Cenvat credit on fictitious invoices from a non-existent supplier is inadmissible, while penalty may fail absent proved mens rea.

Cenvat credit taken on invoices issued by a supplier found non-existent at the stated address was inadmissible because fictitious invoices from a fraudulent source cannot support valid credit, and the manufacturer remained responsible for verifying the supplying chain. Duty and interest were therefore sustained. Penalty, however, was not upheld because the facts did not clearly establish conscious participation in the fraud, and the assessee was given the benefit of doubt on mens rea. The result was partial relief: credit was denied, but the penalty was deleted.

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Issues: (i) Whether Cenvat credit could be denied on the basis of invoices issued by a supplier found to be non-existent at the stated address and whose invoices were held to be fictitious; (ii) Whether penalty was sustainable in the facts of the case.

Issue (i): Whether Cenvat credit could be denied on the basis of invoices issued by a supplier found to be non-existent at the stated address and whose invoices were held to be fictitious?

Analysis: The credit was taken on the strength of invoices issued by M/s. Muskan Prints, but the evidence showed that the firm did not exist at the given address and the invoices were fictitious. The transaction was therefore tainted by fraud, and a document originating from a fraudulent source could not be treated as valid for availing credit. The manufacturer taking credit was required to ensure the validity of the supplying chain and could not rely only on the intermediary merchant manufacturer.

Conclusion: The denial of Cenvat credit was upheld and the duty and interest demand was sustained against the assessee.

Issue (ii): Whether penalty was sustainable in the facts of the case?

Analysis: Although the credit was held inadmissible, the circumstances did not conclusively establish that the assessee had knowingly participated in the fraud. The existence of an undertaking from the merchant manufacturer and the surrounding facts entitled the assessee to the benefit of doubt on the question of mens rea for penalty.

Conclusion: The penalty was set aside.

Final Conclusion: The demand of duty and interest was maintained, but the penalty was deleted, resulting in only partial relief to the assessee.

Ratio Decidendi: Credit based on fictitious invoices issued by a non-existent supplier is inadmissible, and penalty may still be waived where conscious involvement in the fraud is not clearly established.

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