2011 (7) TMI 973 - AT - Central Excise

Supreme Court: Include Interest Costs and Loss of Raw Materials in Cost of Production

The Supreme Court held in favor of the appellant, a zinc and lead manufacturer, in a dispute over the assessable value of concentrates. The court ruled ... Assessable value - Rule 6(b)(ii) of the Central Excise (Valuation) Rules, 1975 - The department’s allegation is that in determining the assessable value on the basis of the cost of production, the appellant did not include the element of interest on loans and loss of materials - The department’s allegation is that in determining the assessable value on the basis of the cost of production, the appellant did not include the element of interest on loans and loss of materials - department alleged that there was short payment of duty of Rs. 8,19,569/- during 1995-1996 to 1999-2000 (October, 1999) period - Board’s Circular No. 6/29/2002-CX.I, dated 13-2-2003, the cost of the goods cleared for captive consumption must be determined in accordance with the general principles of costing and accordingly for this purpose, CAS-4 Standard is to be adopted - As per CAS-4, for determining the cost of goods, the interest cost is not to be included - Supreme Court in the case of C.C.E., Pune v. Cadbury India Ltd. reported in (2006 (8) TMI 2 - SUPREME COURT OF INDIA) has held that for determining the cost of production for the purpose of determining the assessable value under Rule 6(b)(ii) of Central Excise (Valuation) Rules, 1975, the cost must be determined, strictly according to the principles of costing and for this purpose CAS-4 must be adopted As regards the loss of raw materials, the appellant’s plea is that materials loss referred in the balance sheet is ore concentrates loss and since duty is being demanded in respect of ore concentrates, its cost cannot be included - Held that: if the department’s allegation is that the loss of raw materials referred to in the balance sheet refers to loss of ores or other raw materials not of ore concentrates, the burden of proving this would be on the department, but no evidence in this regard has been produced - Decided in favor of the assessee Issues:- Dispute over assessable value of zinc and lead concentrates- Inclusion of interest cost and loss of raw materials in cost of production- Applicability of Circular dated 13-2-2003 for determining cost of production- Burden of proof on department regarding loss of raw materials- Sustainability of Commissioner (Appeals)'s order on interest cost and loss of raw materialsAnalysis:1. Dispute over Assessable Value:The appellant, engaged in zinc and lead manufacturing, faced a dispute regarding the assessable value of zinc and lead concentrates transferred to smelting units. The department alleged short payment of duty due to the exclusion of interest on loans and loss of materials from the cost of production.2. Inclusion of Interest Cost and Loss of Raw Materials:The appellant argued that interest on loans need not be included as per CAS-4 accounting standard and Board's Circular dated 13-2-2003. The department contended that Circular 13-2-2003 applied prospectively, but the Supreme Court held that CAS-4 principles must be adopted for determining production cost.3. Applicability of Circular 13-2-2003:The Board's Circular dated 13-2-2003 mandated determining cost of goods for captive use based on CAS-4. The Tribunal and Supreme Court emphasized following CAS-4 principles for cost determination, rejecting the department's argument on Circular's prospective application.4. Burden of Proof on Department:Regarding the loss of raw materials, the appellant clarified that it pertained to ore concentrates, not raw materials. The burden of proving otherwise rested on the department, which failed to provide evidence supporting their claim, leading to the unsustainability of the Commissioner (Appeals)'s finding.5. Sustainability of Commissioner (Appeals)'s Order:The Tribunal found the Commissioner (Appeals)'s order unsustainable due to incorrect inclusion of interest cost and loss of raw materials in the cost of production. Consequently, the impugned order was set aside, and the appeal was allowed in favor of the appellant.In conclusion, the judgment clarified the principles governing the determination of assessable value, the inclusion of costs in production, and the burden of proof in disputes over cost components. The decision highlighted the significance of following accounting standards and circulars for accurate cost calculation, ultimately leading to the allowance of the appeal based on the appellant's arguments and the unsustainability of the previous orders.