CENVAT credit and extended limitation: endorsed invoices survived, but the demand failed where fraud by the assessee was not shown.

CENVAT credit on endorsed invoices was not denied merely because the original manufacturer later became untraceable, but the assessee still had to satisfy the independent Rule 7(2) obligation to take all reasonable steps to ensure the inputs were duty-paid; on the facts, that requirement was not met. The Court also held that the extended limitation period could not be invoked absent any allegation or proof that the assessee was party to fraud, collusion, or suppression, so the demand failed on limitation. The invoices were not treated as forged or nonexistent solely due to the manufacturer's later non-traceability.

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Issues: (i) Whether CENVAT credit taken on endorsed invoices could be denied merely because the original manufacturer was later found untraceable, and whether compliance with the reasonable-steps requirement under Rule 7(2) was necessary; (ii) Whether the demand could be sustained by invoking the extended period of limitation under Section 11A(1) when the appellants were not alleged to be parties to any fraud.

Issue (i): Whether CENVAT credit taken on endorsed invoices could be denied merely because the original manufacturer was later found untraceable, and whether compliance with the reasonable-steps requirement under Rule 7(2) was necessary.

Analysis: Credit under the scheme could be taken only on the basis of prescribed documents, but the availability of genuine invoices did not end the inquiry. The Court held that a document issued by a registered dealer or manufacturer is not rendered fake merely because the original manufacturer is subsequently not traceable. At the same time, Rule 7(2) imposed an independent obligation to take all reasonable steps to ensure that the inputs were duty-paid, and the Explanation indicated the manner in which such steps could be shown. The appellants failed to satisfy that requirement.

Conclusion: The issue was answered against the assessee and in favour of the Revenue, save that the invoices were not treated as forged or nonexistent documents merely because the original manufacturer was later untraceable.

Issue (ii): Whether the demand could be sustained by invoking the extended period of limitation under Section 11A(1) when the appellants were not alleged to be parties to any fraud.

Analysis: The Court held that the larger period could be applied only where there was positive evasion or conduct attracting the statutory ingredients for its invocation. On the facts, the appellants were not alleged to have participated in any fraud or collusion, and the mere later non-traceability of the original manufacturer did not justify reopening the transaction beyond the normal period. The notice therefore could not be sustained on the extended limitation footing.

Conclusion: The issue was answered in favour of the assessee and against the Revenue.

Final Conclusion: The remand order was set aside and the appeals were allowed, with the demand failing on limitation even though the Court accepted the Revenue's case on the reasonable-steps requirement under the credit rules.

Ratio Decidendi: A genuine duty-paying document is not made fake merely because the original manufacturer is later untraceable, but CENVAT credit still depends on compliance with the statutory reasonable-steps requirement, and the extended period of limitation cannot be invoked in the absence of allegation and proof that the assessee was party to fraud or suppression.

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