Cenvat credit requires actual receipt of inputs, and inconsistent movement records can justify denial of credit and penalties.

Actual receipt of inputs is a pre-condition for Cenvat credit, and surrounding evidence may be used to test whether invoices reflect genuine movement of goods. Sales tax barrier records, though not a standalone statutory requirement, were treated as relevant to assess whether goods had actually entered the State and reached the dealer. Inconsistencies between alleged entry dates and despatch records, without a credible explanation, supported an adverse inference that the transactions were paper entries and the invoices fictitious. On that basis, the credit demand and the linked penalties were restored.

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Issues: (i) Whether Cenvat credit taken on the basis of invoices could be disallowed where the surrounding evidence showed that the goods were not actually received and the sales tax barrier records were inconsistent with the claimed movement of goods; (ii) Whether the penalties imposed on the manufacturer, dealer and partner were liable to be restored along with the credit demand.

Issue (i): Whether Cenvat credit taken on the basis of invoices could be disallowed where the surrounding evidence showed that the goods were not actually received and the sales tax barrier records were inconsistent with the claimed movement of goods.

Analysis: Actual receipt of inputs is a pre-condition for availing credit. Though the Central Excise law did not mandate production of ST-XXVI-A forms as a standalone condition, the sales tax barrier records were relevant evidence to test whether the goods had in fact entered the State and reached the dealer. The entries showed that in several cases the date of alleged entry at the check post preceded the date of despatch from the depot, and no satisfactory explanation was offered for this inconsistency. In the absence of a credible explanation, the authorities were justified in drawing an adverse inference that the transactions were only on paper and that the invoices were fictitious.

Conclusion: The credit demand sustained by the adjudicating authority was correct and the order dropping it was unsustainable.

Issue (ii): Whether the penalties imposed on the manufacturer, dealer and partner were liable to be restored along with the credit demand.

Analysis: Once the finding of fictitious receipt of goods and wrongful availment of credit was upheld, the foundation for the penalties also survived. The appellate authority had not dealt with the material evidence relied upon by the department and had set aside the penalties without adequately addressing the discrepancies in the movement records and the absence of proof of actual receipt.

Conclusion: The penalties on all the respondents were restored.

Final Conclusion: The appellate order was set aside and the adjudication order confirming part of the credit demand, interest and penalties was restored in full.

Ratio Decidendi: Where the surrounding evidence shows that inputs were not actually received, the burden shifts to the assessee to explain material inconsistencies in movement records, and credit based on fictitious invoices cannot be sustained.

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