Cenvat credit reversal and denial of cross-examination: demand failed where returned job-work inputs were not proved substituted.

Cenvat credit reversal was held unwarranted where the department could not reliably show that unprocessed inputs returned after job work were substituted with the assessee's own cenvatable stock; the homogeneous nature of the goods and the evidentiary gap meant the demand could not be sustained. The adjudication was also found vulnerable because statements relied upon by the department were used without permitting cross-examination, contrary to fair procedure. On these facts, the impugned demand was set aside with consequential relief to the assessee.

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Issues: (i) Whether Cenvat credit was required to be reversed when unprocessed inputs received for job work were returned to the supplier and the department alleged that the returned goods were from the assessee's own cenvatable stock. (ii) Whether denial of cross-examination of the persons whose statements were relied upon vitiated the adjudication.

Issue (i): Whether Cenvat credit was required to be reversed when unprocessed inputs received for job work were returned to the supplier and the department alleged that the returned goods were from the assessee's own cenvatable stock.

Analysis: The dispute turned on whether the material returned to the suppliers was the same as the job-work material originally received, or whether it was substituted with the assessee's own inputs on which credit had been taken. The record showed that the job-work inputs were returned unprocessed in some cases, and the department did not produce sufficient evidence to establish that, on each occasion, the returned goods came from cenvatable stock. The goods returned were homogeneous, and the situation was treated as revenue neutral in the circumstances.

Conclusion: Reversal of Cenvat credit was not warranted on the facts proved, and the issue is decided in favour of the assessee.

Issue (ii): Whether denial of cross-examination of the persons whose statements were relied upon vitiated the adjudication.

Analysis: The adjudication relied upon statements recorded during investigation, but the requested cross-examination was refused. Since those statements formed a material part of the departmental case, denial of an opportunity to test them through cross-examination offended the requirements of fair procedure and rendered the order vulnerable.

Conclusion: The adjudication was vitiated by denial of cross-examination, and the issue is decided in favour of the assessee.

Final Conclusion: The impugned demand could not be sustained, and the appellate orders were set aside with consequential relief to the assessees.

Ratio Decidendi: When the department fails to establish with reliable evidence that returned job-work material was in fact substituted with the assessee's own cenvatable inputs, and the adjudication also suffers from denial of cross-examination on relied-upon statements, the demand cannot be sustained.

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