CENVAT reversal under compounded levy scheme fails where no express rule requires it and suppression is not proved.

Under the compounded levy scheme for notified goods, earlier CENVAT credit on old and unused capital goods could not be demanded back by importing Rule 3(5) of the CENVAT Credit Rules, 2004 where the governing packing-machine rules excluded application of those Rules and contained no express reversal provision; the demand for reversal on removal of the machines as scrap was therefore unsustainable. The demand of duty, interest and penalty also could not be sustained on extended limitation, because the removals had been intimated to the department and audit verification did not establish suppression or wilful misstatement; the assessee succeeded on limitation and penalty as well.

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Issues: (i) Whether, after introduction of the compounded levy scheme for notified goods, the appellant was required to reverse CENVAT credit on capital goods removed from the factory by applying Rule 3(5) of the CENVAT Credit Rules, 2004. (ii) Whether demand of duty, interest and penalty could be sustained on the basis of suppression or wilful misstatement so as to invoke the extended period.

Issue (i): Whether, after introduction of the compounded levy scheme for notified goods, the appellant was required to reverse CENVAT credit on capital goods removed from the factory by applying Rule 3(5) of the CENVAT Credit Rules, 2004.

Analysis: Rule 16(1) and Rule 16(7) of the Chewing Tobacco and Unmanufactured Tobacco Packing Machines Rules, 2010 restrict availment of CENVAT credit on capital goods after the notified date and exclude application of the CENVAT Credit Rules, 2004 in relation to notified goods. In that statutory setting, the credit availed earlier on old and unused machines could not be demanded back by importing Rule 3(5) of the CENVAT Credit Rules, 2004 in the absence of an express provision. The removal of the machines as scrap was also accompanied by payment of duty and interest.

Conclusion: The demand for reversal of CENVAT credit on the removed capital goods was not sustainable and was decided in favour of the assessee.

Issue (ii): Whether demand of duty, interest and penalty could be sustained on the basis of suppression or wilful misstatement so as to invoke the extended period.

Analysis: The removal of the machines had been intimated to the department, and the objection arose during audit. The nature of audit was treated as participative and aimed at verification, not proof of suppression by itself. On the facts, no mala fide intent or deliberate concealment was established, and the record did not support invocation of the extended period or the penalty founded upon it.

Conclusion: The ingredients for extended limitation and penalty were not established and the finding was in favour of the assessee.

Final Conclusion: The order of the lower appellate authority was set aside and the assessee succeeded on both the substantive demand and the consequential penal exposure.

Ratio Decidendi: Where the governing scheme excludes application of the CENVAT Credit Rules, 2004 in relation to notified goods and no express provision requires reversal on removal of earlier capital goods, a demand by importing Rule 3(5) cannot be sustained; penalty and extended limitation also fail in the absence of proved suppression or wilful misstatement.

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