Valuation of captive intermediate goods requires fact-specific adjustment; finished product profit margin cannot be applied mechanically.

In valuing captively consumed intermediate goods under Rule 6(b)(ii), the profit margin of the finished product may be relevant, but only as a fact-sensitive guide. The text states that the notional profit for the intermediate product must reflect the cost structure, product differences and any necessary adjustment, and the finished product margin cannot be applied mechanically as a fixed rule where the goods are not comparable. On the facts noted, adoption of a 30.89% notional profit margin for printing ink was not accepted and the margin was reduced to 20%.

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Issues: Whether, for valuing captively consumed intermediate goods under Rule 6(b)(ii), the profit margin of the finished product could be adopted as the notional profit margin of the intermediate product without adjustment.

Analysis: Rule 6(b)(ii) requires valuation on the cost of production or manufacture including profits, if any, which the assessee would have normally earned on sale of such goods. The profit margin shown for the finished product may have relevance in fixing the notional profit of the intermediate product, but its relevance depends on the facts of each case, including the nature of the two products, comparative cost of production, and whether an adjustment is needed. The margin of profit of the final product cannot be applied mechanically as a hard and fast rule for the intermediate product, especially where the two are not comparable.

Conclusion: The adoption of 30.89% as the notional profit margin for printing ink was not , and the margin was reduced to 20%.

Ratio Decidendi: In valuing captively consumed intermediate goods, the profit margin of the finished product may be considered, but it must be applied with such adjustment as the facts and product differences require; it cannot be adopted mechanically as the notional profit of the intermediate goods.

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