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Central Excise valuation - Cost of Production - How to Compute?


AS per Rule 8 of the 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.

Now how to calculate this cost of production ? And what is the period?

The Institute of Cost & Works Accountants of India [ICWAI] had developed the Cost Accounting Standards, CAS-4 for determining the Cost of Production.

The CBEC in CIRCULAR NO. 692/08/2003-CX, Dated: 13th February, 2003, had clarified that cost of production of captively consumed goods will henceforth be done strictly in accordance with CAS-4.

Now let us take the case of an assessee who wants to clear his goods under the above Rule 8 and calculate the value based on cost of production from 1.4.2009. The assessee is supposed to get a CAS-4 Certificate from a Cost accountant. Now is the Certificate given by the Cost accountant based on the figures for 2008-09 or 2009-10? If it is based on 2008-09 figures, obviously it is not a correct value as the cost of production for 2009-10 cannot be the same as that of 2008-09. If it is based on 2009-10 figures, again it is not the correct value as it is based on assumptions and projections and the correct figure can be ascertained only after 31.3.2010. So the fact is even CAS-4 can give the actual value/cost of production only after the end of the year.

Now what figure is the Department going to accept? Apparently there would be two figures and then the assessee is required to pay differential duty or claim refund. Is he then required to follow the Provisional Assessment route and is he required to pay interest on the differential duty?

Way back in 1988, CBEC issued a circular clarifying that the cost of production of goods for the current year can always be ascertained through established accounting principles. The cost of raw materials, cost of labour etc. for the current year are always readily available. The help of a cost accountant could also be taken to ascertain the cost of production of a particular commodity for the current year. As such the proposal for taking the previous year's figures of cost of production for valuing goods which are captively consumed has not been found acceptable as the current cost of production is relevant under Section 4, in respect of goods captively consumed. [CBEC F.NO. 6/32/1987-CX.1, Dated : March 31, 1988]

The Institute of Cost & Works Accountants of India [ICWAI] issued a Guidance Note in January 2009 on this tricky computation of Cost of Production, which states,

In order to calculate the cost of production for captive consumption under Rule 8 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000, it is necessary to understand that the method and accuracy of cost computation will be determined and impacted by the following factors :

1. The CAS 4 is applicable to the manufacturers who are registered under Central Excise, irrespective of the constitution of the organization. It does not make any difference whether the manufacturer falls in the category of proprietorship, partnership, co-operative sector, company etc.

2. Whether the product is covered under the Cost Accounting Records Rules issued in pursuant to Sec 209(1)(d) of the Companies Act, 1956? If the product is already covered under Cost Accounting Records Rules, the systems required for cost calculation would be in place and the relevant information will be readily available for such calculations .In case Sec 209(1) (d) of the Companies Act, 1956 is not applicable, it is suggested that the assessee may maintain the costing records as per the generally accepted costing principles.

3. The method of valuation of issues followed by the assessee be either lot-wise actual , FIFO or Weighted Average to determine the consumption rates of various input materials and the cost of materials consumed.

4. The level of compliance of Cost Accounting Standards: The principles stated in Cost Accounting Standards, are applicable for all Industries and the level of its compliance determines the adequacy of the costing system in the organization which in turn determines the accuracy of product cost calculation for captive consumption.

5. The material receipts should be valued at purchase price including duties and taxes, freight inwards, insurance, and other expenditure directly attributable to procurement (net of trade discounts, rebates, taxes and duties refundable or to be credited by the taxing authorities) that can be quantified with reasonable accuracy at the time of acquisition.

6. In case raw material is imported through advance license / DEPB or under any other scheme and used for manufacture of goods for captive consumption, adjustment for import duty has to be made to bring the raw material cost to the level of duty paid import. However, Duty Drawback refund/benefit shall not be reduced from the input cost. Other export benefits such as DEPB, DFRC, and DEEC will not be deducted for calculation of cost of production.

7. Finance costs incurred in connection with the acquisition of materials (E.g. LC Charges/ Bank Charges on purchases, cash discount on purchases) shall not form part of material cost.

