2014 (3) TMI 412 - AT - Central Excise

Denial of CENVAT Credit - Entitlement of credit by purchaser of the raw-material from the second stage dealer - Credit availed on bogus transactions - Investigations conducted by the Revenue revealed fake transactions between M/s. Khemka Ispat Ltd., the manufacturing unit and M/s. Bhagwati Trading Co., the first stage dealer. If M/s. Khemka Ispat Ltd. has not received the raw-materials and has incorrectly availed the CENVAT credit and has not actually manufactured their final product and has incorrectly utilised the wrongly availed CENVAT credit for payment of duty on their final product - Held that - in the light of the observations made by the Commissioner (Appeals) as also the factual position that the appellants have received the goods, the burden placed upon them under Rule 7(2) of the CENVAT Credit Rules, 2002 stands discharged. A manufacturer cannot be expected to undertake investigations like Revenue officers and to find out the truth behind the scene. As long as he is receiving the goods from a known dealer under the cover of the invoices and making payments by cheques, he is deemed to have discharged the onus placed upon him under the said rule. Revenue is not disputing the fact of receipt of inputs by the manufacturer. It is also seen that no investigation stands conducted by Revenue from second stage dealer, who has actually supplied the inputs to the appellants. Also, there is no answer by Revenue as to from where the second stage dealer has received the inputs so as to supply the same to the appellants - Following decision of Rishab Industries Vs. CCE & ST, Goa 2007 (8) TMI 657 - CESTAT MUMBAI - Decided in favour of assessee.

Issues Involved:
1. Entitlement to CENVAT credit by the appellants.
2. Validity of transactions and invoices between various dealers and manufacturers.
3. Compliance with Rule 7(2) of the CENVAT Credit Rules, 2004.
4. Burden of proof on the appellant regarding the receipt of goods and payment of duty.

Detailed Analysis:

1. Entitlement to CENVAT Credit by the Appellants:
The appellants, M/s. S.K. Foils Ltd., were engaged in manufacturing cold rolled strips and availed CENVAT credit on raw materials received from M/s. Steel Mongers (I) Pvt. Ltd., a second stage dealer. The Revenue's investigation revealed that the first stage dealer, M/s. Bhagwati Trading Co., and the manufacturer, M/s. Khemka Ispat Ltd., were involved in issuing invoices without actual supply of goods, leading to bogus credit. Despite this, the appellants argued they received and used the materials in their manufacturing process, paying for them via cheque/Demand Draft.

2. Validity of Transactions and Invoices Between Various Dealers and Manufacturers:
Investigations indicated that M/s. Bhagwati Trading Co. issued invoices without supplying inputs, and M/s. Khemka Ispat Ltd. issued excise invoices without manufacturing the goods. Consequently, the Revenue contended that the appellants were not entitled to CENVAT credit. However, the appellants maintained that they had legitimately purchased and received the materials from the second stage dealer, M/s. Steel Mongers (I) Pvt. Ltd., and were not concerned with the fraudulent activities of the first stage dealer and manufacturer.

3. Compliance with Rule 7(2) of the CENVAT Credit Rules, 2004:
According to Rule 7(2), a manufacturer taking CENVAT credit must ensure that the inputs or capital goods on which credit is taken are duty-paid. The rule provides that the manufacturer should verify the identity and address of the supplier from personal knowledge or a certificate issued by the Superintendent of Central Excise. The appellants complied by purchasing from a registered second stage dealer with valid invoices and making payments through banking channels.

4. Burden of Proof on the Appellant Regarding the Receipt of Goods and Payment of Duty:
The Commissioner (Appeals) acknowledged that the appellants received the raw materials and used them in manufacturing their final products, which were cleared on payment of duty. The appellants provided sufficient evidence, including ST-38 challans and transport documents, proving the receipt and use of the goods. The Tribunal held that the appellants had discharged their burden under Rule 7(2) by receiving goods from a registered dealer and making payments via cheque/Demand Draft.

Conclusion:
The Tribunal found that the appellants had satisfied the requirements under Rule 7(2) and could not be expected to investigate the legitimacy of transactions beyond their immediate supplier. The Tribunal cited various precedents supporting the view that CENVAT credit cannot be denied if the inputs were received and used in manufacturing, and payments were made legitimately. Consequently, the impugned order was set aside, and the appeals were allowed with consequential relief to the appellants.

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