Captive consumption valuation under cost construction allows profit inclusion, while misdeclaration can sustain extended limitation.

Captively consumed goods that differ in specification and standard from factory-gate goods may be valued under the cost-based method in Rule 6(b)(ii) of the Central Excise (Valuation) Rules, 1975, rather than by comparison under Rule 6(b)(i). A 10% notional profit may be added where the record supports a reasonable margin of return and the assessee does not establish a lower figure. Deliberate misdeclaration of comparability can justify invocation of the extended limitation period under Section 11A(1), and a revenue-neutrality plea does not negate suppression when concealment is shown. Penalties and interest must conform to the statutory period of operation, and individual penalties depend on proof of personal involvement.

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Issues: (i) Whether the assessable value of goods captively consumed could be determined under Rule 6(b)(ii) of the Central Excise (Valuation) Rules, 1975 instead of Rule 6(b)(i); (ii) whether 10% notional profit could be added to the cost of production while computing the value of captively consumed goods; (iii) whether the extended period of limitation under the proviso to Section 11A(1) of the Central Excise Act, 1944 was invocable in the facts of the case, including the plea of revenue neutrality; and (iv) whether the penalties and interest, including the penalties on the company officers, were sustainable.

Issue (i): Whether the assessable value of goods captively consumed could be determined under Rule 6(b)(ii) of the Central Excise (Valuation) Rules, 1975 instead of Rule 6(b)(i).

Analysis: The goods cleared to the appellant's Tarapur unit were found to be different in specification and standard from the goods sold at the factory gate. The appellant had initially adopted the factory-gate price for captive clearances and later itself shifted to cost construction under Rule 6(b)(ii). On the facts, the comparable-goods method under Rule 6(b)(i) was not available for the captively consumed goods, and the cost-based method was the appropriate basis.

Conclusion: The valuation under Rule 6(b)(ii) was correctly applied and is upheld.

Issue (ii): Whether 10% notional profit could be added to the cost of production while computing the value of captively consumed goods.

Analysis: The record showed that the tyre cord division was earning profits, and no separate balance sheet for the relevant unit was maintained. The Commissioner relied on material indicating a reasonable margin of return and on the Larger Bench view that profit is includible in valuation under Rule 6(b)(ii). The appellant did not establish any lower profit margin to displace the 10% figure.

Conclusion: Addition of 10% profit to the cost of production is upheld.

Issue (iii): Whether the extended period of limitation under the proviso to Section 11A(1) of the Central Excise Act, 1944 was invocable in the facts of the case, including the plea of revenue neutrality.

Analysis: The appellant had declared that the same price applied to goods sold at the factory gate and to goods captively consumed, despite knowledge that the two categories were different. The evidence supported suppression and misdeclaration with intent to evade duty. The plea of revenue neutrality did not displace suppression, particularly where two distinct units were involved and the factual concealment was established.

Conclusion: Invocation of the extended period of limitation is upheld, and the revenue-neutrality defence fails.

Issue (iv): Whether the penalties and interest, including the penalties on the company officers, were sustainable.

Analysis: Section 11AC and Section 11AB could not be applied for the part of the disputed period prior to their commencement in September 1996. The penalty on the Executive Vice-Chairman was not supported by evidence of direct involvement in valuation suppression, whereas the Manager Marketing's penalty was justified because he was aware of the relevant difference in goods. The penalty under Section 11AC was therefore required to be reduced, and interest had to be recalculated consistently with the time period covered by the statutory provisions.

Conclusion: The penalty under Section 11AC is reduced, interest under Section 11AB is to be recalculated, the penalty on the Executive Vice-Chairman is set aside, and the penalty on the Manager Marketing is upheld.

Final Conclusion: The principal valuation and limitation findings were sustained, but the monetary consequences were modified by reducing the statutory penalty, excluding the pre-commencement period from Section 11AC and Section 11AB, and setting aside one individual penalty.

Ratio Decidendi: Where captively consumed goods are distinct from factory-gate goods, valuation may be determined on cost construction with includible profit, and deliberate misdeclaration of comparability can justify extended limitation notwithstanding a claimed Modvat-based revenue neutrality.

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