Valuation of goods under captive consumption
Facts of the case, In ITC LTD VS. CCE 2014 (7) TMI 696 – CESTAT CHENNAI Chennai CESTAT M/s. ITC Ltd. (Packing and Printing Division) is one of the Units/Divisions of M/s. ITC Ltd., engaged in the manufacture of packaging materials. The main raw material in the manufacture of packaging material is paper and paper board, which they received from their other unit, known as ITC Ltd., Badrachalam Paper and Paper Board Unit, Andhra Pradesh (hereinafter referred to as ‘Badrachalam Unit’). The Badrachalam Unit was merged with ITC Ltd. with effect from 1.4.2001. The Badrachalam Unit supplied the paper and paper board to the appellant for captive consumption on payment of excise duty on the value as determined under Rule 8 of Central Excise (Determination of Price of Excisable Goods) Rules, 2000 (hereinafter referred to as „Valuation Rules‟) and following the procedure of CAS-4 standards devised by the Institute of Cost and Works Accountant of India (ICWAI) as per CBEC Circular No. 692/8/2003-CX dated 13.2.2003.
1.1 The appellant also cleared their manufactured goods packaging material to their other units mainly cigarette factories on payment of duty on the value as determined under Rule 8 of Valuation Rules, as per CAS-4 and also sold to outsiders. under Rule 8 provides value shall be 110% of the cost of production (115% prior to 5.8.2003).
I – Whether the IDSC/ICNC debit note raised by Bhadrachalam Unit have to be considered as a component of cost of raw materials of the appellant.
II – Whether the cost of raw material adopted by assesse should be just cost or 115%/110% of Cost.
III – Whether overheads not included were due to abnormal idle capacity and adjustment of stock excludable from cost of the product?
Issue I – IDSC/ICNC debit notes represent the difference between market price of the product adopted for sale to third parties and the value charged in the invoice raised for such transfer between different factories of the group. As per the judgement of supreme court in the case of CCE Vs. Cadbury India Ltd. – 2006 (8) TMI 2 – SUPREME COURT OF INDIA, the Hon’ble Supreme Court in the context of captive consumption held that no profit element/ advertisement and other expenses relating to sale of products could be added to intermediate products which were not sold in the market. Held that the adjudicating authority accepted the IDSC/ICNC debit notes raised to evaluate the operational efficiency of the unit, which is of a notional nature. CBEC Circular dated 13.2.2003 clarified that CAS-4 should be strictly followed to determine assessable value for captive consumption. IDSC/ICNC debit notes was raised by Bhadrachalam Unit in compliance of AS-17 for segment reporting for different purpose as sated above, which is of notional nature. Thus, there is no reason to consider the amount of IDSC/ICNC debit notes as actual cost of raw material and it cannot be added in the cost of raw material at the hands of the appellant for captive consumption under Rule 8 of Valuation Rules.
Issue II – Rule 8 of Valuation Rules makes use of two words “value” and “cost”. When the same rule uses two words both the words cannot have same meaning. Further Rule 2 (c) defines value to be value referred to in section 4 of the Act. That is to say “value” stands for the amount on which excise duty is to be paid where duty is to be paid on advalorem basis. In the case of CCE, Chennai Vs. Eveready Industries (I) Ltd. 2011 (4) TMI 141 – CESTAT, CHENNAI held that While determining the cost of production at National Carbon Plant, the actual cost incurred is alone to be taken into consideration in respect of raw material received from Mumbai namely electrolytic manganese dioxide. The corporate overheads and notional deemed profit taken into account for the limited purpose of computing the assessable value for payment of duty at Navi Mumbai Plant is not to be taken into account while working out the cost of production at National Carbon Plant.
Issue III – the definitions in CAS-2 and CAS-4 basically recognizes this principle in a more formalized and structured manner specifying the type of situations that can result in abnormal cost. Revenue is not contesting this principle. Neither is there any specific finding on the claim of the appellant that there was idle capacity during the relevant period. As seen from para 128 of the adjudication order 12/2012 dt 29-03-12 the ground taken by Revenue is that the appellant has not demonstrated the events which were unusual or unexpected which resulted in underutilization of capacity. One of the arguments raised was that the appellants were actually producing packaging material for captive use and hence lack of orders is not a possible reason. This argument does not appeal because if there is less production of the goods in other factory for which goods packaging material is produced in this factory, the situation can lead to underutilization of capacity. Held that unabsorbed overhead referable to abnormal idle capacity for lack of order and the cost of closing stock shall not form part of the cost of production and the demand of the duty is not sustainable.
Conclusion: – Different court has taken different stands in the issue II based on the facts of the cases while in the case of ITC Tribunal has decided in the favor of assessee that is the cost of the product used in the captive consumption is 100% and does not included the notional profit. The Institute of Cost Accountants of India has come up with the guidance note on CAS 4 exact para is given here under:
These will include any goods manufactured with raw material, indigenous or imported bought out material etc. by the manufacturer in the same factory for further use in manufacture of final product. For this purpose, the cost of production of such self manufactured items shall be considered as material cost for the subsequent product, after considering inward freight, octroi, etc., as applicable. Intermediate products/ goods transferred by another unit of the same manufacturer etc. shall be based on cost of production as per CAS-4.