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Querist – Damodar Valley Corporation

Query:- In accordance with the order of Commissioner (Appeals), Customs & Central
Excise, Patna, the duty, interest and penalty is payable on profit element of 10% over the
cost of production of the spares/ parts manufactured in the workshop at Maithon
Damodar Valley Corporation, which are removed to power plants of Damodar Valley
Corporation for repairs and maintenance of machineries, as per Rule 8 of Central Excise
Valuation (Determination of Price of Excisable Goods) Rules, 2000. In view of this
whether duty on 10% profit should be paid for the period 2006-07 onwards under protest?

Opinion: - As per Rule 8 of Central Excise Valuation (Determination of Price of


Excisable Goods) Rules, 2000, where the excisable goods are not sold by the assessee but
are used for consumption by him or on his behalf in the production or manufacture of
other articles, the value shall be one hundred and ten per cent of the cost of production or
manufacture of such goods.

From a plain reading of the above Rule it would appear that it is applicable in a situation
where excisable goods are not sold by the assessee but are used for consumption by him.
The querist is consuming the spares/ parts manufactured in the workshop at Maithon for
repairs and maintenance of machineries at power plants. Both The power plants and
workshop belong to the querist. Hence it can not be said that the spares/ parts are sold by
the workshop at Maithon to power plants because one cannot sale to one’s own self.
Hence this rule appears to be applicable to them for the reason that goods are used for
consumption by them.

However a question arises that whether this rule is applicable even in a situation where
no profit is being earned by the enterprise or it is running in loss.

The Supreme Court Bench on 9-7-2004 admitted the Civil Appeal No. 3408 of 2004
filed by Commissioner of Central Excise, Calicut against CESTAT Order No. 1766/2003,
dated 17-9-2003 and reported in 2004 (171) E.L.T. 255 (Tri. - Bang.) (Steel Complex
Ltd. v. Commissioner). The order of the Supreme Court is awaited. The judgment of the
Appellate Tribunal was made in the context of currently applicable Rule 8 of Central
Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000.

The Appellate Tribunal in its impugned order had held that that 115% cost of production
cannot be adopted in case manufacturer operated at loss and if it gives valuation bearing
no resemblance to actual or would be sale price.

It was observed by the Hon’ble Tribunal in the judgment that Section 4(1) lays down the
principle of Central Excise Valuation. The core of it is that value shall be the price at
which the transaction is carried out. Sub-section (b) of Section 4 relates to valuation of
goods which are not transacted through sale. Central Excise Valuation Rules, 2000 have
been formulated as a guide for the determination of value of goods which are disposed of
except through sale. The direction cumulatively conveyed by these rules is to determine
the value of those goods as their would have been sale price, in case, they were to be sold
in the course of ordinary trade and commerce. In order to achieve this, rules have
stipulated several methods and guidelines like adjustment for different date of delivery
(Rule 4), adjustments towards freight (Rule 5), sale price of related buyer (Rule 6).
Taking 115% of the cost of production is also one such method (Rule 8). In any event
adopting a measure which would yield a very unreasonable and non-commercial value
has to be avoided. Rule 11 specifically states, “value shall be determined using
reasonable means consistent with the principles and general provisions of these rules and
sub-section (1) of Section 4 of the Act”. The same norm would be wholly unreliable
where manufacturer is incurring huge losses. Rules lay down reasonable means consistent
with principles and general provisions of the Rules and sub-section (1) of Section 4 of the
Central Excise Act for ascertaining the value of the goods.

