CAPTIVE CONSUMPTION & JOB WORK

BY : JAPNEET SINGH() YAMINI PATWAL(FB11119)

CAPTIVE CONSUMPTION
It means goods are not sold but consumed within the same factory or another factory of same manufacturer(i.e. inter unit transfer). No sales tax consumption. is levied on Captive

Captive Consumption for dutiable financial products(Exemptions)

Paying duty on all captive consumption will obviously

cause inconvenience to manufacturers and hence exemptions have been given in many cases. If duty is payable on final product, excise duty is not payable on intermediate product used in manufacture of such final product. Intermediate product manufactured within the factory is exempted from duty, if consumed captively for manufacture of (a) Capital goods as defined in CENVAT Credit Rules i.e. those which are eligible for CENVAT credit or (b) Used for in or in relation to manufacture of final products eligible for CENVAT.

Exemptions:
Exemptions if final product cleared for deemed

export-No duty is payable if final products is cleared to EOU to a unit in Electronics Hardware Technology Park to a unit in Software technology park. In such cases, duty on intermediate product is not payable even if final product is cleared without payment of duty. Exemptions if final product is exported or supplies to SEZ-If final product is exported , the goods are neither exempt form excise duty or chargeable to NIL duty. Hence no duty is payable on Captive consumption. Goods cleared to UN, WHO etc.- In such case any intermediate product manufactured will be exempt from duty.

Valuation in case of Captive Consumption

Valuation is done on the basis of cost of

production plus 10%. If the cost of production based upon general principle of costing of a commodity is 10000 per unit, the assessable value of the goods shall be 11000 per unit(i.e. 10000+10% of 10000). Captive consumption by related person in case goods are supplied to related person and not sold, valuation will be done on the basis of cost of production plus 10%.

Principle of cost of analysis for Captive Consumption

Formula of Costs

Cost is classified as:

Direct material + Direct Labor + Direct

expenses= Prime cost Prime cost + Production OHs + Administration OHs + R & D Cost (Apportioned)= Cost of Production(COP) COP + Selling Costs + distribution Costs= Cost of Sales

Elements of Cost of Production

As

per CAS-4, COP 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. To arrive at cost of production of goods dispatched/ used for captive consumption, adjustment for stock of work in process, finished goods, recoveries of sale of scrap, wastage etc. shall be made. R&D cost shall be included in the COP. Administrative Overheads in relation to activities other than manufacturing activities e.g. Marketing, project management, corporate office expenses etc shall be excluded from COP.

 Product transferred/dispatched duly packed for

captive consumption, cost of such packing shall be included. Analysis of over heads for cost of Production Joint Product, scrap and waste Interest and finance charges to be excluded shall not be considered as COP. Abnormal costs to be excluded Depreciation to be added it is required to be treated as overheads.

Illustration
Raj & Co furnish the following expenditure incurred by them and

want you to find the assessable values for the purpose of paying excise duty on captive consumption. Determine the cost of production in terms of rule 8 of the Central excise Valuation(determination of Price of Excisable Goods) i. Direct material cost per unit inclusive of excise duty at 10 % Rs 880 ii. Direct wages- Rs 250 iii. Other direct expenses- Rs 100 iv. Indirect materials-Rs75 v. Factory Overheads-Rs200 vi. Administrative Overheads(25% relating to production capacity) Rs 100 vii. Selling & Distribution Expenses-Rs 150 viii. Quality control-Rs 25 ix. Sale of scrap realized Rs20 x. Actual profit Margin-15%

Solution:
Particulars 1 2 3 4 5 6 7 Direct material Direct Labour Direct expenses Works Overheads [Indirect material(75) plus Factory OH(200)] Quality Control Cost R & D Cost Administration Overheads(to the extent relates to production activity) Amount(Rs) 800 250 100 275 25 Nil 25

Less: Realizable Value of Scrap Cost of Production

Add: 10% Assessable Value

(20) 1455
145 1600

Job Work
Job work means processing or working upon of raw materials or semi finished goods supplied to job worker, so as to complete a part or whole of the process resulting in manufacture or finishing of an article under notification No. 214/86-CE. Job work is possible whether or not its results in manufacture or finishing of an article.

 Excise

duty will not be payable if raw material/semi finished components are sent for job work under cenvat provisions or under notification No. 214/86-CE.However, in other cases, if job work results in manufacture of a product, duty will become payable by job worker.

Valuation under Rule 10A of valuation Rules even if substantial raw material purchased and used by job worker:
In Audi automobiles vs. CCE(2010) 249 ELT 124 (CESTAT), it was held that (for purpose of valuation rule 10A), the activity will be job work even if substantial raw material is used. In this case, principal manufacturer had supplied chassis and job worker was making chassis using his own raw material . It was held that the words used in rule 10A are on behalf of manufacturer and not for the manufacturer. The valuation of motor vehicle plus chassis should be as per rule 10A i.e. on basis of selling price of Principal Manufacturer.

Provisions Relating to Valuation

When goods are sold at the factory of job worker

by Principal Manufacturer- The value will be the transaction value of the goods at which the goods are sold by the principal manufacturer for delivery at the time of removal of goods from the factory of job worker. This would be so if the principal manufacturer and the buyer of the goods are not related and the price is the sole consideration for the sale (rule 10A(I) Of valuation Rules).

When goods are sold by principal manufacturer from some other place:
If goods manufactured by job worker are delivered at other place (e.g. branch of principal manufacturer) and sold from there, the valuation will be on the basis of normal transaction value of goods sold at or about the same time by the principal manufacturer from such place. This would be so if the principal manufacturer and the buyer of the goods are not related and the price is the sole consideration for the sale (rule 10A(I) Of valuation Rules).

Exemption for job work under cenvat

Payment of duty on the basis of price at which raw

material suppliers final product in market will create a very big exercise liability which will seriously hamper job work and hence exemption will be given if material received under Cenvat provisions ( Cenvat Credit Rule 4(5)(a)

Exemption for job work under Notification No. 214/86-CE

1. All final products are eligible under notification

No. 214/86 2. Notification applicable only to job worker under notification no.214/86 as he can send the material after job work without payment of duty. 3. Supplier has to undertake payment of duty on final product. The supplier of raw materials or semi finished goods has to give an undertaking that he will discharge the duty on final product. 4. Use of goods after job, the material should be normally returned to person who had sent it for job work.