Cenvat credit for bona fide recipients survives when due diligence and supporting records prove genuine input receipt.

Under the Cenvat scheme, credit cannot be denied to a bona fide recipient who received inputs under dealer invoices and maintained contemporaneous supporting records, including proof of receipt and payment by cheque, because the buyer is not required to trace alleged defects in upstream invoices where due diligence is shown. Credit and related penalties remain sustainable where the recipient is found to have colluded in a fraudulent invoicing chain and actively assisted in passing illegal credit. The Tribunal accordingly protected credit and removed penalties for appellants demonstrating genuine receipt and good faith, while sustaining both denial of credit and penalties against those proved to be part of the fraud.

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Issues: (i) Whether Cenvat credit on inputs received under invoices issued through registered dealers could be denied on the ground that the upstream invoices were bogus and duty payment was ?; (ii) whether the penalties imposed on the appellants were sustainable.

Issue (i): Whether Cenvat credit on inputs received under invoices issued through registered dealers could be denied on the ground that the upstream invoices were bogus and duty payment was doubtful.

Analysis: The dispute turned on the reach of the recipient's obligation under the Cenvat scheme to take reasonable steps to satisfy itself about the identity and status of the supplier and the genuineness of the accompanying documents. The record showed receipt of inputs, supporting road permits, and payment by cheque in the case of the appellants whose appeals were allowed. On those facts, the Tribunal applied the principle that a buyer is not required to go behind the records of the first stage dealer when the transaction is otherwise supported by contemporaneous material and the buyer has acted with due diligence. At the same time, where the evidence showed active participation in the fraudulent chain and collusion in passing illegal credit, the credit could not be protected.

Conclusion: The denial of Cenvat credit was set aside in respect of the appellants who established receipt of inputs with supporting documents and due diligence, but sustained against the appellants found to have participated in the fraud.

Issue (ii): Whether the penalties imposed on the appellants were sustainable.

Analysis: Penalty followed the factual finding as to participation in the fraudulent availment and passing of credit. For the appellants whose receipt of inputs and bona fides were accepted, the foundation for penalty did not survive. For the appellants found to be part of the fraudulent arrangement, the evidentiary record supported imposition and continuation of penalty.

Conclusion: The penalties were set aside for the appellants who succeeded on the credit issue and were confirmed for the appellants found guilty of collusion.

Final Conclusion: The Tribunal granted relief to the appellants who established bona fide receipt of inputs and due diligence, while maintaining the adverse findings and penalties against those found to have assisted the fraudulent credit chain.

Ratio Decidendi: Under the Cenvat scheme, credit cannot be denied to a bona fide recipient who has taken reasonable steps to verify the supplier and whose receipt of inputs is supported by genuine contemporaneous records, but credit and penalties are sustainable where the recipient is found to have colluded in a fraudulent invoicing arrangement.

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