TaxTMI 
TaxTMI 
2011 (1) TMI 239
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....th the fact that the Commissioner (Appeals) found it fit to reduce the penalty imposed against the assessee. In some cases the penalty was totally set aside and in some cases the Commissioner (Appeals) extended the benefit of reduction of penalty to the extent of 25 per cent of duty, if duty, interest and penalty were paid within thirty days. Even though the facts may vary from one case to another marginally, the issues involved are as to whether the assessees can take credit on the basis of invoices issued by non-existent suppliers or not; whether the alert circulars could form the basis for demands; whether the department was right in imposing penalty under section 11AC on the assessees who took credit; whether the requirement of Rule 7 of Cenvat Credit Rules has been fulfilled by the assessees and under what circumstances the same can be said to have been fulfilled; the consequences of issue of demand by the revenue to the suppliers of fabrics/the receivers of processed fabrics from the assessees. Hence all the appeals are taken up together and a common order is being passed. 2. Before the regular arguments were putforth by the advocates on behalf of the assessees, Shri P.M. Da....
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....n certificates were issued by the department without any verification on the basis of an application made by various assessees and traders. According to him this led to several traders getting registered who might be renting the premises and thereafter once the scheme was withdrawn vacating the place which would have led to a situation wherein they were found to be non existent. In reality they could have existed. On the ground that alert circulars were issued without authority, without proper verification and in view of the provisions relating to registration that existed at that time, he submitted that the assessees who took credit, cannot be penalised for non existence of the suppliers. He submitted that there is no evidence shown by the department that assessees have not received the goods in this case and the whole case is based on non existence of suppliers. Under these circumstances he submits that the show cause notices issued based on alert circulars and subsequent proceedings have to be held as invalid and rejected. 3. We have considered the submissions made by the learned advocate. First of all the circular dated 11-6-1999 had proposed that any novel modus operandi shou....
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....ll the legal proceedings initiated illegal when the circulars themselves have not been issued on the basis of powers vested in the Board or in the DGCEI. The circular and the letter have been issued to improve overall management of anti evasion work. If the instructions issued by the Board have not been followed by the Commissioner which having nothing to do with statutory functions, the same cannot come in the way of statutory proceedings. It is for the Board to take appropriate action against the Commissioner for issuing the alert circular against the instructions issued by the Board and we do not think the remedy lies in holding all the proceedings invalid and depriving the statutory powers of the revenue officers and also preventing the officers from performing their statutory functions or holding the proceedings in performance of statutory functions invalid. Therefore we find, no substance in preliminary objections raised by the learned advocate and reject the same. 5. Shri P.M. Dave, learned advocate on behalf of assessees, submitted that in all the three cases, the details of basis for conclusion about non existence of suppliers was requested by the appellants and the same ....
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.... a trader) who in turn may supply to the merchant manufacturer and the merchant manufacturer may supply to the processor. 5.3 It will not be proper to hold that in all the cases, the job worker/processor is responsible to ensure that he has taken necessary precautions as required under rule 7 of Cenvat Credit Rules. 6. Shri J.C. Patel, learned advocate submitted that in terms of the provisions of Rule 7, it was enough if the job worker/processor had ensured that the merchant manufacturer/trader for whom he had undertaken the processing was in existence and in respect of that person only he was required to ensure that the provisions of Rule 7 of Cenvat Credit Rules have been fulfilled. He drew our attention to the fact that Rule 7(1)(e) provides for endorsement and this rule was omitted only in July 2004. The period involved in the case also falls within this period. During the period a merchant manufacturer/a registration certificate holder under Rule 12(b) could endorse the invoice issued by the supplier in favour of the processor. In such a case verification/existence of the endorser or the merchant manufacturer would be sufficient. He drew our attention to the fact that erstwh....
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....lable was disproved by the fact that many suppliers were filing quarterly returns regularly. In the case of Mamta Silk Mills (P.) Ltd. (supra) wherein the demand of more than Rs. 58 lakhs was involved and there was an allegation of non receipt of goods, the assessee had already reversed the credit taken. He submitted that the reversal of credit taken amounts to non availment of credit as held by the Hon'ble Gujarat High Court in the case of PSL Holding Ltd., and therefore no further action could have been taken. 8. Shri Suriyanarayanan, learned advocate submits that the department had issued show cause notices to the suppliers and also subsequently to the receivers of processed fabrics. The issue of show cause notices to the suppliers would show that the claim of the revenue that the suppliers were non existent is not believed by the revenue itself. Otherwise there was no question of issuing show cause notice to the parties who were non existent. Since show cause notice has been issued to the suppliers, he submits that the show cause notice issued to the assessees in this case and the subsequent proceedings are to be set aside. Further he also submits that in the case of Gulshan P....
