Captive consumption occurs when a manufacturer uses goods it has produced to make other goods, instead of selling them. When the law needs a value for such goods, cost of production is usually the basis. CAS-4 sets out how that cost is determined.
What CAS-4 includes
Cost of production is the sum of:
| Element | Notes |
|---|---|
| Materials consumed | Net of recoverable taxes and credits; valued per CAS-6 |
| Direct employee cost | Per CAS-7 |
| Direct expenses | Per CAS-10 |
| Works or production overheads | Absorbed on the basis of normal capacity (CAS-2, CAS-3) |
| Quality control, R&D and administrative overheads related to production | To the extent they relate to production |
| Packing cost | Where the goods are packed for captive use |
Adjustments are made for opening and closing work-in-progress, and credit is given for scrap and by-product realisation.
What CAS-4 excludes
- Selling and distribution overheads.
- Abnormal costs — idle capacity, abnormal wastage, penalties and fines.
- Interest and financing charges, except where specifically allowed.
- Profit.
Use under GST
Under rule 28 of the CGST Rules, supplies between related or distinct persons are valued at open market value, or the value of like goods, or — failing these — under rule 30. Rule 30 values the supply at 110% of the cost of production or manufacture. Cost of production computed under CAS-4 is commonly used for this purpose. Where the recipient is eligible for full input tax credit, the second proviso to rule 28 allows the invoice value to be treated as open market value.
Practical points
- Use normal capacity, not actual output, to absorb fixed overheads; otherwise a low-volume year inflates the transfer value.
- Document the basis for each overhead allocation; it is the area most often questioned.
- Prepare the computation per product and per period of supply.