2019 (12) TMI 176 - AT - Central Excise

CENVAT Credit - electronic parts and batteries - credit availed without actually receiving them and without using the same in their factory in the manufacture of their final product - recovery of CENVAT Credit in terms of Rule 14 of the Cenvat Credit Rules readwith Section 11A of the Act alongwith interest under Section 11AA of the Act and penalty. Whether the appellant M/s Avon Meters Pvt. Ltd. is entitled for cenvat credit which has been denied by the Ld. Commissioner alleging that it was mere a paper transaction or not? Whether the penalty under Rule 26 of Central Excise Rules can be imposed on the co-appellants or not? HELD THAT - The appellant has placed on record the opinion of Dr. K. Prakalathan (M. Tech. Ph.D.) Manager (Testing) CIPET Chennai regarding feasibility of mixing of the Polycarbonate granules with granules of polymers of ethylene in primary forms or with granules of polymers of propylene or of other olefins in primary forms or with granules of polymers of styrene in primary forms to mould Energy Meter parts i.e. meter base meter cover terminal base and terminal cover at an injection moulding machine. Further it is states that the Polycarbonate is more polar then PE PP PS but do not say that PE PP PS are non-polar. It makes general statement that due to non-compatibility mixing of polar polymers with non polar polymers results into incompatibility but does not mention out of PC PE PP PS which polymer is polar or non polar and there is no certain conclusive to say PC PE PP and PS cannot be mixed in any case. Polycarbonate is one of the engineering material and as per the tender document; the electric meter should be manufactured either of polycarbonate or engineering material. Admittedly all the inputs in question do qualify as engineering materials as per the tender documents. The suppliers of the goods were not investigated. Merely on the basis of the test report it has been concluded that the supplies of the other inputs except polycarbonate are not input to manufacturer the final product - in most of the cases there is a entry at Information Collection Centre (ICC) of the state VAT which show that the goods have been passed through ICC and reached to the factory of the appellant. Moreover no cross examination of the persons whose statements have been relied upon were granted cross examination neither their statements have been taken in compliance to the provisions of Section 9D of the Central Excise Act 1944. Further in the show cause notice although various discrepancies were found during the course of investigation in the records of the appellant but the main allegation made in the show cause notice is that the input in question on which cenvat credit sought to be denied are not input of the appellant as were not used in the manufacture of their final product but it is mere paper transaction. It means that if it is a paper transaction then no goods have been received in the factory premises of the appellant but the stock found during the course of investigation with the statutory records are showing all the inputs on which cenvat credit sought to be denied were in the stock. It is not the case of shortage of inputs by the revenue. Also Revenue has not able to brought on record the evidence to show the diversion of the goods in question. No investigation was conducted with regard to the fund flow or the money has been received back in cash by the suppliers. The appellant has correctly taken the cenvat credit on the inputs in question therefore the impugned order is not sustainable - Penalty also set aside - appeal allowed - decided in favor of appellant.

1. ISSUES PRESENTED and CONSIDERED

The primary issues considered in this legal judgment are:

Whether the appellant, M/s Avon Meters Pvt. Ltd., is entitled to avail CENVAT credit on inputs allegedly not received in their factory premises, or if it was a mere paper transaction.
Whether penalties under Rule 26 of the Central Excise Rules can be imposed on the co-appellants for allegedly issuing invoices without actual supply of materials.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Entitlement to CENVAT Credit

Legal Framework and Precedents: The case revolves around the CENVAT Credit Rules, 2004, particularly Rule 3(1), which allows manufacturers to avail credit on inputs received and used in the factory. The burden of proof regarding the admissibility of CENVAT credit lies with the manufacturer.
Court's Interpretation and Reasoning: The court found that the investigation was flawed as it relied heavily on statements that were not substantiated by cross-examination or other corroborative evidence. The court emphasized the need for compliance with Section 9D of the Central Excise Act, which mandates examination and cross-examination of witnesses.
Key Evidence and Findings: The court noted that the stock of inputs was found during the investigation and matched the statutory records. There was no evidence of shortage or diversion of goods, and no inculpatory statements from the appellants or their directors.
Application of Law to Facts: The court applied the principles of evidence and procedural fairness, concluding that the evidence provided by the Revenue was insufficient to prove that the transactions were merely on paper.
Treatment of Competing Arguments: The appellants argued that the inputs were used in manufacturing, supported by technical reports and the absence of any evidence to the contrary. The court found these arguments persuasive, especially in light of the procedural lapses by the Revenue.
Conclusions: The court concluded that the appellant was entitled to the CENVAT credit as the inputs were indeed received and used in the manufacturing process.

Issue 2: Imposition of Penalty under Rule 26

Legal Framework and Precedents: Rule 26 of the Central Excise Rules deals with penalties for issuing invoices without actual supply of goods. The court also considered the applicability of penalties to corporate entities under this rule.
Court's Interpretation and Reasoning: The court found that penalties under Rule 26 could not be imposed without concrete evidence of wrongdoing. The statements relied upon by the Revenue were not substantiated through cross-examination, rendering them inadmissible.
Key Evidence and Findings: The court noted the lack of evidence showing that the goods were not supplied. The suppliers confirmed the supply of goods, and payments were made through banking channels.
Application of Law to Facts: The court applied the principles of evidence and statutory interpretation, concluding that the penalties were unjustified in the absence of reliable evidence.
Treatment of Competing Arguments: The appellants argued that the penalties were based on unsubstantiated claims. The court agreed, emphasizing the need for procedural compliance and reliable evidence.
Conclusions: The court set aside the penalties imposed under Rule 26, finding them unsupported by evidence.

3. SIGNIFICANT HOLDINGS

The court emphasized the importance of procedural compliance, particularly the need for cross-examination of witnesses as per Section 9D of the Central Excise Act.
The judgment established that mere allegations of paper transactions are insufficient without concrete evidence of non-receipt or non-use of inputs.
The court held that penalties under Rule 26 cannot be imposed on corporate entities without clear evidence of issuing invoices without actual supply.
The final determination was that the appellant was entitled to the CENVAT credit, and all penalties imposed were set aside.

The judgment underscores the necessity of adhering to procedural safeguards in tax adjudications and the requirement for substantial evidence before denying tax credits or imposing penalties.

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