2003 (9) TMI 89 - SC - Central Excise

Interpreting Rule 6(b)(ii): Actual production costs key in excise duty valuation

The Court focused on interpreting Rule 6(b)(ii) of the Central Excise Valuation Rules in a case involving the valuation of excisable goods for excise duty ... Value of polystyrene sheets for the purposes of excise duty? Held that:- the appellant had already purchased or otherwise procured the inputs for manufacturing the sheets (the excisable goods in question) and had included the cost of the entire amount of granules which went into the production of the sheets. Excise duty presumably was also levied on that basis. The waste or scrap or unused portion of the sheets which was regrind into granules was in a sense already paid for and subjected to excise duty. The cost of production as far as the appellant was concerned could not proceed on the basis as if the granules had been obtained by the assesses for the first time. As said in the case of Collector of Central Excise, Pune v. Dai Ichi Karkaria Ltd.[1999 (8) TMI 920 - SUPREME COURT OF INDIA] that the cost of the excisable product for the purposes of assessment of excise duty under Section 4(1)(b) of the Act read with Rule 6 of the Valuation Rules should be reckoned as if it is reckoned by a man of commerce and that such realism must inform the meaning that the courts give to words of a commercial nature, like 'costs' which are not defined in this statute. In our view, this should have been taken into account in deciding the show cause notice issued to the appellant. The decision of the Tribunal is accordingly set aside. In favour of assessee. Issues:Valuation of excisable goods for excise duty purposes based on the cost of production - Interpretation of Rule 6(b)(ii) of the Central Excise Valuation Rules, 1975.Detailed Analysis:The case involved a manufacturer of batteries who produced polystyrene sheets as a raw material for their batteries, with a significant amount of waste generated in the process. The waste or residue was recycled into polystyrene granules, which were then used to produce fresh sheets. The question arose regarding the valuation of these sheets for excise duty purposes.The assessment year in question was 1976-77, governed by Section 4 of the Central Excises and Salt Act, 1944. The dispute centered around the interpretation of Rule 6(b)(ii) of the Central Excise Valuation Rules, which dealt with the valuation of excisable goods not sold but used in the production of other articles. The appellant argued that the cost of production should include actual costs and notional profits, while the Revenue Authorities contended that the value should be based on the notional sale of the goods without considering actual production costs.The Court emphasized the importance of interpreting the phrase 'cost of production' in Rule 6(b)(ii) and concluded that actual costs must be considered in determining the value of excisable goods. It noted that the appellant had already incurred costs for the inputs used in manufacturing the sheets, including the recycled granules, which had already been subjected to excise duty. The Court rejected the Revenue Authorities' argument that only notional costs should be considered for valuation.The Tribunal had previously held that the scrap of the sheets had some value, which should be the notional value for determining the value of the fresh sheets. However, the Court disagreed, stating that notionality under Rule 6(b)(ii) pertains only to profits, not other production costs. It referenced a previous case to emphasize that the cost of the excisable product for excise duty assessment should be determined realistically, considering commercial principles.Ultimately, the Court set aside the Tribunal's decision, allowing the appeal of the manufacturer without any order as to costs. The judgment clarified the interpretation of Rule 6(b)(ii) and underscored the significance of considering actual production costs in valuing excisable goods for excise duty purposes.