Captive Consumption - Valuation of goods

[Ashok Patil]

As per the provisions of Central Excise Valuation Rules, in case goods are captively consumed, the value of such goods shall be 110% of the cost of production irrespective of value charged to independent buyer.

Now, in case instead of valuing the goods at 110%, if those are valued at more than 110% (say around 150 to 200%) of cost of production then what will be consequences of such higher valuation. There is no intention of transferring CENVAT credit.

[CSSANJAY MALHOTRA]

Notification No.45/2000-Central Excise(N.T.) dated the 30^th June, 2000

Rule 8 of the Central Excise (Determination of Price of Excisable Goods) Rules, 2000 provides for:

“Where the excisable goods are not sold by the assessee but are used for consumption by him or on his behalf in the production or manufacture of other articles, the value shall be one hundred and fifteen per cent of the cost of production or manufacture of such goods”.

Notification No. 60/2003 - Central Excise (N.T.) dated 05.08.2003made an amendment to Valuation Rules thus substituting 110% of Cost of Production as against 115% of COP notified earlier.

Circular No. 975/09/2013-CX dated 25.11.2013

Provides for compliance with the Valuation provisions mentioned in Rule 8,9 & 10 of Valuation Rules 2000.

SUBMISSION

Your concern is genuine that the Cost of Captive consumed goods may sometime have valuation more than 110% of COP.

No issues, have seen various companies practically following the same (Valuation more than 110% of COP) to have accurate transfer pricing accounting in their books of accounts for determination of Cost Centre wise profitability.

Important aspect to be taken care is that Transfer Price may be any amount (i.e. more or less than 110% of COP) on Invoice at the time of removal of goods, BUT the Central Excise Duty Valuation will remain at 110% of COP for the purpose of payment of Excise Duty.

Central Excise Duty paid higher than 110% of COP is referred to Higher Tax payment by assessee and collected by Central Excise Department without any authority of Law, which would be disallowed as CENVAT credit to the Buyer of Goods. Assessee would not be entitled to refund of higher tax from Central Excise department until and unless he proves that there is no unjust enrichment involved in higher tax payment.

Hope all clarifies your query.

[Ashok Patil]

Dear Mr. Malhotra

​Thanks a lot for your valuable inputs and sorry for the confusion. Actually, duty is paid on higher valuation, hence as per your contention Cenvat credit will be disallowed. Am I right? Can you please elaborate this aspect? I mean some legal precedent or any specific provision in this regards.

Thanking you in advance

[CSSANJAY MALHOTRA]

Dear Mr. Patil,

Prior to Notification No. 14/2013 dated 22.11.2013, Duty for Captive consumed goods was paid by the most of manufacturers on normal transactional value who used to sell part of Production outside and consumed part in-house. Amended Notification made it precise for payment of duty on 110% of COP in case of captive consumed goods. Duty payment on higher than 110% of COP is considered by Department as Duty payment applying Rule 4 of Valuation Rules and further it becomes difficult for assessees to convince department.

In case of Ispat Industries, 2007 (2) TMI 5 - CESTAT, MUMBAI= [2007(209)ELT 185 (Tri-LB) CESTAT held that Rule 8 is not applicable where the entire quantity of goods manufactured was not captively consumed. CBEC however after ISPAT and FIAT India judgment came out with Circular No. 975 dated 25.11.2013 thus stating that the valuation rules to be followed as per nature of clearances and not to be followed sequentially.

Paying duty higher would not result into any Revenue Loss for CBEC as the same is Revenue neutral.

Reference may be made to above Judgments as these will given you greater insight.

On CENVAT front, local excise offices treats the Excise duty payment as "Amount" and not the Duty (hence Credit not admissible) which can be claimed any time as refund if paid in excess. Lot of citations exists as to "Tax collected without authority of law" and furthermore excess payment is nothing but amount paid in excess than what is prescribed under law.

Have not come across with any citation of Duty payment more than 110% of COP as of now and have shared submissions on the basis of my several interactions with Policy makers in CBEC.

[Ashok Patil]

Dear Mr. Malhotra

Thanks a lot once again

AI Summary

Valuation of captive consumption: duty governed by prescribed cost-based valuation, excess payment risks CENVAT disallowance. Rule 8 prescribes valuation of captively consumed goods at a statutory percentage of cost of production (now 110%); transfer prices may differ for accounting but excise duty liability is governed by the valuation rules. Excise paid on a higher internal valuation is treated as excess/unauthorised collection, disallowing CENVAT credit to the buyer and permitting refund only upon proof negating unjust enrichment. Administrative guidance and case law address valuation rule applicability where production is partly sold and partly consumed.