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....justifiable in the absence of any evidence. In the case of Raghunandan Dyg. & Ptg. Mills, it was submitted that the assessee was not a party to the fraud. Further one of the suppliers was in existence. 10. Shri Hardik Modh submitted that the demand was made within normal period and Commissioner (Appeals) had imposed penalty not under section 11AC of Central Excise Act, 1944 but under Rule 13 of Cenvat Credit Rules. He submitted that when show cause notice did not invoke the provisions of Rule 13 of Cenvat Credit Rules, the Commissioner (Appeals) erred in imposing penalty under Rule 13 of Cenvat Credit Rules. 11. Shri K.I. Vyas, learned advocate submitted that nowhere in the show cause notice Rule 7 was quoted. In the case of M/s. Bhagwati Silks Mills, alert circular was dated 3-5-2005 and the request for documents leading to the alert circular was made by him. However department supplied only circular and not the documents supporting the alert circular. He also submitted in respect of other assessees that credit was taken in accordance with the provisions of Cenvat Credit Rules and wherever no rebate was claimed or rebate claim was withdrawn the duty demand could not have been co....
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....ppellate court and also a reference court for the whole of Europe. In this decision, the court took a view that whether the vat on the earlier or later sale of the goods concerned to the end user has or has not been paid to the public purse is irrelevant to the right of the taxable person to deduct input vat. The court ruled in favour of the assessees in that case. In this case also he submits that assessees are not parties to the fraud and therefore they are eligible for the credit. He also submits that principles underlying collection of vat in Europe can be applied to cenvat credit also. He also submits that while admittedly fraud vitiates everything and no consequential benefits can be allowed to anyone, a bona fide purchaser is protected. For this purpose he relied upon the provisions of Transfer of Property Act wherein a person is said to have a notice of a fact when he actually knows that fact or when, but for wilful abstention from an enquiry or such which he ought to have made or gross negligence, he would have known it. He submits that the assessees in this case have not been shown to have notice of fraud. In the absence of any evidence to show that goods have not been re....
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.... without receipt of any goods. Further in some of the cases it has been admitted that the assessees had purchased the goods through brokers and they did not have any direct contact with the dealers and/or the manufacturers of inputs. Even though invoices show the central excise registration numbers, that alone is not sufficient to show that the manufacturer or the supplier issuing the invoice was genuine. 17.2 As regards the decision of the European Court relied upon by the learned counsel, he submits that once the original manufacturer and dealers were found to be fake and non existent, it is unthinkable that the goods have been supplied by such non existent parties. In the cases before the European Court, the case of the department was that, the seller of the goods had not paid the tax to the Government. It was not the case that the purchaser had not received the goods. Further it has not been shown that a provision similar to Rule 7(2) of Cenvat Credit Rules existed in the European law. He relied upon the decisions of the Hon'ble Gujarat High Court in the case of Sheela Dyeing & Printing Mills (P.) Ltd. (supra). 17.3 Assessees are the ultimate beneficiaries of the fraudulent a....
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.... with the invoices. It would, therefore, follow that they did not manufacture any goods and hence there could not be any demand of duty. It is not the case of the department that the assessees did not manufacture any goods at all. The case of the department is that the assessees did not receive any inputs along with the fake and bogus invoices. The fake and bogus invoices were used as a cover for receipt of non duty paid material which was used for the manufacture of finished goods i.e., processed fabrics. 17.9 As regards limitation, he submitted that the availment of cenvat credit on the basis of invoices issued by non existent suppliers thereby showing that the invoices were also fake and fictitious, was nothing but an act of fraud committed by the assessees. Therefore extended period has been rightly invoked. He relied upon the decision of the Apex Court in the case of Commissioner of Customs (Preventive) v. Aafloat Textiles (I) (P.) Ltd. 2009 (235) ELT 587. In that case it was held that once it is established that the documents were fraud or fake, extended period of limitation could be invoked. 17.10 Supporting the revenue's appeals, he submitted that while Commissioner (Appe....
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.... inputs or capital goods received by him shall be deemed to have taken reasonable steps if he satisfies himself about the identity and address of the manufacturer or supplier, as the case may be, issuing the documents specified in rule 7, evidencing the payment of excise duty or the additional duty of customs, as the case may be either- (a) from his personal knowledge; or (b) on the strength of a certificate given by a person with whose handwriting or signature he is familiar; or (c) on the strength of a certificate issued to the manufacturer or the supplier, as the case may be, by the Superintendent of Central Excise within whose jurisdiction such manufacturer has his factory or the supplier has his place of business, and where the identity and address of the manufacturer or the supplier is satisfied on the strength of a certificate, the manufacturer or producer taking CENVAT credit shall retain such certificate for production before the Central Excise Officer on demand." 19.2 In all the cases, the assessee-appella....
