2008 (1) TMI 134 - AT - Central Excise

Captive consumption - % of profit adopted by the appellant ranged from 12.27% to 37.75% whereas the profit margin proposed by dept. ranged from 22.4% to 79.09% - no sale price is available as no sale is made by company - for valuation of the intermediate goods captively used, the profit margin of final product can t be adopted as such - Even if same is adopted, as a base, adjustment will have to be made to arrive at the notional profit margin - profit margin adopted by assessee is reasonable

Summary

Issues:
- Valuation of captively used capital goods under Rule 6(b)(ii) of the Central Excise Valuation Rules 1975.
- Determination of notional profit margin for captively used capital goods.
- Comparison of profit margins adopted by the appellant with those proposed by the Department.
- Applicability of profit margins on intermediate goods versus final products.
- Interpretation of Tribunal judgments in similar cases.
- Legal sanction for adopting profit margins on final products.

Analysis:

1. Valuation of captively used capital goods under Rule 6(b)(ii) of the Central Excise Valuation Rules 1975:
The appellant contended that the captively used capital goods were valued based on the cost of production plus a notional profit margin, as they were not sold but used internally. This valuation method was supported by referencing the decision of the Delhi Bench of the Tribunal in a similar case.

2. Determination of notional profit margin for captively used capital goods:
The appellant argued that the notional profit margin should be related to intermediate goods rather than the final product. They cited Tribunal judgments and internal company cases to support their claim that a lower profit margin is reasonable for captively used goods.

3. Comparison of profit margins adopted by the appellant with those proposed by the Department:
The Department proposed higher profit margins ranging from 22.4% to 79.09%, while the appellant's profit margins ranged from 12.27% to 37.75%. The Tribunal noted that the profit margin adopted by the appellant appeared reasonable and that there was no legal basis for adopting higher profit margins.

4. Applicability of profit margins on intermediate goods versus final products:
The Tribunal emphasized that for captively used intermediate goods, the profit margin of the final product cannot be directly applied. Adjustments need to be made to arrive at a reasonable notional profit margin. The Tribunal established 10% as a reasonable profit margin for such cases.

5. Interpretation of Tribunal judgments in similar cases:
The Tribunal referred to its own judgments in cases involving the same appellant company to support the argument that profit margins for captively used goods should be reasonable and not based on profit margins of final products.

6. Legal sanction for adopting profit margins on final products:
The Tribunal concluded that there was no legal basis for adopting higher profit margins based on final products. The appeal was allowed in favor of the appellant, granting consequential relief based on the above analysis.