2025 (6) TMI 119 - AT - Central Excise

Inadmissible refund claims availed under the N/N. 56/2002-CE dated 14.11.2002 - goods were not manufactured and area based exemption wrongly availed - HELD THAT - The identical issue was raised in the case of M/S ECKO CABLES (P) LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE AND SERVICE TAX LUDHIANA 2024 (1) TMI 1116 - CESTAT CHANDIGARH wherein on identical facts this Tribunal has examined the preliminary objection of the department that since the matter is pending before the Hon ble Jammu Kashmir High Court the appeal should be kept in abeyance; the said preliminary objection was rejected by this Tribunal. Conclusion - The demand of CENVAT Credit and penalty confirmed against the appellants under Rule 26 of the Central Excise Rules 2002 is set aside. The impugned orders are not sustainable in law and is set aside - appeal allowed.

Summary

The core legal questions considered by the Tribunal in these appeals revolve around the validity of the demand of CENVAT Credit and imposition of penalty on the appellants, who were alleged to have availed inadmissible CENVAT Credit based on invoices issued by a third party (M/s V.K. Metal Works, Jammu). Specifically, the issues are:

• Whether the appellants can be held liable for availing CENVAT Credit fraudulently based on the transactions with M/s V.K. Metal Works, Jammu, which was alleged to have carried out bogus manufacturing activities and issued fraudulent invoices.
• Whether the demand of duty and penalty confirmed by the Commissioner (Appeals) under Rule 26 of the Central Excise Rules, 2002, is sustainable in light of findings in the main case against M/s V.K. Metal Works, Jammu.
• Whether the appeals should be kept in abeyance pending the outcome of departmental appeals filed before the Hon'ble Jammu & Kashmir High Court against the Tribunal's decision in the main case.

Issue-wise detailed analysis:

1. Liability of appellants for availing inadmissible CENVAT Credit based on transactions with M/s V.K. Metal Works, Jammu

The legal framework involves the provisions of the Central Excise Rules, 2002, particularly Rule 26, which deals with the denial of CENVAT Credit and imposition of penalty in cases of fraudulent availment. The demand arose from an investigation by the Directorate General of Central Excise Intelligence (DGCEI), which alleged that M/s V.K. Metal Works had no manufacturing facilities and had issued bogus invoices, leading to wrongful availment of CENVAT Credit by its customers, including the appellants.

The Tribunal referred extensively to the principal case against M/s V.K. Metal Works, Jammu, which was adjudicated and appealed before the Tribunal's Principal Bench. The Tribunal's Final Order dated 23.05.2018 held that there was no evidence to establish that M/s V.K. Metal Works had engaged in bogus manufacturing or fraudulent passing of CENVAT Credit. The Tribunal emphasized that serious allegations such as clandestine removal of goods require positive and affirmative evidence, which was lacking. The Tribunal noted that sufficient documentary evidence was on record to show transfer of copper scrap to the factory of M/s V.K. Metal Works, and the department's own show cause notice indirectly accepted the existence of manufacturing activity.

Applying this reasoning, the Tribunal found that the appellants, as customers of M/s V.K. Metal Works, could not be held liable for fraudulent availment of CENVAT Credit when the supplier's manufacturing activity was not shown to be bogus. The Tribunal relied on precedents including decisions in cases of similarly placed entities such as Vinod Kumar Jain, Omega Rolling Mills, Rachna Metal Industries, KEI Industries, and Ecko Cables, where identical issues were resolved in favor of the appellants based on the main case's findings.

The Tribunal also highlighted that allegations of clandestine removal require evidence such as receipt of raw materials, utilization, manufacture of finished goods, transportation, and buyer identity, none of which were satisfactorily demonstrated by the Revenue.

2. Sustainability of demand and penalty imposed under Rule 26 of the Central Excise Rules, 2002

The Tribunal considered the legal provisions under Rule 26, which authorize demand and penalty for wrongful availment of CENVAT Credit. However, the Tribunal underscored the necessity of establishing fraud or wrongful claim on a solid evidentiary basis. The absence of affirmative evidence to prove the supplier's fraudulent conduct undermined the basis for confirming the demand and penalty against the appellants.

The Tribunal examined the Commissioner (Appeals)'s confirmation of the demand and penalty and found the impugned orders unsustainable in light of the principal case's findings and consistent judicial precedents. The Tribunal rejected the Revenue's reliance on mere computer printouts and unsubstantiated allegations, reiterating the principle that serious charges require cogent proof.

3. Whether the appeals should be kept in abeyance pending the outcome of departmental appeals before the Hon'ble Jammu & Kashmir High Court

The Revenue sought to keep the appeals in abeyance pending the decision of the High Court on appeals filed against the Tribunal's principal order in the V.K. Metal Works case. The Tribunal referred to the judgment of the Hon'ble Supreme Court in Union of India vs. West Coast Paper Mills Ltd., which permits such discretion.

However, the Tribunal noted that the High Court had not granted any stay on the Tribunal's order. Further, the Tribunal pointed out that various Benches had decided similar appeals even during the pendency of the High Court proceedings, without any stay. The Tribunal found no reason to keep the present appeals pending and rejected the preliminary objection raised by the Revenue.

Key evidence and findings:

• Documentary evidence showing transfer of copper scrap to the factory of M/s V.K. Metal Works.
• Absence of positive and affirmative evidence to prove clandestine removal or bogus manufacturing.
• Department's own show cause notice acknowledging manufacturing activity indirectly.
• Judicial precedents consistently holding that allegations of fraud require strong proof.

Treatment of competing arguments:

The appellants argued that the demand was entirely consequential and based on unproven allegations against M/s V.K. Metal Works. They relied on the Tribunal's principal order and subsequent consistent decisions in favor of similarly situated customers. The Revenue emphasized the pendency of appeals before the High Court and sought to keep the appeals in abeyance, relying on the Supreme Court's precedent.

The Tribunal balanced these arguments by giving primacy to the absence of stay and the settled position of law on the need for evidence to prove fraud. It rejected the Revenue's request for abeyance and found the appellants' reliance on the principal case and related precedents well-founded.

Conclusions:

The Tribunal concluded that the impugned orders confirming demand and penalty against the appellants were not sustainable in law. The appellants could not be held liable for wrongful availment of CENVAT Credit when the supplier's manufacturing activity was not shown to be bogus or fraudulent. The appeals were allowed with consequential relief.

Significant holdings include the following verbatim extract from the Tribunal's reasoning in a related case:

"Allegations of clandestine removal are serious allegations and are required to be confirmed on the basis of positive and affirmative evidences. Even in the above referred case of M/s V.K. Metals and Others, the clandestine removal findings stands set aside by the Tribunal by observing that there has to be shown the receipt of raw material, utilization of the same, actual manufacture of the finished goods, the evidence of transportation and identity of the buyers etc. Inasmuch as nothing has been shown in the present case by the Revenue, we find no reasons to confirm the demand."

Core principles established:

• Fraudulent availment of CENVAT Credit must be established by positive and affirmative evidence; mere allegations or computer printouts are insufficient.
• Customers cannot be held liable for wrongful availment of credit if the supplier's manufacturing activity is not proven to be bogus.
• Pending appeals before a High Court do not automatically warrant abeyance of appeals before the Tribunal, especially where no stay is granted.

Final determinations:

• The demand of CENVAT Credit and penalty confirmed against the appellants under Rule 26 of the Central Excise Rules, 2002, is set aside.
• The appeals are allowed with consequential relief as per law.
• The appeals will not be kept in abeyance despite the pendency of departmental appeals before the High Court.