Interest cost is not included in cost of production as per CAS-4.

PJ/Case Laws/2012-13/1410

Case:-SWARAJ FOUNDRY DIVISION Vs. C.C.E., LUDHIANA

Citation:-2012 (284) E.L.T. 689 (Tri. - Del.)

Brief Facts:- The appellant manufactures castings of iron and steel, which are used for manufacture of motor vehicle parts. The appellant during the period of dispute were clearing the castings to their another unit for its captive consumption on payment of duty on the basis of 115% of the cost of production in accordance with the provisions of Rule 8 of the Central Excise (Valuation) Rules. The cost of the goods was determined in accordance with CAS-4. The department was of the view that the cost should also include the element of "interest on loans" and on this basis, duty demand was raised by the department by issuing show cause notice. The show cause notice was adjudicated by the Commissioner vide order-in-original by which the Commissioner confirmed the duty demand for the period from May, 2001 to September, 2001 along with interest. Besides this, he also imposed penalty on the appellant. Against this order of the Commissioner, the appellant filed appeal before Tribunal.

Appellant’s Contention:-The appellant pleaded that the impugned order of the Commissioner confirming the duty demand by including the interest on loans in cost of the castings is not sustainable for the reason that the same is not required to be included in the cost, that this position has been clarified to the department vide letter, that the interest on loans is not required to be included in the cost of finished products as per Accounting Standard CAS-4, that in terms of Board's Circular regarding the costing of the goods cleared for captive use, the same is to be determined by applying CAS-4 Standard, that this Circular of the Board has retrospective application. That in this regard, reliance is placed on the judgment of the Tribunal in the case ofNirma Ltd. v. C.C.E. reported in 2006 (200) E.L.T. 213 and of Hon'ble Supreme Court's judgment in the of C.C.E., Pune v. Cadbury India Limitedreported in 2006 (200) E.L.T. 353 (S.C.).

Respondent’s Contention:-The respondentdefended the impugned order by reiterating the findings of the Commissioner in the impugned order and pleaded that the Board's Circular have only prospective validity and cannot be applied for the period prior to 13-2-2003 and that in this regard, he relies upon the Apex Court's judgment in the case of H.M. Bags Manufacturer v. CCE reported in 1997 (94) E.L.T. 3 (S.C.).

Reasoning of Judgment:-The Tribunal has carefully considered the submissions from both the sides and perused the records. Coming to the question of interest cost, in terms of the Board's Circular No. 6/29/2002-CX.-I, dated 13-2-2003, the cost of the goods cleared for captive consumption must be determined in accordance with the general principles of costing and accordingly for this purpose, CAS-4 Standard is to be adopted. As per CAS-4, for determining the cost of goods, the interest cost is not to be included. The department's plea, however, is that Circular dated 13-2-2003 of the Board has only prospective application and is not applicable for the period prior to 13-2-2003 for the purpose of determining the cost of production under Rule 6(b)(ii) of the Central Excise (Valuation) Rules. However, Hon'ble Supreme Court in the case of C.C.E., Pune v. Cadbury India Ltd.reported in 2006 (200) E.L.T. 353 (S.C.) where the period of dispute pertains to the period prior to 13-2-2003, has held that for determining the cost of production for the purpose of determining the assessable value under Rule 6(b)(ii) of Central Excise (Valuation) Rules, 1975, the cost must be determined, strictly according to the principles of costing and for this purpose CAS-4 must be adopted. In this regard, paras 9, 10, 11, 12 and 13 are reproduced below:-

"9. The issue in the present case is about the value of the goods captively consumed by the respondent. The assessee has contended that there is no dispute that these intermediate goods are not marketable and are not bought and sold in the market. Hence the valuation of these intermediate goods has to be done according to Rule 6(b)(ii) of the Central Excise (Valuation) Rules, 1975.

Rule 6(b)(ii) reads as follows :

"Rule 6 - If the value of the excisable goods under assessment cannot be determined under Rule 4 or Rule 5, and -
(a)
(b)(i) ..........................................
if the value cannot be determined under (ii) sub-clause (i), on the cost of production or manufacture including profits, if any, which the assessee would have normally earned on the sale of such goods;"

10. According to settled principles of accountancy only the elements that have actually gone into the manufacture/production of these intermediates i.e. sum total of the direct labour cost, direct material cost, direct cost of manufacture and the factory overheads of the factory producing such intermediate products are included in the cost of production. The appellant produced along with the reply to the Show Cause Notice the following authoritative texts: Wheldon's Cost Accounting and Costing Methods, Cost Accounting methods by B.K. Bhar, Principles of Cost Accounting by N.K. Prasad, Glossary of Management Accounting Terms by ICWAI.

11. In C.C.E. v. Dai Ichi Karkaria Ltd. (1999) 7 SCC 448, at page 459 it has been held that the normal principles of accountancy shall be applied to determine the cost. In this decision this Court observed:

"Learned Counsel for the respondents drew our attention to the judgment of this Court in Challapalli Sugar Ltd. v. CIT. The Court was concerned with "written-down value". The "written-down value" had to be taken into consideration while considering the question of deduction on account of depreciation and development rebate under the Income Tax Act. "Written-down value" depended upon the "actual cost" of the assets to the assessee. The expression "actual cost" had not been defined in the Income Tax Act, 1922 and the question was whether the interest paid before the commencement of production on the amount borrowed for the acquisition and installation of the plant and machinery could be considered to be a part of the "actual cost" of the assets to the assessee. As the expression "actual cost" had not been defined, this Court was of the view that it should be construed "in the sense which no commercial man would misunderstand. For this purpose, it could be necessary to ascertain the connotation of the above expression in accordance with the normal rules of accountancy prevailing in commerce and industry". Having considered authoritative books in this regard, this Court said that the accepted accountancy rule for determining the cost of fixed assets was to include all expenditure necessary to bring such assets into existence and to put them in a working condition. That rule of accountancy had to be adopted for determining the "actual cost" of the assets in the absence of any statutory definition or other indication to the contrary."

12. Subsequent to the filing of these appeals, the Institute of Cost and Works Accountants of India (ICWAI) has laid down the principles of determining cost of production for captive consumption and formulated the standards for costing: CAS-4. According to CAS-4 the definition of "cost of production" is as under:

“4.1. Cost of Production: Cost of Production shall consist of Material consumed, Direct wages and salaries, Direct expenses, Works overheads. Quality Control cost. Research and Development cost. Packing cost, Administrative Overheads relating to production."

13. The cost accounting principles laid down by ICWA1 have been recognized by the Central Board of Excise and Customs vide Circular No. 692/8/2003-CX., dated 13-2-2003. The circular requires the department to determine the cost of production of captively consumed goods strictly in accordance with CAS-4."

In view of the above judgment of the Apex Court, the impugned order confirming duty demand on the basis that costing of the product would also include the interest cost, even though it is not required to be included as per CAS-4, is not sustainable. The same is set aside.

Decision:-The appeal is allowed.

Comment:- The analogy drawn from this case is that when CBEC has accepted and followed the principles laid down by ICWAI as enshrined for the purposes of computation of cost of production for the purposes of Rule 8 of Valuation Rules then interest cost cannot be included as it is not required to be included according to CAS-4.

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PJ/Case Laws/2012-13/1410

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