Capital goods credit on box HS wagons was admissible, and prior credit reversal did not sustain penalty.

Box HS wagons falling under Chapter Heading 860692.90 were treated as capital goods under Rule 2(a)(A) of the Cenvat Credit Rules, 2004 because they were used in the factory for procurement of inputs and dispatch of finished goods. On that basis, Cenvat credit was considered admissible. The prior reversal of credit before issue of the show-cause notice did not, by itself, defeat the substantive entitlement where the claim otherwise fell within the Cenvat scheme. In that setting, penalty under Section 11AC of the Central Excise Act, 1944 read with the Cenvat Credit Rules, 2004 was not sustainable.

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Issues: Whether Cenvat credit was admissible on box HS wagons treated as capital goods and whether penalty was sustainable when the credit had been reversed before issuance of the show-cause notice.

Analysis: Rule 2(a)(A) of the Cenvat Credit Rules, 2004 defines capital goods by reference to specified chapters and described goods used in the factory of manufacture of final products. Box HS wagons falling under Chapter Heading 860692.90 were not excluded from that definition, and the wagons were used for procurement of inputs and dispatch of finished goods. The reversal of credit before the show-cause notice did not take away the substantive entitlement where the credit otherwise fell within the scheme of the rules. In these circumstances, the basis for penalty under Section 11AC of the Central Excise Act, 1944 read with the Cenvat Credit Rules, 2004 did not survive.

Conclusion: Cenvat credit on the box HS wagons was held admissible and the penalty was not sustainable, resulting in relief to the assessee.

Ratio Decidendi: Where goods are covered by the statutory definition of capital goods and are used in relation to the manufacture and movement of final products, a prior reversal of credit does not, by itself, justify penalty when the credit claim is otherwise within the Cenvat scheme.

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