Captive consumption valuation excludes input duty covered by Modvat credit because it is not part of real commercial cost.

For captive consumption valuation under Section 4(1)(b) read with Rule 6, the cost of raw material is to be taken in a commercial sense and not as the gross price including excise duty where valid Modvat credit is available. Duty paid on inputs covered by the Modvat scheme is neutralised through the credit mechanism and therefore does not form part of the real cost of production. The Explanation to Section 4(4)(d)(ii) is confined to a different exemption context and does not alter this treatment. The valuation principle thus requires exclusion of such input duty from the assessable cost of the intermediate excisable product.

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Issues: Whether, for valuation of an intermediate excisable product under Section 4(1)(b) of the Central Excises and Salt Act, 1944 read with Rule 6 of the Central Excise (Valuation) Rules, 1975, the cost of raw material must be taken at the price paid by the manufacturer inclusive of excise duty paid thereon, or at the net price after excluding the duty for which Modvat credit is available.

Analysis: The valuation provisions require the cost of production to be determined in a commercial sense where the goods are not sold and are captively consumed. The Modvat scheme grants credit of duty paid on inputs immediately on compliance with the prescribed declaration and acknowledgement, and that credit is available for set-off against duty on the final product. The credit validly taken is indefeasible and does not depend on a co-relation between a particular input and a particular final product. In commercial accounting, duty on inputs against which credit is available is not part of the real cost to the manufacturer because the amount is recoverable through the credit mechanism. The Explanation to Section 4(4)(d)(ii) does not assist the Revenue, as it concerns a different exemption mechanism and not Modvat credit under the Rules.

Conclusion: The excise duty paid on raw material covered by the Modvat scheme is not to be included in computing the cost of the excisable product for valuation purposes; the issue is decided in favour of the assessee.

Ratio Decidendi: For captive consumption valuation under Section 4(1)(b), the cost of inputs must reflect their real commercial cost after excluding duty on which valid Modvat credit is available, because such duty is effectively neutralised by the statutory credit mechanism.

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