
×× ×× ××
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). 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

40 Supra note 5.
370 SUPREME COURT REPORTS [2023] 15 S.C.R.

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. ACGP 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 EnergyLtd. and Anotherv. Central Electricity
Regulatory Commission41,while holding that 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:
“38. When a disqualiﬁcation is provided, it is to operate at the threshold
in respect of the players in the ﬁeld of trading in electricity. When,
however, a regulatory statute is sought to be enforced, the power of
the authority to impose restrictions and conditions must be construed
having regard to the purpose and object it seeks to achieve. Dealing
in any manner with generation, distribution and supply and trading in
electrical energy is vital for the economy of the country. The private
players who are permitted or who are granted licence in this behalf
may have to satisfy the conditions imposed. No doubt, such conditions
must be reasonable. Concededly, the doctrine of proportionality may
have to be invoked.”
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

41 (2009) 15 SCC 570.
42 Supra note 6.
M/S. DAKSHIN GUJARAT VIJ COMPANY LTD. v. M/S. GAYATRI 371
SHAKTI PAPER AND BOARD LTD. [SANJIV KHANNA, J.]

satisﬁed only on the last day of the ﬁnancial year, that is, 31 st 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:
“292. It is critical for us to note the practical diﬃculties staring down
at the face of the captive users and CGPs in the event the concept of
weighted average is applied. We agree with the submissions of the
Appellant that the nature of shareholding in a captive structure is
ﬂuid and dynamic. That, existing captive users within the said captive
structure can choose to give-up its ownership along with consumption
of captive power at any point of time if it considers no usage for the
same. In such a scenario, if no new captive user(s) is added then the
shareholding along with consumption is accordingly adjusted. A CGP
cannot foresee the future and predict as to how many of its shareholders
may give up their ownership along with consumption of captive
power, neither can it be predicted, if any new/ how many captive
user(s) will be inducted within the structure. In such a scenario, if in
terms of Rule 3 of the Rules veriﬁcation of minimum shareholding
along with minimum consumption is not done annually, at the end of
the ﬁnancial year but done considering ownership at diﬀerent periods
during the year, then same would create unforeseen diﬃculties for
a CGP to maintain its captive structure. As such, we opine that the
veriﬁcation mandated under the Rule 3 has to be done annually, by
considering the shareholding existing at the end of the ﬁnancial year.
This is also evident from a perusal of Format-5 formulated by TNERC
as a part of the impugned order, which also speciﬁcally contemplates
veriﬁcation to be done as per the shareholding existing at the end of
the ﬁnancial year. Similar view has already been taken by us in Appeal
No. 02 and 179 of 2018 titled as “Prism Cement Limited v. MPERC
& Ors” (supra).
×× ×× ××

43 Supra note 6.
372 SUPREME COURT REPORTS [2023] 15 S.C.R.

294. In light of our ﬁndings, we also observe that suppose there are
ten (10) captive users who avail open access for captive use under
Section 9 of the Act at the start of the ﬁnancial year, and in the event
three (3) of such captive users stops sourcing captive power after six
months, and instead three new captive users are introduced within the
captive structure by subscribing equity shareholding with voting rights
immediately thereafter, then when the veriﬁcation of captive status will
be done annually on the basis of the shareholding existing at the end
of such ﬁnancial year, in that case the total number of captive users
throughout the ﬁnancial year would be treated as thirteen (7+3+3) and
not 10. This is because the shareholding of the three captive users who
stopped sourcing captive power, cannot have a zero/nil shareholding, as
they sourced captive power for the ﬁrst six months. While verifying the
condition under Rule 3(1)(a)(i) and (ii) of the Rules, the consumption
of captive power has to be done by captive users holding a minimum
of 26% shareholding. Therefore, in the event shareholding of a captive
user is considered as zero/nil after a few months into the ﬁnancial year,
then such user cannot be permitted to take beneﬁt of availing captive
power thereby seeking exemption from payment of CSS. In any event,
the applicability of CSS will also depend upon the observations made
by us in Appeal No. 38 of 2013 titled as ‘M/s. Steel Furnace Association
of India v. PSERC & Anr.’”
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 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

44 Supra note 6.
M/S. DAKSHIN GUJARAT VIJ COMPANY LTD. v. M/S. GAYATRI 373
SHAKTI PAPER AND BOARD LTD. [SANJIV KHANNA, J.]

