Cenvat credit on removal of used capital goods: exhausted credit means no amount payable on clearance.

When used capital goods are removed, the amount payable is computed under the second proviso to Rule 3(5) of the Cenvat Credit Rules, 2004 by reducing the credit taken by 2.5% for each quarter or part thereof from the date of taking credit. On the stated facts, the goods had been used for many years and the credit stood fully exhausted before clearance, so no reversal of cenvat credit was payable. The contrary view that the reduction formula could operate only from the date of insertion of the proviso was rejected, and the demand, interest, and penalty could not survive.

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Issues: Whether cenvat credit was required to be reversed on removal of used capital goods when the credit, after applying the prescribed reduction, stood exhausted.

Analysis: The capital goods had been purchased and used for many years before removal. Under the second proviso to Rule 3(5) of the Cenvat Credit Rules, 2004, where capital goods are removed after being used, the amount payable is the credit taken reduced by 2.5% for each quarter of a year or part thereof from the date of taking credit. On the facts found, the credit stood fully exhausted by the time the goods were cleared, and the fact that they were removed as old and used capital goods supported that position. The contrary view that the reduction could be applied only from the date of insertion of the proviso was rejected.

Conclusion: No reversal of cenvat credit was payable on removal of the capital goods, and the demand, interest, and penalty could not survive.

Ratio Decidendi: When used capital goods are removed, the payable amount is determined by the reduced credit formula under the second proviso to Rule 3(5), and if the credit is fully exhausted by use, no amount is payable on clearance.

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