2025 (10) TMI 120 - AT - Central Excise

Penalty under Rule 25(1) set aside; paper-transaction penalties fall under Rule 26(2) and Section 11AC not attracted

CESTAT allowed the appeal and set aside the penalty imposed under Rule 25(1) read with Section 11AC, holding it unsustainable. The Tribunal found the ... Levy of penalty u/r 25(1) of the Central Excise Rules, 2002 read with Section 11AC of the Act and Rule 26(2) of the Central Excise Rules, 2002 - wrongful availment of CENVAT Credit - purchases made without actual receipt of excisable goods and these were mere paper transactions to pass on cenvat credit fraudulently with the connivance of other manufacturers/dealers - HELD THAT:- The penalty has been imposed on the appellant by invoking the penal provisions of Rule 25(1) of Central Excise Rules, 2002 which cannot be invoked in the facts and circumstances of the present case because the allegation against the appellant, if found correct then the penalty only be imposed under Rule 26(2) of the Central Excise Rules, 2002 which has not been done in the present case and as per the decision of the Punjab and Haryana High Court in the Mini Steel Traders [2014 (6) TMI 419 - PUNJAB & HARYANA HIGH COURT] if their allegation of facilitating others in taking credit or issuing of invoices without actual supply of material which was specifically inserted w.e.f. 01.03.2007 by inserting sub-rule (2) to Rule 26 of Central Excise Rules, 2002 then the penalty under Rule 25(1) of the Central Excise Rules, 2002 read with Section 11AC of the Act and Rule 26(2) of the Central Excise Rules, 2002 cannot be imposed. Further, it is found that the investigation against the appellant in the present case is slip short and it has not been proved during the investigation that no excisable goods were supplied along with the invoices to M/s Modi Alloys by the appellant rather the investigation proves that excisable goods were supplied to M/s Modi Alloys by the appellant and payment were received through baking channels. Thus, imposing penalty on the appellant under rule 25(1) of the Central Excise Act, read with Section 11AC of the Act is not sustainable in law - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether penalty under Rule 25(1) of the Central Excise Rules, 2002 read with Section 11AC of the Act is sustainable where the allegation is that the appellant allegedly connived to issue/obtain invoices to enable others to wrongly avail Cenvat credit without actual receipt of goods. 2. Whether, on the facts of the investigation (supply shown by the seller, bank payments received, no alternative destination of goods proved), the penal provision of Rule 25(1) can be invoked or whether penalty exposure, if any, lies under Rule 26(2) (offence for facilitating issue of invoices/credit without actual supply) which was inserted specifically to deal with such facilitation. 3. Whether the departmental investigation and adjudication met the required standard to establish absence of supply by the appellant (i.e., whether the material on record proved non-supply or a paper transaction by the appellant). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of Rule 25(1) penalty where allegation is facilitation of others' wrongful Cenvat credit Legal framework: Rule 25(1) of the Central Excise Rules, 2002 read with Section 11AC of the Act prescribes penalty for contraventions of the Central Excise Rules/notifications. Rule 26(2) (sub-rule (2) to Rule 26) specifically penalises facilitating others in taking credit or issuing invoices without actual supply; it was inserted to address facilitation-type misconduct. Precedent treatment: The Tribunal relied upon the legal principle (as expounded by the jurisdictional High Court in Mini Steel Traders) that facilitation of others in obtaining credit or issuing invoices without actual supply is covered by Rule 26(2) as inserted, and that Rule 25(1) cannot be invoked in place of Rule 26(2) where the factual matrix pertains to such facilitation. Interpretation and reasoning: The Court examined the charge framed against the appellant and noted that the sole allegation was connivance to pass on Cenvat credit via alleged fake invoices. The adjudicating authority invoked Rule 25(1) but did not invoke Rule 26(2). The Court reasoned that where the core allegation is facilitation of wrongful credit by others (i.e., issuing invoices/supplying for purposes of passing credit), the penal regime specifically introduced by sub-rule (2) to Rule 26 ought to have been invoked; substituting Rule 25(1) for that specific provision