Valuation of captively consumed goods under Rule 8 of the Central Excise Valuation Rules, 2000, must be based on actual cost of production as per the CAS-4 certificate; notional 'transfer prices' used for internal management accounting cannot be used for excise valuation purposes.

Per Ashok Jindal :

The Revenue is in appeal against the impugned order.

2. The facts of the case are that the respondents are engaged in the manufacture and clearance of rolled products of Aluminum in different forms such as corrugated or plain sheet of various thickness falling under Chapter Heading 7606 & 7607 of the First Schedule to the Central Excise Tariff Act, 1985 to its other units for use in further manufacture of final products.

2.1 The Respondent receives duty paid slabs, strips in coil form, pigs, ingots and other rolled products of aluminium required for the manufacture of final products from their own factories/units at Hirakud and Renukoot on payment of duty. The Respondent avails CENVAT credit for the duty paid on the aforesaid raw materials received from their own factories/units on the basis of excise invoices issued by them. Such products received by the Respondent are worked upon by the Respondent and subsequently, the final products are cleared to the Respondent’s own factories/units at Hirakud, Kollur, Mouda, Kalwa, Muri, Belgaum, Taloja, Silvassa, Alupuram, etc.

2.2 The assessable value of the inter-unit transfers is determined by cost-construction method, i.e., 110% of the cost of production. The cost of production determined for the final products cleared to the other factories/units of the Respondent is the sum total of the landed cost of metal products as raw materials received from other units and fabrication cost incurred for manufacture of final product at Belur factory.

2.3 Therefore, for determination of assessable value under the Central Excise Act, 1944, the cost of production is calculated based on CAS-4 certificate received from the Cost Accountant.

2.4 While maintaining books of accounts, the Respondent follows an accounting practice for management information purpose to comply with Accounting Standards, whereby inter-unit transfers are recorded in books of the units at a notional price (hereinafter referred to as “transfer price”) linked to prices of metals prevailing at London Metal Exchange.

2.5 Based on audit of such records of the Respondent, the underlying Show-cause notice was issued upon the Respondent, alleging undervaluation of the final products cleared to their own factories while determining the assessable value on the basis of ‘Cost Construction Method’ in terms of Rule 8 of the Central Excise Valuation Rules, 2000 . It was alleged that the value for the purpose of excise law ought to have been computed by adopting such transfer price, which is a notional cost, rather than actual cost.

2.6 According to the underlying Show-cause notice, while calculating the assessable value of the final products cleared to their own factories, the Respondent took the cost of raw materials procured from their own factories in the CAS-4 method which was less than the Transfer Price of raw materials considered in ‘Annual Closing Schedule’ of the Respondent for such raw material.

2.7 In response to the underlying Show-cause notice, the Respondent filed a detailed reply rebutting all allegations therein. The Respondent explained that the internal accounting is done on the basis of the transfer price fixed by the head office of the Respondent to arrive at the profitability of each unit internally for management information system and for the purpose of complying with the Accounting Standards, and therefore, such transfer price has no relation with the cost of production of the stock so transferred to the other units. Hence, such transfer price should not be taken for the purpose of calculating the cost of production under Rule 8 . Such internal transfer price is recorded in internal ac