CENVAT credit and supplier verification: credit cannot be denied solely because a registered supplier is later found untraceable.

CENVAT credit cannot be denied merely because suppliers are later found to be bogus or untraceable where receipt of goods is undisputed and the invoices were issued by registered manufacturers. Rule 7 of the CENVAT Credit Rules, 2002 requires the recipient to take reasonable steps to verify the supplier's identity and address, but later inability to trace the original supplier does not by itself render the invoices fake or fraudulent in law. On facts, the transactions were supported by documents and materially matched the earlier precedent, so the demand and penalty were unsustainable and the credit reversal was set aside on merits.

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Issues: Whether CENVAT credit could be denied merely because the suppliers of grey fabrics were later found to be bogus or non-existent, when the receipt of goods and the supporting invoices were not disputed and the assessee had taken reasonable steps under the CENVAT scheme.

Analysis: The dispute turned on the application of Rule 7 of the CENVAT Credit Rules, 2002, particularly the requirement under sub-rule (2) that the manufacturer taking credit must take reasonable steps to satisfy himself about the identity and address of the supplier. The Court compared the facts with the earlier decision in Prayagraj Dyeing and held that the mere inability to trace the original manufacturer at a later stage does not, by itself, make the invoices fake or fraudulent in law. Where receipt of goods is not disputed and the invoices were issued by registered manufacturers, credit cannot be denied solely on the ground that the suppliers were subsequently alleged to be non-existent, especially when the assessee had placed material to show that the transactions were supported by documents and the case was materially identical to the earlier precedent.

Conclusion: CENVAT credit could not be denied on the facts of the case merely because the suppliers were later treated as bogus or non-existent, and the impugned demand and penalty were unsustainable.

Final Conclusion: The writ petition succeeded, and the adjudication order confirming reversal of credit was set aside on merits.

Ratio Decidendi: Where receipt of goods and issuance of invoices by registered suppliers are not disputed, CENVAT credit cannot be disallowed only because the supplier is later found untraceable, unless the assessee is shown to have failed the statutory requirement of taking reasonable steps to verify the supplier and the transaction.

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