Credit reversal on capital goods supplied to a 100% EOU against valid CT-3 certificate was held not payable.

Credit reversal on capital goods removed from the factory was held not exigible where the goods were supplied to a 100% Export Oriented Unit against a valid CT-3 certificate under the applicable exemption notification. Rule 3(4) of the Cenvat Credit Rules, 2002 requires reversal on removal, and Rule 3(5) treats that amount as duty for the recipient; however, read with the exemption framework for clearances to an eligible EOU, no further reversal could be demanded on such exempted supply. The duty demand and penalty were accordingly set aside.

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Issues: Whether credit taken on capital goods was required to be reversed when such capital goods were supplied to a 100% Export Oriented Unit against a valid CT-3 certificate under the exemption notification.

Analysis: Rule 3(4) of the Cenvat Credit Rules, 2002 requires reversal of credit when capital goods are removed from the factory, while Rule 3(5) treats the amount paid under sub-rule (4) as duty for the recipient. Read together, these provisions show that the reversal is in the nature of duty. The notification governing supply to a 100% EOU permitted procurement of capital goods without payment of duty against a valid CT-3 certificate. In that situation, the exempted clearance to the eligible EOU could not be subjected to a further reversal demand.

Conclusion: The appellants were not required to reverse the credit, and the duty demand and penalty were set aside in favour of the assessee.

Ratio Decidendi: Where capital goods are supplied to a 100% EOU against a valid CT-3 certificate under an applicable exemption notification, the credit reversal otherwise payable on removal of capital goods is not exigible.

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