Used capital goods and Cenvat credit: depreciated-value clearance accepted, and the demand failed on limitation.

Used capital goods cleared after substantial use were not treated as removal "as such" under Rule 3(5) of the Cenvat Credit Rules, 2004, so the assessee was not required to reverse the full Cenvat credit and could discharge duty on depreciated value. The later proviso introduced by Notification No. 39/2007-CE(NT) was treated as not governing the period in dispute, and the departmental circulars supporting depreciation on used capital goods were accepted. The demand was also barred by limitation because the clearances and duty payment were reflected in returns and were within the department's knowledge. The Revenue's challenge therefore failed on both merits and limitation.

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Issues: (i) Whether used capital goods cleared after three to four years attracted reversal of the entire Cenvat credit under Rule 3(5) of the Cenvat Credit Rules, 2004, or whether duty could be discharged on depreciated value. (ii) Whether the demand was barred by limitation in view of the department having prior knowledge of the clearances.

Issue (i): Whether used capital goods cleared after three to four years attracted reversal of the entire Cenvat credit under Rule 3(5) of the Cenvat Credit Rules, 2004, or whether duty could be discharged on depreciated value.

Analysis: The expression "as such" in Rule 3(5) was applied to goods removed without being put to use, and not to capital goods that had already been used. The insertion of the third proviso by Notification No. 39/2007-CE(NT) dated 12.11.07 for depreciation on used capital goods was treated as a later development and not the governing position for the period in question. The reasoning also accepted the applicability of the departmental circulars supporting depreciation on used capital goods and distinguished the Larger Bench view relied upon by the Revenue on the facts of the case.

Conclusion: The assessee was not required to reverse the full Cenvat credit, and clearance on depreciated value was held proper.

Issue (ii): Whether the demand was barred by limitation in view of the department having prior knowledge of the clearances.

Analysis: The clearances and duty payment were reflected in the returns and were within the knowledge of the department. In such circumstances, the basis for sustaining the demand on limitation was not made out.

Conclusion: The demand was hit by limitation.

Final Conclusion: The Revenue's challenge failed on both merits and limitation, and the appellate relief granted to the assessee was maintained.

Ratio Decidendi: Rule 3(5) of the Cenvat Credit Rules, 2004 applies to removal of capital goods as such, and not to the clearance of used capital goods after substantial use; where the department is already aware of the clearances from returns and records, the demand cannot be sustained on limitation.

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