IMPORTANT POINT
The main legal point established in the judgment is the interpretation and application of Rule 3(5) of the Cenvat Credit Rules, 2004, and its amendment in 2007, particularly regarding the refund of Cenvat credit based on the duration of use of capital goods and the retrospective operation of the amended rule.

JUDGMENT

Sanjib Banerjee, CJ. - In view of the order proposed to be made, the facts need not be noticed in any greater detail since the issues involved are primarily legal.

2. The essential facts have been recorded in the previous order of February 15, 2022, though the parties were left free to urge all grounds.

3. The appellant-assessee procured an Arc Furnace as capital goods for the purpose of its manufacturing unit that produces ferro silicate components which attract excise duty. However, by reason of the location of the manufacturing unit, the assessee is entitled to refund of the excise duty to the extent paid. The appellant was also entitled to obtain Cenvat credit for acquisition of capital goods used in its process of manufacture. However, in terms of Rule 3(5) of the Cenvat Credit Rules, 2004, as such Rule stood at the relevant time, when any capital goods had been acquired and Cenvat credit obtained, if such capital goods were subsequently to be sold or transferred, the Cenvat credit had to be refunded.

4. Under the practice that was followed for the assessee to obtain the refund of the excise duty paid, it would first adjust the quantum of excise duty payable against any Cenvat credit in the assessee's account; and the balance amount of the duty would be paid in cash. A return would be filed by the assessee at the end of each month. Upon scrutiny of the return, the amount of excise duty paid in cash would be refunded to the assessee by the concerned Assistant Commissioner.

5. As regards the acquisition of any capital goods upon obtaining Cenvat credit, at the time of sale or transfer of such capital goods, the extent of Cenvat credit availed of had to be refunded. Rule 3(5) of the said Rules as it stood used the expression 'as such' but did not make any distinction between capital goods that may have been acquired 10 years back and used and capital goods which may have been acquired a day before and proposed to be sold or transferred without being used. It is obvious that if the capital goods had been put to use they would suffer depreciation and the usual wear and tear and would not be worth the price at which they were acquired at the time of the subsequent sale or transfer. The duration of use may have a bearing on the quantum of reduction of the value of the capital goods. However, the relevant Rule, apparently, did not expressly take such aspect into account. At the same time to ensure that the amount to be refunded under the Rule was rational and not arbitrary or oppressive, the Rule could be read with reference to the expression 'as such'. That would imply that if the capital goods acquired were in the same state as at the time of acquisition, a complete refund of the Cenvat credit would have to be made. As a corollary, it would follow that if the capital goods were not in the state in which it had been acquired - upon such capital goods being put to use - the entirety of the Cenvat credit may not have to be refunded. The Rule, however, made no express distinction as to the quantum of refund of Cenvat credit that had to be made for no use or for little use or for exhaustive use of the capital goods.

6. This anomaly in Rule 3(5) of the said Rules was addressed by a 2007 amendment that made a distinction and gave a rebate of two and half percent of the Cenvat credit obtained for every quarter of use of the capital goods. Thus, if the capital goods had been used for a period of 10 years, only a nominal amount of the Cenvat credit obtained would be liable to be refunded; whereas, if the capital goods were not used at all and proposed to be sold in the same quarter in which they were acquired, the entirety of the Cenvat credit obtained would have to be refunded.

7. Indeed, there is also a provision in the said Rules that when the capital goods are reduced to scrap, it is only the duty on the transaction which has to be paid and not a refund on the entirety of the Cenvat credit obtained at the time of the acquisition of