Cost of production for captive consumption excludes post-manufacturing marketing and distribution expenses under accepted valuation principles.

Captively consumed intermediate goods are to be valued on the basis of cost of production computed under accepted cost-accounting principles. Only costs that actually enter manufacture, such as direct material, direct labour, direct manufacturing costs and factory overheads, form part of production cost. Expenses incurred after manufacture, including advertising, marketing, insurance and other selling or distribution expenses, are excluded from that computation. The 2003 Board circular required valuation in accordance with CAS-4, and those standards did not support inclusion of the disputed post-manufacturing expenses. Marketing and distribution expenses were therefore not includible in the cost of production of captively consumed goods.

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Issues: Whether marketing, advertising, selling and distribution expenses were includible in the cost of production of captively consumed intermediate goods for valuation under Rule 6(b)(ii) of the Central Excise (Valuation) Rules, 1975.

Analysis: The valuation of captively consumed goods was to be determined on the basis of cost of production in accordance with accepted cost-accounting principles. The settled position applied by the Tribunal was that only elements actually going into manufacture or production, such as direct labour, direct material, direct manufacturing cost and factory overheads, form part of the cost of production. Expenses incurred after manufacture, including advertising, marketing, insurance and other selling or distribution expenses, do not enter the production cost of intermediate goods. The Board's circular of 2003 also required computation strictly in accordance with CAS-4 principles, and those principles did not support inclusion of the disputed expenses.

Conclusion: Marketing and distribution expenses were not includible in the cost of production of captively consumed goods, and the revenue's challenge failed.

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