Captive consumption valuation requires adjusted notional profit for intermediate goods, not mechanical adoption of final-product margins.

For captively consumed intermediate goods valued under Rule 6(b)(ii) of the Central Excise (Valuation) Rules, 1975, notional profit must relate to the intermediate goods themselves. The profit earned on the final product cannot be adopted mechanically for the captive input, because that would ignore the different valuation basis and the absence of market sale of the intermediate goods. If final-product profit is used as a benchmark, it requires suitable downward adjustment, including for selling and distribution elements, to reflect the intermediate goods' notional profit. The text also notes that reliance on freight and a wholesale market theory under Section 4 of the Central Excise Act, 1944 went beyond the show cause notices.

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Issues: Whether, for captively consumed intermediate goods, the assessable value under Rule 6(b)(ii) of the Central Excise (Valuation) Rules, 1975 had to be determined by adopting the profit earned on the final product without adjustment, and whether selling and distribution expenses could be deducted from the profit base in the manner applied by the Revenue.

Analysis: The dispute concerned I.C. engines captively consumed in the manufacture of tractors. The demand was not founded on any alleged wrong computation of the manufacturing cost of the engines, but on the manner in which the margin of profit on the final product had been used for valuing the intermediate product. The Revenue could not insist on excluding selling and distribution expenses from the profit computation for the intermediate goods while relying on the final product's profitability, because the engines were not sold in the market at all. Where the assessable value of an intermediate product is based on notional profit, the profit of the final product cannot be transplanted mechanically; suitable downward adjustment is required to arrive at the notional profit relatable to the intermediate goods. The order also went beyond the scope of the show cause notices insofar as it invoked freight and a wholesale market theory under Section 4 of the Central Excise Act, 1944.

Conclusion: The profit on the sale of tractors could not be adopted as the unadjusted measure of profit for the captively consumed I.C. engines, and the impugned demand was unsustainable.

Final Conclusion: The appeals succeeded and the impugned valuation and duty demands were set aside.

Ratio Decidendi: For captively consumed goods valued under Rule 6(b)(ii), the notional profit must be determined with reference to the intermediate goods themselves and, if the profit of the final product is used as a benchmark, it must be suitably adjusted rather than adopted mechanically.

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