2025 (11) TMI 1337 - AT - Central Excise

CENVAT demand and penalty quashed; no fraud proven, Rule 7 lapse not enough to invoke Section 11A(1)

Krishna Art Silk Cloth Pvt Limited, Krishan Kumar Ahuja Versus Commissioner of Central Excise & Service Tax, Surat, Gujarat

CESTAT Ahmedabad set aside the order of Commissioner (Appeals) confirming demand of CENVAT credit and equal penalty on the assessee and its director. The ... Eligibility to avail CENVAT Credit - Cenvat credit passed on by the firms/units declared as fake/non-existent/bogus vide alert Circulars - invocation of extended period of limitation - HELD THAT:- The learned Commissioner (Appeals) has rightly come to the conclusion that the appellant had failed to take reasonable steps to ensure that credit was taken on duty paid inputs on which appropriate duty of excise had been paid as envisaged on them in terms of Rule 7(b) of the erstwhile Cenvat Credit Rules, 2002. Learned Commissioner has mentioned in the impugned order that during investigation by the department, the suppliers of inputs were found nonexistent. Accordingly, alert Circulars were issued by the department and the said units were declared as fictitious/ non-existent. Nobody came forward to claim that the said suppliers were not fake units. During investigations, it was proved that fraud was perpetrated by certain persons involving fake/ fictitious identities and the appellant claimed to have purchased the duty paid inputs from those entities which were later found to be non-existent. In M/s. Prayagraj Dyeing & Printing Mills Pvt. Limited vs. Union of India [2013 (5) TMI 705 - GUJARAT HIGH COURT] the Hon'ble Gujarat High Court held that there is a marked distinction between a forged document and a document issued by practising fraud. If it appears that a document is a forged one or a manufactured one, it is concocted or a created one then in the eye of law it is a non-existent document. On the other hand, a document issued in the context of a fraud or misrepresentation is by itself a genuine document and according to settled law, such document is at the most, voidable and is valid till it is set aside. A transaction that takes place on the basis of such document is good one and can even give a good title to the “holder in due course for valuable consideration” - The Hon'ble Gujarat High Court has further observed in the above mentioned judgment that in the absence of any allegation that the appellants were parties to the fraud, the larger period of limitation cannot be applied and thus, even if the original document was assumed to be issued by practising fraud, the appellants “being holders in due course for valuable consideration” without notice, the larger period of limitation cannot be invoked. In view of the law laid down in M/s. Prayagraj Dyeing & Printing Mills Pvt. Limited vs. Union of India [2013 (5) TMI 705 - GUJARAT HIGH COURT] by Hon'ble Gujarat High Court, it is concluded that the appellants can be considered as “holder in due course for valuable consideration without notice”. Even though the appellant failed to adopt due diligence as mentioned in Rule 7(2) of the Cenvat Credit Rules, 2004, the proviso to Section 11A(1) of the Central Excise Act, 1944 cannot be invoked against the appellant because there is no evidence on the record that the appellants were actively involved in the fraud committed by the suppliers/ traders. Thus, learned Commissioner (Appeals) and the Adjudicating Authority have erred in invoking extended period of limitation in confirming demand of Cenvat credit of Rs. 23,10,005/- and imposing penalty of Rs. 23,10,005/- on Appellant No.1, M/s. Krishna Art Silk Cloth Pvt Limited and imposing penalty of Rs. 23,10,005/- on Appellant No. 2 Shri Krishan Kumar Ahuja, Director of the Appellant No.1 M/s. Krishna Art Silk Cloth Pvt Limited and therefore, the impugned order passed by learned Commissioner (Appeals) is liable to be set-aside and the appeals are liable to be allowed. Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the assessee/job-worker is eligible to retain Cenvat credit availed on the basis of invoices issued by suppliers subsequently declared fake/non-existent in departmental alert circulars. 2. Whether the extended period of limitation under the proviso to Section 11A(1) of the Central Excise Act can be invoked to recover Cenvat credit and levy penalty where inputs received were traceable to suppliers later found to be fictitious, absent proof that the recipient was a party to the upstream fraud. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legal framework Rule 7(2)/Rule 7(b) of the erstwhile Cenvat Credit Rules requires the recipient to take all reasonable steps to ensure that Cenvat credit is taken only on inputs on which appropriate excise duty has been paid; general principles of title and bona fide receipt are relevant (principles such as nemo dat quod non habet and holder-in-due-course for valuable consideration). Issue 1 - Precedent Treatment The Court treats as controlling the decisions of the High Court in Prayagraj Dyeing & Printing Mills and the subsequent affirmance by the Supreme Court in Kirtida Silk Mills, which distinguish between documents that are forged or non-existent and documents issued in the context of fraud (void v. voidable), and which hold that mere failure of due diligence