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 of captively consumed goods under Rule 6(b)(ii) of the Central Excise Valuation Rules - normal sale price / nearest ascertainable equivalent - projected profit ('profit, if any') - gross profit (and not net profit) - exclusion of profit or loss from other activities in valuation - projection of profit in accordance with generally accepted principles of costing - binding effect of Circular of the Central Board of Excise & Customs on method of valuationValuation of captively consumed goods under Rule 6(b)(ii) of the Central Excise Valuation Rules - projected profit ('profit, if any') - normal sale price / nearest ascertainable equivalent - exclusion of profit or loss from other activities in valuation - gross profit (and not net profit) - projection of profit in accordance with generally accepted principles of costing - Determinative legal test for the profit element to be included in valuation of captively consumed goods under Rule 6(b)(ii). - HELD THAT: - Rule 6(b)(ii) contemplates valuation of captively consumed goods on cost of production including the profit which the assessee would have normally earned on the sale of such goods. The statutory scheme (Section 4 read with the Valuation Rules) seeks the normal sale price or the nearest ascertainable equivalent thereof of the goods under assessment. Accordingly, the profit to be included is the profit that would have normally been earned on the sale of the goods under assessment (i.e., the captively consumed goods), not profits attributable to manufacture or trading in other goods. Since captively consumed goods are not actually sold, the profit component is a projected profit; projection must be made in accordance with generally accepted costing principles. The profit element required by the Rule is the gross profit (the manufacturing profit component before deductions to arrive at net profit) and not net profit. [Paras 5, 6, 7, 8]Profit for valuation under Rule 6(b)(ii) is the projected gross profit that would have been normally earned on sale of the goods under assessment; profit or loss from other activities is irrelevant; projection must follow accepted costing principles.Binding effect of Circular of the Central Board of Excise & Customs on method of valuation - Validity of reassessment/demand and penalties where valuation and price-list conformed to the Board's instruction. - HELD THAT: - The appellants' price declaration and assessment were made in conformity with the Board's circular (letter dated 30-10-1996) which instructed that the profit margin of the previous year be added as the normal profit. The record shows the appellant included profit of the textile division (and excluded non-textile activities) when declaring the price. A revenue demand made inconsistent with the valuation method prescribed by the Board's circular cannot be sustained. Penalties levied consequential to an unsustainable duty demand cannot independently survive. [Paras 11]The adjudication order increasing the profit element and confirming duty, interest and penalties is set aside; appeals are allowed and consequential relief granted.Final Conclusion: The reference is answered that valuation of captively consumed goods under Rule 6(b)(ii) requires inclusion of the projected gross profit that would have been normally earned on sale of the goods under assessment, excluding profits/losses from other activities and to be projected by accepted costing methods; applying the Board's circular and the record in this case, the adjudication demanding enhanced duty and imposing penalties is set aside and the appeals are allowed. 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.