Used capital goods cleared after substantial use are not treated as cleared "as such"; differential duty and penalty fail.

Used capital goods received under the Cenvat Credit Rules, 2002 and cleared after more than two years of use under the Cenvat Credit Rules, 2004 were not to be treated as cleared "as such" for duty and valuation purposes. The valuation had to be determined with reference to the regime applicable when the goods were received, and there was no basis to demand reversal of the entire credit originally taken merely because the goods were later removed. On that footing, the demand for differential duty failed, and the connected penalty also had no foundation.

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Issues: Whether used capital goods received during the currency of the Cenvat Credit Rules, 2002 and cleared after more than two years during the currency of the Cenvat Credit Rules, 2004 were liable to be treated as cleared "as such" for duty and valuation purposes, and whether differential duty and penalty were sustainable.

Analysis: The applicable valuation and rate provisions under the Cenvat Credit Rules, 2002 differed from those under the Cenvat Credit Rules, 2004. The capital goods were received under the 2002 Rules, put to use for more than two years, and removed only in 2006. Such removal after substantial use could not be equated with clearance "as such". In these circumstances, the valuation was required to be determined with reference to the regime applicable when the goods were received, and there was no basis to invoke a demand on the footing that the entire credit originally taken had to be reversed. The consequential penalty also had no foundation.

Conclusion: The demand of differential duty and the penalty were not sustainable, and the order of the Commissioner (Appeals) was upheld.

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