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....er cases be upheld the demand & penalty under section 11AC of Central Excise Act, 1944, Hence appeals by the assessees as well as revenue against the orders of the Commissioner (Appeals). 20. Therefore the most important aspect to be looked into in all these cases is whether the assessees involved have fulfilled their obligations caused on them by Rule 7(2) of Cenvat Credit Rules, 2002. 20.1 Before we proceed to examine this aspect, it becomes necessary to consider the provisions of Rule 12(b) of Cenvat Credit Rules, 2002. Rule 12(b) as it existed during the relevant period has been explained in the circular issued by the Board vide S/703/19/2003-CX dated 25-3-2003. 20.2 The rule itself reads as under : "12B. Job work in textiles and textile articles.-(1) Notwithstanding anything contained in these rules, every person (not being an export-oriented unit or a unit located in special economic zone) who gets yarns or fabrics falling under Chapter 50, 51, 52, 53, 54, 55, 58 or 60, readymade garments falling under Chapter 61 or 62 or made up textile articles falling under Chapter 63 of First Schedule to the Tariff Act, produced or manufactured on his account, on job work (hereinafter....
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....se Rules as above would show that it is very important to know as to who was the manufacturer and who was responsible to fulfil all the obligations towards central excise. It was contended that Rule 12(b) of Central Excise Rules would not be applicable to the persons who had already been registered earlier and would be applicable only in respect of new assessees. However the rule does not prevent the old manufacturers also from utilising the facility. As discussed earlier while giving the detailed arguments presented by different learned advocates, Rule 12(b) of Central Excise Rules envisages four types of situations namely a merchant manufacturer may undertake to fulfil all the obligations himself; the job worker may be authorised by the merchant manufacturer to fulfil the obligations on his behalf in which situation, the job worker would be virtually acting as an agent for the purpose of manufacture of fabrics of the merchant manufacturer or alternatively the merchant manufacturer may be authorised by the job worker in which case the merchant manufacturer would be the agent of job worker. In cases where either the merchant manufacturer or the job worker had authorised either of t....
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....supplier of the fabrics to the merchant manufacturer who has endorsed it is in existence. 20.6 However where the goods have not travelled directly from the weaver/the manufacturer to the job worker and the invoice has not been endorsed, the question arises as to whether it would be sufficient if the job worker knows the supplier or he is required to know the original manufacturer who had paid the duty even though another invoice had been issued by the merchant manufacturer and he had supplied his invoice as well as the original manufacturer's invoice. In such cases if the job worker was authorised by the merchant manufacturer for fulfilling of central excise obligations, the job worker would be required to know the supplier of the fabrics to the merchant manufacturer. Otherwise it may be sufficient if he knew the merchant manufacturer and is able to show that he had taken the steps envisaged in Rule 7 of Cenvat Credit Rules. 20.7 Thus even though several other legal issues were raised, the most important aspect in all these cases requires verification of facts once again. 21. Admittedly a large number of cases out of the appeals under consideration are based on alert circulars. ....
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....uments putforth before us. 24. The next important question that arises is that of limitation. 24.1 It was contended on behalf of the assessees that extended period could not have been invoked in these cases since no evidence has been shown that the assessees did not receive the goods or did not manufacture the processed fabrics. It was also contended that the assessees were bona fide purchasers. Several decisions have been cited by both the sides. The decisions of the Hon'ble Supreme Court in the case of Aafloat Textiles (I) Pvt. Ltd., Golden Tools International support the case of the department. It has to be noted that the decision of the Hon'ble Supreme Court is the latest and therefore the decisions rendered earlier and cited before us are not relevant. In the case of Aafloat Textiles (I) Pvt. Ltd. it was held that fraud vitiates everything and even a bona fide purchaser would not get any protection. Further the Hon'ble Supreme Court also laid down that the principle "buyer beware". Therefore it if for the buyer to be careful and take reasonable steps to ensure that the documents are genuine. In these cases, unlike Aafloat Textiles case, it is a legal obligation. Once t....
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....f Rule 7(2) of Cenvat Credit Rules, 2002 requires that an assessee knows the supplier personally or obtains a certificate from a known person and keep it with himself for production on demand. Alternatively he is required to obtain a certificate from superintendent of central excise and keep it with him for production. The certificate to be obtained from the superintendent cannot be the registration certificate in view of the fact that the Government had already issued the instructions that registration certificate has to be issued without any verification. Even otherwise according to the provisions existing during the relevant time, there was no obligation on the central excise officers to conduct verification before issue of a registration certificate. In fact the law provides that once an application is filed for registration, registration certificate is deemed to have been issued and therefore once a person submits application for registration, he is deemed to be registered. Therefore it would not be reasonable to view the requirement of a certificate from the superintendent of central excise as the requirement to produce a copy of registration certificate. Therefore it has to ....