8. Periodicity of Certificates and basis for calculation of cost of production under CAS-4 : The basic purpose of CAS-4 is to calculate deemed transaction value of the goods captively consumed in the same unit or transferred to the other unit of the same manufacturer. The valuation (assessable value) is required at the time of removal of the goods. Normally the costing will be for the future dispatches/period. It could be either for the existing product or in respect of a new product yet to be manufactured. In case of costing for the existing product, it will be worked out based on the actual cost for the previous quarter. In case of costing for a new product, it will be calculated at projected cost, keeping in view projected normalized production and other cost parameters. The frequency of revising the certificate of cost of production will depend upon the significance in the changes in the cost due to various factors like input cost fluctuations, changes in the employee cost and other expenses. Valuation of opening stock and closing stock of WIP and Finished goods need not be considered in the above referred situations. In cases where goods are cleared based on the cost of production worked out as per the audited accounts of the previous audited period, it is advisable to prepare a fresh certificate of cost of production based on the audited accounts of the period for which the goods are cleared and the differential duty is paid or taken credit of as the case may be. In the circumstances mentioned in the above para, it is advisable to compute the actual material cost as per the issue valuation adopted by the assessee for material issues. If the actual cost of production is to be worked out after the close of the year, then due consideration should be given to opening and closing stock of WIP and Finished goods.

9. In case of multi-locational units, the cost of production should be worked out separately for each unit taking into consideration material cost and overheads of the respective unit.

10. In case the assessee is manufacturing different varieties, sizes, etc. of goods, then cost of production for each of the variety/size should be worked out separately.

11. If duty is paid on intermediate products and final product is exempted, then at the year end actual costing should be worked out and differential duty to be recovered / refunded.

12. It is advisable for the assessee to obtain certificate from cost accountant before the removal of the goods.

13. Companies following standard costing system should adjust the variances to the various products as per normally accepted cost accounting principles for calculation of product wise actual cost.

The fact is that the actual Cost of Production can effectively be determined only after the end of the period and so at the time of clearance, the value declared is not correct and there has to be an adjustment and that would result in a differential duty and that would bring in all complications.

After issuing the Circular in February 2003 releasing CAS 4 (along with couple of other Cost Accounting Standards viz., CAS 2 and CAS 3) with much fanfare, the Board seems to have gone into a blissful slumber on this issue. They did not even bother to notify the field formations about the Guidance Note on CAS 4 issued by the ICWAI in January 2009.

Further other Cost Accounting Standards issued by ICWAI also have to be looked into before understanding the CAS 4 certification done by a Cost Accountant. For e.g. CAS1, CAS3, CAS 6 etc are equally relevant. In fact the Council of ICWAI resolved that CAS 1 to 6 have to be mandatorily applied for preparation and certification of general purpose cost accounting statements for period commencing on or after April 1, 2010.

CAS 1 to CAS 6 are issued for the following purposes:

CAS 1: Classifications of Costs

CAS 2: Capacity Determination

CAS 3: Overheads

CAS 4: Cost of Production for Captive Consumption

CAS 5: Determination of Average (Equalized) Cost of Transportation

CAS 6: Material Cost

Any way will the good Board issue a clarification regarding this?

Cost is a fact
Price is a policy
Profit is a projection

No more export of edible oils - CBEC

DGFT vide Notification No. 60 dated 20.11.2008 had allowed export of edible oils in branded consumer packs of 5 Kgs. subject to a quantitative limit of 10,000 MTs till 31.10.2009. Export of 9365.76 MTs of edible oil has already been made till 31.10.2009 and as such, export of edible oils exempted as above need to be stopped forthwith from all Ports and no further exports should be permitted beyond the limit of 10,000 MTs. The DGFT has requested the Board to ensure that the quantitative limit of 10,000 MT is not breached.

So the Board wants the Customs officers to ensure that export is not allowed.

CBEC F.No.528/5/2007-Cus.(TU) Dated: November 19, 2009

Bidi and Matches manufacturers exempted from filing Annual capacity Statements

Government has exempted assessees who manufacture

(i) biris, manufactured without the aid of machines falling under tariff item 2403 10 31

(ii) matches manufactured without the aid of power falling under heading 3605

(iii) reinforced cement concrete pipes falling under heading 6810

from the submission of the Annual Installed Capacity Statement.

