Cenvat credit reversal on removed capital goods upheld, with interest recoverable, but penalty declined in an interpretational dispute.

Where capital goods on which Cenvat credit had been taken were removed from the factory after use, the credit attributable to those goods was held reversible under Rule 3(4) of the Cenvat Credit Rules, 2002, and interest on the reversed credit followed. The tribunal relied on the Larger Bench view and found the first appellate authority had applied an incorrect version of the rule and an erroneous understanding of the amendment. Penalty was nevertheless not sustained because the dispute was interpretational and required authoritative clarification, so penal consequences were not warranted on the facts.

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Issues: (i) whether Cenvat credit taken on capital goods removed from the factory after use was required to be reversed with interest; and (ii) whether penalty was sustainable in the facts of the case.

Issue (i): Whether Cenvat credit taken on capital goods removed from the factory after use was required to be reversed with interest.

Analysis: The relevant rule, as inserted by Notification No. 13/2003-C.E. (N.T.) dated 01.03.2003, required payment of an amount equal to the credit availed when inputs or capital goods on which credit had been taken were removed as such. The first appellate authority had relied on an incorrect version of the rule and had also proceeded on the basis of an erroneous understanding of the subsequent amendment. The appellate tribunal followed the Larger Bench view that where capital goods are removed after credit has been taken, the credit attributable to such capital goods is liable to be reversed, and the consequential interest liability also follows.

Conclusion: The assessee was liable to reverse the Cenvat credit and pay interest thereon, and the relief granted by the first appellate authority on this aspect was set aside.

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

Analysis: The dispute turned on interpretation of Rule 3(4) of the Cenvat Credit Rules, 2002 and the correct legal consequence of removal of capital goods after use. In view of the interpretational nature of the controversy and the need for authoritative clarification by the Larger Bench, the matter did not justify penal consequences.

Conclusion: Penalty was not warranted and the setting aside of penalty was upheld.

Final Conclusion: The demand for reversal of Cenvat credit and the associated interest was sustained, but the assessee was spared penalty, resulting in a partial success for the Revenue.

Ratio Decidendi: When capital goods on which Cenvat credit has been taken are removed as such or after use in circumstances attracting the credit-reversal rule, the credit attributable to those goods and the consequential interest are recoverable, but penalty is not automatic where the dispute is one of interpretation.

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