2025 (12) TMI 364 - AT - Central Excise

CENVAT credit on melting scrap disallowed; endorsed Bills of Entry not valid documents under Rule 9, penalties upheld

CESTAT Chennai-AT dismissed the appeal, holding the appellant ineligible for CENVAT credit taken on melting scrap on the basis of endorsed Bills of Entry. ... Entitlement to avail cenvat credit on basis of endorsed bills of entry - allegation of suppression of facts alleged in the notice is sustainable so as to invoke the larger period of limitation provided under Rule 15 of Cenvat Credit Rules, 2004 read with proviso to Section 11 AC of Central Excise Act, 1944 or not - levy of penalty for the omissions/commissions alleged on the part of the notices - HELD THAT:- Admittedly in this case, the Appellant was a manufacturer of re-rollable materials viz. T.M.T bars which are their final products during the material period. The raw materials for such final products are ingots and billets. But what was imported and endorsed was melting scrap which are raw materials for the manufacture of ingots/billets and not for T.M.T. bars. For the production of ingots/billets one should have an induction furnace. The assessee herein did not have an induction furnace in the year 2006 and hence they were not in a position to produce ingots/billets at that point of time. Hence they are not entitled to take credit of duty paid on the melting scrap which was not their input. In so far as the melting scrap is concerned, they were merely acting as traders in a factory premises which is again impermissible. Rule 9 does not permit/authorize endorsement of a bill of entry for receiving materials by a registered dealer. It was also observed therein that the first stage dealer is required to purchase the goods under cover of invoice from a manufacturer or from an importer. It is found that the Lower Adjudicating Authority has discussed all the issues raised by the Appellant. It is not disputed that the imported scrap has not been physically transferred from one party to another party which is a precondition for availing CENVAT credit facility. There is violation of the provisions of CENVAT Credit Rules, 2004, making the appellant ineligible to avail of credit. It is also not clear how CENVAT credit has been availed or transferred without receipt of the goods involved physically. Further, it is failed to understand the motive behind import of the scrap which is not an input at that relevant time and to stock it in its own dealer’s premises and then transfer to the other dealer who is related to them and also further retransfers to the appellant’s main unit for its usage. All these transactions availing credit and transferring the same have been carried out without receipt or dispatch of the goods. There is no sale or purchase - Furthermore, there is no evidence to establish that any physical movement of goods actually took place. While endorsed documents may serve as evidence of duty payment, there must also be clear and credible proof of receipt of the goods under those documents and their subsequent use in manufacture / sale. Mere creation of paperwork or paper trial to indicate movement of goods, or mere endorsement of Bills of Entry, is not sufficient to establish eligibility for credit. The essential conditions required for availing credit have therefore not been fulfilled. The Appellants have failed to substantiate, with clear proof or evidence, that the transactions in question actually took place, based on the records available - Appeal dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether CENVAT credit could be availed on imported melting scrap on the basis of endorsed Bills of Entry and subsequent dealer invoices, when there was no physical movement of goods and the scrap was not an input for the manufacturer at the relevant time. 1.2 Whether the endorsement of Bills of Entry and reliance on dealer registrations and records were sufficient to validate the documents for CENVAT credit under Rule 9 of the CENVAT Credit Rules, 2004. 1.3 Whether the precedent permitting transfer of credit on the basis of endorsed Bills of Entry (Union of India v. Marmagoa Steel Ltd.) was applicable to the facts of the present case. 1.4 Whether the conduct of the appellants amounted to misuse of the CENVAT scheme, justifying invocation of the extended period and imposition of penalties under Rule 15(2) and Rule 15A of the CENVAT Credit Rules, 2004 read with Section 11AC of the Central Excise Act, 1944 and Rule 25 of the Central Excise Rules, 2002. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Availment of CENVAT credit on imported melting scrap on the basis of endorsed Bills of Entry and dealer invoices; validity of documents under Rule 9 CCR, 2004 Legal framework (as discussed) 2.1 The Tribunal examined Rule 9 of the CENVAT Credit Rules, 2004 regarding authorized duty-paying documents and the manner in which manufacturers and registered dealers may avail and pass on credit. It was noted that a manufacturer may take credit on inputs received under a Bill of Entry, and on invoices issued by an importer/first stage dealer/second stage dealer, provided such dealers maintain proper records indicating that the inputs are from duty-paid stock of the producer/importer. 2.2 It was emphasized that Rule 9 does not prescribe an endorsed Bill of Entry as a permissible document for a registered dealer to receive inputs or to pass on CENVAT credit, and that physical receipt of goods is a precondition for availing credit. Interpretation and reasoning 2.3 The Tribunal noted that the imported melting scrap was received and remained at the premises of the manufacturer throughout, and that the purported transfers between the two registered dealers and back to the manufacturer were only on paper, without any physical movement of goods or actual purchase/sale. 2.4 It was found that the imported scrap was melting scrap, which is a raw material for ingots/billets, whereas the manufacturer was admittedly engaged in manufacture of TMT bars, whose immediate inputs were ingots and billets. The manufacturer did not have an induction furnace in 2006 and therefore could not use melting scrap as input at the relevant time. On this basis, the Tribunal held that the scrap was not an 'input' for the manufacturer when imported. 