2006 (8) TMI 2 - SC - Central Excise

Supreme Court affirms exclusion of additional expenses in captively consumed goods valuation

The Supreme Court upheld the Tribunal's decision to exclude additional expenses beyond direct production costs in the valuation of captively consumed ... Valuation of captively consumed goods under Rule 6(b)(ii) - cost of production including profits - accountancy principles for determining cost of production - application of Cost Accounting Standard CAS-4 for captive consumption - exclusion of selling, distribution and general administrative expenses from cost of intermediate goodsValuation of captively consumed goods under Rule 6(b)(ii) - cost of production including profits - exclusion of selling, distribution and general administrative expenses from cost of intermediate goods - Whether the assessable value of intermediate goods captively consumed must include expenses such as selling, advertising, insurance and other general administrative costs in addition to cost of manufacture and profit under Rule 6(b)(ii). - HELD THAT: - The Court held that valuation under sub-rule (ii) of Rule 6(b) is to be based on the cost of production or manufacture including the profit which the assessee would normally have earned on sale. Applying settled principles of accountancy, the cost of production of intermediate goods consists of elements that have actually gone into their manufacture - direct material, direct labour, direct manufacturing costs and factory/works overheads. Expenses that relate to the manufacture of the final product or to selling, distribution and general administration (for example advertising, insurance and other company-level expenses) are not part of the cost of production of the intermediate goods and hence are not includible in the assessable value under Rule 6(b)(ii). The Court relied on authoritative accountancy principles and prior pronouncements that normal rules of accountancy govern the determination of cost where statute is silent, and applied those principles to reject the addition of total company expenses by the revenue in this case. [Paras 10, 11, 15]Expenses other than those forming part of the actual cost of manufacture (direct material, direct labour, direct manufacturing costs and works/factory overheads) are not includible in the assessable value of captively consumed intermediate goods under Rule 6(b)(ii).Application of Cost Accounting Standard CAS-4 for captive consumption - accountancy principles for determining cost of production - Whether the cost of production for captively consumed goods must be determined in accordance with CAS-4 as recognized by the Central Board of Excise and Customs. - HELD THAT: - The Court noted that the Institute of Cost & Works Accountants of India has laid down CAS-4 defining 'cost of production' to include material consumed, direct wages and salaries, direct expenses, works overheads, quality control, R&D, packing cost and administrative overheads relating to production. The Central Board of Excise and Customs had recognised these cost accounting principles by issuing Circular No. 692/8/2003-CX dated 13-2-2003 directing the department to determine cost of production of captively consumed goods strictly in accordance with CAS-4. The Tribunal and various authorities have applied CAS-4 for relevant periods, and the Department accepted the position in those cases; consequently the department is bound by the circular and CAS-4 must be applied for determining cost of production of captively consumed goods. [Paras 12, 13, 14]Cost of production of captively consumed goods is to be determined in accordance with CAS-4 as recognised by the Central Board of Excise and Customs.Final Conclusion: Appeals dismissed; the assessable value of the captively consumed intermediate goods is to be determined by applying normal accountancy principles (as reflected in CAS-4), and expenses unrelated to the actual cost of manufacture of those intermediates (such as advertising, insurance and general administrative expenses of the final-product factory) are not includible under Rule 6(b)(ii). Issues: Valuation of captively consumed goods under Rule 6(b)(ii) of Central Excise (Valuation) Rules.In the judgment, the Supreme Court addressed the issue of the valuation of milk crumbs, refined milk chocolate, and other products captively consumed by a company in the manufacture of chocolate. The company sought valuation under Rule 6(b)(ii) of the Central Excise (Valuation) Rules, based on the 'cost of production or manufacture including profits, if any, which the assessee would have normally earned on the sale of such goods.' The department, however, argued that additional expenses such as labor cost, factory overheads, administration expenses, and others should be included in the valuation. The Commissioner (Appeals) and the Assistant Commissioner supported this view, relying on Rule 6(b)(ii) and a circular issued by the Board. The Tribunal, on the other hand, held that only direct costs related to production should be included in the assessable value, excluding other expenses. The Tribunal referred to the principles of accountancy and previous decisions to support its stance.The Court examined the provisions of Rule 6(b)(ii) and considered the principles of accountancy in determining the cost of production for captively consumed goods. It noted that only elements directly related to the manufacture of intermediates should be included in the cost of production, as supported by authoritative texts on cost accounting. The Court also referred to the decision in CCE v. Dai Ichi Karkaria Ltd., emphasizing the application of normal principles of accountancy in determining costs. Additionally, the Court highlighted the principles laid down by the Institute of Cost Accountants of India (ICWAI) regarding the cost of production for captive consumption, as outlined in CAS-4. The Court recognized the importance of following CAS-4 in determining the cost of production for captively consumed goods, as supported by various Tribunal decisions and a circular issued by the Central Board of Excise and Customs.Ultimately, the Court dismissed the appeals, upholding the Tribunal's decision to exclude additional expenses beyond direct production costs in the valuation of captively consumed goods. The Court emphasized that since the intermediate products were not sold or marketable, including expenses related to the final product's factory in their valuation was unwarranted. The Court's decision was based on the principles of accountancy, relevant legal provisions, and established guidelines for determining the cost of production for captively consumed goods.