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 IssueII.
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 2005have 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

45 Supra note 5.
374 SUPREME COURT REPORTS [2023] 15 S.C.R.

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….”
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% dividedby 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:

46 Supra note 5.
M/S. DAKSHIN GUJARAT VIJ COMPANY LTD. v. M/S. GAYATRI 375
SHAKTI PAPER AND BOARD LTD. [SANJIV KHANNA, J.]

Total Generation 100% Unitary Qualifying Ratio is
Consumption Requirement (Not less than) 51% Consumption Requirement
d i vi d e d b y S h a re h o l d i n g
Requirement (with a variation
of 10%) i.e. 51% divided by
Shareholding Requirement (Not less than) 26%
26% which equals to 1.96%
consumption by a captive user
for every 1% shareholding

Shareholder Actual Actual Unitary
Consumption Shareholding Ratio
Remarks Result
Achieved
Illustration 1
A 20 10.2 1.96
B 20 10.2 1.96
A, B, C, D, and E A to E
C 20 10.2 1.96
(all) consume not qualify
D 20 10.2 1.96 less than 1.96% for as
E 20 10.2 1.96 1% sha reh ol d ing captive
Others 0 49 0 and therefore all users
qualify as captive
users. All collectively
own more than 26%
shareholding.
Illustration 2
A 15 7 2.14 A, B, C, D, and E
B 15 6 2.5 (all) consume more
A to E
C 15 5 3 than 1.96% for 1%
qualify
D 15 4 3.75 shareholding and
as
E 15 4 3.75 therefore all qualify
captive
Others 25 74 - as captive users. All
users
collectively own 26%
shareholding.
Illustration 3
A, B and C
A 30 10 3
qualify the captive A to D
consumpt io n q ua qualify
B 30 10 3 their shareholding as
in the ratio of not captive
C 20 10 2 less than 1.96% of users. E
1% shareholding. is not a
The ratio of D is not captive
D 5.75 3 1.92 above 1.96, yet it user.
qualiﬁes on account
376 SUPREME COURT REPORTS [2023] 15 S.C.R.

of its ratio
E 5 3 1.67 b e ing w i th i n th e
permissible limit of
10% variation. E
does not qualify as
unitary consumption
is 1.67% only, i.e.
less than 1.96% per
1% sha reh ol d ing
and the same does
not fall within 10%
variation. Excluding
E, the shareholding
held by A, B, C and
Others 9.25 64 - 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%.
Illustration 4
A, B, C and D
A 25 6 4.17 qualify the captive
consumpt io n q ua
B 20 5 4 their shareholding
in the ratio of not
C 15 5 3 less than 1.96% for
No one
1% shareholding. E
qualiﬁes
does not qualify as
D 10 5 2 as
unitary consumption
captive
is 1% only, i.e. less
user
than 1.96% per
E 5 5 1 1% shareholding.
Excl uding E, the
shareholding held
Others 25 74 - by A, B, C and D
however is only 21%.
M/S. DAKSHIN GUJARAT VIJ COMPANY LTD. v. M/S. GAYATRI 377
SHAKTI PAPER AND BOARD LTD. [SANJIV KHANNA, J.]

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.
Illustration 5
Neither of A or B
A 30 1 30
qualify as captive
user even though they
B 21 25 0.84 collectively satisfy
th e re q ui rem en t s
of minimum
s h a re h o l d i n g o f
not less than 26%
and minimum
consumption of not
less than 51%. B
No one
does not qualify as
qualiﬁes
unitary consumption
as
is less than 1.95%
captive
and not within the
user
Others 49 74 - 10% variation. A
or B independently
do not satisfy
the sha re ho l di ng
an d consumpt ion
req ui remen ts . By
virtue of Rule 3(2)
of 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 insigniﬁ cant shareholder
of the CGP disproportionately uses the electricity generated, in which
378 SUPREME COURT REPORTS [2023] 15 S.C.R.

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 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

47 Supra note 6.
M/S. DAKSHIN GUJARAT VIJ COMPANY LTD. v. M/S. GAYATRI 379
SHAKTI PAPER AND BOARD LTD. [SANJIV KHANNA, J.]

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:
“255. We have analysed the submissions of the parties on the issue of
treatment of an SPV as an AOP. As seen before, Rule 3 of the Rules
deals with the requirements to be fulﬁlled to qualify as a captive. In
the said rule, SPV as a CGP is given under Rule 3 (1)(b). Further,
it is also seen that Rule 3(1)(a)(i) has two provisos contemplating
the manner in which the requirements to qualify as a CGP is to be
fulﬁlled by a registered Co-operative society and an AOP. It is also
seen that the said two provisos do not relate to Rule 3(1)(b) which
deals with a SPV.

