Captive consumption valuation requires projected gross profit only, and demand fails where valuation follows the binding circular.

Rule 6(b)(ii) valuation of captively consumed goods requires addition of only the projected gross profit attributable to the goods under assessment; profit from other products or activities is irrelevant, and the reference is to a normal sale profit that would have been earned on those goods. Where the assessee's price list and valuation followed the Board's circular on inclusion of prior year profit, the revenue could not sustain a demand beyond that prescribed method. Penalties, being consequential, also failed once the duty demand was set aside.

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Issues: (i) In valuing captively consumed goods under Rule 6(b)(ii), whether the profit to be added is the profit attributable only to the goods under assessment and whether it is projected gross profit; (ii) whether the demand and penalties could be sustained when the assessee's price list and valuation followed the Board's circular on inclusion of prior year profit.

Issue (i): In valuing captively consumed goods under Rule 6(b)(ii), whether the profit to be added is the profit attributable only to the goods under assessment and whether it is projected gross profit.

Analysis: Section 4 of the Central Excise Act, 1944 and the Valuation Rules treat assessable value as the nearest ascertainable equivalent of the normal sale price of the goods under assessment. For captively consumed goods, Rule 6(b) first permits comparison with comparable goods and, if that is not possible, valuation on cost of production including the profit that the assessee would have normally earned on sale of such goods. The profit component therefore relates only to the captively consumed goods, not to profits arising from other products or other activities. Since there is no actual sale of captively consumed goods, the relevant profit is necessarily projected. The profit to be added is also the gross profit and not net profit.

Conclusion: The profit to be added under Rule 6(b)(ii) is only the projected gross profit attributable to the captively consumed goods under assessment, and profits from other goods or activities are irrelevant.

Issue (ii): Whether the demand and penalties could be sustained when the assessee's price list and valuation followed the Board's circular on inclusion of prior year profit.

Analysis: The record showed that the assessee's declared price was based on the cost of production and profit of the textile division, and that the inclusion of prior year profit was in line with the Board's instruction dated 30 October 1996. As the circular bound the revenue authorities, the demand could not travel beyond the assessment made in accordance with that prescribed method. Once the duty demand failed, the penalties, being consequential, could not survive independently.

Conclusion: The demand and penalties were unsustainable and had to be set aside.

Final Conclusion: The appeals succeeded, the impugned order was set aside, and the assessee obtained consequential relief.

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