2023 (12) TMI 603 - AT - Central Excise

CESTAT allows CENVAT credit for HR coils as manufacturing inputs despite Revenue's allegations of fake invoices

M/s Allied Recycling Limited Versus The Commissioner of Central Excise, Ludhiana And M/s Kailash Steel & Alloys Versus The Commissioner of Central Excise, Ludhiana

The CESTAT Chandigarh ruled in favor of the appellant regarding CENVAT credit denial for HR coils/sheets. The Revenue alleged these were final products, ... CENVATCredit - rolled products/ rounds and HR coil/ sheets - denial on the ground that they are not inputs but were final products in themselves - procuring only Cenvatable invoices from their suppliers, like M/s Kailash Steel and Alloys without commensurate movement of goods - penalties - HELD THAT:- The learned Commissioner failed to appreciate that HR Coils can be used as inputs in the manufacture of ingots/ billets in an induction furnace. The Revenue’s allegation that the appellant did not have equipment to cut the coils and manufactured “formers” for captive consumption is not based on any evidence like Panchnama. The appellant’s claim that they have borrowed the equipment from other manufacturers cannot be ignored. Obtaining only the invoices from his suppliers, without receiving the material - HELD THAT:- Revenue has not undertaken any investigation into the aspect of actual transportation and the receipt of the material; no statement of transporter/ driver was recorded; no enquiries with the banks was made to ascertain whether the transactions were genuine and are not just temporary adjustments with flow back of money. Under such circumstances, the Department has not made out any case against the appellants. Mere allegation without any evidence to substantiate cannot hold. Penalties - HELD THAT:- The appellants are eligible for the disputed CENVAT credit. When the credit is held to be admissible, penalties impose on both the appellants do not survive. Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether CENVAT credit on HR/CR coils, sheets, rounds and similar rolled products used in small proportion in manufacture of ingots/billets/wire rods can be treated as admissible inputs rather than final products. 2. Whether a finding of fraudulent availment of CENVAT credit can be sustained where the Department relies on price-comparison (input price higher than finished product) and invoices without independent evidentiary steps to establish non-receipt of goods or flow-back of money. 3. Whether penalty under the Rules can be sustained against the supplier and recipient where CENVAT credit is held to be admissible. 4. Whether reliance on extended limitation or invocation of Rule 26 (as amended w.e.f. 01.03.2007) and judicial precedents concerning extended period and mens rea for penalty are determinative where admissibility of credit is established. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Admissibility of CENVAT credit on HR/CR coils, sheets, rounds used in manufacture of ingots/billets Legal framework: CENVAT provisions permit availing credit on inputs consumed in manufacture. Classification of a material as an input versus a final product depends on whether it is consumed/contained in the final output. Administrative circulars clarifying treatment of specific items (e.g., 'formers') are relevant interpretative aids. Precedent treatment: A departmental circular (CBEC Circular No.690/6/2003-CX dated 21.02.2003) has accepted that 'formers' used in induction furnaces are consumed and contained in ingots/billets and thus are inputs. A prior adjudicatory order by the Tribunal involving identical facts had held similar credit admissible; that ratio was applied. Interpretation and reasoning: The Court considered quantitative and functional aspects: the disputed rolled products were used in small proportion (approx. 1,100 MT out of ~89,000 MT total raw material), and could be used for blending or as 'formers' (hollow cylindrical profiles) that get consumed in the induction furnace and are contained in the ingots/billets. The Department's purely economic-logic argument (price of input exceeding price of finished product) was rejected as legally untenable because it ignored (a) the small proportion of such inputs, (b) the holistic cost structure (multiple inputs, labour, consumables, overheads), and (c) cost-accountant certification showing profitability and average pricing data. The Court noted absence of evidence to rebut the claimed mode of consumption (no panchnama or evidence that equipment to form formers was absent; borrower-arrangement for equipment plausible). The administrative circular was treated as supportive of the input characterization. Ratio vs. Obiter: The holding that HR/CR coils/sheets used as formers or in small proportions for blending are inputs and eligible for CENVAT credit is ratio of the decision. Observations that pricing disparity alone cannot overturn admissibility without holistic cost analysis are also ratio. References to the circular and its application are ratio. Conclusions: CENVAT credit on the disputed HR/CR rolled products is admissible