Cenvat Credit on damaged capital goods cleared as scrap is payable on transaction value, not by credit reversal.

Rule 3(5A) of the Cenvat Credit Rules, 2004 distinguishes between removal of used capital goods in working condition and clearance of capital goods as waste and scrap. Where damaged capital goods are cleared as waste and scrap, the amount payable is the duty leviable on transaction value, not reversal of Cenvat credit. On the admitted facts, the goods had been used for years, were found unusable, and were cleared as scrap. Payment on transaction value was therefore sufficient, and the demand for credit reversal was not sustainable.

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Issues: Whether capital goods, after being damaged and cleared as waste and scrap, attracted liability under Rule 3(5A) of the Cenvat Credit Rules, 2004 by requiring payment of an amount based on reversal of credit, or by payment of duty on transaction value.

Analysis: The capital goods were used for several years before being damaged, the insurance survey recorded that they were not usable, and the goods were in fact cleared as waste and scrap. Rule 3(5A) of the Cenvat Credit Rules, 2004 draws a distinction between removal of used capital goods in working condition and clearance of capital goods as waste and scrap. Where the capital goods are cleared as waste and scrap, the amount payable is the duty leviable on transaction value. On the admitted facts, the clearance fell within Rule 3(5A)(b) and not within the provision applicable to removal of usable capital goods.

Conclusion: The clearance of the damaged capital goods was rightly treated as clearance of waste and scrap, and payment on transaction value was sufficient. The demand for reversal of Cenvat credit was not sustainable.

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