2013 (4) TMI 5 - AT - Central Excise

Duty Confirmation & Penalty Imposed on Companies for Fraudulent Credit

The case involved the confirmation of duty and imposition of penalties against M/s. Satvik Industries and M/s. Genius Electrical & Electronics (P) ... Reversal of Cenvat/Modvat credit by utilization for payment of duty - passing of fraudulent Cenvat/Modvat credit to buyers - distinction between reversal of credit and passing on fraudulent credit - application of section 11D of the Central Excise Act - penalty under Rule 13 of the Cenvat Credit Rules - pre deposit and stay pending appealReversal of Cenvat/Modvat credit by utilization for payment of duty - distinction between reversal of credit and passing on fraudulent credit - Whether utilization of allegedly inadmissible Cenvat/Modvat credit by debiting the credit account and showing payment of duty on final products (when, according to Revenue, final products were not manufactured) operates as reversal of the wrong credit so as to preclude further recovery of the same. - HELD THAT: - The majority (Member (J)) prima facie accepted the appellants' contention that the credit availed by M/s Satvik Industries was debited and utilized for payment of duty on final products and, since even according to the Revenue no final products were manufactured, there was no liability to pay excise duty; consequently the utilization/debit entry amounted to reversal of the credit and further recovery of the same would be unfair. The Tribunal relied upon earlier decisions to the effect that credit availed on inputs and subsequently used to discharge duty (even if the credit was not strictly admissible) can be treated as reversed and not subject to a subsequent demand. The majority therefore held, at the prima facie/stay stage, that further directional deposit of the credit would not be equitable. Member (T), however, recorded disagreement with the legal equivalence of such utilization and reversal, emphasising that issuing invoices which enable buyers to claim credit causes loss to revenue and is distinct from bona fide reversal entries; he noted that section 11D and the distinction between the three factual situations (simple debit reversal, removal of inputs with duty reversal, and issuance of invoices to pass fraudulent credit) lead to a different legal consequence. The operative result reflects the majority's prima facie conclusion for the purpose of stay, while the separate opinion records that the legal question is not settled in favour of treating the practised modus operandi as mere reversal of credit. [Paras 16, 19, 20, 21, 22]At the prima facie/stay stage the Tribunal (majority) treated the utilization/debit as reversal of credit and held further recovery against M/s Satvik Industries to be not fair; a separate member recorded disagreement on the legal equivalence and highlighted applicability of section 11D and the gravity of fraudulent passing of credit.Passing of fraudulent Cenvat/Modvat credit to buyers - recovery of inadmissible credit from buyers - Whether the credit so shown as utilized by the manufacturer but availed as input credit by the buyers is recoverable from the buyers. - HELD THAT: - The Tribunal noted that proceedings for recovery against buyers of the final products have been initiated by the Revenue and observed that the credit utilized by M/s Satvik Industries for payment of duty (which was subsequently availed by a buyer as credit) is required to be denied and recoverable from the buyer. The order records that duty confirmed against one such buyer, M/s Genuis Electrical & Electronics (P) Ltd., stands paid by that buyer and that the denial/recovery from buyers is appropriate in the departmental proceedings instituted against them. [Paras 9, 11]The Tribunal treated denial and recovery of inadmissible credit from buyers as appropriate and noted departmental proceedings against such buyers; for the buyer before the Tribunal the duty confirmed stands paid.Penalty under Rule 13 of the Cenvat Credit Rules - pre deposit and stay pending appeal - Interim pre deposit directions and stay: quantum to be pre deposited by M/s Satvik Industries and sufficiency of deposit by M/s Genuis Electrical & Electronics (P) Ltd. for admission and stay. - HELD THAT: - Balancing the prima facie findings and the seriousness of allegations of fraudulent passing of credit, the Tribunal directed M/s Satvik Industries to deposit a specified sum towards penalty within eight weeks; upon such pre deposit the pre deposit of the balance was waived and stay on recovery was granted during pendency of the appeals. For M/s Genuis Electrical & Electronics (P) Ltd., the Tribunal treated the amount