2001 (3) TMI 128 - AT - Central Excise

Captive-use excisable goods valuation u/s4 r.6(b)(ii): cost plus projected manufacturing profit upheld; extra duty demand set aside

For valuation of captively consumed excisable goods under s. 4 and r. 6(b)(ii) of the Central Excise Valuation Rules, the tribunal held that the ... Valuation (for levy of Central Excise duty) of goods manufactured by an assessee and consumed by him in further manufacture - Valuation of captively consumed goods are contained in Rule 6(b) of Central Excise Valuation Rules - Captive consumption - determination of assessable value based on cost of production - HELD THAT:- As discussed, assessable value is the normal sale price or the nearest ascertainable equivalent thereto of the goods under assessment. The sale price of a manufacturer includes the total profit, earned by him. From this profit he has to defray taxes etc. before arriving at the net profit. It is, therefore, clear from the provisions of Section 4 and the valuation Rules that the manufacturing profit relevant for valuation of excisable goods is the gross profit and not the net profit. In determining the assessable value of captively consumed goods under Rule 6(b)(ii) of the Central Excise Rules, the profit to be taken into account is the profit that the assessee would have normally earned on the sale of the goods under assessment i.e. the captively consumed goods. Profit or loss made by the manufacturer from other activities, be they manufacture of other goods or trading in other goods, are of no relevance while determining the assessable value for captively consumed goods. Profit, if any, is a projected profit, and the projection of profit should be done in accordance with the generally accepted principles of costing of manufactured goods. That the eventuality of taking profit from the manufacture of captively consumed goods does not arise, is of no relevance to determination of assessable value after making required addition towards the element of profit. The profit to be included in the assessment of captively consumed goods is the gross profit and not net profit. It is clear from the record of the case as well as the submissions made before us that the appellants' declaration of price was based on the cost of production and profit of their textile division and that they did not take into account the cost and profit from cement and other divisions while filing the price list in question. The profit declared and included by the appellant in the price list was the profit earned in the previous year from the textile division. The inclusion of profit made in the previous year was in conformity with the instruction on the subject contained in the Circular letter F. No. 6/28/94-CX. I, dated 30th October, 1996 of the Central Board of Excise & Customs. The Circular binds the revenue authorities. They can not demand duty in excess of the duty assessed in accordance with the method of assessment stipulated in the circular. Therefore, the demand made in the adjudication order, cannot be sustained. The penalties imposed are consequent to the duty demand. As the duty demand is not sustainable, penalties can not independently survive. They are also required to be set aside. Accordingly, we set aside the impugned order and allow the appeals, with consequential relief, if any. Issues: (i) Whether, under Rule 6(b)(ii) of the Central Excise Valuation Rules, the profit to be included in valuation of captively consumed goods is the profit that the assessee would have normally earned on the sale of the goods under assessment; (ii) Whether profit or loss from other manufacturing or trading activities is relevant in determining the assessable value of captively consumed goods; (iii) Whether the profit to be included is a projected profit and the standard for its computation; (iv) Whether the profit to be included is gross profit or net profit.Issue (i): Whether the profit to be taken into account under Rule 6(b)(ii) is the profit the assessee would have normally earned on sale of the captively consumed goods.Analysis: The Court examined Section 4(1) of the Central Excise Act and the Valuation Rules, noting that valuation aims at the normal sale price or the nearest ascertainable equivalent. Rule 6(b)(ii) provides for valuation on cost of production including the profit the assessee would have normally earned on sale of such goods. The Court interpreted these provisions to require the profit relatable to the goods under assessment rather than actual profit (since captively consumed goods are not sold) and observed that such profit must be the profit that would have been earned on sale of those goods.Conclusion: The profit to be taken into account under Rule 6(b)(ii) is the profit that the assessee would have normally earned on sale of the goods under assessment (captively consumed goods).Issue (ii): Whether profit or loss from other activities of the manufacturer is relevant in determining assessable value of captively consumed goods.Analysis: The Court applied the statutory yardstick of the normal sale price of the goods under assessment and the nearest ascertainable equivalent, noting Rule 6(b)(i) permits comparison with comparable goods of the same type, style, quality and class. It held that the assessment must focus on the goods under assessment and adjustments, if any, must relate to material differences between those goods and comparables.Conclusion: Profit or loss from manufacture of other goods or other activities of the manufacturer is irrelevant for determining the assessable value of captively consumed goods.Issue (iii): Whether the profit to be included is a projected profit and the manner of its computation.Analysis: The Court observed that captively consumed goods are not sold and therefore actual profit is not realized; the profit element must be projected. The parties agreed industry routinely projects such profit and generally accepted costing principles and accounting standards govern inter-process profit and transfer pricing. The Court held that projection should follow generally accepted principles of costing.Conclusion: The profit to be included is a projected profit, to be determined in accordance with generally accepted principles of costing of manufactured goods.Issue (iv): Whether the profit to be included in valuation is gross profit or net profit.Analysis: Interpreting Section 4 and the Valuation Rules, the Court noted that sale price of a manufacturer includes total (gross) profit and that taxes and other deductions are to be accounted for thereafter; thus the statutory scheme contemplates inclusion of gross profit in valuation.Conclusion: The profit to be included in the valuation of captively consumed goods is gross profit and not net profit.Final Conclusion: The reference is answered by holding that valuation of captively consumed goods under Rule 6(b)(ii) requires inclusion of the profit that would normally have been earned on the sale of the goods under assessment (as a projected gross profit computed by accepted costing principles), excluding profits or losses from other activities; applying these principles, the impugned adjudication was set aside and the appeals allowed with consequential reliefs.Ratio Decidendi: For valuation of captively consumed goods under Rule 6(b)(ii) of the Central Excise Valuation Rules, the assessable value is to reflect the normal sale price or its nearest ascertainable equivalent by including a projected gross profit attributable to the goods under assessment determined by generally accepted costing principles, and excluding profit or loss from other activities of the assessee.