Captive consumption valuation excludes loan interest and unproven raw material loss from production cost.

For captive consumption valuation under Rule 6(b)(ii) of the Central Excise Valuation Rules, 1975, the cost of production must follow accepted costing principles, including CAS-4, so interest on loans is not part of production cost; the demand on that basis was unsustainable. On the alleged loss of raw materials, the department had to prove that the loss related to items required to be added to cost, but produced no evidence; the proposed inclusion therefore could not stand. The valuation adopted by the department failed on both grounds, and the appellate order confirming duty, interest and penalty was set aside.

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Issues: (i) whether interest on loans was required to be included while determining the cost of production for captively consumed zinc and lead concentrates under Rule 6(b)(ii) of the Central Excise Valuation Rules, 1975; and (ii) whether the alleged loss of raw materials was required to be included in the assessable value of the ore concentrates.

Issue (i): whether interest on loans was required to be included while determining the cost of production for captively consumed zinc and lead concentrates under Rule 6(b)(ii) of the Central Excise Valuation Rules, 1975

Analysis: The assessable value of captively consumed goods had to be determined on the basis of cost of production under Rule 6(b)(ii). The governing costing principle was the normal principle of accountancy, as recognized by CAS-4 and the Board circular, under which interest cost is not included in the cost of production. The conclusion was reinforced by the decision accepting CAS-4 as the proper basis for captive consumption valuation.

Conclusion: Interest on loans was not includible in the cost of production and the demand on that count was unsustainable.

Issue (ii): whether the alleged loss of raw materials was required to be included in the assessable value of the ore concentrates

Analysis: The appellant maintained that the loss reflected in the balance sheet was loss of ore concentrates and not loss of raw materials other than the very goods on which duty was being paid. The burden to prove the contrary lay on the department, but no evidence was produced to establish that the loss related to raw materials which had to be added to the cost of production. In the absence of such proof, the inclusion of that alleged loss in valuation could not stand.

Conclusion: The alleged loss of raw materials was not liable to be included and the demand on that count was unsustainable.

Final Conclusion: The valuation adopted by the department could not be sustained on either ground, and the appellate order confirming duty, interest and penalty was set aside.

Ratio Decidendi: For captive consumption valuation under Rule 6(b)(ii), only the actual elements of cost recognized by accepted costing principles may be included, and any addition not supported by evidence cannot be made to the cost of production.

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