2013 (5) TMI 705 - HC - Central Excise

Original Manufacturer Cannot Be Ignored; No Cenvat Credit Without Due Diligence Under Section 11A Limitation Rules

The HC held that the existence of the original registered manufacturer at the relevant time cannot be negated merely because they are currently ... Validity of show cause notice based on Alert Circulars - Cenvat Credit - reasonable steps before availing credit - Compliance with reasonable steps under Rule 7(2) - original manufacturer of fabrics were alleged to be fictitious - endorsed invoices - period of limitation - Whether the department can escape its liability to find out a person who was registered with them and to pursue him for payment of duty? There is also no dispute in these cases that the goods were purchased by the merchant manufacturer officially and they have suffered the duty thereon and the amounts have been paid through cheques. Held that:- Merely because today, the original manufacturer, who is registered with the Revenue, is not traceable, it does not mean that he did not exist at the relevant point of time. If today, a manufacturer is not available for various reasons that does not mean that at the relevant point of time, such manufacturer who was registered with the Central Excise, did not exist. Reasonable steps - held that:- The Appellants in these cases, however, not having taken those steps, cannot get the benefit of the credit even though he is not party to fraud. Period of limitations - held that:- in the absence of any allegation that the appellants were parties to the fraud, the larger period of limitation cannot be applied, and thus, even if the original document was assumed to be issued by practising fraud, the appellants being holders in due course for valuable consideration without notice, the larger period of limitation cannot be extended in the case before us. In this connection, we may profitably refer to the decision of the Supreme Court in the case of Commissioner of Central Excise, Belapur v. E. Merck India Ltd. [2007 (7) TMI 299 - SUPREME COURT] where the Supreme Court took a view that in the absence of a willful misdeclaration on the part of the respondent-assessee, there was no scope of invoking Section 11A of the Act. The documents, invoices in question, issued by the registered licencee being genuine and in the absence of any allegations against the appellants of fraud, the Tribunal should not have remanded the matter back as the claim was totally barred by limitation. - Decided in favor of assessee. Issues Involved:1. Validity of show cause notice based on Alert Circulars.2. Compliance with reasonable steps under Rule 7(2) of Cenvat Credit Rules, 2002.3. Interpretation of 'reasonable steps' under Rule 7(2) of Cenvat Credit Rules, 2002.4. Definition of 'supplier' under Rule 7(1)(e) of Cenvat Credit Rules, 2002.5. Relevance of the original manufacturer's existence under Rule 7(1)(e) and Rule 7(2) of Cenvat Credit Rules, 2002.6. Applicability of Rule 12(B) to the appellant's case.7. Applicability of the principle laid down in Sheela Dyeing and Printing Mills Pvt. Ltd. case.8. Applicability of the larger period of limitation under Section 11A(1) of the Act.Detailed Analysis:Issue 1: Validity of Show Cause Notice Based on Alert CircularsThe court concluded that the show-cause notice was not solely based on Alert Circulars but was backed by detailed investigations and evidence. Therefore, this issue does not arise in the facts of the present case.Issue 2: Compliance with Reasonable Steps under Rule 7(2) of Cenvat Credit Rules, 2002The court held that the appellant failed to take all reasonable steps to ensure that the inputs or capital goods in respect of which they had taken the credit were goods on which appropriate duty of excise had been paid. The Tribunal's decision that the appellant did not comply with Rule 7(2) was upheld.Issue 3: Interpretation of 'Reasonable Steps' under Rule 7(2) of Cenvat Credit Rules, 2002The court agreed with the Tribunal that the appellant did not take 'reasonable steps' as required under Rule 7(2). The Tribunal's interpretation that the appellant must ensure the duty has been paid on the inputs was correct.Issue 4: Definition of 'Supplier' under Rule 7(1)(e) of Cenvat Credit Rules, 2002The court held that the term 'supplier' includes traders/merchants who endorsed the invoices as per Rule 7(1)(e). The Tribunal's interpretation was upheld.Issue 5: Relevance of the Original Manufacturer's Existence under Rule 7(1)(e) and Rule 7(2) of Cenvat Credit Rules, 2002The court found that the original manufacturer's existence was relevant for compliance with Rule 7(2). The Tribunal's decision that the appellant had not taken reasonable steps because the original manufacturer was fictitious was correct.Issue 6: Applicability of Rule 12(B) to the Appellant's CaseThe court held that the appellant could not escape the demand for duty under Rule 12(B) as the dealers are chargeable to duty on processed fabrics. The Tribunal's decision was upheld.Issue 7: Applicability of the Principle Laid Down in Sheela Dyeing and Printing Mills Pvt. Ltd. CaseThe court held that the principle laid down in Sheela Dyeing and Printing Mills Pvt. Ltd. was applicable to the present case, supporting the Revenue's position.Issue 8: Applicability of the Larger Period of Limitation under Section 11A(1) of the ActThe court held that the larger period of limitation could not be invoked in the absence of any allegation that the appellants were parties to the fraud. The demand was barred by limitation, and the Tribunal's decision was overturned on this point.Conclusion:The appeals were allowed, and the Tribunal's order was set aside on the ground of limitation. The court clarified that in cases where the larger period of limitation was not invoked, the matters could proceed as per the Tribunal's order. There was no order as to costs.