Holding

Only the direct labour, direct material, direct manufacturing cost and the factory overheads of the factory producing the intermediate goods are includable in the cost of production; other expenses cannot be added.

Summary

Cadbury India Ltd. manufactured several intermediate milk products that were captively consumed in its own factories for making chocolate and were never sold. The assessee sought valuation under Rule 6(b)(ii) of the Central Excise (Valuation) Rules, 1975, presenting a cost statement prepared by a chartered accountant. The Revenue, however, added a wide range of expenses – including administration, travelling, insurance, advertising and interest – to the declared value. The Customs, Excise and Gold (Control) Appellate Tribunal set aside the Revenue’s assessment, holding that only the direct costs and factory overheads directly attributable to the production of the intermediate goods could be included. On appeal, the Supreme Court affirmed this view, relying on settled principles of accountancy and the ICWAI’s CAS‑4 standards, and dismissed the appeals.

Issues considered

Whether expenditure incurred in manufacturing captively consumed intermediate goods can be included in the cost of production for valuation under Rule 6(b)(ii) of the Central Excise (Valuation) Rules, 1975.
Whether overheads such as administration, advertising, insurance and interest may be added to the assessable value of such goods.

Legislation cited

Central Excise (Valuation) Rules, 1975s. Rule 6(b)(ii)

Subjects

valuationcaptively consumed goodscentral excisecost of productionRule 6(b)(ii)cost accountingCAS-4ICWAIintermediate goodsexcise law

Judgment

COMMISSIONER OF CENTRAL EXCISE, PUNE A
v.
MIS. CADBURY INDIA LTD.

AUGUST I, 2006

[ASHOK BHAN AND MARKANDEY KATJU, JJ.] B

Central Excise (Valuation) Rules, 1975; Rule 6(b)(ii)/Circular No.6921
• 812003-CX dated 13.2.2003 issued by the Central Board of Excise and
Customs:
c
Valuation-Goods/milk products captively consumed in manufacturing
of final product/chocolate-Expenditure incurred on-Factory expenses-
Inclusion in the cost of production-Held: Products in question captively
consumed by the a~sessee in his factories-These are neither marketable nor
did the assessee sell them-Principles of Accountancy as recognized by the D
Central Board of Excise and Customs could be followed for determining the
cost of production-Direct Labour Cost/material cost/overhead expenses in
producing the intermediate products could only be included in the cost of
production of the final product-Revenue is not permitted to rake view to the
contrary-Hence, factory expenses incurred on these products could not be
included in the cost for the purpose of valuation. E
The question, which arose for determination before this Court in
these appeals was as to whether the expenditure incurred in manufacturing
of certain products of milk which are captively consumed in the factories
of the assessee in the manufacture of chocolate, the final product, and no F
part of which are sold by the respondent, could be included in the cost of
production in terms of Rule 6(b)(ii) of the Central Excise (Valuation) Rules
for the purpose of valuation.

Dismissing the appeals, the Court

HELD: 1.1. According to settled principles of accountancy only the G
elements that have actually gone into the manufacture/production of the
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
207 H
208 SUPREME COURT REPORTS [2006] SUPP. 4 S.C.R.

A production. (210-F-G(

CCE v. Dai !chi Karkaria ltd, ( 1999( 7 SCC 448, relied on.

1.2. The cost accounting principles as laid down by the Institute of
Cost and Works Accountants of India (ICWAI) have been recognized by
B 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 these principles. (211-H; 212-A(

C
BMF Be/tings ltd v. CCE: (2005) 184 E.L.T. 158 (Tri. - Bang.); ITC
v. CCE, (190) ELT 119; Teja Engineeringv. CCE, (2006) 193ELT100 (Tri-
Chennai); Ashima Denims v. CCE. (2005) 191 ELT 318 (Tri-Mumbai); and
-
Arti Industries v. CCE, (2005) 186 ELT 208 (Tri-Chennai), referred to.

1.3. In the present case thr intermediate products are captively
D consumed in the assessee's own factory. These intermediate products are
not sold nor are marketable. Hence question of including the factory
expenses in producing the final product in their valuation as was sought
to be added by the Revenue, does not arise. (212-D(

CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 2947-2948
E of 2001.

From the Final Order No. C-1/3430-31/WZB/2000 dated 28.9.2000/
24. I 0.2000 of the Customs, Excisee & Gold (Control) Appellate Tribunal,
West Regional Bench at Mumbai in appeal No. E/102 l/'2000-MUM.

WITH
F
C.A. Nos. 1856-1857/2002, 5232-5233/2003, 1425/2005 and 2878-2879/
2005.

Harish Chander, Binu Tamta, T.S. Murthy, R. Sudhinder and B.K.
G Prasad for the Appellant.

Joseph Vellapally, Ashok H. Desai, D.B. Shroff, Pratap Venugopal, E.
Venu Kumarr for (K.J. John & Co.), U.A. Rana, P.K. Thakur (Gagrat & Co.),
Bhavesh Panjwani, P.H. Parekh, Sameer Parii<j, Arun Francis (for P.H. Parekh
& Co.), C.N. Sree Kumar, V. Lakshmikumaran, Alok Yadav and Rajesh
H Kumar for the Respondents.
COMMISSIONER OF CENTRAL EXCISE, PUNE "· CADBURY INDIA LTD. [MARKANDEY KA TIU,J.] 2Q9

The Judgment of the Court was delivered by A
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.
B
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 re5pondent in C
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 Exdse (Valuation) Rules, which provides for basing the
valuation on such goods on the "cost of production on manufacture including D
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. E
A separate statement in support of the profit added was fonnulated 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, F
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.
G
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 H
210 SUPREME COURT REPORTS [2006] SUPP. 4 S.C.R.

A 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 v. Bombay
Tyres International, AIR ( 1984) SC 420.

In further appeal the Tribunal set aside the orders of the Commissioner
B 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.
c 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,
D 1975.

R!!le 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
E (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
F 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
G 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.
H
COMMISSIONEROFCENTRALEXCISE,PUNE,.. CADBURY INDIA LTD.[MARKANDEYKATJU,l] 211

In CCE v. Dai !chi Karkaria Ltd., [1999] 7 SCC 448, at page 459 it A
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 Chal/apa/li Sugar Ltd. v. CIT. The Court
was concerned with "written-down value". The "written-down value" B
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
c
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 D
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
E
them in a working condition. That rule of accountancy had to be
adopted for determining the "a<Jtual 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
F
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,
G

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. H
212 SUPREME COURT REPORTS [2006J SUPP. 4 S.C.R.

A 692/8/2003 ex dated 13.2.200;>. 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. v. CCE: (2005) 184
E.L.T. I 58 (Tri. Bang.) for the period 1995 to 2000 has directed the department
-
B to apply CAS-4 forthe determination of the cost of production of the captively
consumed goods. In ITC v. CCE, (190) ELT 119 the Tribunal held that the
department has to calculate the cost of production in terms of CAS-4. Other

C
decisions of the Tribunal, wherein it has directed that CAS-4 be applied for
determination of the cost of production, are Teja Engineering v. CCE, (2006)
193 ELT 100 (Tri-Chennai), Ashima Denims v. CCE, (2005) 191 ELT 318
-
(Tri-Mumbai), and Arti Industries v. CCE, (2005) 186 EL T 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
D 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
E 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
F
are dismissed. No costs.

Civil Appeal Nos. 1856-195712002, 5232-523312003, 142512005 & 2878-
287912005)

G In view of the decision in Civil Appeal Nos. 2947-2948/200 I, these
appeals are accordingly dismissed. No costs.

S.K.S. Appeals dismissed.
-