Full Cenvat credit reversal applies on clearance of used capital goods as such; penalty may still be denied on bona fide dispute.

On clearance of used capital goods "as such" under Rule 3(5) of the Cenvat Credit Rules, 2004, the entire Cenvat credit originally taken had to be reversed; the expression covered goods cleared after use as well as without use, and depreciation-based reversal under the repealed Rule 57S(2) could not apply. Because the dispute arose from conflicting Tribunal views on the correct method of reversal, penalty was not imposed. Once full reversal was held due, interest was payable on the differential amount, so the duty and interest demand was restored while the penalty was set aside.

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Issues: (i) Whether, on clearance of used capital goods as such, the assessee was required to reverse the entire Cenvat credit taken at the time of receipt under Rule 3(5) of the Cenvat Credit Rules, 2004; (ii) whether penalty was imposable on the assessee for reversal of only the duty on depreciated value; (iii) whether interest was payable on the differential amount.

Issue (i): Whether, on clearance of used capital goods as such, the assessee was required to reverse the entire Cenvat credit taken at the time of receipt under Rule 3(5) of the Cenvat Credit Rules, 2004.

Analysis: The expression "as such" was held to cover capital goods cleared after use as well as those cleared without use. The assessee's reliance on depreciation-based reversal under Rule 57S(2) of the Central Excise Rules, 1944 was rejected because that provision was not in force on the date of clearance. The relevant rule required payment of an amount equivalent to the credit availed on capital goods cleared as such, and the absence of any sale value did not alter that obligation.

Conclusion: The issue was decided against the assessee and in favour of the Revenue; the entire credit had to be reversed.

Issue (ii): Whether penalty was imposable on the assessee for reversal of only the duty on depreciated value.

Analysis: The dispute on reversal arose from conflicting Tribunal views on the scope of the expression "as such" and on the manner of reversal. Since the controversy was one of interpretation and the Tribunal itself had taken divergent views, the conduct was not treated as warranting penal consequences.

Conclusion: The issue was decided in favour of the assessee and against the Revenue; penalty was not imposable.

Issue (iii): Whether interest was payable on the differential amount.

Analysis: Once the full credit reversal was found to be due under Rule 3(5), the short payment of the differential amount attracted the statutory consequence of interest.

Conclusion: The issue was decided in favour of the Revenue and against the assessee; interest was payable.

Final Conclusion: The demand of differential duty and interest was restored, while the penalty was set aside, resulting in a partial success for the Revenue.

Ratio Decidendi: On clearance of capital goods as such under Rule 3(5) of the Cenvat Credit Rules, 2004, the assessee must reverse the entire credit originally availed, and depreciation-based reversal under a prior repealed provision cannot be applied unless the governing rule so permits; penalty may be denied where the dispute turns on bona fide interpretation.

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