2014 (6) TMI 454 - AT - Central Excise

Modvat credit - Fraudulent availment - Demand of amount equivalent to the credit of duty taken on Naphtha for the entire period - input used for adulteration of petrol, diesel etc - illegal divertion - appellants have manipulated their records to indicate that said Naphtha have been used in the manufacture for solvents - non-production of final product - 22 out of 45, purported purchasers of solvent were found to be non-existent or if in existence they in their statements have said that they never purchased solvent from the appellant - number of bank accounts were opened in Mumbai/Navi Mumbai on behalf of purported existent and non-existent purchasers (who were located in different parts of the country) and large amounts of cash were deposited which in turn were transferred to appellants account as if receipt of sale amount of solvents - transportation of solvents. Held that - Whole case is the total silence on the part of the appellants about the financial transactions unearthed by the Revenue. No comments have been made why the bank accounts were opened in Mumbai/Navi Mumbai for the purported buyer in different parts of the country (mostly non existent). How a huge amount were deposited in cash and thereafter transferred to the appellant as payments towards the Beesol, their final product. No meaningful explanation has been given by them in respect of 22 customers who have purported to have purchased Beesol indicated either such customers are non existent or they have not purchased Beesol or any other solvent from the appellant at all baring two cases wherein the customers have stated that they have purchased, except saying that the said units might have closed down or some of them being traders have stopped the business or taking central excise registration was not essential. The details found during investigation and confronted to appellant are required to be refuted on the basis of solid evidence by the appellant. In the absence of any such refutal, the allegations made by the revenue about the non existence or non purchase by these 22 units have to be upheld. In the event of not using the inputs in the manufacture of dutiable final products for whatever reason the credit alongwith interest is required to be paid back to the Government and penalty for misuse of facility/trust. The above proposition were covered under different rules at different point of time. In the present case when the irregularities were done the relevant rule was Rule 57I/57AH of the Central Excise Rules, 1944. However, when the Show Cause Notice was issued separate set of Cenvat Credit Rules has come into existence and it became Cenvat Credit Rules. Thus there was no period when the credit of inputs were not allowed and inputs were not to be used in the manufacture of taxable final product and there was no change in the law (except the Rule number or language of the Rule) for the recovery of credit on inputs which were not used in the manufacturing process was concerned From the investigation it is very clear that the appellants have not used either the whole or part of the Naphtha procured duty free. Naphtha purported to have been used in the manufacture of Beesol and purported to have been sold to 22 customers was definitely not used but diverted. But how much Naphtha has been diverted is not clearly coming out as the appellant did not co-operate in the investigation did not produce ledger account of all the parties so as to enable the Revenue to check up from the banks the money trail. In the circumstances, we are of the view that the ends of justice would be met by (i) disallowing the credit of Naphtha taken which is estimated (based upon input/output ratio) to have been used in the manufacture of Beesols the solvents purported to be sold to the 22 buyers (excluding the few consignments of two of such buyers who have admitted to have purchased one or two consignments); (ii) in respect of the remaining customers, appellants may be given last chance to produce all the invoices as also transport documents and ledger account detailing the banking transaction to enable verification of money trail - matter remanded back - Commissioner to re determine quantum of penalty - Decided against assessee.

Issues Involved:

1. Fraudulent availment of Modvat credit.
2. Non-production of final product.
3. Non-existent or fictitious purchasers.
4. Illegal diversion of Naphtha.
5. Legality of demand under repealed rules.
6. Extended period of limitation.
7. Imposition of penalties on individuals.

Detailed Analysis:

1. Fraudulent Availment of Modvat Credit:
The appellants were accused of fraudulently availing Modvat credit on Naphtha without actual receipt or consumption in manufacturing solvents. The Revenue alleged that Naphtha was diverted illegally and records were manipulated to show its use in solvent production, which is a condition for availing credit.

2. Non-Production of Final Product:
The Revenue's case was based on the non-production of final products (solvents) supported by three main evidences: non-existent purchasers, fictitious bank accounts, and manipulated transportation records. The Commissioner confirmed the demand of Rs. 12,38,49,639/- along with interest and penalties on various individuals associated with the appellant company.

3. Non-Existent or Fictitious Purchasers:
The investigation revealed that many purported purchasers were either non-existent or denied purchasing solvents from the appellants. Only two purchasers admitted to buying a minimal number of consignments, contrary to the records showing large quantities.

4. Illegal Diversion of Naphtha:
The Revenue alleged that the Naphtha was diverted into the illegal market instead of being used in manufacturing solvents. This was evidenced by the fabricated documents, non-existent customers, and manipulated bank transactions showing large cash deposits transferred to the appellant's account.

5. Legality of Demand Under Repealed Rules:
The appellants contended that the demand under Rule 57I of the Central Excise Rules was unsustainable as the rule was not in existence when the Show Cause Notice was issued. The Tribunal, however, upheld the demand citing Section 38A of the Central Excise Act, which allows continuation of proceedings under repealed rules.

6. Extended Period of Limitation:
The appellants argued against the invocation of the extended period of limitation. The Tribunal held that the extended period was correctly invoked due to clear fraud and suppression of facts with the intent to evade duty.

7. Imposition of Penalties on Individuals:
Penalties were imposed on various individuals associated with the appellant company, including directors and proprietors, for their roles in the fraudulent activities. The Tribunal upheld the imposition of penalties but remitted the matter for redetermining the duty liability and penalties based on the directions provided.

Conclusion:
The Tribunal concluded that the appellants had not used the Naphtha for manufacturing solvents as claimed and had manipulated records to avail Modvat credit fraudulently. The demand for reversal of credit was upheld, and the case was remitted for verification of genuine transactions and redetermination of duty liability and penalties. The extended period of limitation was deemed applicable due to the fraudulent nature of the activities.

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