CENVAT credit demands fail where shortages and untested statements lack corroboration under Section 9D and diversion is unproven.

CENVAT credit disputes arising from alleged shortages, diversion of imported and domestic raw materials, and claimed clandestine removals were examined against the evidentiary record. Mere stock shortages, without corroboration of removal, buyers, transport, or sale proceeds, were treated as insufficient to sustain credit denial. Reliance on transporter and vehicle-owner statements was also found inadequate where Section 9D requirements were not met and documentary evidence supported the assessees. Alleged fictitious sales to Kolkata buyers and the related demand for credit were similarly unsupported by clinching proof of diversion. The connected penalty exposure on individuals was consequential only and could not survive once the substantive demands failed.

---

---

Issues: (i) whether shortages of raw materials at the Silvassa and Daman units justified denial of CENVAT credit; (ii) whether denial of CENVAT credit on imported raw materials allegedly diverted from Bhiwandi and the related demand for clandestine removal of 898 MT of PVC compounds could be sustained; (iii) whether the demand of CENVAT credit of Rs. 12,92,65,299 on alleged diversion of raw materials in the guise of fictitious sales to Kolkata buyers was sustainable; and (iv) whether penalties on the individuals could survive once the substantive demands failed.

Issue (i): whether shortages of raw materials at the Silvassa and Daman units justified denial of CENVAT credit.

Analysis: The shortages were found only on physical stock verification. No corroborative material was produced to show removal of the inputs, identify buyers, establish transport, or trace flow of consideration. The Appellants explained the differences as posting errors and processing losses, and the record did not contain contrary evidence of diversion. A mere shortage, without more, was held insufficient to sustain duty or credit demand.

Conclusion: The denial of CENVAT credit on the alleged shortages of raw materials was not sustainable and was set aside.

Issue (ii): whether denial of CENVAT credit on imported raw materials allegedly diverted from Bhiwandi and the related demand for clandestine removal of 898 MT of PVC compounds could be sustained.

Analysis: The case rested mainly on statements of vehicle owners and one transporter, and on RTO reports for five vehicles. The statements were not tested in accordance with Section 9D and were not admissible because the makers were not properly examined and offered for cross-examination. Documentary evidence, including lorry receipts, transport records, and the explanation regarding incorrect vehicle numbers, supported the Appellants. The allegation of fictitious sale of sole parts was also not established by reliable evidence, and the demand for 898 MT was found to be only an arithmetical extrapolation without proof of clandestine manufacture, transport, buyers, or sale proceeds.

Conclusion: The demand of CENVAT credit on the alleged diversion of imported raw materials and the demand of duty on alleged clandestine removal of 898 MT of PVC compounds were not sustainable and were set aside.

Issue (iii): whether the demand of CENVAT credit of Rs. 12,92,65,299 on alleged diversion of raw materials in the guise of fictitious sales to Kolkata buyers was sustainable.

Analysis: The department relied chiefly on transporter and vehicle-owner statements to deny transport of finished goods, but those statements were either not tested under Section 9D or were contradicted by retraction, cross-examination, waybills, lorry receipts, buyer confirmations, transporter ledgers, and EOU re-warehousing records. The evidence showed actual movement and delivery of goods, and the department failed to produce clinching evidence of diversion of raw materials, identification of diverted buyers, or flow-back of funds. The alleged credit demand was also inconsistent with the record showing payment of duty on clearances.

Conclusion: The Revenue's demand for CENVAT credit of Rs. 12,92,65,299 was not sustainable and the Commissioner's dropping of that demand was upheld.

Issue (iv): whether penalties on the individuals could survive once the substantive demands failed.

Analysis: The penalties were wholly consequential to the allegations of clandestine removal and inadmissible credit. Once the substantive demands failed, no independent basis remained for penal action against the individuals.

Conclusion: The penalties on the individual appellants could not be sustained.

Final Conclusion: The substantive demands were rejected for want of reliable and corroborated evidence, the assessee-side appeals succeeded, the Revenue's challenge failed, and the connected penalty liabilities also fell.

Ratio Decidendi: CENVAT credit and clandestine removal demands cannot be sustained on shortages or untested statements alone; strict compliance with Section 9D and corroborative, clinching evidence are required, and where duty on clearances has already been discharged, further denial of credit is not justified.

---