(EXPOSURE DRAFT)
GUIDENCE NOTES
ON
COST ACCOUNTING STANDARD ON CAPTIVE CONSUMPTION
Release of CAS -2,3 & 4 by Charmain CBEC
Mr.M.K.Zutshi on 23.1.2003
INTRODUCTION
On the introduction of Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000, w.e.f. 1st of July 2000, it was clarified by the Board vide Circular No.354/81/2000-TRU dated 30th June 2000, that in order to value goods which are captively consumed, the general principles of costing would be adopted for the application of Rule 8.
The Central Board of Excise and
Customs thereafter interacted with the
The Institute of Cost and Works Accountants of India (ICWAI), since then has developed five cost accounting standards out of which three namely, CAS-2 on Capacity Determination, CAS-3 on Overheads and CAS-4 on Cost of Production for Captive Consumption, were released on 13th February, 2003 by CBEC jointly with ICWAI.
The Cost Accounting principle for determination of cost
of production is well established.
Similarly, rules for levy of excise duty on goods used for captive
consumption are also well defined. Captive Consumption means the consumption of
goods manufactured by one division and consumed by another division(s) of the
same organization or related undertaking for manufacturing another product(s).
Liability of excise duty arises as soon as the goods covered under excise duty
are manufactured but excise duty is collected at the time of removal or
clearance from the place of manufacture even if such removal does not amount to
sale. Assessable value of goods used for
captive consumption is based on cost of production. According to the Central
Excise Valuation (Determination of Price of Excisable Goods) Rules 2000, the
assessable value of goods used for captive consumption is 115% (110%
w.e.f.5-8-2003) of cost of production of such goods, and as may be prescribed
by the Government from time to time.
Valuation for captively consumed
goods:
According
to Rule 8, in cases where goods are not sold but are used for captive
consumption by the assessee or on his behalf in the production or manufacture
of other articles, the value shall be 115 % (110% w.e.f.5-8-2003) of the cost
of production or manufacture of such goods. This formula provides a thumb rule
for goods used for captive consumption.
By
circular No. 692/8/2003-CX, dt.13.2.2003 the Board has clarified that cost of
production of captively consumed goods will henceforth be done strictly in
accordance with (Cost Accounting Standard – 4). This standard has been
formulated by the
Application of CAS-4:
The
relevance of CAS-4 is in cases where a manufacturer is manufacturing a product
which is otherwise exempt from duty but in process of manufacture an
intermediate product mentioned in the tariff, comes into existence which is
dutiable. In all such cases the liability to pay duty becomes applicable. The
intermediate goods which come into existence must discharge applicable duty
before it gets cleared for in place in the factory / unit for the manufacture
of the duty exempted final product. The value of duty in all such cases shall
be on ‘Cost + 10%’ w.e.f
In a landmark judgment hon’ble
Supreme Court of India, observed that ‘the
"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) 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.
As such it cannot now take a contrary stand.’
The observations made by the Supreme court is consistent with the views expressed by the tribunals that though CAS-4 was issued on 13.2.2003, cases pending finalization may be considered in line with costing principles laid down in CAS-4, issued by the Institute of Cost and Works Accountants of India. Full text of the Judgment is being reproduced below:
CASE NO.:
Appeal (civil) 2947-2948 of 2001
PETITIONER:
Commissioner of Central Excise, Pune
RESPONDENT:
M/s. Cadbury India Ltd.
DATE OF JUDGMENT:
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 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.
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., (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 :
"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
"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) 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.
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.
Assessments finalized prior to
A clarification was issued by the
Chief Commissioner, Chennai, Zone
stating that cases which have been finalized prior to 13.2.2003 should
not be opened for application of CAS-4.
The extracts of the letter is being reproduced below:
‘Copy of letter C.No.
IV/16/92/2003-Cx.Pol dated 05.09.2003 of this office.
Please refer to the Board’s
circular No. 692/8/2003-CX-I (F.No. 6/29/2002- CX-I) dated 13.02.2003
communicating acceptance of cost Accounting Standard-4 (CAS-4) for the purpose
of valuation of the excisable goods which are captively consumed under Rule 8
of Central Excise Valuation (Determination of price of Excisable goods) Rules
2000.
The field formations have raised certain doubts as to whether the above said CAS-4 could be applied to all pending assessments. It is observed from the above cited circular of the Board that the principles of CAS costing are to be adopted w.e.f, 13.2.2003 and therefore the assessments pending finalization on 13.02.2003 will also be covered under CAS-4. Assessments already finalized prior to 13.02.2003 on the basis of Board’s Circular 258/92/96 CX dated 30.10.96 are not required to be reopened. The field officers in this Commissionerates have been advised accordingly. Kindly confirm.’
Therefore it shall be fair to say
that in view of the above circular and decision of the Hon’ble Supreme Court of
India, application of Cost Accounting Standard-4 or CAS-4, is on all cases
whether before or after 13th February,2003 except where cases have
been finalized prior to 13.2.2003.
Valuation of goods partly captively consumed and partly sold:
Where the goods to be valued are
captively consumed in one’s own factory, valuation will be done on the basis of
110% of the cost of production of goods. If the goods are partially sold by the
assessee and partly captively consumed, the goods sold would be assessed on the
basis of transaction value under section 4A and the goods captively consumed
would be valued under rule 8 i.e.110% of the cost production of goods, states
the board circular no.643/32/2002-CE dt.
Where the goods are transferred
to a sister unit or another unit of the same company, valuation would be done
as per the proviso to Rule 9.This is confirmed by the Board’s circular dt.
There can be situations where an assessee may manufacture an intermediate product(which is excisable) which requires to be processed or used for further production in another unit of the same manufacturer located at a different place. In such a situation also, the principle of rule 8 has to be followed and accordingly cost of production plus 10% thereof must be adopted as the basis of arriving at the assessable value. This is because the use by the unit of the same manufacturer has to be regarded as use on his behalf as contemplated under rule 8.
There could be situations where a manufacturer may clear an intermediate product which is an excisable good to a job worker who is an independent contractor for further processing and return. In such cases, if manufacturer follows the job work procedure as prescribed in the Cenvat Credit Rules, 2004 he may not be called upon to pay any duty at the time of clearing the intermediate product to the job worker provided the job worked items are returned to the factory of the manufacturer within 180 days and that the job worked item is either further used in manufacture by the manufacturer or cleared on payment of duty by the manufacturer. In other words, manufacturer of intermediate products clearing the goods on job work under challan procedure in terms of Cenvat Credit Rules, 2004 need not pay any duty at the time of clearance to the job worker.
In a situation where the
manufacturer receives input and avails credit on the same. Thereafter he may
like to remove the goods as such to another of his units. The relevance of
application of rule 8 and charging of 10% in such cases is not relevant since
there is no manufacture which has taken place. The Board has by circular No.643/34/2002/CE
dt.
READERS ARE REQUESTED TO SEND THEIR SUGGESTIONS TO
Mr. Rakesh Singh
Loss Due to Profit: S.Jaikumar & G.Natrajan, Advocates
Add to Substact: S.Jaikumar & G.Natrajan, Advocates