Cenvat credit on used capital goods must be reversed on depreciated value; penalty fails absent mala fide intention.

Capital goods cleared after substantial use were not to be treated as removed as such for automatic full Cenvat credit reversal; the applicable approach was reversal on depreciated value under the Board circular, with remand required to recompute the credit payable on that basis. Where duty had been paid on the depreciated value and the dispute arose from conflicting views on the credit issue, mala fide intention was not established, so penalty was not justified and was set aside.

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Issues: (i) Whether Cenvat credit taken on capital goods cleared after years of use was required to be reversed in full or only on the depreciated value in terms of the Board circular. (ii) Whether penalty was sustainable when the goods were cleared after use and duty was paid on the depreciated value.

Issue (i): Whether Cenvat credit taken on capital goods cleared after years of use was required to be reversed in full or only on the depreciated value in terms of the Board circular.

Analysis: The relevant approach was that full reversal was required only when capital goods were removed as such. Where they had been used for several years and then cleared, the applicable method was reversal on depreciated value in accordance with the Board circular prescribing deduction of 2.5% of credit for each quarter of use. The Tribunal also noted that the larger bench view supported application of that circular, and remand was necessary to determine the correct depreciated value.

Conclusion: Full reversal was not mechanically sustainable on the facts found, and the matter was remanded for computation of credit payable on the depreciated value.

Issue (ii): Whether penalty was sustainable when the goods were cleared after use and duty was paid on the depreciated value.

Analysis: The Tribunal found that there were conflicting judicial views on the underlying credit issue and that the appellant had cleared the goods on payment of duty at depreciated value, with the duty being available as credit to the sister unit. In those circumstances, mala fide intention was not established and penalty was considered unjustified.

Conclusion: The penalty was set aside.

Final Conclusion: The impugned order was set aside and the matter was remanded for fresh determination of the Cenvat credit payable on the depreciated value, with the penalty relief granted to the appellant.

Ratio Decidendi: Capital goods cleared after substantial use are not to be treated as removed as such for automatic full credit reversal, and penalty is not justified where the dispute turns on a bona fide interpretational issue and there is no established mala fide.

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