CENVAT credit on defective imported goods re-exported under bond need not be reversed; related demand and penalty fail.

Where imported inputs or capital goods were found defective and re-exported as such under bond, CENVAT credit already availed was not required to be reversed under Rule 3(5) of the CENVAT Credit Rules, 2004. The Tribunal relied on Board circulars recognising that inputs or capital goods removed for export under bond were not barred from such treatment, and treated the earlier Tribunal ruling on re-export of defective imports as applicable. The contrary Supreme Court authority was distinguished on facts because it did not concern re-export of defective imported goods. On that basis, the demand and penalty based solely on non-reversal could not survive.

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Issues: Whether CENVAT credit taken on imported inputs and capital goods, which were found defective and were re-exported to the foreign supplier, was required to be reversed under Rule 3(5) of the CENVAT Credit Rules, 2004, and whether the consequential demand and penalty were sustainable.

Analysis: The dispute turned on the treatment of imported goods that had been cleared from the factory only for re-export because they were found unusable or defective. The Board circulars relied upon by the assessee clarified that inputs exported as such under bond need not suffer reversal of credit, and the later circular also recognized that there was no bar to removal of inputs or capital goods as such for export under bond. The facts were held to be on all fours with the earlier Tribunal decision dealing with re-export of imported goods on quality grounds, and that decision was treated as applicable. The contrary reliance placed on the Supreme Court decision was found inapposite because that case involved a different factual situation and did not concern re-export of defective imported goods.

Conclusion: Reversal of CENVAT credit was not required on re-export of the defective imported inputs and capital goods, and the demand could not be sustained.

Final Conclusion: The demands and penalties were unsustainable, and the appeals succeeded with consequential relief.

Ratio Decidendi: Where imported inputs or capital goods are found defective and are re-exported as such under bond, credit already availed is not required to be reversed, and any demand or penalty founded solely on such non-reversal cannot survive.

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