2014 (1) TMI 1475 - HC - Central Excise

Assessee entitled to CENVAT credit despite rule violations when exercising reasonable care as bona fide purchaser

The HC upheld the assessee's entitlement to CENVAT credit despite allegations of rule violations. The court found that the assessee had exercised ... Availment of CENVAT Credit - Reasonable steps / care to be taken before availing Cenvat Credit - Duty paying documents - Violation of the provisions of Rule 3, 9(3) & Rule 7 of the Cenvat Credit Rules, 2004 - Held that:- both the Commissioner (Appeals) and the Tribunal have given cogent reasons to indicate that the assessee had taken reasonable steps to ensure that the inputs in respect of which he has taken the cenvat credit are goods on which the appropriate duty of excise, as indicated in the documents accompanying the goods, has been paid. Admittedly, in the present case, the assessee was a bona fide purchaser of the goods for a price which included the duty element and payment was made by cheque. The assessee had received the inputs which were entered in the statutory records maintained by the assessee. The goods were demonstrated to have travelled to the premises of the assessee under the cover of Form 31 issued by the Trade Tax Department, and the ledger account as well as the statutory records establish the receipt of the goods. In such a situation, it would be impractical to require the assessee to go behind the records maintained by the first stage dealer. The assessee, in the present case, was found to have duly acted with all reasonable diligence in its dealings with the first stage dealer - Decided against Revenue. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court were:(a) Whether the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) was justified in law in rejecting the revenue's appeal against the respondent who availed Cenvat Credit based on invoices issued by M/s M.K. Steels, Kolkata, where the inquiry established the invoices to be fake and the manufacturer named therein, M/s Sarla Ispat (P) Ltd., Durgapur, was found to be non-existent.(b) Whether the CESTAT was justified in law in rejecting the revenue's appeal when the respondent allegedly failed to exercise due care in receiving the goods and violated the provisions of Rule 3, Rule 9(3), and Rule 7 of the Cenvat Credit Rules, 2004.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Legitimacy of Cenvat Credit availed on invoices found to be fake and manufacturer non-existentRelevant legal framework and precedents: The matter was examined under the Cenvat Credit Rules, 2004, particularly Rule 7 (4) of the 2002 Rules and Rule 9 (5) of the 2004 Rules, which require a manufacturer to verify particulars in invoices issued by the first stage dealer. The Court also considered the Explanation to Rule 9(3) of the 2004 Rules regarding the reasonable steps required to verify the identity of the supplier.Judicial precedent from the Jharkhand High Court was cited, which held that a buyer who receives invoices and makes payment on that basis is entitled to presume that excise duty has been or will be paid by the supplier, and it would be unreasonable to expect the buyer to verify the supplier's accounts or duty payments.Court's interpretation and reasoning: The Court noted that the respondent (assessee) was engaged in manufacturing and procured raw materials from M/s MK Steels (P) Ltd., a registered dealer. The goods were received and entered in the Cenvat credit account, used in manufacturing, and cleared on payment of duty. The goods were transported under Form 31 issued by the Trade Tax Department, and payments were made by cheque. These facts were undisputed.The Court emphasized that the manufacturer is only required to check the particulars in the invoice issued by the first stage dealer and be familiar with the dealer's identity. It would be impractical and unreasonable to expect the manufacturer to verify the correctness of the dealer's records or duty payments beyond this.The Court upheld the findings of the Commissioner (Appeals) and the Tribunal that the respondent had acted bona fide, taking reasonable steps to ensure the genuineness of the transactions, and that the denial of Cenvat credit was improper.Key evidence and findings: The respondent produced Form 31, ledger accounts showing payments by cheque, and Form RG 23-A, Part-II. The Tribunal found these sufficient to prove receipt of goods and bona fide transactions. The supplier, M/s MK Steels, was a registered dealer, and the goods had physically reached the respondent's premises.Application of law to facts: The Court applied Rule 7 (4) of the 2002 Rules and Rule 9 (5) of the 2004 Rules to hold that the respondent had discharged its legal obligation by verifying the dealer's identity and invoices. The Explanation to Rule 9 (3) was noted to provide a deeming fiction for reasonable steps taken, but