| After about 20 years of marriage, actor Mel Gibson discovered that he was finally `starting to scratch the surface of what women want'. What did he find? That `the answer lies somewhere between conversation and chocolate.' British comedian Jo Brand would assure the anxious that anything is good if it's made of chocolate. However, conversations with the taxman are usually anything but good, even if they are about chocolate.
And that is what happened in the case of Cadbury India Ltd. The company manufactured `milk crumbs, refined milk chocolate and four other products' in its factory at Induri, Pune. These products were not sold but `captively consumed' by Cadbury `in the manufacture of chocolate.' Valuation of these products was done according to Rule 6(b)(ii) of the Central Excise (Valuation) Rules; that is, at `cost of production on manufacture, including profits, if any, the assessee would have earned in the sale of such goods.'
To support the computations, Cadbury submitted to the excise authorities `a statement verified by a chartered accountant,' which indicated `the cost of edible and packing material used in the manufacture, including its overheads.' A separate statement in support of the profit added was also provided.
Matt Lauer, NBC's Today show co-host, once said on the telly that researchers had discovered chocolate produced some of the same reactions in the brain as marijuana. It seems the researchers also discovered other similarities between the two, but couldn't remember what they were!
Assessees, perhaps, produce strange reactions in the minds of the taxmen. Which explains why at the time of finalising Cadbury's assessment, the Department took the view that the value of the products in question should include `labour cost, direct expenses, total factory expense, administration expenses, travelling expense, insurance premium, advertising expense and interest.'
Additions to cost
Here is a snatch of the facts, as narrated in the text of the Supreme Court's verdict dated August 1: "The Assistant Commissioner added these elements to the declared value. He added the total expenses of the company as shown in the balance sheet and deducted the cost material. A percentage of this cost of the remaining figure was treated as the factor by which the assessable value should be increased."
When Cadbury appealed against the order, before the Commissioner, he held that since Rule 6(b)(ii) itself specified the inclusion of the profit on the goods captively consumed, valuation should be brought to the level of the sale value of the goods. Accordingly, all expenses, as specified by the Assistant Commissioner should be included, ruled the Commissioner.
"Life is like a box of chocolates, the best ones are half eaten!" rues a quote on www.virtualchocolate.com. Cadbury might have felt likewise after the setback at the Commissioner level, yet it didn't give up. It approached the Tribunal, where the decision went in favour of the company. "The Tribunal held that the expenses other than the cost of manufacture, cost of raw materials and the profit would not be includible in the assessable value."
Appealing against this order was the Commissioner of Central Excise, Pune, at the apex court, arguing through Harish Chander. For Cadbury, it was Joseph Vellapally who spoke. He drew the attention of the court to `settled principles of accountancy' according to which only the elements that have actually gone into the manufacture/production of the intermediate products were relevant.
These were `sum total of the direct labour cost, direct material cost, direct cost of manufacture and the factory overheads'. He produced `authoritative texts' such as: Wheldon's Cost Accounting and Costing Methods, Cost Accounting methods by B.K. Bhar, Principles of Cost Accounting by N. K. Prasad, and Glossary of Management Accounting Terms by ICWAI (the Institute of Cost and Works Accountants of India)."
CAS-4
Justices Ashok Bhan and Markandey Katju of the apex court heard the arguments. They took notice of the fact that the ICWAI had laid down the principles of determining cost of production for captive consumption and formulated CAS-4, a standard for cost accounting. In this standard, `cost of production' has been defined as consisting 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.'
The court observed that the Central Board of Excise and Customs (CBEC) has recognised the cost accounting principles stipulated by the ICWAI. The Board's circular requires the Department to determine the cost of production of captively consumed goods `strictly in accordance with CAS-4'.
The standard appears to have fared well in practice. "The Tribunal in the case of BMF Beltings Ltd vs CCE for the period 1995 to 2000 has directed the Department to apply CAS-4 for the determination of the cost of production of the captively consumed goods," said the apex court, citing earlier decisions of the Tribunal. "In ITC vs CCE the Tribunal held that the Department has to calculate the cost of production in terms of CAS-4. Other decisions of the Tribunal, wherein it has directed that CAS-4 be applied for determination of the cost of production, are Teja Engineering vs CCE, Ashima Denims vs CCE, and Arti Industries vs CCE. This is, therefore, a consistent view taken by the Tribunal. The Department has not filed any appeal in these cases and accepted the legal position."
It may be interesting to know that though CAS-4 came in subsequent to the filing of the current appeals before the apex court, the verdict went in favour of Cadbury.
"Given that I regularly eat four squares of dairy milk chocolate before training and major races, I'm delighted to have joined up with Cadbury," is a quote of athlete Paula Radcliffe. "And one thing's for sure, I certainly won't be running low in supplies in the near future," she'd add. Similarly, accountants can be sure that professional bodies such as the ICAI and the ICWAI won't be running low in supplies of standards to come in handy when arguing with the taxman.
Tailpiece
"Las cosas claras y el chocolate espeso."
"Means?"
"Ideas should be clear and chocolate thick. A Spanish proverb!"
D. Murali
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