2025 (5) TMI 640 - AT - Central Excise

Denial of CENVAT Credit - levy of penalty - entitlement to take cenvat credit on the basis of invoices issued by second stage dealer alleging that only invoices has been issued no goods have been received by the Appellant No. 1 - HELD THAT - The case of the revenue is that first stage dealer or the second stage dealer are non existent during the impugned period. The Appellant No. 1 has taken the credit against invoice issued by the second stage dealer and have received the goods which were entered in the statutory records and further used in the manufacture of final product on which they have paid the duty. If case of the revenue is that the Appellant No. 1 has not received the inputs then question arises from where the Appellant No. 1 has received the inputs the investigations has not been done to that extent. There is no investigation done at the end of the transporter to find out whether the Appellant No. 1 has received inputs or not? The Appellant No. 1 is entitled to take cenvat credit on the basis of the invoices issued by the second stage dealer along with inputs and all the requirements of the invoices has been fulfilled in terms of Rule 9(2) of the Cenvat Credit Rules 2004 which were found to be correct in the invoices issued by the second stage dealer and the Appellant No. 1 has made payment through account payee cheque. In that circumstances it cannot be said that in the absence of any supporting evidence that Appellant No. 1 has not received the goods in the factory premises. Similar view has been taken by the Hon ble Allahabad High Court in the case of Commissioner of Central Excise Service Tax vs. Juhi Alloys Ltd. 2014 (1) TMI 1475 - ALLAHABAD HIGH COURT wherein the Hon ble High Court observed The assessee had received the inputs which were entered in the statutory records maintained by the assessee. The goods were demonstrated to have travelled to the premises of the assessee under the cover of Form 31 issued by the Trade Tax Department and the ledge account as well as the statutory records establish the receipt of the goods. In such a situation it would be impractical to require the assessee to go behind the records maintained by the first stage dealer. The assessee in the present case was found to have duly acted with all reasonable diligence in its dealings with the first stage dealer. Penalty also not imposable. Conclusion - The appellant has correctly taken the cenvat credit on the invoices issued by second sage dealer accompanying the goods and in the absence of any evidence placed on the record by the revenue that if the Appellant No. 1 has not received the goods then from where they procured the inputs to manufacture the final products on which they have paid the duty. Penalty also set aside. Appeal allowed.

The core legal questions considered in this judgment revolve around the entitlement of the appellant to avail cenvat credit on the basis of invoices issued by second stage dealers, where it is alleged that the goods were not actually received, and whether penalties can be imposed on the appellant and other parties for wrongful availment of cenvat credit based on purportedly fake or non-existent manufacturers' invoices.

Specifically, the issues are:

Whether the appellant is entitled to cenvat credit when the invoices are issued by second stage dealers allegedly based on invoices from non-existent manufacturers, and no actual receipt of goods is established.
Whether the appellant can be penalized for wrongful availment of cenvat credit in the absence of concrete evidence proving non-receipt of goods or existence of fake invoices.
The evidentiary value of statements relied upon by the revenue, especially third-party statements, and the necessity of corroborative evidence.
The applicability of precedents regarding the burden on the purchaser to verify the payment of excise duty by suppliers and the reasonableness of such expectations.

Detailed analysis of these issues is as follows:

Entitlement to Cenvat Credit Based on Invoices from Second Stage Dealers Allegedly Linked to Non-Existent Manufacturers

The relevant legal framework includes Rule 9(2) and Rule 9(3) of the Cenvat Credit Rules, 2004, which govern the conditions under which cenvat credit can be availed, including the requirement of receipt of inputs and the duty having been paid by the supplier. The Court also referred to judicial precedents such as the judgment of the Allahabad High Court in Commissioner of Central Excise & Service Tax vs. Juhi Alloys Ltd., which clarified that a bona fide purchaser who has taken reasonable steps to ensure that excise duty has been paid on inputs is entitled to cenvat credit. The Court emphasized that it is not practical or expected for the purchaser to verify the supplier's payment of duty beyond the invoices and statutory records.

