Captive consumption valuation must follow CAS-4 cost of production, with profit element open to proof of a lower margin.

Valuation of captively consumed unmachined castings transferred to sister units had to be worked out under the cost-of-production method, with the costing exercise aligned to accepted accounting principles. The Tribunal treated CAS-4 as the proper basis for determining cost and held that the profit element could not be applied mechanically; the assessee could establish a lower margin if supported by evidence. The assessable value was therefore required to be reworked on this basis, and the matter was remitted to the original authority for fresh determination after hearing the assessee.

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Issues: Whether the assessable value of unmachined castings transferred to sister units was to be determined under Rule 6(b)(ii) of the Central Excise Valuation Rules, 1975 by adopting the cost of production on a proper costing basis, including CAS-4 and appropriate profit element.

Analysis: Rule 6(b)(ii) requires valuation of captively consumed goods on the basis of the cost of production of such goods, including profits, if any, that the assessee would ordinarily earn on sale. The Tribunal found that the method of taking the total cost of raw materials used to produce the finished quantity was not erroneous, but the costing exercise had to be aligned with the accepted cost-accounting method. CAS-4, though recognised by the Board later, was considered the proper basis for working out the cost of production. The Tribunal also accepted that the profit element should not be mechanically applied and that a lesser profit could be adopted if shown by the assessee.

Conclusion: The assessable value was required to be reworked on the basis of CAS-4, with liberty to the assessee to establish a lower profit margin; the matter was remitted to the original authority for fresh determination after hearing the assessee.

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