Cenvat credit on captive power plant not reversible absent physical removal; lease did not trigger Rule 3(5) consequences.

Rule 3(5) of the Cenvat Credit Rules, 2004 applies only when inputs or capital goods are removed as such from the factory. Credit taken for a captive power plant situated within the factory premises and functioning as part of the approved manufacturing setup was not required to be reversed on its lease to another company, because the goods were not physically removed and the rule contains no deeming fiction treating a lease as removal. The demand for reversal therefore failed, and the consequential interest and penalty were also unsustainable.

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Issues: Whether Cenvat credit taken on inputs, capital goods and input services used for setting up a captive power plant had to be reversed under Rule 3(5) of the Cenvat Credit Rules, 2004 on the lease of the power plant to another company, and whether the demand, interest and penalty were sustainable.

Analysis: Rule 3(5) applies when inputs or capital goods on which credit has been taken are removed as such from the factory. The power plant continued to remain within the factory premises as part of the approved ground plan and functioned as a captive power plant for the manufacture of cement. The capital goods had become an integral part of the plant and were not physically removed from the factory. The provision contains no express deeming fiction by which a lease of the plant can be treated as removal of the goods. The requirement of physical movement of goods is consistent with the statutory scheme and the credited goods did not satisfy that condition. As the main demand failed, the consequential interest and penalty also could not survive.

Conclusion: Rule 3(5) was not attracted, and the demand for reversal of credit, together with interest and penalty, was unsustainable.

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