under Rule 7 is a ground to deny credit on merits but does not automatically render the recipient liable under extended limitation unless active participation in fraud is shown. Issue 1 - Interpretation and reasoning The Tribunal finds the facts here identical to those in Prayagraj: goods received for job-work on endorsed invoices, entries made in input registers, processed goods accounted and cleared, and no evidence that the recipient purchased or owned the goods. The departmental investigation declared upstream suppliers non-existent via alert circulars, but no party came forward to deny that finding. The Tribunal accepts that the documents came from persons practising fraud but emphasizes the distinction that such documents are voidable rather than void ab initio where they were genuine invoices used in the ordinary course. Given that the appellants were job-workers and holders in due course for valuable consideration without notice, their transactions retained commercial validity absent proof of collusion or active involvement in creating or using forged documents. Issue 1 - Ratio vs. Obiter Ratio: Where a recipient (including a job-worker) receives inputs on endorsed invoices and there is no evidence that the recipient was a party to the supplier's fraud, the transaction may confer the status of holder in due course and the Cenvat credit cannot be disallowed on the basis that the supplier was later declared non-existent, except on merits under Rule 7(2) if due diligence was not observed. Obiter: Observations regarding the commercial integrity of transactions and practical impossibility for purchasers/job-workers to verify excise payment in all cases are explanatory of the ratio and rely on prior higher court reasoning; they are not novel holdings beyond application of precedent. Issue 1 - Conclusion The Tribunal concludes that, although failure to comply with Rule 7(2) may render credit technically deniable on merits, the appellants as job-workers who received goods on endorsed invoices and were not parties to the upstream fraud are to be treated as holders in due course; hence the Cenvat credit cannot be recovered by invoking extended limitation on the sole ground that suppliers were later declared fictitious. The adjudicating authority erred to the extent it invoked extended period merely because suppliers proved fictitious. Issue 2 - Legal framework The proviso to Section 11A(1) provides an extended period for recovery where positive evasion of duty is established; the extended period is a punitive exception to normal limitation and requires proof of positive evasion or wilful mis-declaration by the recipient. Issue 2 - Precedent Treatment The Tribunal follows the High Court ruling in Prayagraj and the Supreme Court confirmation in Kirtida Silk Mills that the extended period cannot be invoked against a recipient unless the Revenue establishes that the recipient was actively involved in the fraud or there was positive evasion of duty by the recipient; mere failure in due diligence without active participation does not attract the proviso. Issue 2 - Interpretation and reasoning The Tribunal reasons that the extended period is distinct from merits: even if on merits the credit might be technically unsustainable for lack of due diligence, the extraordinary step of invoking extended limitation requires evidence that the recipient knowingly participated in evasion. Investigative findings that suppliers are non-existent do not by themselves establish the recipient's positive evasion or wilful participation. The maxim nemo dat quod non habet, which operates to deny good title from a seller who had none, is directed at buyers/owners and does not automatically apply to a job-worker processing goods on behalf of others based on endorsed invoices. Issue 2 - Ratio vs. Obiter Ratio: Extended limitation under the proviso to Section 11A(1) cannot be invoked against a recipient/job-worker unless the Revenue proves positive evasion of duty or active involvement of the recipient in the upstream fraud; absence of such proof mandates denial of extended limitation even where suppliers are subsequently found fictitious. Obiter: Application of the nemo dat maxim to endorsees/job-workers in circumstances where they have no ownership claim is discussed as explanatory and fact-specific; the statement that alert circulars alone do not suffice to invoke the extended period is an application of precedent rather than a broad new rule. Issue 2 - Conclusion The Tribunal holds that the adjudicating authority and the Commissioner (Appeals) erred in confirming demand and imposing penalties by invoking the extended period of limitation without evidence of positive evasion or active participation by the appellants in the fraud. Consequently, the extended period and the penalties based thereon are set aside. Cross-reference and overall disposition Because the Tribunal finds factual parity with the controlling precedent and no evidence of recipient participation in fraud, the orders confirming demand and penalties under extended limitation are quashed; the Tribunal distinguishes reliance on earlier orders (e.g., Chintan Processors, Palav Synthetics) as inapplicable on the facts where the appellants were job-workers receiving goods on endorsed invoices and not purchasers from the fictitious manufacturers.