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CAS 4 – Guidance NoteCost of Production for Captive Consumption

(Exposure Draft)( p )

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Strictly Confidential. For private circulation only 1

CAS 4 Cost of Production for CAS 4 – Cost of Production for Captive Consumption

2Strictly Confidential. For private circulation only

Cost of Production for CAS ‐ 4

• Objectives:

Captive Consumption

Objectives:‐ Determine assessable value of excisable goods for captiveconsumption

• Highlights:‐ Assessable value of goods for captive consumption is 110% of cost

f d ti (C t l E i V l ti R l 2000)of production (Central Excise Valuation Rules, 2000)‐ Cost of materials to exclude recoverable duties & taxes‐ Costs of joint products to be allocated on rational & consistent basisCosts of joint products to be allocated on rational & consistent basis‐ NRV of by‐products & scrap to be credited to the cost of production‐ Inputs & amortized cost of moulds, tools, dies, etc received free ofcost to be added



• Disclosures:

Captive Consumption

Disclosures:‐ Material changes in cost accounting principles/practices affectingcost of production

‐ Stock adjustment for WIP & Finished Goods if not readily available



Captive Consumption

Materials Consumed

Direct Wages & Salaries

Admin Overheads relating to Salariesproduction

Cost of Production

Direct Expenses

R & D Costs

Packing Costs

Quality Control Cost

Works Overheads

Cost


CAS 4 Guidance NoteCAS 4 Guidance Note(Exposure Draft)


BackgroundCAS – 4 – Guidance Note

• Background:g‐ Valuation of Excisable Goods as per Central Excise Act, 1944

Section Valuation

Sec 3 Duty leviable on all excisable goods set forth in Schedule to Central Excise Tariff Act, 1985

Sec 4 Machinery to determine value of goods subject to dutySec 4 Machinery to determine value of goods subject to duty on basis of transaction value. Three conditions spelt:‐Goods are sold at the time & place of removal‐ Assessee and buyer of goods are not related‐ Assessee and buyer of goods are not related‐ Price is sole consideration for sale

Sec 4A Valuation of excisable goods on basis of MRP as per i i f St d d f W i ht & M A t 1976

‐ If any of requirements of Section 4 are not satisfied, assessablevalue to be determined under Central Excise Valuation Rules 2000

provision of Standard of Weights & Measures Act, 1976


value to be determined under Central Excise Valuation Rules, 2000

BackgroundCAS – 4 – Guidance Note

• Central Excise Valuation Rules:Rule Valuation

Rule 8 ‐Excisable goods are not sold‐but are captively consumed by him or on his behalf‐then value of excisable goods shall be 110% of COP

Rule 9 & 10 ‐Excisable goods are sold to related party/ g p y/interconnected undertaking and:‐ goods sold are captively consumed‐ then valuation as per Rule 8 i.e. 110% of COPp

‘COP’ – Cost of Production


Captive ConsumptionCAS – 4 – Guidance Note

• Captive Consumption‐ Goods are not sold by assessee‐ Used for consumption by him or on his behalf‐ In same premises or elsewhereIn same premises or elsewhere

• Goods sold to related party who do not sell but consume thesame, then it is treated as captive consumption

• Goods captively consumed in the same factory exempted fromduty, if duty is payable on final product(Notification No. 67/95CE dt.16.03.1995)(Notification No. 67/95 CE dt.16.03.1995)

• For purpose of valuation captively consumed goods categorizedas:

d f d ld b l d‐ Goods manufactured, not sold but captively consumed‐ Goods manufactured, partly sold and partly captively consumed‐ Goods manufactured, sold to related party for captive consumption


Related PersonCAS – 4 – Guidance Note

• Person deemed to be related if (sec 4(3)(b) of Excise Act)( ( )( ) f )‐ They are interconnected undertakings (as per MRTP Act, 1969)‐ They are relatives (sec 2(41) and sec 6 of Companies Act)‐ Amongst them the buyer is a relative and a distributor of theassessee or a sub‐distributor of such distributor or

‐ They are so associated that they have interest directly or indirectlyThey are so associated that they have interest, directly or indirectlyin the business of each other

• Interconnected undertaking‐ Signifies corporate relationship‐ Covers large categories of legal entities/undertaking such asholding company subsidiary company a relative and distributor ofholding company, subsidiary company, a relative and distributor ofthe assessee and any sub‐distributor


ApplicationCAS – 4 – Guidance Note

• Situations when CAS – 4 to be used‐ Cost of production for captive consumption‐ Goods manufactured and transferred to projects/sites for further

kwork‐ Free samples for distribution as sales promotion, if sale price notavailable

‐ Transfer/sale to related party/undertaking for captiveconsumptionl h f l l bl‐ Valuation where no specific rule is applicable


ApplicationCAS – 4 – Guidance Note

• Applicable to organizations registered with Excise Dept:pp g g p‐ Proprietorship concern‐ Partnership Firm‐ Cooperative societies‐ Private/Public Limited Companies

SSI it t f t f i d t• SSI units as exempt from payment of excise duty• Relevant in cases where intermediate product is dutiablebut final product is exemptbut final product is exempt


