Cenvat credit fails where invoices arise from fictitious dealer transactions and fraud vitiates the underlying supply.

Cenvat credit was held inadmissible where invoices were issued by a dealer found to be fictitious and the underlying dealings were mere paper transactions. The Tribunal found that the dealer had no genuine business premises or godown, and that there was no actual movement of goods. It held that invoices arising from fraudulent transactions lost their authenticity, and payment through banking channels or supporting papers could not cure the defect when the transactions themselves were vitiated by fraud. The credit claim therefore failed, and the disallowance of credit with penalty was restored.

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Issues: Whether Cenvat credit can be sustained when the invoices were issued by a dealer found to be fictitious and the transactions were held to be mere paper transactions, and whether fraud at the dealer stage defeats the credit claimed by the assessee.

Analysis: The credit scheme required receipt of inputs under valid documents from a properly registered dealer. On the evidence recorded, the dealer had no genuine business premises or godown and had indulged in paper transactions without actual movement of goods. The Tribunal accepted the Revenue's case that invoices issued in such circumstances lost their authenticity and could not support credit, because once fraud is established the transaction is vitiated and no benefit can flow from such invoices. The assessee's reliance on payment through banking channels and other documents did not overcome the finding that the underlying transactions themselves were fraudulent.

Conclusion: Cenvat credit was inadmissible and the assessee's claim failed; the Revenue's challenge succeeded.

Final Conclusion: The order allowing credit was set aside and the original adjudication disallowing the credit and imposing penalty was restored.

Ratio Decidendi: Cenvat credit cannot be allowed on invoices issued in fraudulent paper transactions by a dealer who had no genuine premises or actual receipt and clearance of goods, since fraud vitiates the transaction and invalidates the credit claim.

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