48 For short, “SPV”.
49 Supra note 6.
380 SUPREME COURT REPORTS [2023] 15 S.C.R.

256. We agree with the submission put forward by the Appellant that
second proviso to Rule 3(1)(a) is a stand-alone provision and as such
does not relate to Rule 3 (1)(b). The Parliament in its wisdom has
created an intelligible diﬀerentia under Rule 3, between a SPV and
an AOP. It is clear from a reading of Rule 3 that second proviso to
Rule 3(1)(a) which exclusively deals with an AOP, lays down that the
captive user (s) shall hold not less than 26% ownership of the plant
in aggregate and shall not consume less than 51% of the electricity
generated, determined on an annual basis, in proportion to their
ownership of the power plant.
257. On the other hand, Rule 3(1)(b) exclusively deals with a SPV, and
it only provides that the conditions mentioned in Rule 3(1)(a)(i) and
(ii) are applicable to a SPV, with the second proviso not mandated to
be applied to it. Thus, we ﬁnd force in the argument of the Appellant
that second Proviso to Rule 3(1)(a) is a stand-alone provision.
258. The above argument of the Appellant is further strengthened on
the principles enunciated by the Hon’ble Supreme Court with regard
to interpretation of statutes by Courts. The Hon’ble Supreme Court
has time and again held that Courts cannot rewrite or recast legislation,
they should not act as law makers where there is no ambiguity in the
language in a piece of legislation then such legislation ought to be
literally interpreted without any deviation. The Hon’ble Supreme Court
has also held that provisos are exceptions to the general rule. In this
regard, we refer to the following judgments:
×× ×× ××
259. From the principles drawn from the above judgments, we observe
that TNERC vide the impugned order particularly in para 6.4.4 has
endeavoured to add an intention to Rule 3(1)(b) which was otherwise
absent from its construction. By holding that the second proviso to
Rule 3(1)(a) is applicable to Rule 3(1)(b) thereby equating a SPV with
an AOP, the impugned order has committed an error in interpreting
the said Rule in the manner in which it has been enacted by the
Parliament. We also concur with the principles laid down in the cases
of Kailash Nath (supra) and Sanjay Kumar (Supra) that a proviso is
an exception and it cannot travel beyond the provision to which it is a
M/S. DAKSHIN GUJARAT VIJ COMPANY LTD. v. M/S. GAYATRI 381
SHAKTI PAPER AND BOARD LTD. [SANJIV KHANNA, J.]

proviso. We therefore, ﬁnd that the same are applicable in the facts of
the present Appeal. It is settled law that the function of a proviso is to
except something out of the enactment or to qualify something enacted
therein which but for the proviso would be within the purview of the
enactment. Applying this clear jurisprudence, TNERC could not have
applied the second proviso to Rule 3(1)(a) to Rule 3(1)(b). Hence, the
requirement of consuming minimum of 51% electricity generated on
an annual basis and the requirement of the captive users holding 26%
of the ownership of the plant in aggregate, and such consumption
being in proportion to the shares of ownership of the power plant can
only be applicable to power plants set- up by an AOP but cannot be
applied to power plants set-up by SPV.
50. Kadodara Power50 takes the opposite view, and the APTEL has
reasoned:
“Is a company formed as a special purpose vehicle an association of
person?
15. The question has arisen because the word ‘association of persons’
is not deﬁned anywhere in the Act or in the Rules. The proviso
to Rule 3 (l)(a)(ii) makes two special conditions for cooperative
societies and association of persons. If the CGP is held by a person
it is suﬃcient that the person consumes not less than 51% of the
aggregate electricity generated in such plant. In case the plant is
owned by a registered cooperative society then all the members
together have to collectively consume 51% of the aggregate
electricity generated. In case the CGP is owned by an association
of persons the captive users together shall hold not less than 26% of
the ownership of the plant in aggregate and shall consume not less
than 51% of the electricity generated in proportion to their shares of
the ownership of the plant within a variation not exceeding + 10%.
A special purpose vehicle is a legal entity owning, operating and
maintaining a generating station with no other business or activity
to be engaged in by the legal entity. Now if three companies need

