Used capital goods and Cenvat credit: proportionate reversal based on period of use was held permissible.

Used capital goods removed after use were not treated as goods removed as such for full Cenvat credit reversal. The Tribunal held that, for the relevant period, the scheme allowed proportionate reduction based on period of use, drawing support from the earlier Rule 57S framework, the Board circular, and the later amendment expressly recognising a 2.5% per quarter reduction. Full reversal of the credit taken on receipt was therefore not required, and depreciation at 2.5% per quarter with corresponding reversal was permissible.

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Issues: (i) Whether used capital goods removed from the factory after use attract reversal of the entire Cenvat credit taken at the time of receipt. (ii) Whether, in the absence of an express provision during the relevant period, depreciation at 2.5% per quarter and proportionate reversal of credit is permissible on removal of such capital goods.

Issue (i): Whether used capital goods removed from the factory after use attract reversal of the entire Cenvat credit taken at the time of receipt.

Analysis: The applicable regime during the relevant period distinguished between removal of capital goods as such and removal after use. The Tribunal noted the legislative evolution from Rule 57S, which expressly allowed deduction of 2.5% per quarter for used capital goods, to Rule 3(5) of the Cenvat Credit Rules, 2004, and later to the amended provision introduced on 13.11.2007. Reading the scheme together with the Board circular and the authorities cited, the Tribunal held that used capital goods could not be treated as goods removed as such so as to require reversal of the entire credit.

Conclusion: The entire Cenvat credit taken on used capital goods was not required to be reversed.

Issue (ii): Whether, in the absence of an express provision during the relevant period, depreciation at 2.5% per quarter and proportionate reversal of credit is permissible on removal of such capital goods.

Analysis: The Tribunal preferred the view of the Madras High Court in Rogini Mills, taking into account the prior statutory provision, the Board circular, and the later amendment expressly adopting the 2.5% per quarter reduction. It held that allowing unrestricted retention of credit on long-used capital goods would be inconsistent with the scheme of Cenvat credit, and that proportionate reduction based on period of use was the appropriate approach for the relevant period.

Conclusion: Depreciation at 2.5% per quarter and proportionate reversal of credit was permissible.

Final Conclusion: The reference was answered by holding that used capital goods removed after use do not require reversal of the full credit, but the credit is subject to reduction on a proportional basis consistent with the period of use.

Ratio Decidendi: Where capital goods are removed after use, the Cenvat credit scheme permits proportionate reversal based on period of use, and the later express amendment can be treated as reflecting the correct construction of the earlier regime.

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