Valuation Of Captive Inputs For Determination Of Non-Injurious Price

• In the past, the DGTR used to consider valuation of captive inputs as per cost of production of such inputs.
• However, the Supreme Court held that such an approach was not appropriate, as it creates an artificial discrimination between integrated and non-integrated companies.
• At present, the DGTR considers the valuation of captive inputs as per cost or market price, based on records of the domestic industry
• Where the domestic industry values inputs at cost in its records, the DGTR considers the optimized cost of production of such captive input. Further, a return of 22% is allowed on the assets deployed for production of such inputs.
• Where the domestic industry values inputs at market price in its records, the DGTR considers the same. However, no return on assets deployed for such inputs is allowed.

The Directorate General of Trade Remedies ("DGTR") follows the lesser duty rule in which the anti-dumping duty is imposed on the lower of dumping margin or injury margin. The injury margin is determined based on the noninjurious price, which is calculated as the sum of the cost of production of the domestic industry, plus a return on capital employed. The non-injurious price is considered to be a price level at which if the imports occur, no injury will be caused to the domestic industry. At such price, the domestic industry is expected to be able to recover its costs and earn a reasonable return on the investment made by it. The provisions of Annexure – III detail out the manner in which the cost of production is required to be calculated for determination of non-injurious price. However, the provisions are silent concerning the manner in which a captive input may be valued for this purpose.

Treatment of captive inputs under cost accounting standard

The erstwhile Cost Accounting Standard 4 was issued for determination of cost of production for captive inputs. CAS-4 provided principles and methods for determining the cost of production of excisable goods used for captive consumption. However, CAS-4, that is Cost Accounting Standard on cost of production for captive consumption has now been replaced with cost accounting standard on cost of production / acquisition / supply of goods/provision of services. Similar methodology has been prescribed in CAS-4 for determination of cost of production for captive input.

Further, under the erstwhile Central Excise Valuation (Determination of Price of Excisable Goods) Rules 2000, the assessable value of goods used for captive consumption was 110% of cost of production of such goods. However, with the introduction of Goods and Services Tax, the Excise Rules are no longer applicable. Further, in any case, the valuation under Excise Rules is not accepted for the purpose of determination of non-injurious price¹.

Practice of the DGTR

While computing the costs of such captive inputs, DGTR follows principles prescribed under Annexure-III to Anti-Dumping Rules 1995. In the past, DGTR considered only the cost of production for determining the value of the input, irrespective of how the transfer is booked in the financial accounts.

However, in the case of Reliance Industries Ltd v. Designated Authority, the Hon'ble Supreme Court² noted that valuation of captive inputs based on cost of production was not appropriate. In this case, the domestic industry had a captive power plant and also drew electricity at market prices from the grid for manufacturing the like article. However, in determination of the non-injurious price, the DGTR considered the cost of production of electricity instead of the market rate of electricity. The Hon'ble Supreme Court held that the Authority is always required to take into consideration the market value of the inputs, and not their actual cost of captive production. The Court considered that noninjurious price is required to be determined at a level which allows protection of the domestic industry as a whole. Consideration of cost of production would create an artificial discrimination between the integrated and nonintegrated companies to the peril of the smaller plants with no backward integration. Therefore, the Court opined that market price of captive inputs should be considered for determination of non-injurious price.

At present, the DGTR has accepted captive inputs at market prices in the calculation of non-injurious price, provided that the domestic industry has transferred that input at market price in its books and records. The same has also been recorded by the DGTR in its Manual of Operating Practices.

• In case the domestic industry transfers the captively produced inputs at market value consistently in the books of accounts, then such market value of captively produced inputs may be adopted for determination of the non-injurious price. However, if the captive inputs are transferred at market prices, no return is allowed on assets used for manufacturing captive inputs.
• If the domestic industry considers the actual cost incurred for producing these inputs in its books of accounts, the DGTR would consider the valuation of such input at cost. The DGTR determines the optimum cost for the captive input based on optimum utilisation of raw material and utilities at optimum capacity utilisation. Further, an additional return at 22% on capital employed for assets utilized for producing such inputs is also allowed. This cost is then considered for the determination of cost of production of the like article.

In the mid-term review concerning imports of Aniline³ from China, the domestic industry had transferred the input at market prices. In this case, the DGTR considered the market price as per records maintained by the domestic industry. The DGTR noted that in a situation where a business enterprise has an option between selling or captively consuming an input, and decides to sell the input in the market, it shows relative viability of the decision.

However, there have been some instances wherein the DGTR has sought details of cost of production, even where the captive input was valued at market price in the books of accounts of the company, and vice versa. In this regard, it is imperative that any methodology adopted is consistently followed. If the DGTR considers that the value as per records shall be considered, the same should be adopted in each case. Further, adequate disclosure of the methodology adopted should be made, to allow transparency with regard to the methodology followed.

Footnotes

1. Decision of Customs, Excise and Service Tax Appellate Tribunal in Gujarat Fluorochemicals Ltd. v. Designated Authority [Final Order in Appeal No. AD/52500/2016 dated 16th September 2016 ]

2. Decision of Supreme Court in Reliance Industries Limited vs. Designated Authority [Civil Appeal No. 1294 of 2001, decided on11th September 2006]

3. Final findings in the mid-term review of anti-dumping duty on imports of Aniline from China PR [F. No. 7/25/2022 - DGTR dated 11th December 2023]

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