where they are shown to be consumed/contained in the manufactured ingots/billets or used in small proportions for blending; the Department's price-comparison reasoning is insufficient to disallow credit absent contrary evidence. Issue 2 - Sufficiency of evidence to establish non-receipt of goods and fraudulent availment of credit Legal framework: For disallowance/penal action based on non-receipt and fraudulent availment, the Department must establish non-receipt through independent evidentiary steps (e.g., transporters' statements, weighment/slip verification, bank transaction enquiries, proof of flow-back of money). Precedent treatment: Authorities dealing with evidentiary burden for extended period and fraud were cited by appellants (Supreme Court decisions on extended period and requirement of knowledge/intent), but the Tribunal did not need to adjudicate limitation issues once admissibility was found. Prior Tribunal decision on identical facts was followed. Interpretation and reasoning: The Tribunal found the Department's case rested on allegations of mere invoice exchange without conducting fundamental inquiries: no statements of transporters/drivers, no bank enquiry to detect flow-back, no follow-up on weighment slips and freight evidence, and no panchnama to contradict the appellants' equipment-use claim. Where the Department did not undertake these investigations, allegations of non-receipt and fraudulent credit were unsupported. The existence of banking transactions, weighment slips and freight payments (asserted by appellants) were uncontradicted and not probed by Revenue. Ratio vs. Obiter: The conclusion that allegations of invoice-only transactions cannot sustain a finding of fraudulent credit without independent evidentiary steps is ratio. The finding that Revenue failed in its investigatory duty and therefore did not make out a case is ratio. Mention of specific missing investigative acts is factual-ratio support for the legal conclusion. Conclusions: In absence of concrete investigatory evidence (transport statements, bank enquiries, weighment/freight verification, panchnama), findings of non-receipt and fraudulent availing of CENVAT credit cannot be sustained. Issue 3 - Liability to penalty on supplier and recipient where CENVAT credit held admissible Legal framework: Penalties under the Rules are contingent on culpability and disallowance of credit; if credit is adjudged admissible, consequential penalties based on alleged fraudulent availment ordinarily do not survive. Precedent treatment: Appellants relied on established authorities that penalty requires proof of intent/knowledge and cannot rest on assumptions; Tribunal accepted and applied prior favorable Tribunal order in identical facts. Interpretation and reasoning: Because the Tribunal held the disputed CENVAT credit admissible and found Revenue's fraud/non-receipt allegations unproven, the consequential penalties imposed on both supplier and recipient could not be sustained. The Tribunal accordingly did not examine ancillary issues (e.g., limitation) once penalties became untenable in light of admissibility. Ratio vs. Obiter: The holding that penalties do not survive where credit is held admissible and fraud not proved is ratio. Conclusions: Penalties imposed on both supplier and recipient are set aside because the underlying disallowance/fraud finding is not sustained. Issue 4 - Relevance of extended limitation and Rule 26 amendment for period prior to 01.03.2007 Legal framework: Extended limitation and amendment to Rule 26 can affect penalty reach; Supreme Court authorities require Departmental awareness and proof for invoking extended period and caution against penal imposition absent mens rea. Precedent treatment: Appellants cited multiple Supreme Court decisions on limitations and mens rea for penalties. The Tribunal noted these authorities but did not decide limitation applicability because it disposed the appeals on admissibility and penalty-survival grounds. The Tribunal also followed its earlier order on identical facts. Interpretation and reasoning: While recognizing the significance of the precedents cited by appellants about extended period and penalty liability, the Tribunal deemed discussion of limitation and Rule 26 amendments unnecessary once it concluded the credits were admissible and penalties unsustainable. Ratio vs. Obiter: Observations about extended period and Rule 26 are obiter in this judgment because the Court did not rule finally on those aspects. Conclusions: Issues of extended limitation and applicability of Rule 26 amendments were not adjudicated as determinative; they remain incidental and were not necessary to the decision. Cross-references Findings on admissibility of inputs (Issue 1) directly inform the conclusions on sufficiency of evidence for fraud (Issue 2) and the non-survival of penalties (Issue 3). Prior Tribunal decision on identical facts was applied to support Issue 1 and thereby resolve Issues 2-3. Issues concerning limitation and Rule 26 (Issue 4) were not examined further because the primary findings rendered them moot.