Captive consumption valuation permits notional profit where arm's length sales show profit-earning capacity despite limited market sales.

For captively consumed IC engines valued under Rule 6(b)(ii), assessable value may include notional profit based on what the assessee would normally earn on sale of the goods. The fact that only a small part of the final product was sold, while the balance was transferred to Indian Railways, did not make the profit element irrelevant where sales at arm's length showed actual profit earning capacity. The percentage of sales was treated as immaterial, and the lower appellate authority's adoption of a moderate 15% profit figure was found legally and factually proper.

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Issues: Whether, for valuing captively consumed IC engines under Rule 6(b)(ii), notional profit could be added on the basis of profit earned on sale of the final product, even though only a small part of the final product was sold and the rest was transferred to Indian Railways.

Analysis: The assessable value of goods used captively is to be determined on the cost of production or manufacture including the profit, if any, which the assessee would have normally earned on sale of such goods. The fact that only a small percentage of the final product was sold did not make the profit element irrelevant where the assessee was admittedly selling the product at a profit in arm's length transactions. The percentage of sales was held immaterial, and the lower appellate authority had taken a moderate 15% profit figure rather than the higher range shown on record. The adoption of that figure was found to be legally and factually proper.

Conclusion: Notional profit was correctly added while computing the assessable value under Rule 6(b)(ii), and the assessee's challenge failed.

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