Assessee entitled to CENVAT credit on CVD paid inputs despite clandestine removal when documentary evidence exists

Delhi HC held that an assessee engaged in clandestine removal was entitled to CENVAT credit on countervailing duty paid inputs where documentary evidence existed. The court found complete identity between the assessee and importer, noting that PVC resin was actually used in manufacturing despite involvement of fictitious entities. While the assessee lacked documentation for other inputs, authorities were directed to grant permissible CENVAT credit based on available records showing CVD payments. The appeal was allowed, favoring the appellant despite findings of clandestine removal.

---

---

The core legal question considered by the Court was whether, under the circumstances of the case, the appellant/assessee was entitled to claim Cenvat credit in respect of countervailing duty (CVD) paid on inputs imported by a related proprietorship concern.

In analyzing this issue, the Court examined the relevant legal framework governing Cenvat credit and countervailing duty under the Central Excise Act and the Cenvat Credit Rules, 2004. The Court also reviewed precedents including the Supreme Court's decision in Formica India Division vs. Collector of Central Excise and various High Court decisions addressing entitlement to input credit despite procedural irregularities or non-registration.

The Commissioner's adjudication had rejected the appellant's claim for Cenvat credit on the ground that neither the supplier (M/s Marvellous Impex) nor the manufacturer (the appellant) were registered with the excise authorities at the relevant time, and that the clearances were clandestine, lacking proper invoices and records. The Commissioner emphasized that registration, maintenance of records, and proper clearance with duty payment are substantive requirements, not mere procedural formalities, and their absence justified denial of credit. The Commissioner also found that the importer sold the PVC resin to a fictitious firm, M/s Hemant Trading, and that the appellant suppressed manufacture and clearance of excisable goods to evade duty.

The Tribunal upheld the Commissioner's order, holding that the appellant failed to produce documented evidence of duty-paid inputs as required by Rule 9 of the Cenvat Credit Rules, 2004. It distinguished the present case from precedents by noting that the appellant's transactions lacked proper documentation and involved illicit receipt of raw materials, thereby invalidating the claim for credit.

The appellant contended that the denial of credit was contrary to binding Supreme Court and High Court decisions, which had held that entitlement to credit should not be denied on technical grounds, including non-registration or procedural lapses, especially where the duty was in fact paid. The appellant argued that since the countervailing duty was undisputedly paid by the related importer and the inputs were used in manufacture, credit should be allowed.

The Court examined the Supreme Court's ruling in Formica India Division, which held that denial of modvat credit on technical grounds such as non-compliance with procedural rules would amount to double taxation and that the assessee should be permitted to comply with procedural requirements even belatedly to claim credit. Similarly, the Court reviewed the Allahabad High Court and Karnataka High Court decisions, which recognized entitlement to Cenvat credit even during periods of non-registration or despite suppression of manufacture, provided the duty was paid and inputs were used in manufacture.

The Court noted that the Commissioner's findings established that the importer and manufacturer were under common proprietorship, and that the PVC resin was indeed used as raw material in the appellant's manufacturing units. Although the importer had created a fictitious firm to conceal the transaction, the inputs were consumed by the appellant. The Court recognized that while the appellant failed to produce documents for some inputs, the record did contain evidence of payment of countervailing duty on the PVC resin imported by the related concern. The appellant had also been granted Small Scale Industry (SSI) status, which entitled it to certain benefits and exemptions.

Applying the law to the facts, the Court held that denial of Cenvat credit solely on the basis of non-registration and procedural irregularities was not justified where there was documentary evidence of duty paid on inputs actually used in manufacture. The Court emphasized that the substantive right to credit should not be defeated by technical non-compliance, particularly where the duty was discharged and the inputs were consumed in the manufacture of excisable goods.

The Court rejected the Revenue's reliance on the fictitious nature of the intermediary firm and clandestine clearances to deny credit in respect of the duty-paid inputs. It held that the existence of such irregularities could not negate the entitlement to credit for the inputs on which duty was paid and which were used in manufacture. The Court directed the Revenue authorities to grant Cenvat credit to the appellant in accordance with the documents available and those that could be produced, thus allowing the claim to the extent permissible under law.

In conclusion, the Court set aside the impugned order of the Tribunal and answered the question of law in favor of the appellant and against the Revenue, allowing the appeal.

Significant holdings include the following verbatim excerpt from the Commissioner's order, which the Court considered but ultimately found insufficient to deny credit:

"I observe that all these conditions starting from the basic requirement of getting registered with the central excise authorities, maintenance of the records and clearance on payment of appropriate central excise duty are not merely procedural but are of the kind that the Apex Court in the above referred case has described as 'of substantive nature as likely to facilitate commission of fraud and introduce administrative inconveniences.'"

However, the Court clarified that despite such findings, the entitlement to Cenvat credit cannot be denied where duty-paid inputs are used in manufacture and documentary evidence exists. The Court relied on the Supreme Court's observation in Formica India Division:

"To deny that benefit on the technical ground of non-compliance with Rule 56-A would be tantamount to permitting recovery of double duty on the intermediary product."

Core principles established include:

• Entitlement to Cenvat credit is a substantive right and cannot be denied on mere technical or procedural grounds such as non-registration, provided the duty has been paid and inputs are used in manufacture.
• Documentary evidence of duty payment and receipt of inputs is essential, but where such evidence exists, credit should be allowed notwithstanding irregularities in the supply chain or concealment attempts.
• The existence of fictitious intermediaries or clandestine clearances does not negate the fundamental right to credit on duty-paid inputs used in manufacture.
• Revenue authorities must grant credit to the extent permissible based on available documents and allow the assessee to produce further evidence.

The final determination was that the appellant was entitled to Cenvat credit on the countervailing duty paid inputs imported by the related proprietorship concern, and the denial of such credit by the Commissioner and Tribunal was set aside. The matter was remanded to the Revenue authorities to grant credit in accordance with the documents on record and any further evidence produced by the appellant.

---