It was decided by the Hon’ble Apex Court in the case of PCC Pole Factory Versus
Collector of Central Excise - 2003 (158) E.L.T. 429 (S.C.) that 10% profit cannot be
added to the PCC Poles manufactured and used by the Electricity Board for the purposes
of laying electric lines and transmission of electric energy because Electricity Board itself
was carrying on the job work and had not assigned the job to any other person who can
gain such profit and no business was carried on by the Electricity Board after
manufacturing the poles and selling them out or dealing out with any other person.
In another case the Supreme Court Bench on 13-4-1998 dismissed the Civil Appeal No.
3588 of 1997, filed by Collector of Central Excise, Shillong against the CEGAT Order
No. 2740/96-A, dated 8-8-1996 and reported in 2002 (147) E.L.T. 1177 (Tri. - Del.)
(Collector v. Upper Assam Plywood). By dismissing the appeal of the Central Excise
department the Hon’ble Apex Court affirmed the judgment of the Appellate Tribunal.

The Appellate Tribunal in its impugned order had held that as it is found that the goods
are not being sold but only captively consumed, the addition of profit margin is not called
for especially as the relevant provision under Rule 6(b)(ii) refers to the addition of
profits, if any. So the price arrived on the basis of costing would correctly represent the
assessable value.

However it should be noted that the Apex Court judgment rendered both in the case of
PCC Pole Factory and Upper Assam Plywood was rendered in the context of erstwhile
Central Excise (Valuation) Rules, 1975.

Rule 6(b) of erstwhile Central Excise (Valuation) Rules, 1975 is parallel to the present
Rule 8 of Central Excise Valuation (Determination of Price of Excisable Goods) Rules,
2000. Rule 6(b) of the Valuation Rules speaks of two methods of determining assessable
value; (i) on the basis of the value of comparable goods produced by the assessee or by
any other assessee; and (ii) on the basis of the cost of production including profits, if
any, which the assessee would have normally earned on the sale of such goods.
Method (ii) will be used only when method (i) is not available. Method (ii) contemplates
of hypothetical profit which is bound to be approximate in nature. It was clarified vide
circular F. No. 6/66/84-CX.1, dated 23-7-1986 that the previous year’s profit should be
acceptable as the profit that the assessee would have normally earned.

It would be apparent from the reading of erstwhile valuation rules relating to captive
consumption that “profits, if any,” would be added to the cost of production. Which
means that if no profit is earned than the question of addition of any profit would not
arise.
However in the present valuation rules relating to captive consumption, a profit of one
hundred and ten per cent of the cost of production or manufacture of goods is required to
be added and the phrase “profits, if any” has been omitted. It appears from the plain
reading of the current rules that irrespective of the fact whether a profit has been earned
or not, 10 % profit should be added to the cost of production or manufacture of goods.

Hence in our opinion the judgment of the Apex Court rendered both in the case of PCC
Pole Factory and Upper Assam Plywood appears not to be applicable in context of
present valuation rules because of the distinguishing features of present valuation rules
from the erstwhile rules.

Hence in our opinion it would be advisable that duty on the profit element of 10% over
the cost of production of the spares/ parts manufactured in the workshop at Maithon
should be paid in accordance with the Rule 8 of Central Excise Valuation (Determination
of Price of Excisable Goods) Rules, 2000. However since issue is pending with the
Hon’ble Tribunal for determination and also the judgment of the Hon’ble Apex Court is
awaited in the case civil appeal of Steel Complex Ltd, in the context of currently
applicable Rule 8 of Central Excise Valuation (Determination of Price of Excisable
Goods) Rules, 2000, it is advisable that duty be paid under protest taking the recourse to
Rule 7 of Central Excise Rules, 2002 relating to provisional assessment. Further the
querist should inform the Central Excise Authorities that duty of excise paid on the profit
element is not being passed on to the consumer and documentary evidence to support it
should be kept in record till the final assessment.

It is to be noted that a Board’s valuation Circular No. 692/8/2003 dated 13-2-2003 was
issued stating that “general principles of costing” would be adopted for applying Rule 8
and that the cost of production of captively consumed goods will ‘henceforth’ be done
strictly in accordance with Cost Accounting Standard-4 developed by the Institute of Cost
& Works Accountants of India (ICWAI).