The investigation by DGCEI alleged that certain manufacturers had not paid duty, and that first stage dealers issued invoices without actual movement of goods, which were then used by second stage dealers to pass on cenvat credit to the appellant. However, the appellant contended that it had received the goods as reflected in statutory records, made payments through account payee cheques, and had cleared the final products on payment of duty.

The Court noted that while the revenue alleged non-receipt of inputs, there was no investigation or evidence from transporters or other corroborative sources to establish that the appellant did not receive the goods. The second stage dealer was found to be an existent entity, and the appellant maintained proper records. The Court held that in the absence of any evidence to the contrary, it must be presumed that the appellant received the inputs and was entitled to the cenvat credit.

The Court applied the principle that "once a buyer of inputs receives invoices of excisable items, unless factually it is established to the contrary, it will be presumed that when payments have been made in respect of those inputs on the basis of invoices, the buyer is entitled to assume that the excise duty has been/will be paid by the supplier on the excisable inputs." This principle was supported by multiple precedents including the Jharkhand High Court and various Tribunal decisions.

Penalty Imposition and Evidentiary Requirements

The penalty was imposed on the appellant and other firms for alleged wrongful availment of cenvat credit. The appellant challenged this on grounds that the evidence relied upon by the revenue was insufficient, particularly pointing out that statements were third-party in nature and uncorroborated. The appellant further argued that no investigation reports or documents supported the allegations against certain first stage dealers or the appellant itself.

The Court agreed with the appellant's submissions, emphasizing that penalties cannot be imposed without tangible and corroborative evidence. The mere existence of show cause notices and allegations based on unverified statements were insufficient to sustain penalty. The Court referred to Tribunal decisions holding that cases cannot be booked merely on presumption or assumption and that there must be corroborative evidence to prove allegations.

Application of Law to Facts and Treatment of Competing Arguments

The Court carefully examined the facts and the evidence presented. It noted that the appellant had maintained statutory records showing receipt of goods, had made payments by cheque, and had cleared the final products on payment of duty. The revenue's case was based primarily on the investigation report alleging non-existence or non-payment of duty by manufacturers and first stage dealers, but no investigation was conducted at the level of transporters or to verify actual receipt of goods by the appellant.

The Court found that the revenue failed to produce any direct or corroborative evidence to prove that the appellant did not receive the inputs. The appellant's reliance on statutory records and payments was held to be sufficient to establish entitlement to cenvat credit. The Court rejected the revenue's argument that credit should be denied merely because the manufacturers had not paid duty or were non-existent, especially when the appellant was a bona fide purchaser who had taken reasonable steps to ensure compliance.

Conclusions

The Court concluded that the appellant was entitled to avail cenvat credit on the basis of invoices issued by the second stage dealers, accompanied by actual receipt of goods as reflected in statutory records and payments made. The absence of any investigation or evidence to prove non-receipt of goods by the appellant was a critical factor. The Court set aside the impugned order denying credit and imposing penalty, and held that no penalty was imposable on the appellants.

Significant holdings and core principles established include:

"Once a buyer of inputs receives invoices of excisable items, unless factually it is established to the contrary, it will be presumed that when payments have been made in respect of those inputs on the basis of invoices, the buyer is entitled to assume that the excise duty has been/will be paid by the supplier on the excisable inputs."

"The issue in each case is whether, within the meaning of Rule 9(3) of the Rules of 2004, the assessee has taken reasonable steps to ensure that the inputs in respect of which he has taken cenvat credit were goods on which appropriate duty of excise was paid. Once it is demonstrated that reasonable steps had been taken, which is a question of fact in each case, it would be contrary to the Rules to cast an impossible or impractical burden on the assessee."

"Cases cannot be booked merely on the presumption and assumption; there should be corroborative evidence to prove the allegation."

"In the absence of any corroborative evidence to show that the appellant has not received the goods, it cannot be alleged against the appellant that they have received the invoices and not the goods merely on the ground that there was no storage facility."

The final determination was that the appellant was entitled to cenvat credit on the invoices issued by second stage dealers, and the penalty imposed on the appellant and associated firms was set aside due to lack of evidence. The appeals were allowed with consequential relief.

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