2025 (7) TMI 218 - AT - Service Tax

CENVAT Credit - availment of fraudulent CENVAT Credit on the basis of such bogus bills/invoices issued by nonexistent shell companies - demand based on uncorroborated statements without following proper legal procedures - invocation of extended period of limitation - HELD THAT - The appellant acts as a production house producing Television Serials and require support services from different service providers. They have received different services which are integral part of their provision of output services. They are not in a position to verify the credentials of all vendors. However it is a fact that the appellant has paid Service tax on the input services received by them to the service provider. The Department has also not denied this. Further utilising the said credit the appellant has discharged their service tax liability on the output services. The principle that an innocent buyer/service recipient cannot be penalized for the fraud of the supplier has been consistently upheld by the Tribunal when the recipient has acted in good faith. Further it is also settled that once the appellant being the service recipient has paid Service Tax to the supplier on the invoices raised the credit at the recipient s end cannot be denied without opening the assessment at the supplier s end which is clearly absent in the present case. The impugned order relies heavily on statements of Shri Kamal Kumar Jain and others recorded during investigation. However these statements have no evidentiary value as they were not examined in terms of Section 9D of the Central Excise Act 1944. The Department cannot build its case solely on uncorroborated statements without following proper legal procedures for recording evidence - further there is no evidence of the appellant s involvement in or knowledge of any fraudulent activities. The Department has failed to establish any collusion between the appellant and the alleged fraudulent suppliers. The appellant cannot be implicated or penalized for the offence committed at the service provider s end and accordingly the CENVAT Credit availed by the appellant cannot be denied on the basis of the statements recorded from the Director of the service provider. The disallowance of CENVAT Credit of Rs. 13, 07, 441/- confirmed in the impugned order is not sustainable and hence the same is set aside. As there is no irregularity in the availment of CENVAT Credit the question of demanding interest or imposing penalty does not arise. The impugned order is set aside - appeal allowed.

Summary

The core legal questions considered in this appeal include:

1. Whether the appellant, a bona fide recipient of input services, can be denied CENVAT Credit on the ground that the input service providers issued bogus invoices through shell companies involved in fraudulent activities.

2. Whether the appellant had knowledge or involvement in the fraudulent activities of the suppliers, and if such knowledge is necessary to deny CENVAT Credit.

3. The evidentiary value of statements recorded during investigation under Section 9D of the Central Excise Act, 1944, and whether reliance on such statements without following prescribed procedures is legally valid.

4. Whether the cessation of directorship of the alleged mastermind prior to the disputed transactions affects the imputability of fraud to the appellant.

5. Whether the appellant fulfilled the substantive conditions for availing CENVAT Credit under the relevant service tax laws.

6. The applicability of limitation provisions in denying CENVAT Credit and imposing penalties.

Issue-wise detailed analysis:

1. Denial of CENVAT Credit to a bona fide recipient on account of fraudulent input service providers

The legal framework governing CENVAT Credit under the Finance Act, 1994, and the CENVAT Credit Rules, 2004, requires that a registered service provider can avail credit of service tax paid on input services used for providing taxable output services. However, the Revenue contended that the appellant availed credit on the basis of bogus invoices issued by shell companies involved in fraud, thus disallowing credit and imposing penalty.

The Court examined precedents such as M/s Shiv Aspraval Gupta Corporate Consultant Pvt. Ltd. and M/s Bajaj Allianz General Insurance Co. Ltd., which establish that an innocent buyer or service recipient who acts in good faith and fulfills all substantive conditions for credit cannot be penalized for the supplier's fraud. The principle that credit cannot be denied without opening assessment at the supplier's end was emphasized.

Applying this to the facts, the appellant had paid service tax to the suppliers and utilized the credit for discharging output service tax liability. The appellant maintained proper books of accounts, made payments through banking channels, and filed regular returns. There was no evidence of suppression or evasion by the appellant. Therefore, the denial of credit solely based on the fraudulent nature of suppliers was not justified.

