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.

Summary

Issues Involved:
1. Entitlement of M/s Avon Meters Pvt. Ltd. to Cenvat credit.
2. Imposition of penalty under Rule 26 of Central Excise Rules on co-appellants.

Issue-wise Detailed Analysis:

Issue 1: Entitlement to Cenvat Credit

The main contention is whether M/s Avon Meters Pvt. Ltd. is entitled to Cenvat credit, which was denied by the Commissioner on the grounds that it was a mere paper transaction without actual receipt of goods.

Allegations and Investigation Findings:
The Revenue alleged that the appellant availed Cenvat credit without receiving the inputs in their factory. During the investigation, certain discrepancies were noted, including the presence of engineering materials other than polycarbonate, which were claimed not to be inputs for the appellant. The investigation also relied on test reports and statements from various individuals, which were not cross-examined as per Section 9D of the Central Excise Act, 1944.

Appellant's Defense:
The appellant argued that:
- The goods were recorded at the Information Collection Centre (ICC) of the state VAT, indicating their receipt.
- No cross-examination of the witnesses was allowed, rendering their statements inadmissible.
- Technical manuals and expert opinions confirmed that the materials in question qualify as engineering materials and could be used in manufacturing.
- There was no evidence of diversion of goods or cash flow irregularities.
- The stock of inputs matched the recorded balance, and no shortage was found.

Tribunal's Findings:
The Tribunal observed that:
- The procedure under Section 9D was not followed, making the statements inadmissible.
- The appellant provided sufficient evidence, including expert opinions and technical manuals, proving the feasibility of using the disputed materials in manufacturing.
- No effort was made to ascertain the quantity of raw materials required to produce the finished goods.
- The investigation did not conclusively prove non-receipt or misuse of inputs.

Conclusion:
The Tribunal held that the appellant correctly availed the Cenvat credit, and the impugned order was not sustainable. The recovery of Cenvat credit and penalties imposed were set aside.

Issue 2: Imposition of Penalty under Rule 26

The issue relates to the imposition of penalties on co-appellants under Rule 26(2) of the Central Excise Rules, 2002, on grounds of issuing invoices without actual supply of material.

Appellant's Defense:
The co-appellants argued that:
- There was no evidence other than the retracted statements of directors, which were recorded under duress.
- Rule 26(2) applies to individuals, not companies, as upheld by several Tribunal decisions.
- The Central Excise Act does not provide for penalties for mere issuance of invoices without actual supply, making Rule 26(2) ultra vires.

Tribunal's Findings:
The Tribunal noted that:
- The statements relied upon were not examined as per Section 9D, making them inadmissible.
- The penalty provisions under Rule 26(2) were not applicable to companies and lacked legal backing under the Central Excise Act.

Conclusion:
The Tribunal set aside the penalties imposed on the co-appellants, holding that the impugned order was not sustainable.

Final Judgment:

The Tribunal allowed the appeals, set aside the impugned order, and granted consequential relief to the appellants.

(Order pronounced on 03.12.2019)