http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 4  

CASE NO.: Appeal (civil)  2947-2948 of 2001

PETITIONER: Commissioner of Central Excise, Pune

RESPONDENT: M/s. Cadbury India Ltd.

DATE OF JUDGMENT: 01/08/2006

BENCH: Ashok Bhan & Markandey Katju

JUDGMENT: J U D G M E N T (with Civil Appeal Nos.1856-1857/2002, 5232-5233/2003,1425/2005 and 2878-2879/2005)

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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 4  

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  AIR 1984  SC 420.

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 \026 If the value of the excisable goods  under assessment cannot be determined under  Rule 4 or Rule 5, and \026 (a)\005\005\005\005 (b)(i)\005\005\005\005 (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., (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 :

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 4  

"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 \026 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) E.L.T. 158 (Tri. \026 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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 4  

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 \026 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.