Notification No. 26/2009 - Cx.,(N.T.), Dated: November 18, 2009

Austerity in Government

Minister of State for Finance, Namo Narain Meena informed the Lok Sabha that Ministry of Finance has advised all Ministries/Departments to effect a mandatory 10% cut in non-plan expenditure on Domestic and Foreign travel expenses, Publications, Professional services, Advertising & Publicity, Office Expenses, POL (except for security related requirement) and other administrative expenses for the year 2009-10. The remaining portion of non-plan expenditure will be subjected to a mandatory 5% cut. Ministries/Departments have full powers for incurring miscellaneous and contingent expenditure and data in regard to purchases is not maintained centrally. Since procurements are done by individual Ministries/Departments, all related complaints are also to be handled by them.

Orders have been issued by DOP&T permitting Ministries/Departments to make purchases of items required for office consumption directly from Kendriya Bhandar/NCCF without calling for quotations or for granting purchase preference to Kendriya Bhandar/NCCFs, depending on the value of procurement.

Perhaps many of the ministries are not aware of this advice going by the Government you could see in the media. The travel costs of senior babus are enormous. Just imagine an executive class ticket from Delhi to Chennai would cost about 26000 rupees while an ordinary class would cost 6000 rupees. Is there any justification for anyone to spend 20,000 rupees more for a two hour flight? And in these days of hi-tech communication facilities, what is the need for anyone to really travel?

Jurisprudentiol – Tuesday's cases

Legal Corner IconCentral Excise

A presumption under section 114(e) of Evidence Act is available in respect of postal acknowledgement card that public proceedings have been regularly and lawfully performed inasmuch as a copy of Order-in-Original had been served on an agent of the company – Appeal rightly dismissed by Commissioner(A) as time barred – CESTAT

AN order of adjudication concerning denial of CENVAT credit was passed on 8.2.2005, against which the party filed an appeal with the Commissioner (Appeals) on 30.8.2005. That appeal was obviously beyond the period of limitation prescribed under sec. 35 of the Central Excise Act, 1944 and even beyond the condonable period of delay of 30 days prescribed under the said provision. On this basis, the Commissioner (Appeals) dismissed the appeal as time-barred.

Income Tax

Sec 154 - Assessee treats power subsidy as capital receipt - Revenue allows - but later rectifies order to deny claim on basis of Apex Court decision - Powers under Sec 154 allow Revenue to rectify only 'mistake apparent' and not debatable allowance: SC Larger Bench

THE Income Tax Act provides room for rectification of mistake under Sec 154. But, what does constitute 'rectifiable mistake'? Should it be a 'mistake apparent from the record' or it can be allowance of a claim which is perhaps not admissible to the assessee. Or, Revenue can change its opinion later on the basis of a court decision, on a claim allowed in the assessment order and can take recourse to powers u/s 154 to deny the same? This is exactly the issue before the Apex Court in this case.

Central Excise

Revenue loses Seven Crore case in Tribunal: Process of making Multi Drug Therapy (MDT) combi pack is manufacture – Appellants entitled to take Cenvat Credit – CESTAT

If the stand of Revenue in this case is accepted, no medicine packed in blister pack will be chargeable to excise duty since tablets/ capsules in loose condition are considered as marketable by the lower authorities. No doubt, in some cases tablets are sold in loose condition also. It is for this reason that Revenue is required to establish that goods were marketable even before the process was undertaken.

See our columns Tomorrow for the judgements

Until Tomorrow with more DDT

Have a nice day.

Mail your comments to

Sub: CAS to be followed

I have come acros a case where input is commen and outputs are main product and by product. now for ascertaining value addition of the by product, it has been advised from the department to follow CAS - 7.

When serched from net, found that CAS - 7 is for employee cost, and not for joint cost.

However, during search in net I found draft CAS - 7 also, containing costing of joint cost, which was issued for receiving comments, but which could have not been finalised. finally when CAS-7 issued it was different.

but it was asked to follow CAS-7, which is not addressing related issue.

Even institute is not aware that draft which does not finalised, (Mis)used, for lingering the issue.

Posted by Anand Chauhan
Sub: Ref DDT 1242

As per the CBEC Circular 692_08_2003-CX, DT. 13.02.2003 the cost of production of captively consumed goods required to be done strictly in accordance with CAS-4.

It doesn't say for any certifiate to be issued from a Cost Accountant in this regard.

Cost Audit Reports OR Certificate may be issued on close of a financial year only. Hence it is practically difficult to derive actual cost of product if applied the certify cost.

Posted by George Michael Michael