2.5 The Tribunal agreed with the original adjudicating authority that CENVAT credit cannot be transferred to a dealer on the basis of an endorsed Bill of Entry issued to a manufacturer where the goods are not the manufacturer's inputs, and that Rule 9 does not authorize endorsement as a valid mode for a registered dealer to receive or pass on credit. 2.6 It was further recorded that the first stage dealer had not 'purchased' the imported scrap under cover of an invoice from the manufacturer/importer, nor had the dealers physically received the goods. The alleged receipts and issues by the dealers were only paper transactions, known to all three units, which shared common personnel and management, as evidenced by the statements of the authorized signatories who signed undated endorsements on the Bills of Entry. 2.7 The Tribunal stressed that mere existence of endorsed documents and internal records, without corroborated physical movement or possession of the goods, is insufficient to satisfy the basic conditions for availing CENVAT credit. The absence of any sale or purchase, and the creation of a paper trail solely to enable credit at a later date, were highlighted. Conclusions 2.8 The Tribunal held that the imported melting scrap was not an eligible input for the manufacturer at the relevant time and that the use of endorsed Bills of Entry and dealer invoices, without physical receipt or proper procurement of goods, violated Rule 9 and Rule 4 of the CENVAT Credit Rules, 2004. Accordingly, the manufacturer was not entitled to CENVAT credit, and the demand for recovery of wrongly availed credit under Rule 14 read with Section 11A(1) was upheld. Issue 3: Applicability of the decision in Union of India v. Marmagoa Steel Ltd. on endorsed Bills of Entry Legal framework (as discussed) 2.9 The Tribunal referred to the decision of the Supreme Court in Union of India v. Marmagoa Steel Ltd., wherein it was held that CENVAT credit is admissible on imported consignments when the Bill of Entry is directly transferred by the importer to another unit of the assessee, without the goods being received by the importer's own manufacturing unit, provided duty has been paid and transfer of goods under the endorsed Bill of Entry is established. Interpretation and reasoning 2.10 The Tribunal distinguished that precedent on facts. It observed that in Marmagoa Steel, transfer under endorsed Bills of Entry was accompanied by proof of receipt of goods by the recipient unit, and the duty payment and transfer were not in dispute. 2.11 In the present matter, the Tribunal found that the dealers (Appellants 2 and 3) had not procured the goods from the manufacturer/importer or from any other dealer under valid invoices, and there was no acceptable or corroborative evidence of actual receipt or procurement of the goods by them. It also noted that the importer-manufacturer itself could not have taken credit earlier because the imported scrap was not its input at the relevant time. Conclusions 2.12 The Tribunal held that the ratio of Marmagoa Steel was not applicable in the absence of proof of physical movement/receipt of goods and in view of the ineligibility of the scrap as input at the relevant time. The reliance on that decision by the appellants was rejected. Issue 4: Misuse of CENVAT scheme, invocation of extended period, and imposition of penalties under Rule 15(2), Rule 15A CCR and Rule 25 CER Legal framework (as discussed) 2.13 The Tribunal considered Rule 14 and Rule 15(2) of the CENVAT Credit Rules, 2004 read with the proviso to Section 11A(1) and Section 11AC of the Central Excise Act, 1944, as well as penalties on registered dealers under Rule 15A of the CENVAT Credit Rules, 2004 and Rule 25 of the Central Excise Rules, 2002. It was noted that Rule 15A came into force with effect from 01.03.2008 and that its provisions, along with Rule 11 and Rule 25 of the Central Excise Rules, 2002, apply to registered dealers. Interpretation and reasoning 2.14 The Tribunal endorsed the original authority's findings that the sequence of transfers-from importer-manufacturer to its dealer registration, then to the related dealer, and back to the manufacturing unit-was devised with a mala fide intention to misuse the CENVAT scheme. The aim was to convert otherwise ineligible credit on scrap (not an input in 2006) into apparently eligible input credit when the induction furnace was installed in 2008. 2.15 The Tribunal relied on the statements of common employees/authorized signatories who operated across all three units, signed undated endorsements, and were fully aware that the transactions were only on paper and that no physical movement or legal purchase/sale occurred. This common knowledge and coordinated conduct were treated as evidence of deliberate contravention. 2.16 Regarding the dealers, the Tribunal noted that the first dealer had not purchased the imported scrap under proper invoices and had passed on credit despite knowing the invalid nature of the transactions; similarly, the second dealer issued CENVATable invoices without ever receiving the goods, solely to enable the manufacturer to take credit. These acts post-01.03.2008 were held to fall squarely within Rule 15A and also to attract Rule 25 of the Central Excise Rules, 2002, as applied to registered dealers. Conclusions 2.17 The Tribunal concluded that the appellants had intentionally contravened the CENVAT Credit Rules, 2004 and Central Excise Rules, 2002, by creating paper transactions and passing on credit without physical movement or valid procurement of goods. The extended period for recovery was implicitly justified on the basis of mala fides and suppression inherent in the scheme. 2.18 The denial and recovery of CENVAT credit, along with penalties on the manufacturer under Rule 15(2) read with Section 11AC, and on the dealers under Rule 15A of the CENVAT Credit Rules, 2004 and Rule 25 of the Central Excise Rules, 2002, were upheld. The appeals were dismissed in toto and the impugned appellate orders sustained.