Intermediate goods valuation must rest on cost and not final-product profit, and pending demand cannot offset refund due.

Valuation of semi-finished goods cleared to a sister unit had to be based on manufacturing cost plus a reasonable notional profit on the intermediate goods themselves; the profit margin of the final products could not be imported into that assessment, so the lower valuation method was rejected. A refund of pre-deposit arising from a successful appeal could not be appropriated against a separate demand that was still under appellate challenge, so the sanctioned refund remained payable to the assessee.

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Issues: (i) Whether the assessable value of semi-finished goods cleared to a sister unit was to be determined by adding the profit margin of the final products; (ii) Whether the refund of pre-deposit could be appropriated towards a demand that was still under appeal.

Issue (i): Whether the assessable value of semi-finished goods cleared to a sister unit was to be determined by adding the profit margin of the final products.

Analysis: Valuation of captively consumed intermediate goods under Rule 6(b)(ii) of the Central Excise (Valuation) Rules, 1975 required determination of manufacturing cost and a reasonable notional profit on the intermediate goods themselves. The profit earned on the final products could not be mechanically imported into the valuation of semi-finished goods. The assessment had therefore to proceed on the basis of cost accounting and not on the actual profit margin of the end products.

Conclusion: The issue was decided in favour of the assessee and the valuation adopted by the lower authorities was held to be unsustainable.

Issue (ii): Whether the refund of pre-deposit could be appropriated towards a demand that was still under appeal.

Analysis: A refund arising from success in appeal could not be adjusted against a separate demand when the challenge to that demand was still pending. Since the demand sought to be adjusted was itself in appellate scrutiny, appropriation of the sanctioned refund was not proper. The refund therefore remained payable to the assessee.

Conclusion: The issue was decided in favour of the assessee and the appropriation of refund was held to be impermissible.

Final Conclusion: Both appeals succeeded, the valuation basis adopted below was rejected, and the assessee was held entitled to refund of the pre-deposit.

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