Cenvat credit on cleared spares: duty paid on clearance can operate as reversal, defeating a further demand

Cenvat credit on bought-out spares cleared from the factory on payment of duty was treated as effectively reversed where the duty was paid on their clearance on the sale price. On that factual basis, the Department could not ignore the duty already discharged on the same goods and demand a further reversal of the alleged ineligible credit. The stated settled view applied was that utilisation of credit for duty payment on the very goods in question operates as reversal of that credit, so a duplicate demand is not sustainable. The consequential interest and equivalent penalty also fell with the credit demand.

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Issues: Whether Cenvat credit taken on bought-out spares cleared as such on payment of duty could be denied and recovered on the ground that those spares were not used in the manufacture of the transformer, and whether the duty already paid on their clearance could be treated as reversal of the alleged ineligible credit.

Analysis: The bought-out spares were cleared from the factory on payment of duty, and the assessable value adopted for clearance was the sale price. The duty paid on such clearance exceeded the value at which the goods had entered the factory, and the duty so paid had already been reversed by the appellants in substance. On this factual footing, the duty collected at the time of clearance of the spares could not be ignored by the Department while simultaneously insisting on a further reversal of the same credit. The settled view applied was that where credit taken is utilized for duty payment on the very goods in question, such utilization operates as reversal of the credit, and a further demand is not sustainable.

Conclusion: The demand for reversal of Cenvat credit, along with interest and equivalent penalty, was not maintainable and was set aside.

Final Conclusion: The credit dispute was decided in favour of the assessee, and the consequential demand and penalty were annulled.

Ratio Decidendi: Where goods on which credit has been taken are cleared on payment of duty, the duty so paid can constitute reversal of the credit, and a further demand for the same alleged ineligible credit is not sustainable.

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