Captive consumption valuation excludes final-product selling expenses and is limited to production cost plus admissible profit

For captively consumed goods not sold in the market, assessable value under Rule 6(b)(ii) is confined to cost of production or manufacture determined on accepted accountancy principles, together with admissible profit. That cost includes direct material, direct labour, direct expenses and manufacturing overheads actually entering the intermediate goods, but excludes selling and post-manufacture expenses attributable to the final product, such as advertising, insurance and administration. The accounting standard recognised by the professional body and the departmental circular support this valuation approach, so the additional expenses proposed by the Department were not includible.

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Issues: Whether, for goods captively consumed and not sold in the market, valuation under Rule 6(b)(ii) of the Central Excise (Valuation) Rules, 1975 is to be based only on the cost of production including profit, or whether it can also include expenses relatable to the final product such as advertising, insurance, administration and similar post-manufacture expenses.

Analysis: Rule 6(b)(ii) requires valuation on the cost of production or manufacture including profits, if any, that the assessee would normally earn on sale of such goods. Cost of production is to be determined on settled accountancy principles, which bring in the direct material, direct labour, direct expenses and manufacturing overheads that actually go into producing the intermediate goods. The cost of the final product manufacturer's expenses, including advertising, insurance and other selling or post-manufacture expenses, do not form part of the captively consumed goods' cost where those goods are neither sold nor marketable as such. The cost accounting standard adopted by the professional accounting body and recognized by the departmental circular also supports this approach.

Conclusion: The valuation had to be confined to the cost of production of the captively consumed intermediate goods together with admissible profit, and the additional expenses sought to be added by the Department were not includible. The issue is decided in favour of the assessee.

Ratio Decidendi: For captively consumed goods not sold in the market, assessable value under Rule 6(b)(ii) is confined to the cost of production determined on accepted accountancy principles plus admissible profit, and does not extend to unrelated selling or final-product expenses.

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