CENVAT Credit Removal on Capital Goods: 2.5% Depreciation Applies to Full Amount from Credit Date Under Rule 3(5A) (5A)

CESTAT Chennai ruled in favor of appellant regarding CENVAT credit removal on capital goods. The dispute concerned whether 2.5% depreciation deduction should apply to 100% of credit from availing date or only 50% as per department's calculation. The tribunal held that under Rule 3(5A), deduction applies from "date of availing credit" and appellant's calculation applying deduction on full amount from initial credit date was correct. Additionally, the tribunal found the show cause notice time-barred as department failed to establish willful suppression, noting appellant maintained proper accounts and filed returns showing credit reversal. Appeal allowed on limitation grounds.

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Issues Involved:

1. Correct calculation of Cenvat credit reversal on removal of used capital goods.
2. Interpretation of Rule 3(5) and Rule 3(5A) of Cenvat Credit Rules, 2004.
3. Applicability of extended period for raising the demand.
4. Revenue neutrality and its impact on the invocation of the extended period.

Issue-wise Detailed Analysis:

1. Correct Calculation of Cenvat Credit Reversal on Removal of Used Capital Goods:

The appellant is engaged in the manufacture of parts of textile machinery and had availed Cenvat credit on capital goods. Upon removal of these goods, the appellant calculated the amount to be reversed by reducing 2.5% per quarter from the date of availing the initial credit on the entire 100% of the capital goods. The department argued that the appellant should have applied the 2.5% reduction only on the 50% credit availed in the first year and the remaining 50% in the subsequent year. The appellant's method resulted in a lesser amount of duty being reversed compared to the department's calculation.

2. Interpretation of Rule 3(5) and Rule 3(5A) of Cenvat Credit Rules, 2004:

Rule 3(5) and Rule 3(5A) stipulate that when capital goods on which Cenvat credit has been taken are removed after use, the manufacturer must pay an amount equal to the Cenvat credit taken, reduced by a specified percentage per quarter. The appellant argued that the deduction should be calculated from the date of initially availing the credit, while the department contended that the deduction should apply separately to the two 50% credits availed in different financial years. The tribunal noted that the rules specify "from the date of availing the credit" and not "from the date of use," supporting the department's interpretation.

3. Applicability of Extended Period for Raising the Demand:

The appellant contended that the issue was purely interpretational, and there was no positive act of suppression. The tribunal agreed, noting that the entire figures were taken from the appellant's accounts and that the appellant had already paid the duty amount calculated by their method. The show cause notice was issued based on a difference in the method of calculation, and the tribunal found no grounds for wilful suppression of facts. Consequently, the tribunal held that the invocation of the extended period was not justified, making the show cause notice time-barred.

4. Revenue Neutrality and Its Impact on the Invocation of the Extended Period:

The appellant argued that the situation was revenue neutral as the duty paid on the transferred capital goods was availed as Cenvat credit by their own unit. The tribunal referred to previous decisions, including Anglo French Textiles vs. CCE Pondicherry, where the demand was set aside on the ground of revenue neutrality. The tribunal concluded that the issue was interpretational, and the extended period could not be invoked due to the revenue-neutral situation and lack of suppression.

Conclusion:

The tribunal set aside the impugned order on the ground of limitation, allowing the appeal with consequential reliefs. The appellant succeeded on the ground that the show cause notice was time-barred, given the interpretational nature of the issue and the absence of any positive act of suppression. The order was pronounced in the open court on 29.07.2024.

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