50 Supra note 5.
382 SUPREME COURT REPORTS [2023] 15 S.C.R.

to set up the power plant primarily for their own use they can
come together and form another legal entity which may itself be a
company registered under the Companies Act. This company may
set up a power plant. In that case the company formed by three
diﬀerent companies would become a special purpose vehicle. If a
company which is a special purpose vehicle is one person then all
that is necessary is that this company should consume 51% of the
generation. However, if it is treated as association of persons apart
from a condition of consuming minimum 51% of its generation
the three share holders will also have to consume 51% of the
generation in proportion to their ownership in the power plant. It
is contended on behalf of some of the appellants before us who are
special purpose vehicles that they are not an association of persons
and accordingly it is only necessary for them to consume 51%
of their generation collectively without adhering to the Rule of
proportionality of consumption to their share. This does not appear
to us to be the correct view. Section 2(8) of the Act, as extracted
above, says that a captive generating plant may be set up by any
person and includes the power plant set up by any cooperative
society or association of persons. Mr. M. G. Ramachandran contends
that going by this deﬁnition if the special purpose vehicle is not an
association of persons it cannot set up a captive generating plant
because the deﬁnition does not mention any person other than a
cooperative society and association of person. There is small ﬂaw
in the argument of Mr. M. G. Ramachandran in as much as the
deﬁnition of captive generating plant is inclusive. In other words,
the captive generating plant may be set up by any person including
a cooperative society or association of persons. In other words, the
person to set up a generating plant may be somebody who does not
fulﬁll the description of either a cooperative society or association
of persons. Nonetheless, reading the entire Rule 3 as a whole it does
appear to us that a CGP owned by a special purpose vehicle has to be
treated as an association of person and liable to consume 51% of his
generation in proportion to the ownership of the plant. Every legal
entity is the person. Therefore, the special purpose vehicle which
M/S. DAKSHIN GUJARAT VIJ COMPANY LTD. v. M/S. GAYATRI 383
SHAKTI PAPER AND BOARD LTD. [SANJIV KHANNA, J.]

has to be a legal entity shall be a person in itself. Any generating
company or a captive generating company is also a person. The
Rules specially deals with cooperative society. In an association
of persons it has to be a ‘person’ because without being a person it
cannot set up a captive generating plant. Therefore it will be wrong
to say that since the special purpose vehicle is a ‘person’ in itself
it cannot be covered by a deﬁnition of ‘association of persons’ and
has to be covered by the main provision which requires the owner
to consume 51% or more of the generation of the plant. In our view
the deﬁnition is somewhat strange in as much as the term ‘person’
is said to include an ‘association of persons’. One therefore cannot
say that a CGP owner can be either a ‘person’ or an ‘association of
persons’ a special purpose vehicle thus can be a ‘person’ as well as
an ‘association of persons’. A cooperative society is an ‘association
of persons’ in the sense that some persons come together to form a
cooperative society. However, the moment an association or society
is formed according to the legal provisions it becomes a person in
itself. A special provision has been made permitting a cooperative
society from consuming 51% collectively. The ﬁrst proviso 3 (1)(a)
(ii) itself suggests that a special privilege has been conferred on a
cooperative society. Other persons who are also legal entities formed
by several persons coming together have not been given such special
privilege. Who can such association of persons be? Of the various
legal entities comprehended as persons owning a CGP the special
purpose vehicle does seem to ﬁt the description of ‘association of
persons’. We fail to comprehend who other than a special purpose
vehicle can be an ‘association of persons’. None of the lawyers
arguing before us gave example of ‘association of persons’ other
than a special purpose vehicle. Therefore, we have no hesitation to
hold that special purpose vehicle is an association of persons.
16. In case the special purpose vehicle was not required to maintain
the rule of proportionality of consumption, the Central Government
could have speciﬁcally mentioned the same just as it has done for a
cooperative society. The Rule having not exempted a special purpose
vehicle from the requirement of consuming 51% of the generation in
384 SUPREME COURT REPORTS [2023] 15 S.C.R.

