Assessable Value in the case of Goods captively consumed-Addition of Profit- Reg. - Central Excise - 258/92/96-CX

Circular No. 258/92/96-CX dated 30/10/96 F.No. 6/28/94-CX.1 Government of India Ministry of Finance Department of Revenue Central Board of Excise and Customs, New Delhi Subject: Assessable Value in the case of Goods captively consumed-Addition of Profit- Reg. I am directed to refer to instructions contained in Board's letter F.No. 6/64/80-CX.1 dated 6.12.80, Circular F.No. 6/72/85-CX.1 dated 11.3.86 and Issue 'A' of Section 37B order No. 24/14/93 dated 31.12.93 regarding the method to be followed for determining assessable value of goods captively consumed. The Board in its order dated 31.12.93 issued under section 37-B has clarified that for the purpose of assessment of goods captively consumed, value should be arrived at by adding previous year's gross profit, if any, of the assessee as per their audited balance sheets. 2. Subsequently, a doubt has been raised as to which profit whether "Gross Profit" (i.e. profit before depreciation taxation) or "Profit before tax" or any other profit has to be taken into consideration for determination of assessable value of the goods captively consumed. Another doubt has also been raised whether the present method of determining profit margin as a percentage with reference to sales turnover and loading the profit margin of the preceding year to the cost of production of the present year to arrive at the assessable value are to be continued. 3. The matter has been further examined in consultation with the Cost Accounts Branch of Department of Expenditure. Board has observed that the method of calculation provided under Rule 6(b) (ii) of the Central Excise (Valuation) Rules, 1975 is to ascertain the nearest equivalent of the normal price. Therefore, while determining the cost of production of captively consumed goods during the current year, all elements which are otherwise includible in Section 4(1)(a) price have ot be included in the cost of production. It is hereby clarified that for calculation of value of the goods captively consumed under rule 6(b)(ii) the following steps are to be followed:- (i) The cost of production of the goods has to be determined so as to include inter alia, the cost of material, labour cost and overheads including administrative cost, advertising expenses, depreciation, interest etc. (ii) Profit before tax has to be taken from audited balance sheet of the previous year and the profit margin has to be calculated as a percentage of cost os production in the previous year as per the formula prescribed by the Cost Accounts Branch of Department of Expenditure (copy enclosed. (iii) The profit margin of the previous year as arrived at step (ii) as a percentage of cost of production has to be loaded to the cost of production of the impugned goods derived at (i) above for the current year to arrive at the assessable value of captively consumed goods. C.A. certificate and the loss and profit statement should be scrutinised carefully, in the light of these guidelines and should not be accepted blindly or automatically. 4. Board's earlier circular/ instructions as mentioned above stand modified to this extent. Sd/- (S.C. Bhatia) (Under Secretary to the Govt. of India) ___________________________________________ Annexure A clarification has been sought whether gross profit or gross profit before tax has to be taken into consideration for determination of assessable-value under Rule 6(b)(ii) of Central Excise Rules, 1975. It is clarified that for the purpose of assessable value, profit before tax should be considered. "Profit before tax" is, invariably, a distinct item appearing in the Profit Loss Account of companies. Profit before tax is arrived at after providing for interest and depreciation. Therefore, cost of production of the captively consumed goods will also include applicable interest, depreciation etc. 2. As regards the methodology of determining percentage of profit with reference to sale of the previous year and applying it is to the cost of production of the present year (which presently in vogue), the existing methodology may continue. 3. It is clarified that profit before tax should be related to the net-sales (total sales minus Excise Duty). Further, profit percentage so computed should be adjusted for its application on the cost co production of the relevant year as under:- (i) Let net sales (excluding Excise Duty) = Rs. 100 (ii) Profit before tax @ 20% on sales in previous year = 20/- (iii) Therefore, cost of production (Sales - profit) = 80/- (iv) Thus profit before tax as percentage of cost of production = 20 x 100 or 25% 80 Thus profit before tax which is 20% on sale = 25% on cost of production. In the same way for any other percentage on net sales, the corresponding percentage on cost can be worked out on the above steps. Sd/- (A.K. Gautam) Joint Director (Cost)