already deposited as sufficient for admission under the relevant provision and dispensed with the condition of pre deposit of penalty, allowing their stay petition. The concurring member agreed with the operative directions on pre deposit and stay for both parties for the limited purpose of avoiding delay in the stay stage. [Paras 10, 11, 22, 23]M/s Satvik Industries ordered to make the directed pre deposit towards penalty with balance waived on compliance and stay granted; deposit made by M/s Genuis Electrical & Electronics (P) Ltd. held sufficient and their stay petition allowed.Final Conclusion: At the interim/stay stage the Tribunal (majority) held that the appellants' utilization of the disputed credit by debiting their credit account and showing payment of duty prima facie operated as reversal of the credit and restrained further recovery from M/s Satvik Industries; nevertheless the Tribunal directed a specified pre deposit towards penalty by Satvik and treated the deposit by M/s Genuis Electrical & Electronics (P) Ltd. as sufficient for stay and admission of appeal. A separate member recorded a contrary view that issuance of invoices to pass fraudulent credit is legally distinct from bona fide reversal and flagged applicability of section 11D and the need to treat such conduct as prejudicial to revenue. Issues Involved:1. Confirmation of duty and imposition of penalty against M/s. Satvik Industries and M/s. Genius Electrical & Electronics (P) Ltd.2. Legitimacy of availing and utilizing Modvat credit based on fraudulent invoices.3. Reversal of credit and its implications.4. Compliance with Section 11D of the Central Excise Act.Detailed Analysis:Issue 1: Confirmation of Duty and Imposition of PenaltyThe duty of Rs. 1,06,01,497/- was confirmed against M/s. Satvik Industries along with an identical penalty. Similarly, a duty of Rs. 16,07,133/- was confirmed against M/s. Genius Electrical & Electronics (P) Ltd. with an identical penalty. The central excise officers found that M/s. Satvik Industries had been availing Modvat credit based on fake invoices issued by M/s. Aggarwal Plastic (India), which had ceased manufacturing activities since January 2002. Consequently, M/s. Satvik Industries was accused of showing the purchase of raw materials without actual receipt and clearing final products without actual manufacture, thus facilitating their buyers to avail of non-admissible credit.Issue 2: Legitimacy of Availing and Utilizing Modvat CreditThe appellants argued that the illegal credit availed was reversed by debiting it for payment of duty on final products, which according to the Revenue, were not manufactured. The Revenue contended that the credit availed based on fraudulent invoices was not available to M/s. Satvik Industries and should be deposited. The Tribunal noted that since the final products were not manufactured, there was no liability to pay excise duty, and the utilization of the credit for payment of duty on non-manufactured products could be considered a reversal of the credit.Issue 3: Reversal of Credit and Its ImplicationsThe Tribunal relied on decisions such as Crompton Greaves Ltd. vs. CCE and Vickers System International Ltd. vs. CCE, which held that Modvat credit availed and used for payment of duty, even if no excise duty was leviable, could be considered a reversal of credit. The Tribunal concluded that the credit availed by M/s. Satvik Industries was reversed by utilizing it for payment of duty on final products, and further recovery of inadmissible credit was not sustainable.Issue 4: Compliance with Section 11D of the Central Excise ActA separate order by Member (Technical) disagreed with the notion that issuing invoices showing utilization of wrong Cenvat credit is equivalent to reversal of wrong Cenvat credit. It was emphasized that fraudulent credit passed on to buyers causes a loss to the Revenue. The provisions of Section 11D require any amount collected as representing excise duty to be deposited with the exchequer. The Member (Technical) highlighted that the situation at hand involved fraudulent credit and issuance of invoices to enable buyers to take credit, which is different from legitimate reversal of credit.Conclusion:1. M/s. Satvik Industries: Directed to deposit Rs. 30 lakhs towards penalty within eight weeks. The balance amount of pre-deposit was waived, and compliance was to be reported on 11.5.2012.2. M/s. Genius Electrical & Electronics (P) Ltd.: The deposit of Rs. 16 lakhs was deemed sufficient for the admission of the appeal, and the pre-deposit of the balance amount was waived.There shall be a stay on the collection of the balance amounts during the pendency of the appeals.