Actual Cost of Production governs captive excise valuation; notional profit applies, but cost cannot be deemed.

For captive consumption valuation under Rule 6(b)(ii) of the Central Excise Valuation Rules, 1975, "cost of production" must reflect the actual production cost of the goods, while any notional element applies only to profits ordinarily earned on sale. Recycled waste used again in manufacture does not convert the cost component into a notional figure where the original input cost has already been incurred and duty has been paid on the waste. The correct approach is to value the goods on actual cost of production with notional profits only; valuation based on a notional cost of granules is not sustainable.

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Issues: Whether, for valuation of polystyrene sheets captively consumed in the manufacture of batteries, the expression "cost of production" under Rule 6(b)(ii) of the Central Excise Valuation Rules, 1975 requires actual cost of production or a notional cost based on the deemed value of recycled waste.

Analysis: Section 4 of the Central Excises and Salt Act, 1944 and Rule 6(b)(ii) of the Central Excise Valuation Rules, 1975 require valuation of goods not sold by the assessee on the basis of cost of production, with notionality attaching only to the profits, if any, normally earned on sale. The cost element cannot be treated as notional merely because part of the material is recovered waste and reused. Commercially, the assessee had already borne the cost of the granules that went into the original manufacture of the sheets, and the waste that was reground had already suffered duty and formed part of the earlier input cost. The Tribunal erred in proceeding on a notional cost of granules instead of the actual cost of production.

Conclusion: The valuation had to be based on actual cost of production with notional profits only, and the demand confirmed on a notional cost basis was unsustainable.

Ratio Decidendi: Under Rule 6(b)(ii) of the Central Excise Valuation Rules, 1975, "cost of production" means actual cost of production, while the deeming element applies only to profits and not to the cost component.

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