Cenvat credit on rejected capital goods: only credit reversal was required on return to supplier, not differential duty.

Removal of unutilised capital goods returned to the original supplier required restoration only of the Cenvat credit actually taken, not payment of any higher differential duty. The goods were rejected as unfit for use, the invoice described them as rejected, and the assessee had availed only 50% credit and paid duty equal to that credit on removal. The applicable Cenvat rules treated removal of capital goods as such on the basis that duty is payable as if the goods were manufactured in the factory, but the operative principle was that duty on capital goods removed without use could not exceed the credit allowed. No differential duty was payable.

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Issues: Whether, on removal of unutilised capital goods returned to the original supplier, the assessee was required to pay differential duty over and above the Cenvat credit already availed.

Analysis: The removal was of capital goods found unfit for use and returned to the original supplier. The invoice described the goods as rejected, and the Revenue did not dispute that the assessee had taken only 50% credit under the applicable Cenvat scheme and had paid duty equal to the credit taken at the time of removal. Rule 57AB(1)(b) permitted utilisation of credit for payment of duty when capital goods were removed as such, and the Explanation contemplated duty on such removal as if the goods had been manufactured in the factory. The parallel principle under Rule 57S(2)(a) was that duty on capital goods removed without use could not be less than the credit allowed. The legal position, therefore, was that the assessee had to restore only the credit availed, not pay any higher duty.

Conclusion: No differential duty was payable. The issue was decided in favour of the assessee.

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