Used capital goods and Cenvat credit: prior use prevents treatment as clearance "as such" and blocks reversal

Used capital goods are not cleared "as such" when they are transferred after prior use in the purchaser's factory and then employed in its own manufacture. Where the predecessor had already taken and utilised Cenvat credit, and the purchaser merely acquired ownership by sale without taking over a running unit with liabilities, no reversal of credit can be demanded on later clearance of those goods. The pre-amendment Cenvat Credit Rules did not impose liability on removal of used capital goods, and the later proviso for such clearances shows that the unamended rule did not cover them. The demand and penalty were therefore unsustainable.

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Issues: Whether Cenvat credit taken by the predecessor on capital goods was required to be reversed by the appellant when the capital goods, after transfer of ownership and use in the appellant's factory, were cleared.

Analysis: The capital goods had been purchased by the predecessor, credit had already been taken and utilised, and ownership was later transferred to the appellant by sale. The appellant did not take over a running unit with liabilities. The capital goods were thereafter used in the manufacture of the appellant's final products and were not removed in the same condition in which they were received. Liability under the phrase "removed as such" arises only when capital goods are cleared without being used. The later amendment to the Cenvat Credit Rules, 2004 specifically introduced a proviso for clearance of used capital goods, indicating that prior to that amendment the unamended rule did not fasten such liability in the case of used capital goods.

Conclusion: The appellant was not liable to reverse the credit or pay duty on the clearance of the used capital goods; the demand and penalty were unsustainable.

Ratio Decidendi: Capital goods that are cleared after being used are not cleared "as such", and in the absence of a specific pre-amendment provision imposing liability on removal of used capital goods, no reversal of Cenvat credit can be demanded from the purchaser who merely acquired ownership and used the goods in its own manufacture.

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