proportion to the ownership of the persons forming the special purpose
vehicle as has been done in the case of cooperative society it will only
be rational and logical to hold that a special purpose vehicle is also
subject to the rule of proportionality of consumption to the percentage
share of ownership as an ‘association of persons’.
51. We agree with the reasoning giving in Kadodara Power51 Rule
3(1)(b) of the Rules does not negate or undo the eligibility requirements
speciﬁed in paragraphs (i) and (ii) to Rule 3(1)(a) of the Rules, which
in case of an association of persons mandates the satisfaction of the
proportionality requirement under the second proviso to Rules 3(1)(a).
Rule 3(1)(b) refers to a situation where a company set up as a SPV has
multiple units generating electricity. It stipulates that the company formed
as a SPV can identify one or more of such generating units for its captive
use. All the generating units need not be identiﬁed for captive use. The
units which are not identiﬁed for captive use need not satisfy the conditions
mentioned in paragraphs (i) and (ii) of Rule 3(1)(a) of the Rules. Electricity
generated by these unidentiﬁed units need not be accounted and considered.
The explanation clariﬁes the situation as it states that the requirement
of consumption of electricity by captive users shall be determined with
reference to the generating unit or units identiﬁed for captive use. The
unit or units identiﬁed for captive use, in other words, must satisfy the
requirements of paragraphs (i) and (ii) of Rule 3(1)(a) of the Rules read
with the second proviso. This is also clear from Rule 3(2), which states
that the equity shares held by the captive user in the generating station,
which is identiﬁed for captive use, should not be less than 26% of the
proportionate equity of the company relating to the generating unit or
units identiﬁed as a CGP. The illustration to Section 3(1)(b) that is lucid,
for the sake of convenience is again reproduced:
“Illustration.—In a generating station with two units of 50 MW
each namely Units A and B, one unit of 50 MW namely Unit A may
be identiﬁed as the Captive Generating Plant. The captive users
shall hold not less than thirteen per cent of the equity shares in the

51 Supra note 5.
M/S. DAKSHIN GUJARAT VIJ COMPANY LTD. v. M/S. GAYATRI 385
SHAKTI PAPER AND BOARD LTD. [SANJIV KHANNA, J.]

company (being the twenty-six per cent proportionate to Unit A of 50
MW) and not less than ﬁfty-one per cent of the electricity generated
in Unit A determined on an annual basis is to be consumed by the
captive users.”
Thus, Rule 3(1)(b) of the Rules liberalises, gives ﬂexibility and an
option when a generating station owned by company, incorporated as a
SPV, has multiple generating units. Rule 3(1)(b) does not undo or override
the eligibility criteria speciﬁed under Rule 3(1)(a) read with second proviso.
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.
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:
“28. The terms “association of persons” and “body of individuals”
(which are interchangeable) have a legal connotation and refer to
an entity having rights and duties. They are not to be understood
literally. For example, if half a dozen people are travelling in a car

52 (2008) 5 SCC 449; for short, “Ramanlal Bhailal Patel”.
53 Supra note 52.
386 SUPREME COURT REPORTS [2023] 15 S.C.R.

or a boat, or standing in a bus-stop, they may be a group of persons
or a “body of individuals” in the literal sense. But they are not an
association of persons/body of individuals in the legal sense. When
a calamity occurs or a disaster strikes, and a band of volunteers or
doctors meet at the site and associate or cooperate with each other
for providing relief to victims, and not doing anything for their own
beneﬁt, they may literally be an association of persons, but they
are not “an association of persons/body of individuals” in the legal
sense. A mere combination of persons or coming together of persons
without anything more, without any intention to have a joint venture
or carry on some common activity with a common understanding
and purpose will not convert two or more persons into a body of
individuals/association of persons. An “association of persons/
body of individuals” is one in which two or more persons join in
a common purpose and common action to achieve some common
beneﬁt. Where there is a combination of individuals by volition of
the parties, engaged together in some joint enterprise or venture, it is
known as “association of persons/body of individuals”. The common
object will have some relevance to determine whether a group or
set of persons is an association of persons or body of individuals
with reference to a particular statute. For example, when the said
terms “association of persons” or “body of individuals” occur in a
section which imposes a tax on income, the association must be one
the object of which is to produce income, proﬁt or gain (vide CIT v.
Indira Balkrishna, Mohd. Noorulla v. CIT, N.V.Shanmugam and Co.
v. CIT and Meeraand Co. v. CIT). But the object need not always be
to carry on commercial or business activity. For example, when the
word “person” occurs in a statute relating to agriculture or ceiling on
landholding, the term “association of persons/body of individuals”
may refer to a combination of individuals who join together to acquire
and own land as co-owners and carry on agricultural operations as
a joint enterprise.”
M/S. DAKSHIN GUJARAT VIJ COMPANY LTD. v. M/S. GAYATRI 387
SHAKTI PAPER AND BOARD LTD. [SANJIV KHANNA, J.]

