2004 (7) TMI 193 - AT - Central Excise

Tribunal remands case for profit margin review based on cost accounting principles.

The Tribunal set aside the lower authority's order and remanded the case for reconsideration. The adjudicating authority was instructed to determine the ... Valuation of captively consumed goods - Margin of profit under Rule 6(b)(ii) of the Central Excise Valuation Rules, 1975 - Inclusion of interest and financial charges in cost of production - Application of cost accounting principles (CAS-4) for captive consumption valuation - Permissibility of raising excisability/marketability in proceedings for finalisation of provisional price listsPermissibility of raising excisability/marketability in proceedings for finalisation of provisional price lists - Whether the appellants could contest excisability/marketability of slides and inner frames in an appeal against finalisation of provisional price lists. - HELD THAT: - The Tribunal held that these appeals arose from orders finalising provisional assessments of price declarations and therefore related solely to valuation. The question of excisability or marketability was not raised in the show cause notices nor decided by the adjudicating authority in the context of classification; consequently the appellants could not introduce that issue in these proceedings. The Tribunal noted that the appellants had separate litigation on classification which had been decided against them and that reraising the excisability point in the present forum was not permissible.The plea on excisability/marketability is not maintainable in these appeals and cannot be entertained.Margin of profit under Rule 6(b)(ii) of the Central Excise Valuation Rules, 1975 - Valuation of captively consumed goods - Application of cost accounting principles (CAS-4) for captive consumption valuation - Whether profit margin for captively consumed slides and inner frames can be determined by adopting the company's overall profit as reflected in the audited balance sheet, or must reflect the profit 'normally earned on the sale of such goods'. - HELD THAT: - Applying Rule 6(b)(ii), the Tribunal reiterated that 'profit, if any' means the profit that would normally be earned on the sale of the specific goods whose value is being determined, and not the actual profit of the manufacturer from other products or overall company profit. The Tribunal relied on earlier authorities that components or intermediate goods used captively cannot be valued by reference to profit margins of finished products or the company's aggregate profit. Cost accounting principles and accepted precedents require valuation based on a notional profit attributable to the specific captively consumed goods, determined by appropriate cost accounting certification rather than by taking the overall audited profit percentage for the company as a whole.The adoption of the company's total profit from the balance sheet for determining margin of profit on slides and inner frames is not permissible; the margin must reflect the profit that would normally be earned on those specific goods.Inclusion of interest and financial charges in cost of production - Application of cost accounting principles (CAS-4) for captive consumption valuation - Whether interest on loans taken for purchase of machinery used in the slide making department forms part of the cost of production for valuation of captively consumed goods. - HELD THAT: - The Tribunal applied the CAS4 costing principle which expressly treats interest and financial charges as financial charges that shall not be considered part of cost of production. Having regard to CAS4 and the accepted costing principles, the Tribunal held that interest on loans for purchase of machines used in the manufacture of slides and inner frames cannot be added to the cost of production for the purpose of arriving at assessable value.Interest and financial charges on machinery loans are not includable in cost of production for valuation of the captively consumed slides and inner frames.Valuation of captively consumed goods - Margin of profit under Rule 6(b)(ii) of the Central Excise Valuation Rules, 1975 - Application of cost accounting principles (CAS-4) for captive consumption valuation - Remand for fresh determination of margin of profit for the captively consumed slides and inner frames. - HELD THAT: - While setting aside the lower authority's finalisation of provisional assessments to the extent they adopted companywide profit margins and included interest, the Tribunal directed remand to the adjudicating authority to compute the margin of profit afresh. The Tribunal instructed that the margin should be adopted in accordance with cost accounting principles and should represent the profit that the appellants would have normally earned on sale of slides and inner frames; interest charges are to be excluded as per CAS4. The remand is for fresh decision on the margin of profit (not for rehearing on excisability).Matter remanded to adjudicating authority to recompute margin of profit under Rule 6(b)(ii) in accordance with cost accounting principles, excluding interest and financial charges.Final Conclusion: Appeal allowed in part: orders finalising provisional assessments set aside and matter remanded for fresh computation of margin of profit for the captively consumed slides and inner frames in accordance with cost accounting principles (excluding interest/financial charges); excisability/marketability issue not entertained in these proceedings. Issues Involved:1. Excisability of slides and inner frames.2. Valuation of goods for captive consumption under Rule 6(b)(ii) of the Central Excise Valuation Rules, 1975.3. Inclusion of interest charges in the cost of production.4. Determination of margin of profit for captive consumption.Issue-wise Detailed Analysis:1. Excisability of Slides and Inner Frames:The appellants contended that slides and inner frames are not excisable as they are not marketable products. They argued that for a product to be excisable, it must satisfy the twin tests of being a manufactured product and being marketable. The appellants relied on several Supreme Court decisions to support their claim that the goods in question were not capable of being sold. However, the Tribunal found that the issue of excisability was not raised in the show cause notice or before the lower authorities. The Tribunal noted that the appellants had been in litigation over the classification of these goods, which had been decided against them previously. Therefore, the Tribunal held that the issue of excisability could not be raised in this appeal.2. Valuation of Goods for Captive Consumption:The appellants challenged the valuation adopted by the lower authority, arguing that since there was no sale of slides and inner frames, no profit margin should be added. The Tribunal referred to Rule 6(b)(ii) of the Valuation Rules, 1975, which mandates the inclusion of the margin of profit that would normally be earned on the sale of such goods. The Tribunal emphasized that the profit margin should be specific to the goods in question and not based on the overall profit of the company. The Tribunal cited several precedents, including the Dharangadhra Chemical Works case and the Raymonds Ltd. case, to support this view. Consequently, the Tribunal agreed with the appellants that the total profit of the company could not be used to determine the margin of profit for slides and inner frames.3. Inclusion of Interest Charges in the Cost of Production:The appellants argued that interest charges on loans taken for the purchase of machinery should not be included in the cost of production. They referred to CAS-4, a costing principle issued by the Council of Institute of Cost and Works Accountants of India, which states that interest and financial charges should not be considered part of the cost of production. The Tribunal concurred with this argument, noting that the interest on loans for machinery purchases should not be included in the cost of production as per the CAS-4 guidelines.4. Determination of Margin of Profit for Captive Consumption:The lower authorities had adopted the previous year's profit margin from the company's balance sheet to calculate the notional profit to be added to the cost of production. The Tribunal found that this method was based on instructions from the Board and had been accepted in earlier Tribunal orders. However, the Tribunal directed that the margin of profit should be determined based on cost accounting principles specific to the goods in question, rather than the overall profit of the company. The Tribunal remanded the matter to the adjudicating authority to take a fresh decision on the margin of profit by adopting the correct costing principles and excluding interest charges.Conclusion:The Tribunal set aside the order of the lower authority and remanded the matter for reconsideration. The adjudicating authority was directed to determine the margin of profit specific to slides and inner frames based on cost accounting principles and to exclude interest charges from the cost of production. The appeal was allowed by way of remand.