even absent this, the respondent had independently established reasonable steps.Treatment of competing arguments: The revenue argued that the respondent should have verified the existence of the original manufacturer (Sarla Ispat) and the payment of duty by the dealer's supplier. The Court rejected this, holding that the law does not impose an impossible burden on the buyer to verify upstream transactions or the genuineness of the supplier's records.Conclusion: The Court concluded that the CESTAT was justified in rejecting the revenue's appeal since the respondent had taken reasonable steps and acted bona fide in availing Cenvat credit on the invoices issued by a registered dealer.Issue 2: Alleged violation of Rule 3, Rule 9(3), and Rule 7 of the Cenvat Credit Rules, 2004Relevant legal framework and precedents: Rule 9(3) mandates that the manufacturer or producer taking Cenvat credit must take all reasonable steps to ensure that the inputs on which credit is taken are goods on which appropriate excise duty has been paid. The Explanation to Rule 9(3) provides a deeming fiction for reasonable steps if the manufacturer verifies the identity and address of the supplier by personal knowledge or certificate.Court's interpretation and reasoning: The Court reiterated that the question of whether reasonable steps have been taken is a question of fact. It found that the respondent had satisfied this requirement by verifying the dealer's registration, receiving goods physically, making payment by cheque, and maintaining statutory records.The Court held that it would be impractical and unreasonable to require the respondent to investigate beyond the first stage dealer, such as verifying the existence of the original manufacturer or the payment of duty by the dealer's supplier.Key evidence and findings: The respondent produced documentary evidence including Form 31, ledger accounts, and payment proofs. The Tribunal and Commissioner (Appeals) found these sufficient to establish reasonable steps under Rule 9(3).Application of law to facts: The Court applied Rule 9(3) and its Explanation to find that the respondent had fulfilled the statutory requirement of taking reasonable steps. The bona fide nature of the transaction was supported by payment by cheque and receipt of goods.Treatment of competing arguments: The revenue contended that the respondent violated Rule 9(3) by failing to verify the non-existence of the manufacturer named in the invoices. The Court rejected this, emphasizing that the law does not impose an impossible burden and that the respondent's steps were sufficient.Conclusion: The Court held that the respondent complied with Rule 9(3) and other relevant provisions, and therefore the denial of Cenvat credit was unwarranted.3. SIGNIFICANT HOLDINGSThe Court preserved the following crucial legal reasoning verbatim:'Once a buyer of inputs receives invoices of excisable items, unless factually it is established to the contrary, it will be presumed that when payments have been made in respect of those inputs on the basis of invoices, the buyer is entitled to assume that the excise duty has been/will be paid by the supplier on the excisable inputs. The buyer will be therefore entitled to claim Modvat credit on the said assumption. It would be most unreasonable and unrealistic to expect the buyer of such inputs to go and verify the accounts of the supplier or to find out from the department of Central Excise whether actually duty has been paid on the inputs by the supplier. No business can be carried out like this, and the law does not expect the impossible.'Core principles established include:The manufacturer availing Cenvat credit is required only to verify the identity and registration status of the first stage dealer issuing the invoice and to satisfy himself that the goods have been received and payment made.Reasonable steps under Rule 9(3) do not extend to verifying the genuineness of the upstream supplier or the payment of duty by the dealer's supplier.The burden to verify excise duty payment beyond the first stage dealer is not imposed on the buyer to avoid impractical and impossible compliance requirements.Payment by cheque and receipt of goods under proper statutory forms constitute strong evidence of bona fide transactions.Final determinations on each issue were:(1) The CESTAT was justified in rejecting the revenue's appeal against denial of Cenvat credit since the respondent had taken reasonable steps and acted bona fide in availing credit on invoices issued by a registered first stage dealer.(2) The respondent did not violate Rule 3, Rule 9(3), or Rule 7 of the Cenvat Credit Rules, 2004, as it had fulfilled the requirement of taking reasonable steps to ensure the inputs on which credit was availed were duty paid.Accordingly, the appeals by the revenue were dismissed as they did not raise any substantial question of law.