CENVAT credit reversal and limitation: used subscriber equipment escaped reversal, while warehouse losses attracted only normal-period liability.

CENVAT credit reversal under Rule 3(5) was held inapplicable for set-top boxes and customer premises equipment already installed at subscribers' premises, and for equipment returned as scrap after use, because these were treated as used goods and not as inputs removed as such. Credit reversal was required only for equipment lost or damaged in the warehouse before use, but only for the normal period. The extended period was held unavailable because periodic audits had covered the records and no discrepancy was found, and penalty was also set aside for the same reason.

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Issues: (i) Whether CENVAT credit was required to be reversed on set-top box and customer premises equipment lying at customers' premises or returned as scrap after use at subscribers' premises. (ii) Whether CENVAT credit was required to be reversed on equipment lost or damaged at the appellant's warehouse before use, and whether extended period of limitation and penalty were invocable.

Issue (i): Whether CENVAT credit was required to be reversed on set-top box and customer premises equipment lying at customers' premises or returned as scrap after use at subscribers' premises.

Analysis: Rule 3(5) of the CENVAT Credit Rules, 2004 applies when inputs are removed as such. Equipment already installed at subscribers' premises and equipment returned to the warehouse after use were treated as used goods and not as inputs removed as such. The provision for reversal was therefore not attracted on these counts.

Conclusion: The demand on these two counts was unsustainable and the assessee was not required to reverse CENVAT credit.

Issue (ii): Whether CENVAT credit was required to be reversed on equipment lost or damaged at the appellant's warehouse before use, and whether extended period of limitation and penalty were invocable.

Analysis: Equipment lost or damaged in the warehouse before being put to use was treated as removed as such, so credit reversal was required for the normal period. However, the assessee's records had been subjected to periodic audit and no discrepancy had been pointed out, so the extended period was held inapplicable. On the same footing, penalty was held not leviable.

Conclusion: Credit reversal was upheld only for the normal period on this count, but the demand for the extended period and the penalty were set aside.

Final Conclusion: The dispute was allowed in part, with relief granted on the customer-premises and post-use scrap counts, and the warehouse loss count confined to the normal period without penalty.

Ratio Decidendi: Rule 3(5) requires reversal only when inputs or capital goods are removed as such; used equipment or post-use scrap is outside its scope, while suppression or wilful default is necessary to invoke the extended period and penalty.

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