Captive consumption valuation must use the goods' own cost and profit, not the finished product's margin.

For captively consumed goods, assessable value under the valuation rules had to be based on the cost of production or manufacture of the goods under assessment, including only the normal profit attributable to those goods. Profit from the finished product could not be imported into the valuation of the intermediate goods, so the prior method linking drums or acetylene gas to the profit of the end product was incorrect. Acetylene gas remained excisable despite captive consumption, and its value likewise had to be computed on its own cost and profit element. The valuation orders were set aside and the matters were remanded for fresh computation.

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Issues: (i) Whether, for goods captively consumed, the assessable value under the valuation rules was to be computed by adding profit on the captively consumed goods themselves or by linking profit to the finished end product. (ii) Whether acetylene gas captively consumed in the manufacture of trichloroethylene/perchloroethylene was liable to be valued on the same principle, and whether the margin of profit could be carried over from the end product.

Issue (i): Whether, for goods captively consumed, the assessable value under the valuation rules was to be computed by adding profit on the captively consumed goods themselves or by linking profit to the finished end product.

Analysis: The applicable valuation framework required the value of captively consumed goods to be based on cost of production or manufacture, including the profit which the assessee would normally earn on sale of those goods. The margin of profit had to be related to the goods under assessment, not to the finished product manufactured out of them. The prior orders had linked the profit of the captively consumed drums to the profit on caustic soda, and the Tribunal found that this was not a proper method of valuation. The matter also raised questions about the correct treatment of deductions in computing profit, and the Tribunal considered that the valuation had to be recomputed on proper accounting principles for the captively consumed goods alone.

Conclusion: The assessable value could not be determined by adopting the profit margin of the end product; it had to be recomputed with reference to the captively consumed goods themselves. The issue was decided in favour of the assessee, and the matter was remanded for fresh computation.

Issue (ii): Whether acetylene gas captively consumed in the manufacture of trichloroethylene/perchloroethylene was liable to be valued on the same principle, and whether the margin of profit could be carried over from the end product.

Analysis: The Tribunal rejected the contention that acetylene gas ceased to be goods merely because it was captively consumed. It held that acetylene gas remained excisable and that valuation also had to proceed on the basis of the captively consumed commodity itself. For the same reason, the profit of the finished product could not be adopted as the profit of acetylene gas. The correct course was to recalculate the assessable value on the cost of manufacture of acetylene gas with a proper profit element attributable to that gas alone.

Conclusion: Acetylene gas was held to be excisable, but the assessable value could not be computed by using the profit margin of the end product. The matter was remanded for fresh valuation in favour of the assessee on the valuation methodology.

Final Conclusion: The impugned valuation orders were set aside and the matters were sent back for fresh adjudication on the correct basis of captive consumption valuation, with profit to be determined for the goods under assessment and not by reference to the finished product.

Ratio Decidendi: For captively consumed goods, assessable value must be determined on the cost of production or manufacture of those goods, with only the normal profit relatable to those goods, and not by importing the profit margin of the finished product made from them.

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