2. Knowledge or involvement of the appellant in fraudulent activities

The appellant denied any knowledge or collusion with the fraudulent suppliers. Statements recorded from the appellant's directors indicated that transactions were routed through agents and that the appellant was not aware of the directors of the supplier companies. The Department failed to establish any collusion or knowledge of fraud on the part of the appellant.

The Court held that mere discovery of fraud at the supplier's end cannot be attributed to the appellant without positive evidence of knowledge or participation. The appellant's transparency in recording transactions and filing returns further negated any inference of wrongdoing.

3. Evidentiary value of statements recorded during investigation under Section 9D of the Central Excise Act, 1944

The impugned order heavily relied on statements recorded from Shri Kamal Kumar Jain and others during investigation. However, the Court noted that these statements were not examined in accordance with Section 9D of the Central Excise Act, which prescribes mandatory procedures for admitting such statements as evidence.

Precedents including the Punjab and Haryana High Court decision in G-Tech Industries v. Union of India were cited, which clarify that statements recorded during inquiry or investigation have no evidentiary value unless the procedural safeguards under Section 9D are complied with. The Court emphasized that reliance on uncorroborated statements recorded without following Section 9D is legally impermissible.

Accordingly, the Court held that the statements against the appellant lacked evidentiary value and could not be the basis for denying credit or imposing penalty.

4. Effect of cessation of directorship of alleged mastermind on imputability of fraud

The Department alleged fraudulent activities by Shri Kamal Kumar Jain, who was director of the supplier company M/s Culminating Project Pvt. Ltd. until 31.10.2014. The disputed transactions and credit availment by the appellant occurred from October 2014 to March 2015, after Mr. Jain's directorship had ceased.

The Court reasoned that the misconduct of a former director cannot be imputed to vitiate genuine transactions conducted after his departure. The Department cannot paint all transactions with the same brush based on past misconduct. Therefore, the fraudulent intent or activities of Mr. Jain could not be attributed to the appellant for transactions occurring post his directorship.

5. Fulfillment of substantive conditions for availing CENVAT Credit

The appellant demonstrated compliance with all substantive conditions for credit: registration as a service provider, receipt of taxable input services, use of input services for taxable output services, payment through banking channels, and payment of service tax on output services. Minor procedural lapses such as incorrect addresses on invoices were held not to vitiate the substantive benefit of credit, in line with precedents.

6. Limitation and penalty

The appellant argued that the demand was barred by limitation as no assessment was opened against the suppliers. The Court noted that since the credit was availed and reflected in returns, and no supplier assessment was initiated, denial of credit and penalty on the appellant lacked legal basis. The absence of suppression or evasion negated the applicability of extended limitation and penalty provisions.

Significant holdings:

"The principle that an innocent buyer/service recipient cannot be penalized for the fraud of the supplier has been consistently upheld by the Tribunal when the recipient has acted in good faith."

"Once the appellant, being the service recipient, has paid Service Tax to the supplier on the invoices raised, the credit at the recipient's end cannot be denied without opening the assessment at the supplier's end, which is clearly absent in the present case."

"The misconduct of a former director/officer cannot be used as a blanket ground to deny legitimate business transactions conducted after such person's association with the entity has ended."

"Statements recorded during investigation have no evidentiary value unless and until tested in terms of Section 9D of the Central Excise Act, 1944."

"Reliance on uncorroborated statements recorded without following the procedure prescribed under Section 9D is legally impermissible."

"The appellant cannot be implicated or penalized for the offence committed at the service providers' end where the appellant has paid tax on the invoices raised and has no knowledge of fraud."

"In the absence of any specific finding or evidence of suppression of facts or intention to evade payment of service tax by the appellant, the confirmation of demand by invoking extended period of limitation is without any legal basis."

The Court ultimately set aside the impugned order disallowing CENVAT Credit of Rs. 13,07,441/-, and held that no penalty or interest could be imposed on the appellant. The appeal was allowed with consequential relief.