is not permissible on the facts. Ratio vs. Obiter: Ratio - Penal provision specific to facilitating issuance/availment of credit (Rule 26(2)) must be invoked where facts point to facilitation; Rule 25(1) cannot be mechanically substituted. Obiter - Observations on the policy rationale for insertion of Rule 26(2) and the inappropriateness of applying a general penal rule in lieu of a specific one. Conclusion: Penalty under Rule 25(1) is not sustainable where the allegation, if at all made out, falls within the scope of Rule 26(2) which was not invoked. Issue 2 - Adequacy of departmental investigation to prove non-supply by the appellant Legal framework: Burden of proof on the Revenue to establish contravention and to identify the correct penal provision; proof must demonstrate either non-supply by the seller or other acts amounting to contravention of excise provisions. Precedent treatment: The Tribunal applied the principle that material inconsistencies or absence of positive findings (e.g., proof of diversion, alternative destination, or absence of bank payments) undermine the imposition of penalty. Interpretation and reasoning: The Tribunal examined investigative findings and found that (a) records showed goods were supplied by the appellant to the alleged intermediary; (b) bank payments for those transactions were received by the appellant; (c) the investigation did not identify where the goods would have gone had they not been supplied by the appellant; and (d) no alternate buyer or diversion was demonstrated. Given these facts, the Tribunal concluded the investigation was 'slip short' of proving non-supply by the appellant. Ratio vs. Obiter: Ratio - In the absence of affirmative proof that the seller did not supply goods (or that the seller knowingly participated in a paper transaction), penalty cannot be sustained. Obiter - Remarks noting that payment through banking channels and absence of alternate destination are significant indicia undermining an allegation of paper transactions. Conclusion: The departmental investigation failed to establish the essential factual foundation (non-supply or deliberate paper transaction by the appellant) necessary to impose penalty; therefore imposition of penalty is unsustainable. Issue 3 - Proper determination of penal liability where buyer's inadmissible Cenvat credit is the primary grievance Legal framework: When inadmissible Cenvat credit is availed by a buyer on the basis of alleged fake invoices, the liability/penalty for issuance of such invoices or for facilitating wrongful credit may attach to different actors depending upon proof of their individual roles; statutory scheme prescribes different provisions for contraventions and facilitation. Precedent treatment: The Tribunal accepted the High Court's interpretation that the penal amendment expressly addresses facilitation and therefore must guide imposition of penalties in such fact patterns. Interpretation and reasoning: The Court noted that the Revenue's allegation of wrongful availment related to the buyer and that the appellant was a seller. The impugned order did not allege that the appellant removed excisable goods in contravention of rules, failed to account for produced/stored excisable goods, or manufactured without registration. Instead, records demonstrated regular supply and receipt of payment. Therefore, even if the buyer's credit was inadmissible vis-à-vis the buyer, penal consequences against the seller require proof of the seller's culpability as per the specific provision (Rule 26(2)). Ratio vs. Obiter: Ratio - Penal consequences flow only upon proof that the seller engaged in acts falling within the targeted penal provision; mere association with a buyer who later misused invoices is insufficient. Obiter - Observations on the need to distinguish liability of buyers and sellers in chain-fraud scenarios. Conclusion: Where the buyer's availment of inadmissible credit is the grievance, penalty against the seller requires specific proof of facilitation or participation as defined under the appropriate penal provision; in absence of such proof, penal action is not maintainable. Final Disposition (as per Court's conclusion) Penalty imposed under Rule 25(1) read with Section 11AC is set aside because (i) the allegations, if any, fall within the scope of Rule 26(2) which was not invoked; and (ii) the investigation did not establish non-supply by the appellant (goods were shown to be supplied and payments received). The appeal is allowed and the penalty is quashed with consequential reliefs as per law.