Penalty for fake supplier invoices upheld under Cenvat rules, but higher excise penalty failed without proof of fraud

Penalty under Section 11AC of the Central Excise Act, 1944 was held unsustainable because the Revenue did not prove connivance, suppression of facts, fraud, or misdeclaration when credit was taken on invoices from non-existent or fake suppliers. The record showed non-compliance with the obligation to take reasonable steps under Rule 7(2) and Rule 7(4) of the Cenvat Credit Rules, 2002, which justified penalty under Rule 13(1). In the absence of evidence establishing the statutory ingredients for the higher penalty, only the Rule 13(1) penalty was upheld.

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Issues: Whether penalty was imposable under Section 11AC of the Central Excise Act, 1944, or under Rule 13(1) of the Cenvat Credit Rules, 2002, where credit was taken on invoices issued by non-existent or fake suppliers without proof of connivance, suppression of facts, fraud, or misdeclaration.

Analysis: The Revenue failed to produce evidence showing that the assessee had connived with the suppliers or knowingly availed inadmissible credit. The material was sufficient to show non-compliance with the requirement of taking reasonable steps under Rule 7(2) and Rule 7(4) of the Cenvat Credit Rules, 2002, but not sufficient to establish the ingredients necessary for penalty under Section 11AC of the Central Excise Act, 1944. In the absence of proof of suppression of facts, fraud, or misdeclaration, the higher statutory penalty was not attracted.

Conclusion: Penalty under Section 11AC of the Central Excise Act, 1944 was not sustainable, while penalty under Rule 13(1) of the Cenvat Credit Rules, 2002 was upheld.

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