CENVAT credit on obsolete inputs need not be fully reversed where residual value remains and duty is paid on auction value.

CENVAT credit on inputs marked obsolete need not be reversed in full where the goods were not wholly written off and retained residual value capable of realisation on auction; on those facts, payment of duty on the transaction value supported the assessee's treatment and the demand for full reversal was not sustainable on merits. The later show-cause notice was also held time-barred because the department had prior knowledge of the disposal method and duty payment basis, so the extended demand could not be invoked. The proceedings were therefore dropped and that result was upheld on both merits and limitation.

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Issues: (i) Whether CENVAT credit was required to be reversed on inputs written off as obsolete and cleared on payment of duty on transaction value. (ii) Whether the show-cause notice was barred by limitation.

Issue (i): Whether CENVAT credit was required to be reversed on inputs written off as obsolete and cleared on payment of duty on transaction value.

Analysis: The inputs were not fully written off as obsolete; they were reduced only to 5%/10% of their value and were still capable of fetching value on auction. On these facts, the situation did not fall within the circular provision relied upon by the Revenue for fully written-off inputs. The relevant circular position supported duty payment on the auction/transaction value, and the demand based on reversal of the entire credit was not sustainable on merits.

Conclusion: The demand for reversal of credit was not warranted on the facts proved, and the assessee succeeded on merits.

Issue (ii): Whether the show-cause notice was barred by limitation.

Analysis: The department was already informed of the manner in which obsolete inputs were to be disposed of, including auction and duty payment on the transaction value. In view of this prior knowledge, the extended demand raised later for the relevant period could not be sustained.

Conclusion: The show-cause notice was time-barred.

Final Conclusion: The order dropping the proceedings was upheld, as the demand failed both on merits and on limitation.

Ratio Decidendi: Where obsolete inputs are not wholly written off and the department is aware of their disposal and duty treatment, a demand for reversal of the entire credit is not sustainable, and a later notice may also be hit by limitation.

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