Used capital goods and Cenvat credit: duty on transaction value applies, with no penalty absent clandestine removal

On clearance of used capital goods after prolonged use, the applicable Cenvat rule required payment of duty on the transaction value at the time of removal, not reversal of the entire credit originally availed. The later amendment to Rule 3(5) could not be applied retrospectively to goods cleared in December 2005, so the demand for balance credit reversal was unsustainable. Penalty was also set aside because the clearance was under invoice, sales tax had been paid, there was no clandestine removal, and the duty difference arose from a bona fide understanding that was corrected after the audit objection.

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Issues: (i) Whether, on clearance of used capital goods after prolonged use, the assessee was required to reverse the entire cenvat credit originally taken or was liable only to pay duty on the transaction value. (ii) Whether penalty was sustainable in the facts of the case.

Issue (i): Whether, on clearance of used capital goods after prolonged use, the assessee was required to reverse the entire cenvat credit originally taken or was liable only to pay duty on the transaction value.

Analysis: The applicable legal position, as followed in Tribunal decisions on Rule 3(4) of the Cenvat Credit Rules, 2002 and Rule 3(5) of the Cenvat Credit Rules, 2004, was that at the time of removal of used capital goods the assessee is required to pay an amount equivalent to the duty leviable on the transaction value, and not reverse the whole credit originally availed. The subsequent amendment to Rule 3(5), effective from 13-11-2007, could not be applied retrospectively to capital goods cleared in December 2005. The assessee had already paid duty on the sale value and interest.

Conclusion: The demand for reversal of the balance cenvat credit was not sustainable and was set aside in favour of the assessee.

Issue (ii): Whether penalty was sustainable in the facts of the case.

Analysis: The clearance was under invoice, sales tax had been paid on the transaction value, and the removal was not clandestine. The duty shortfall arose from a bona fide understanding that old used capital goods were not required to be cleared on duty payment. The assessee paid the duty once the audit objection was raised, which negatived any allegation of mala fide evasion warranting penalty under the penal provisions invoked.

Conclusion: Penalty was not justified and was set aside in favour of the assessee.

Final Conclusion: The appeal succeeded, the impugned demand and penalty were annulled, and the assessee received consequential relief.

Ratio Decidendi: On clearance of used capital goods, the liability is governed by the applicable rule in force at the time of removal, and in the absence of clandestine conduct, penalty is not warranted where duty is paid on a bona fide understanding once the issue is pointed out.

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