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Cost of Utilities is Variable Cost and needs to be Absorbed on the basis of Actual Capacity Utilization

Cost of Utilities is Variable Cost and needs to be Absorbed on the basis of Actual Capacity Utilization - Central Excise - By: - Rakesh Singh - Dated:- 20-1-2016 Last Replied Date:- 5-2-2016 - 2015 (10) TMI 1990 - CESTAT NEW DELHI M/s India Glycols Ltd. Versus CCE, Allahabad It has been explained in the Guidance Notes on CAS-4 that fixed overheads comprise of expenses which do not vary with the change in volume of production such as fixed portion of salaries and wages, rent, insurance, technical .....

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denominator came up in the instant case where it was held that utilities are part of variable cost and is to be absorbed on the basis of actual capacity utilization and not on the basis of normal capacity utilization. The Issues: 1. The company had a manufacturing unit in Gorakhpur for manufacture of denatured rectified spirit, an excisable goods from molasses and another unit in Kashipur which manufactured Ethylene glycol. The dispute is in respect of the clearances of de-natured rectified spir .....

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to be determined on basis of CAS-IV format developed by ICWAI. The dispute is only about the calculation of the cost of production on the basis of CAS-IV format. The appellant during the period of dispute had divided the expenses on account of salary and wages, utilities, direct expenses, depreciation, works over head and administrative over heads by normal capacity utilization and only raw material consumption expenses and process chemical consumption expenses had been divided by the actual ca .....

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er unit cost of production has to be determined on this basis. That based on these costing guidelines, the expenses on account of salaries and wages, direct expenses, depreciation, works over heads and administrative over heads have to be absorbed in cost on the basis of the normal capacity utilization as during the period of dispute, the actual capacity utilization was much less than the normal capacity utilization. 3. That in this regard, the utilities, that is, the expenses on account of powe .....

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the cost of production by dividing these expenses also by actual capacity utilization is not correct. He therefore, pleaded that the impugned order is not correct, as the same is contrary to the principles of costing. Besides this, he also pleaded that whatever duty was payable by the Gorakhpur unit its CENVAT Credit was available to the Kashipur Unit and as such it is a Revenue's neutral situation and for this reason also, there is no justification for this huge duty demand. 4. Shri Ranjan .....

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bsorbed the expenses on account of utilities on the basis of normal capacity utilization which was four times higher than the actual capacity utilization during the period of dispute. He also pleaded that during 2011-2012 when their cost accountant changed and a new accountant joined, the expenses on account of utilities, salaries and wages utilities direct expenses depreciation works over heads and administrative over heads were treated as variable over heads and were absorbed by dividing the s .....

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manufactured and cleared by the Gorakhpur unit, who is appellant in this case, was to be determined on the basis of 110% of the cost of production under Rule 8 of the Central Excise Valuation Rules, 2000. There is also no dispute that in terms of the Board's Circular No. 692/8/2003CX dated 13/2/2003, the cost of production was to be determined strictly in accordance with the CAS-IV Format Standard developed by the Institute of Cost Works Accountant of India (ICWAI). The dispute is only about .....

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ses and process chemical consumption expenses on the basis of the actual production, which during the period of dispute, was one-fourth of the production on normal capacity utilization. The other expenses, i.e., expenses on account of salary and wages, utilities, direct expenses, depreciation, works over heads and administrative over heads have been treated as fixed expenses and the same have been absorbed in the costing by dividing the same by the production on normal capacity utilization and n .....

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heads are the items of expense with the change with the volume of production such as the cost of utilities, raw material, etc., the fixed over heads are those whose value does not change with the volume of production, such as salaries, rent, etc and according to this para 5.9 while variable production over heads shall be absorbed in production cost based on actual capacity utilization, i.e., on the basis of actual production, the fixed production over heads and similar items of fixed cost such a .....

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ilization, as in the present case the actual production was much lower than the production based on the normal capacity utilization and prima facie, this is what the appellant had done. However, we find that there are considerable expenses each year on utilities which in terms of the para 5.9 of the CS Format guidelines are to be treated as variable over heads and the cost of variable over heads is to be absorbed in costing based on the actual captive utilization while this is the cost of utilit .....

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we are of the view that this is not the case for total waiver. The appellant, therefore, are directed to deposit an amount of ₹ 50 lakh within a period of six weeks for compliance with the Provision of Section 35F. On pre-deposit of this amount within a stipulated period, the requirement of pre-deposit, balance amount of duty demand, interest and penalty would stand waived and recovery thereof stated. - Reply By Debtosh Dey - The Reply = Many judgments on captive consumption, related part .....

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