Of Central Excise, Pune Vs. M/S. Cadbury India Ltd  Insc 465 (1 August 2006)
Bhan & Markandey Katju
Civil Appeal Nos.1856-1857/2002, 5232-5233/2003,1425/2005 and 2878-2879/2005)
MARKANDEY KATJU, J.
Appeals Nos. 2947-2948/2001 have been filed against the impugned final order
dated 28.9.2000 passed by the Customs Excise and Gold (Control) Appellate
Tribunal, West Regional Bench at Mumbai in Appeal No.E/1021, 1022/2000-MUN.
learned counsel for the parties.
question involved in these appeals is about the valuation of milk crumbs,
refined milk chocolate and four other products manufactured by the respondent -
M/s. Cadbury India Limited, in its factory at Induri, Pune
and captively consumed in that factory and other factories of the respondent in
the manufacture of chocolate. No part of these products are sold by the
respondent had sought valuation of these goods under Rule 6(b)(ii) of the
Central Excise (Valuation) Rules, which provides for basing the valuation on
such goods on the "cost of production on manufacture including profits, if
any, the assessee would have earned in the sale of such goods." The assessee
had showed the price of these goods supported by a statement verified by a
chartered accountant. The statement indicated the cost of edible and packing
material used in the manufacture including its overheads. A separate statement
in support of the profit added was formulated and these assessments were
time of the finalization of the assessment, the department took the view that
the value of the goods should include the labour cost, direct expenses, total
factory expense, administration expenses, travelling expense, insurance
premium, advertising expense and interest. The Assistant Commissioner added
these elements to the declared value. He added the total expenses of the
company as shown in the balance sheet and deducted the cost material. A
percentage of this cost of the remaining figure was treated as the factor by
which the assessable value should be increased.
appeal the Commissioner (Appeals) upheld the order of the Assistant
Commissioner. He held that since Rule 6(b)(ii) itself specified including the
profit on the goods captively consumed hence this indicated the intention in
the rule that the valuation should be brought to the level of the sale value of
the goods and hence this includes all expenses referred to above. The Commissioner(Appeals)
also relied on the circular dated 30.10.1996 issued by the Board relating to captively
consumed goods. He has also relied upon paragraph 49 of the Supreme Court's
judgment in Union of India vs. Bombay Tyres International AIR 1984 SC 420.
further appeal the Tribunal set aside the orders of the Commissioner and the
Assistant Commissioner. The Tribunal held that sub-rule (ii) of Rule 6(b) can
be invoked only in a situation where the goods are not sold and there are no
comparable goods. The Tribunal held that the expenses other than the cost of
manufacture, cost of raw materials and the profit would not be includible in
the assessable value.
issue in the present case is about the value of the goods captively consumed by
the respondent. The assessee has contended that there is no dispute that these
intermediate goods are not marketable and are not bought and sold in the
market. Hence the valuation of these intermediate goods has to be done
according to Rule 6(b)(ii) of the Central Excise (Valuation) Rules, 1975.
6(b)(ii) reads as follows:
6 If the value of the excisable goods under assessment cannot be determined
under Rule 4 or Rule 5, and
if the value
cannot be determined under sub-clause (i), on the cost of production or
manufacture including profits, if any, which the assessee would have normally
earned on the sale of such goods; " According to settled principles of
accountancy only the elements that have actually gone into the
manufacture/production of these intermediates i.e. sum total of the direct
labor cost, direct material cost, direct cost of manufacture and the factory
overheads of the factory producing such intermediate products are included in
the cost of production. The Appellant produced alongwith the reply to the Show
Cause Notice the following authoritative texts: Wheldon's Cost Accounting and
Costing Methods, Cost Accounting methods by B K Bhar, Principles of Cost
Accounting by N.K. Prasad, Glossary of Management Accounting Terms by ICWAI.
v. Dai Ichi Karkaria Ltd., (1999) 7 SCC 448, at page 459 it has been held that
the normal principles of accountancy shall be applied to determine the cost. In
this decision this Court observed :
Counsel for the respondents drew our attention to the judgment of this Court in
Challapalli Sugar Ltd. v. CIT. The Court was concerned with "written-down
value". The "written-down value" had to be taken into
consideration while considering the question of deduction on account of
depreciation and development rebate under the Income Tax Act.
value" depended upon the "actual cost" of the assets to the assessee.
expression "actual cost" had not been defined in the Income Tax Act,
1922 and the question was whether the interest paid before the commencement of
production on the amount borrowed for the acquisition and installation of the
plant and machinery could be considered to be a part of the "actual
cost" of the assets to the assessee. As the expression "actual
cost" had not been defined, this Court was of the view that it should be
construed "in the sense which no commercial man would misunderstand. For
this purpose, it could be necessary to ascertain the connotation of the above
expression in accordance with the normal rules of accountancy prevailing in
commerce and industry". Having considered authoritative books in this
regard, this Court said that the accepted accountancy rule for determining the
cost of fixed assets was to include all expenditure necessary to bring such
assets into existence and to put them in a working condition. That rule of
accountancy had to be adopted for determining the "actual cost" of
the assets in the absence of any statutory definition or other indication to
the contrary." Subsequent to the filing of these appeals, the Institute of Cost and Works Accountants of India (ICWAI) has laid down the
principles of determining cost of production for captive consumption and
formulated the standards for costing : CAS-4. According to CAS-4 the definition
of "cost of production" is as under :
"Cost of Production :
of Production shall consist of Material consumed, Direct wages and salaries, Direct
expenses, Works overheads, Quality Control cost, Research and Development cost,
Packing cost, Administrative Overheads relating to production." The cost
accounting principles laid down by ICWAI have been recognized by the Central
Board of Excise and Customs vide Circular No.692/8/2003 CX dated 13.2.2003.
The circular requires the department to determine the cost of production of captively
consumed goods strictly in accordance with CAS-4.
in the case of BMF BELTINGS LTD. vs. CCE : 2005 (184) E.L.T. 158 (Tri. Bang.) for
the period 1995 to 2000 has directed the department to apply CAS-4 for the
determination of the cost of production of the captively consumed goods. In ITC
vs. CCE (190) ELT 119 the Tribunal held that the department has to calculate
the cost of production in terms of CAS-4. Other decisions of the Tribunal,
wherein it has directed that CAS-4 be applied for determination of the cost of
production, are Teja Engineering v/s CCE 2006 (193) ELT 100 (Tri- Chennai), Ashima
Denims v/s CCE 2005 (191) ELT 318 (Tri-Mumbai), and Arti Industries vs. CCE
2005 (186) ELT 208 (Tri-Chennai). This is therefore a consistent view taken by
the Tribunal. The department has not filed any appeal in these cases and
accepted the legal position. Apart from this, in the light of several decisions
of this Court, the Department is also bound by the said circular No.692/8/2003 CX
dated 13.2.2003 issued by the CBEC.
such it cannot now take a contrary stand.
be noted that in the present case the intermediate products (milk crumbs,
refined milk chocolate and four other intermediate products) are captively
consumed in the Respondent's own factory. These intermediate products are not
sold nor are marketable.
there can be no question of including the expenses of the factory which
produces the final product namely the chocolate e.g. advertising, insurance and
another expenses in their valuation as was sought to be added by the
Commissioner (Appeals) and the Assistant Commissioner.
the reasons given above, we find no merit in these appeals and they are
dismissed. No costs.
Appeal Nos. 1856-1957/2002, 5232-5233/2003, 1425/2005 & 2878-2879/2005) In
view of the decision in Civil Appeal Nos. 2947- 2948/2001, these appeals are
accordingly dismissed. No costs.