Dear Smita,
Please see thread http://scn.sap.com/thread/1638348 for further details.
"Your best option is to deactivate the Product Category in the Org Structure > Extended Attributes > Product Category. After doing this, the deactivated category will not show in Product Category searches for users so cannot be used.
This will leave the Product Category in place in SRM for any dependent documents.
If you are using Catalogs you will also have to make sure you have no items that refer to the Product Category or shoppers will get an error message.
An error message will also be received if they attempt to maintain a PO containing the removed category."
Alternatively, you can check the OSS Note '872533 - FAQ: Middleware'. There are some useful reports there.
Hope I was able to help you!!
Imre