Chartered Accountant
Bookmark and Share
click here to subscribe our newsletter
 
 
Corporate News *   CBIC issues draft rules for Customs valuation *  Top Headlines: Threshold for Benami deals, green bond investors, and more *  Govt aims 1-hour clearance for goods at all ports *  Exporters Allowed To Use RoDTEP, RoSCTL Scrips To Pay Customs Duty, Transfer Them; Rules Amended *  Millions of labourers to be affected by brick producers’ strike over hike in GST, coal rates *  Inauguration of ‘kendriya GST parisar’ *  Transporter can seek Release of Conveyance alone, not Goods under GST Act: Madras HC *  GST: Quoting of DIN Mandatory for Responding to Notice, Govt Modifies Portal *  Firms can soon file claims for GST credits of ?400 cr *  CBIC issues modalities for filing transitional credit under GST. *  Mumbai: Man creates 36 fake GST firms, arrested for input tax credit fraud of Rs 23 cr *  Report to restructure Commerce Ministry under study; idea is to set up trade promotion body: Goyal *  Firms can soon file claims for GST credits of ?400 cr *  Gambling Alert! Govt May Levy Up To 28% GST; UP, Bengal Back Move *  EPFO backs raising retirement age to ease pressure on pension funds *  India Moving Up Power Scale, Set to Become Third Largest Economy By 2030 *  Airfares Get Expensive: What Changes for Flyers From Today? *  IRCTC Latest News: Passengers to Pay More For Cancelling Confirmed Rail Tickets Soon. *  IBC prevails over Customs Act, says Supreme Court. *  As GST enters sixth year, a time for evaluation and reassessment *  There’s GST on daily essentials as Centre needs money to buy MLAs: Arvind Kejriwal *  Now, GST on cancellation of confirmed train tickets, hotel bookings *  GST kitty for top States could rise 20% in FY23, says Crisil *  French customs officials seize another cargo vessel over Russia sanctions *  TradeLens builds on Asia momentum with Pakistan Customs deal *  Hike tax on tobacco, reduce affordability & increase revenue: Civil society organizations to GST council *  Bihar: ?10 crore tax evasion on tobacco products detected in raids *  Centre failed on GST, COVID; would it be anti-national? Rajan on Infosys row *  Service Tax not Chargeable on Income Tax TDS portion paid by recipient: CESTAT grants relief to TVS *  Foreign portfolio investors make net investment of Rs 7575cr in Sep so far
Subject News *  Run-up to Budget: Monetary threshold for GST offences may rise to Rs 25 cr *   GST (Tax) E-invoice Must For Businesses With Over Rs 5 Crore Annual Turnover *   Both Central GST and excise duty can be imposed on tobacco, rules Karnataka high court *   CBIC Issues Clarification On Extended Timelines For GST Compliance *   CBIC Issues Clarification On Extended Timelines For GST Compliance *  Budget 2023- 9.6 crore gas connections *  GST: Tamil Nadu Issues Instructions for Assessment and Adjudication Proceedings *  GST: CBIC Extends Last Date for filing of ITC *  GST collection in September surpasses Rs 1.4 lakh crore for straight seventh time *  Dollar smuggling case: Customs chargesheet names M Sivasankar as key conspirator. *  Hike in GST rates fuels inflation *  Assam: CBI arrests GST commissioner in Guwahati *  GST fraud worth ?824cr by 15 insurance Cos detected *  India proposes 15% customs duties on 22 items imported from UK *  Decriminalising certain offences under GST on cards *  Surge in GST collections more due to higher inflation: India Ratings *  MNRE Notifies BCD and Hike in GST Rates as ‘Change in Law’ Events But With a Condition | Mercom India *   Solar projects awarded before customs duty change allowed cost pass-through *  Rajasthan High Court Dismisses Writ Petitions Challenging Levy Of GST On Royalty *   GST revenue in September likely at Rs 1.45 lakh crore *  Govt working on decriminalising certain offences under GST, lower compounding charge *  Building an institution like GST Council takes time, trashing is easy: Sitharaman *  GST collections in Sept may touch ?1.5 lakh crore *  KTR asks Centre to withdraw GST on handlooms *  After Gameskraft, More Online Gaming Startups To Receive GST Tax Claims *  Madras HC: AAR Application Filed Under VAT Does Not Survive After GST Enactment *  Threshold for criminal offences under GST law may be raised *  Bengaluru: Gaming company faces biggest GST notice of Rs 21,000 crore *  CBIC clarifies Classification of Cranes for GST, Customs Duty *  Customs seize gold hidden in bicycle in Kerala airport  

Comments

Print   |    |  Comment

PJ/Case Laws/2012-13/1410

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

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.

Department News


Query

 
PRADEEP JAIN, F.C.A.

Head Office : -

Address :
"SUGYAN", H - 29, SHASTRI NAGAR, JODHPUR (RAJ.) - 342003

Phone No. :
0291 - 2439496, 0291 - 3258496

Mobile No. :
09314722236

Fax No. :0291 - 2439496


Branch Office : -

Address:
1008, 10th FLOOR, SUKH SAGAR COMPLEX,
NEAR FORTUNE LANDMARK HOTEL, USMANPURA,
ASHRAM ROAD, AHMEDABAD-380013

Phone No. :
079-32999496, 27560043

Mobile No. :
093777659496, 09377649496

E-mail :pradeep@capradeepjain.com