CENVAT credit reversal requires actual removal of capital goods; leasing installed plant inside the factory does not trigger the rule.

CENVAT credit reversal under Rule 3(5) applies only when inputs or capital goods on which credit was taken are actually removed as such from the factory or specified premises. Leasing an installed captive power plant within the factory, without physical clearance or invoiced removal, did not amount to removal as such, so the deeming provision was not triggered and the credit reversal demand failed. Because the penalty was based on the same alleged inadmissibility of credit and supposed suppression, once the principal demand failed, the penalty under the Central Excise and CENVAT provisions also could not survive. The Tribunal's view was upheld and the Revenue's appeals failed.

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Issues: (i) Whether leasing out a captive power plant within the factory premises amounted to removal of inputs or capital goods as such so as to attract Rule 3(5) of the Cenvat Credit Rules, 2004. (ii) Whether the demand of penalty under Section 11AC of the Central Excise Act, 1944 read with Rule 15 of the Cenvat Credit Rules, 2004 was sustainable.

Issue (i): Whether leasing out a captive power plant within the factory premises amounted to removal of inputs or capital goods as such so as to attract Rule 3(5) of the Cenvat Credit Rules, 2004.

Analysis: Rule 3(5) applies when inputs or capital goods on which CENVAT credit has been taken are removed as such from the factory or the premises of the provider of output service, and the rule contemplates removal under cover of an invoice referred to in Rule 9. On the facts found, the power plant remained installed in the same premises, there was no physical clearance of the goods from the factory, and no invoice was issued evidencing such removal. A deeming fiction cannot be extended beyond the express language of the rule, and a lease of the power plant did not by itself amount to removal as such.

Conclusion: Rule 3(5) was not attracted, and the credit reversal demand failed.

Issue (ii): Whether the demand of penalty under Section 11AC of the Central Excise Act, 1944 read with Rule 15 of the Cenvat Credit Rules, 2004 was sustainable.

Analysis: The penalty was founded on the same alleged inadmissibility of credit and the alleged suppression of removal. Once the principal demand itself was held unsustainable because the lease did not constitute removal as such, the basis for penalty also disappeared.

Conclusion: The penalty was not sustainable.

Final Conclusion: The Tribunal's view was upheld, the substantial questions were answered against the Revenue, and the appeals failed.

Ratio Decidendi: CENVAT credit reversal under Rule 3(5) arises only on actual removal of inputs or capital goods as such from the factory or specified premises, and a lease of installed goods without physical removal or invoiced clearance does not attract the deeming provision.

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