Fraudulent Cenvat credit fails without actual duty-paid goods, while retrospective personal penalty under Rule 26(2)(ii) is impermissible.

Fraudulent invoices unsupported by actual receipt of duty-paid goods cannot sustain Cenvat credit; where dealer records, supplier existence, freight evidence, and vehicle details do not correlate, the credit is rightly denied and the demand with company penalty is maintained. Personal penalty under Rule 26(2)(ii) cannot be imposed for conduct that occurred before that provision was inserted on 01.03.2007, so penalties on the director and general manager were set aside as the penal clause was not in force when the alleged offence occurred.

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Issues: (i) Whether Cenvat credit availed on invoices found to be fake and unsupported by actual receipt of duty-paid goods was admissible. (ii) Whether personal penalty under Rule 26(2)(ii) of the Central Excise Rules, 2002 could be imposed for an alleged offence committed before the provision was inserted.

Issue (i): Whether Cenvat credit availed on invoices found to be fake and unsupported by actual receipt of duty-paid goods was admissible.

Analysis: The invoices were found to have been issued by a dealer who had stopped operations during the relevant period, the supposed suppliers were non-existent, the dealer's records did not correlate with the invoices, no freight payment was made, and the vehicle details were incapable of transporting the goods. These facts established that the invoices were fraudulent and that the credit was not linked to any duty-paid goods. The finding of fraud also led to the conclusion that the assessee was party to the arrangement, so the plea of receipt and use of inputs did not assist it.

Conclusion: The Cenvat credit was rightly denied and the demand and penalty against the company were sustained.

Issue (ii): Whether personal penalty under Rule 26(2)(ii) of the Central Excise Rules, 2002 could be imposed for an alleged offence committed before the provision was inserted.

Analysis: The personal penalties were imposed under Rule 26(2)(ii), which was inserted only with effect from 01.03.2007 by Notification No. 18/2007-C.E. (N.T.), whereas the alleged conduct occurred in October 2006. A penal provision cannot be applied retrospectively to conduct preceding its insertion.

Conclusion: The personal penalties on the director and general manager were not sustainable and were set aside.

Final Conclusion: The credit demand against the company was upheld, but the personal penalties on the individual appellants were quashed because the penal provision was not in force on the date of the alleged offence.

Ratio Decidendi: Fraudulent invoices not backed by actual duty-paid goods cannot sustain Cenvat credit, and a penal provision cannot be applied retrospectively to acts committed before its insertion.

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