Valuation of inputs transferred to a sister unit without sale follows residuary Rule 11, not captive consumption cost basis.

Inputs removed as such from a factory and transferred to a sister unit without sale are not to be valued under the captive consumption cost formula in Rule 8. The circular draws a distinction between captive consumption within the same factory and removal to another unit, and states that where no independent transaction value is available, valuation should proceed under the residuary Rule 11 by reasonable means consistent with the valuation scheme and Section 4. On those facts, the department's reliance on Rule 8 was rejected.

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Issues: Whether inputs removed as such from the factory and transferred to a sister unit without any sale are to be valued under the captive consumption formula in Rule 8, or under the proviso to Rule 9 and, if necessary, Rule 11 of the valuation rules.

Analysis: The valuation circular distinguished between captive consumption within the same factory and removal of goods to a sister unit. It further noted that where inputs or capital goods on which credit has been taken are removed as such to a sister unit and no sale is involved, the situation is not one of captive consumption in the ordinary sense. In such a case, if no transaction value from independent sales is available, recourse is not to Rule 8 based on cost of production of goods not manufactured in the assessee's factory, but to the residuary Rule 11, with value determined by reasonable means consistent with the valuation scheme and Section 4. As the only removal here was transfer outside the factory to a sister unit and no sale was involved, the department's basis for insisting on Rule 8 was not accepted.

Conclusion: The valuation adopted by the department under Rule 8 was not applicable to the facts of the case, and the appellant succeeded on the issue.

Final Conclusion: The pre-deposit requirement was waived, recovery was stayed, and the appeal was allowed with consequential relief to the appellant.

Ratio Decidendi: Where inputs taken on credit are removed as such to a sister unit without sale and no independent transaction value is available, valuation is to be determined under the residuary valuation mechanism on reasonable means, not by applying the captive consumption cost-based rule.

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