Captive consumption valuation: genuine factory-gate sale price may apply, while no-comparable-sale cases require fresh cost-based determination.

Genuine factory-gate wholesale sale price of identical goods can be used to value captively consumed goods, even where the sales volume is small, so long as the price is commercial and not shown to be manipulated or to involve related-person dealings. For goods without a comparable sale price, valuation must proceed on correct cost-accounting principles, taking all elements of production into account and deriving profit from the books rather than presuming it. The earlier costing directions were found defective, so the matter was remitted for fresh determination on an open basis.

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Issues: (i) Whether captively consumed goods could be assessed on the basis of the price of comparable goods sold at the factory gate when such sales were genuine. (ii) Whether the remand for valuation of captively consumed goods without comparable sale price should be confined by the costing directions in the impugned order or made an open remand.

Issue (i): Whether captively consumed goods could be assessed on the basis of the price of comparable goods sold at the factory gate when such sales were genuine.

Analysis: Where a manufacturer sells part of the identical goods in wholesale at the factory gate, the genuine sale price of those goods is relevant for valuing captively consumed goods. The quantum of sales is not decisive, and the department cannot reject the sale price merely because it is low or because the buyers are franchisees, unless the price is shown to be manipulated or not genuine. On the facts, the sales were commercial and there was no basis to treat the buyers as related persons.

Conclusion: The valuation based on comparable wholesale sale price was upheld and the Revenue failed on this issue.

Issue (ii): Whether the remand for valuation of captively consumed goods without comparable sale price should be confined by the costing directions in the impugned order or made an open remand.

Analysis: For goods without comparable sale price, valuation has to proceed on the basis of cost of production and manufacturing profit, but the costing must be worked out on correct accounting principles. All elements entering into production must be considered, and profit cannot be presumed without reference to the books of account. The costing approach adopted below, as well as the directions in the impugned order, were found to be defective, and a fresh determination was necessary without being bound by the earlier observations on method and elements of cost.

Conclusion: The remand was converted into an open remand and the costing directions in the impugned order were set aside.

Final Conclusion: The dispute on comparable sale-price valuation was decided against the Revenue, but the valuation of goods without comparable sale price was sent back for fresh determination without restrictive costing directions, resulting in a partial success for the Revenue.

Ratio Decidendi: Genuine factory-gate sale price of comparable goods can be adopted for captively consumed goods, and where no comparable sale exists, valuation must be based on correct cost-accounting principles on a fresh and open remand.

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