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 co-owners 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:
“29. Normally, where a group of persons have not become co-
owners by their own volition with a common purpose, they cannot
be considered as a “person”. When the children of the owner of a
property succeed to his property by testamentary succession or inherit
by operation of law, they become co-owners, but the co-ownership
is not by volition of parties nor do they have any common purpose.
Each can act in regard to his/her share, on his/her own, without any
right or obligation towards the other owners. The legal heirs though
co-owners, do not automatically become an “association of persons/
body of individuals”. When diﬀerent persons buy undivided shares
in a plot of land and engage a common developer to construct an
apartment building, with individual ownership in regard to respective
apartment and joint ownership of common areas, the co-owners of
the plot of land, do not become an “association of persons/body of
individuals”, in the absence of a deeming provision in a statute or an
agreement. Similarly, when two or more persons merely purchase a
property, under a common sale deed, without any agreement to have
a common or joint venture, they will not become an “association of
persons/body of individuals”. Mere purchase under a common deed
without anything more, will not convert a co-ownership into a joint
enterprise. Thus when there are ten co-owners of a property, they
are ten persons and not a “body of individuals” to be treated as a
“single person”. But if the co-owners proceed further and enter into
an arrangement or agreement to have a joint enterprise or venture to
produce a common result for their beneﬁt, then the co-owners may
answer the deﬁnition of a “person”.”

54 Supra note 52.
388 SUPREME COURT REPORTS [2023] 15 S.C.R.

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.
M/S. DAKSHIN GUJARAT VIJ COMPANY LTD. v. M/S. GAYATRI 389
SHAKTI PAPER AND BOARD LTD. [SANJIV KHANNA, J.]

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:
“43. We need not multiply authorities after authorities on this point
because the legal position seems to be clearly and manifestly well
established. To sum up, a proviso may serve four diﬀerent purposes:

55 (1985) 1 SCC 591.
390 SUPREME COURT REPORTS [2023] 15 S.C.R.

(1) qualifying or excepting certain provisions from the main
enactment:
(2) it may entirely change the very concept of the intendment of
the enactment by insisting on certain mandatory conditions to be
fulﬁlled in order to make the enactment workable:
(3) it may be so embedded in the Act itself as to become an
integral part of the enactment and thus acquire the tenor and
colour of the substantive enactment itself; and
(4) it may be used merely to act as an optional addenda to the
enactment with the sole object of explaining the real intendment
of the statutory provision.”
Accordingly, the second proviso to Rule 3(1)(a) of the Rules is not
case speciﬁc. It is to be treated as corollary to the interpretation embedded
under Section 2(8) of the Act, that is, “primarily for its own use”. In order
make the enactment under Section 2(8) of the Act workable in any instance
where group captive users are not registered cooperative societies, the rule
of proportionality under the second proviso to Rule 3(1)(a) of the Rules
should be read as a mandatory condition.
63. This Court in Monnet Ispat& Energy Ltd. And Othersv. 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 own use”. Thus itheld that Rule 3(1)
(a) of the Rules cannot be said to be against the purposes of the Act. This
Court in Monnet Ispat57observes:
“14. In the light of what has been discussed by this Court in Global
Energy Ltd. (supra) when we examine deﬁnition of Generating Plant
in section 2(8) of the Act it emphasizes setting up primarily for his
own use or in case of cooperative society for use by its members.

56 C.A. No. 18506-18507 of 2017; for short, “Monnet Ispat”.
57 Supra note 56.
M/S. DAKSHIN GUJARAT VIJ COMPANY LTD. v. M/S. GAYATRI 391
SHAKTI PAPER AND BOARD LTD. [SANJIV KHANNA, J.]

When we consider Rule 3(1)(a)(ii) of the Rules of 2005, it is clear
that it provides not less than 51% of aggregate electricity generated
in such plant determined on annual basis is consumed for captive use.
The rule conforms to the requirement of section 2(8) that primarily
electricity should be generated by captive generating plant for his own
use/members as the case may be. The provisions of Rule 3(1)(a)(ii)
of the Rules of 2005 cannot be said to be against purposes of the Act.
Rather it promotes rationale of the provision and essential qualiﬁcations
laid down in the Act itself…”
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 company, but it also is also an association of
persons in terms of the second proviso to Rule 3(1)(a).
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
392 SUPREME COURT REPORTS [2023] 15 S.C.R.

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.

Headnotes prepared by: Issues answered.
Divya Pandey