Valuation for part sale & CAS – 4 – Guidance Note

• Goods partly sold and partly captively consumed

part captive consumption

p y p y p y‐ Valuation of assessable goods partially soldBasis of transaction value u/s 4

‐ Valuation of assessable goods captively consumedValued under Rule 8 i.e. 110% of COP (Board Circular No643/32/2002‐CE dt 1‐7‐2002)643/32/2002 CE dt. 1 7 2002)


Valuation in case of jobCAS – 4 – Guidance Note

• Capital Goods

work arrangement

p‐ Captively consumed exempt from excise duty payment as perNotification No.67/1995‐CE‐16th March, 95

‐ Exemption available when goods manufactured by third party inExemption available when goods manufactured by third party infactory of manufacturer

• Job work Arrangement (Rule 10A)• Assessable value of goods manufactured on job work:

• Removed from the job worker premises• Excise duty is payable on sale price of the principal manufacturer• Excise duty is payable on sale price of the principal manufacturer

• No duty payable for intermediate goods sent to job worker:‐ Intermediate excisable product sent to independent job workerp p j‐ Manufacturer to follow Cenvat Credit Rules, 2004‐ Goods returned to manufacturer’s factory within 180 daysFurther used by manufacturer or cleared on payment of duty


‐ Further used by manufacturer or cleared on payment of duty

Other ValuationsCAS – 4 – Guidance Note

• Free Samplep‐ Valuation on basis of identical goods cleared at around same time‐ If such valuation not possible, then at 110% of COP under Rule 11

lr.w. Rule 8

• Removed for Test/TrialV l ti b i f id ti l d l d t d ti‐ Valuation on basis of identical goods cleared at around same time

‐ Applicable when goods removed for exhibition

• Loss making unitLoss making unit‐ 110% of COP as per Rule 8


General ConsiderationsCAS – 4 – Guidance Note

• Purpose of CAS 4p‐ Deemed valuation of captively consumed goods‐ In same unit or transferred to other unit of same manufacturer‐ Valuation required at the time of removal of goods

• Existing Product Cost Certification‐ Normally costing is done for future dispatches/period‐ Worked on cost of previous quarter‐ Adjustment to previous quarters costs made for various factors:‐ Adjustment to previous quarters costs made for various factors:

‐ Input price fluctuations‐ Changes in taxation structures‐ General inflation‐ Projected capacity utilization‐ Pattern of employee costs


p y


‐ Periodicity of Certification‐ Monthly‐ If significant changes in cost orPrices of major materials change frequently and very widely‐ Prices of major materials change frequently and very widely

‐ Quarterly‐ In all other cases

• New Product Cost Certification‐ Calculated at projected cost, projected production, projected

normal capacit tili ation and other factorsnormal capacity utilization and other factors

• Provisional Assessment under Rule 7‐ When normal capacity utilization is not quantifiable and/or‐ When normal capacity utilization is not quantifiable and/or‐ Actual capacity utilization is likely to be low compared to previousquarter



‐ Then annual certification done at year end‐ Based on finalized books of accounts‐ Differential duty payable if costs are higher than provisional

• Stock Adjustment• Stock Adjustment‐ For past period certification FG & WIP stock adjustment to be

considered‐ For future period/new product no stock adjustment

• Cost of Production to be worked out separately for eachlocation taking into consideration OH of that unitlocation taking into consideration OH of that unit

• Cost of Production for each variety/size of product/goodsto be worked out separatelyp y

• When production process is prolonged, cost can be workedat the time of removal of goods



• Export Benefits on imported materialp p‐ Export benefits not to be reduced from RM Cost/COP, since COP is

being calculated for captive consumption meant for domesticproductionproduction

‐ In case of consumption of duty free material imported under anyexport benefit scheme for domestic sales, differential duty payablenot using such goods for intended purpose is to be taken intoaccount

• Depreciation• Depreciation‐ Computed as per rates mentioned in Companies Act, 1956‐ Presented as part of Works OH in Cost Sheetp‐ Depreciation on idle fixed assets to be excluded



• Insurance‐ Production activity related premium to be included in Works OH‐ Insurance on loss of profit policy and finished goods in transit

l b l d dpolicy to be excluded

• R&D cost incurred for developing a new product to beexcluded from calculation of COPexcluded from calculation of COP

• Cost of trial run for production to be excluded from COP• Disclosures• Disclosures

‐ If there is any change in cost accounting principles and practicesduring the concerned period which may materially affect the cost ofg p y yproduction in terms of comparability with previous periods

‐ If opening stock and closing stock of work ‐in‐progress and finishedgoods are not readily available for certification purpose


goods are not readily available for certification purpose

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• This is a draft note prepared only for academic purpose andf p p y f p pshould not be construed in any other sense. The scope of theview expressed in this note is restricted to that stated aboveand should not be extended, amputed, marginalised orextrapolated beyond what is statedThi t i l l d f th t t d b d• This note is solely prepared for the purpose stated above andis not suitable nor should be used for any other purpose/s

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