Cenvat credit reversal and duty-paid clearance of spare parts defeated demand, extended limitation, interest and penalty

Cenvat credit demand on capital goods and spare parts was held unsustainable where the capital goods credit had been reversed before notice and spare parts were cleared as such on payment of central excise duty without further manufacture. That duty payment was treated as equivalent to reversal of the related credit, so no further demand survived. The extended period of limitation was also unavailable because the facts showed no wilful suppression, misstatement, or intent to evade duty; accordingly, interest and penalty were not leviable. The impugned order was set aside and the assessee obtained complete relief.

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Issues: (i) Whether Cenvat credit availed on capital goods and inputs was liable to be demanded where the capital goods credit had been reversed and spare parts were cleared on payment of central excise duty without further manufacture. (ii) Whether the extended period of limitation, interest and penalty were attracted.

Issue (i): Whether Cenvat credit availed on capital goods and inputs was liable to be demanded where the capital goods credit had been reversed and spare parts were cleared on payment of central excise duty without further manufacture.

Analysis: The credit on capital goods had been reversed before issuance of the notice, which was treated as sufficient compliance. As regards the spare parts, they were cleared as such on payment of appropriate central excise duty, and that payment was treated as equivalent to reversal of the credit relatable to such inputs. Since no further manufacturing activity was undertaken on those goods at the time of clearance, the demand for reversal of credit was held unsustainable.

Conclusion: The demand of Cenvat credit was not sustainable against the assessee.

Issue (ii): Whether the extended period of limitation, interest and penalty were attracted.

Analysis: The notice was issued after about two and a half years, but the assessee had already reversed the credit on capital goods and paid duty on spare parts cleared as such. On those facts, there was no wilful suppression, misstatement or intention to evade duty, so the ingredients for invoking the proviso to section 11A were absent. Once the demand itself failed, interest and penalty could not survive.

Conclusion: The extended period of limitation was not available to the Revenue, and interest and penalty were not leviable.

Final Conclusion: The impugned order was set aside and the assessee's appeal was allowed, resulting in complete relief from the confirmed credit demand, interest and penalty.

Ratio Decidendi: Where credit on capital goods is reversed and goods are cleared as such on payment of duty without further manufacture, no further Cenvat credit demand survives, and in the absence of wilful suppression the extended limitation period and consequential penalty cannot be invoked.

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