Modvat credit on fictitious invoices denied where no actual receipt of inputs was proved; related penalties partly set aside.

Modvat credit was denied where invoices were unsupported by actual receipt of inputs, and evidence showed only paper transactions, including nonexistent job-worker premises, inculpatory statements, and circulation of invoices without movement of goods. The retractions were rejected as inconsistent and not enough to displace the surrounding material, so the demand against the manufacturer was upheld. Penalty under Rule 26 of the Central Excise Rules, 2002 was held unsustainable against the partner, export buyer and authorised signatory because mere issuance of invoices, without proof of direct illicit handling, sale, or removal of goods, was insufficient. The connected penalties were set aside.

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Issues: (i) Whether the Modvat credit availed on the strength of invoices issued by the registered dealer was admissible when the alleged inputs were not actually received and the job workers shown in the records were found to be non-existent; (ii) whether the penalties imposed on the partner of the registered dealer, the export buyer and the authorised signatory were sustainable.

Issue (i): Whether the Modvat credit availed on the strength of invoices issued by the registered dealer was admissible when the alleged inputs were not actually received and the job workers shown in the records were found to be non-existent.

Analysis: The absence of any real job-worker premises at the declared address, the repeated inculpatory statements of the proprietor and the authorised signatory, and the corroborative material showing circulation of invoices without movement of goods established that the transactions were only on paper. The retractions were not accepted as they were inconsistent and did not displace the surrounding evidence. The alleged receipt and conversion of inputs was therefore held to be fictitious.

Conclusion: The denial of Modvat credit and the demand against the manufacturer were upheld.

Issue (ii): Whether the penalties imposed on the partner of the registered dealer, the export buyer and the authorised signatory were sustainable.

Analysis: The penalty on the partner of the registered dealer was held to be unsustainable because mere issuance of invoices without sale of goods did not attract penal action under Rule 26 of the Central Excise Rules, 2002. The penalty on the export buyer was also set aside as the proceedings were confined to the supplier's alleged non-receipt of inputs and did not involve denial of rebate to the buyer. The penalty on the authorised signatory, who was found to have prepared false job-work challans without handling goods, was similarly set aside on the same legal reasoning.

Conclusion: The penalties on the partner of the registered dealer, the export buyer and the authorised signatory were set aside.

Final Conclusion: The demand and penalty against the manufacturer were sustained, but the connected penalties on the other appellants were annulled, resulting in a partial allowance of the batch of appeals.

Ratio Decidendi: Modvat credit cannot be allowed on fictitious invoices unsupported by actual receipt of inputs, while penalty under Rule 26 of the Central Excise Rules, 2002 is not attracted merely for issuing invoices without sale of goods absent proof of direct illicit handling or removal.

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