Capital goods credit reversal does not arise on transfer of a factory as a going concern without physical removal of the goods.

Capital goods credit reversal under Rule 3(4) of the Cenvat Credit Rules, 2002 was not attracted where the factory was sold as a whole with the capital goods remaining embedded in it. The provision requires physical removal of capital goods from the factory in the manner contemplated by the excise removal scheme, and mere transfer of ownership of the factory as a going concern does not satisfy that condition. The availability of a separate transfer mechanism for unutilised credit on sale of a factory also indicated that such transfers were not intended to trigger reversal of credit already availed and utilised. The demand and penalty were therefore held unsustainable.

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Issues: Whether, on sale of the factory as a whole along with capital goods and transfer of ownership to the purchaser, the capital goods credit already availed and utilised by the manufacturer became recoverable under Rule 3(4) of the Cenvat Credit Rules, 2002.

Analysis: Rule 3(4) obliges reversal only when capital goods on which credit has been taken are removed from the factory, and the expression has to be read harmoniously with the scheme of removal under the Central Excise Rules. The relevant scheme contemplates physical removal of excisable goods under invoice, and Rule 8 of the Cenvat Credit Rules, 2002 separately provides for transfer of unutilised credit when a factory is transferred by sale or other modes, showing that the rules addressed change of ownership without creating a liability to reverse credit already utilised. Since the factory was transferred as a whole with the capital goods embedded therein and there was no physical removal of the capital goods from the factory, the conditions for invoking Rule 3(4) were not satisfied.

Conclusion: The demand for reversal of capital goods credit was not sustainable and the issue was answered in favour of the assessee.

Final Conclusion: The impugned demand and penalty could not be sustained because transfer of the factory with the capital goods intact did not amount to removal attracting the credit-reversal provision.

Ratio Decidendi: Credit reversal for capital goods is attracted only on physical removal of the capital goods from the factory in the manner contemplated by the excise invoice and removal provisions, not on mere transfer of ownership of the factory as a going concern.

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