Transitional CENVAT credit on stock allowed without duty invoices; supplier verification could not defeat deemed credit entitlement.

A transitional CENVAT credit scheme allowed deemed credit on fabrics lying in stock on 31.03.2003 where manufacturers could not produce duty-paying documents for inputs under Chapters 50 to 63, and credit could be taken on the basis of the prescribed declaration and stock valuation. On that basis, supplier invoices or proof of actual duty payment were not required, so the objection for want of such documents failed. Once credit was claimed under the stock-based transitional provision, supplier verification was not material to entitlement, and the supplier-side investigation, show-cause notice, demand and penalties were unsustainable. The impugned order was set aside, with consequential relief.

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Issues: (i) Whether the appellants were entitled to avail deemed CENVAT credit on fabrics lying in stock as on 31.03.2003 without producing documents evidencing actual payment of duty; (ii) Whether investigation at the end of the suppliers and the consequent show-cause notice and demand could be sustained.

Issue (i): Whether the appellants were entitled to avail deemed CENVAT credit on fabrics lying in stock as on 31.03.2003 without producing documents evidencing actual payment of duty.

Analysis: Rule 9A(2) of the CENVAT Credit Rules, 2002 provided a transitional mechanism for manufacturers unable to produce duty-paying documents in respect of inputs falling under Chapters 50 to 63 lying in stock, in process, or contained in finished products as on 31.03.2003. The prescribed declaration under the notification enabled credit to be taken on the basis of stock and valuation, and the appellants had availed credit under that scheme. In such a situation, production of supplier invoices or proof of actual duty payment was not required.

Conclusion: The appellants were entitled to avail the credit under the transitional scheme, and the objection based on absence of duty-paying documents was not sustainable.

Issue (ii): Whether investigation at the end of the suppliers and the consequent show-cause notice and demand could be sustained.

Analysis: Once credit was claimed under the stock-based transitional provision, the identity or existence of suppliers was not material to the entitlement. The record also showed that, in the relevant context, verification of suppliers was not required as indicated by the Board circular relied upon in the order. Therefore, the foundation for the investigation and the notice did not survive.

Conclusion: The supplier-side investigation, the show-cause notice, and the consequential demand and penalties were unsustainable.

Final Conclusion: The impugned order was set aside and the appellants succeeded with consequential relief.

Ratio Decidendi: Where a transitional credit scheme permits deemed credit on stock lying as on a specified date to assessees unable to produce duty-paying documents, entitlement cannot be denied on the basis of supplier verification or absence of invoices for the original procurement of goods.

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