Captive-consumption valuation requires actual cost of production; internal transfer price cannot replace it, and suppression is needed for extended limitation.

For captive-consumption valuation under Rule 6(b)(ii) of the Central Excise Valuation Rules, electricity used in yarn manufacture had to be valued on actual cost of production, not on an internal transfer price between divisions. The internal billing figure was treated as only a notional amount and an unreliable basis for valuation. On limitation, the extended period under the proviso to Section 11A of the Central Excise Act could not be invoked because the assessee had disclosed actual generation cost and there was no finding of suppression or intent to evade duty. The demand was therefore time-barred and the penalties could not survive.

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Issues: (i) Whether the cost of electricity captively generated and used in the manufacture of yarn was to be taken at actual cost of production or at the transfer price between the divisions for valuation under Rule 6(b)(ii) of the Central Excise Valuation Rules; (ii) Whether the extended period under the proviso to Section 11A of the Central Excise Act, 1944 could be invoked and penalties sustained.

Issue (i): Whether the cost of electricity captively generated and used in the manufacture of yarn was to be taken at actual cost of production or at the transfer price between the divisions for valuation under Rule 6(b)(ii) of the Central Excise Valuation Rules.

Analysis: Rule 6(b)(ii) requires valuation on the basis of cost of production. The controlling principle applied was that actual cost must enter the computation of cost of production, and not a notional or inter-divisional transfer price. Internal billing between divisions was treated as an unreliable indicator of real price and transfer pricing was said to require close scrutiny. Authorities dealing with comparable-goods valuation or compulsory extra collections were held inapplicable.

Conclusion: The cost of electricity had to be taken on actual cost basis, not on the transfer price between divisions, and the issue was decided in favour of the assessee.

Issue (ii): Whether the extended period under the proviso to Section 11A of the Central Excise Act, 1944 could be invoked and penalties sustained.

Analysis: The assessee had adopted actual cost of generation for power and there was no finding of falsity in the actual cost figures. In the absence of suppression of facts or intent to evade duty, the extended limitation could not be applied. Once the demand itself was held unsustainable and time-barred, the consequential penalties, including the penalty on the second appellant, could not survive.

Conclusion: The extended period was not invocable, the demand was time-barred, and the penalties were unsustainable.

Final Conclusion: The valuation dispute and the limitation objection were both resolved in favour of the assessee, resulting in setting aside of the impugned order with consequential relief.

Ratio Decidendi: For captive-consumption valuation under Rule 6(b)(ii), cost of production must be based on actual cost, and the extended period cannot be invoked absent proven suppression of facts or intent to evade duty.

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