SUPREME COURT OF INDIA
Commissioner of Central Excise, Pune
Vs
Messrs Cadbury India Limited
Appeal (Civil) 2947-2948 of 2001 (With Civil Appeal Nos.1856-1857/2002, 5232-5233/2003, 1425/2005 and 2878-2879/2005)
(Ashok Bhan and Markandeya Katju, JJ)
01.08.2006
MARKANDEY KATJU, J.
Civil 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.
Heard learned counsel for the parties.
The 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.
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 provisionally approved.
At the 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.
In 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.
In 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.
The 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.
Rule 6(b)(ii) reads as follows:
"Rule 6 If the value of the excisable goods under assessment cannot be
determined under Rule 4 or Rule 5, and
(a).............
(b)(i)..............
(ii) 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.
In CCE v. Dai Ichi Karkaria Ltd., , 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:
"Learned 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.
"Written-down value" depended upon the "actual cost" of the
assets to the assessee. The 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:
"4.1. Cost of Production : Cost 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.
The Tribunal in the case of BMF BELTINGS LTD. vs. CCE : 2005 (184) ELT
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 2005 Indlaw CESTAT 2456 (Tri- Chennai), Ashima Denims v/s
CCE 2004 Indlaw CESTAT 4030 (Tri-Mumbai), and
Arti Industries vs. CCE 2005 Indlaw CESTAT 763
(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. As such it cannot now take a contrary stand.
It may 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. Hence 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.
For the reasons given above, we find no merit in these appeals and they are
dismissed. No costs.
Civil 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.