Failure of Due Diligence Not Enough to Invoke Extended Period for CENVAT Demand: CESTAT Gives Relief to Krishna Art Silk [Read Order]

The Ahmedabad Bench of Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has ruled that the extended period under Section 11A(1) of the Central Excise Act, 1944 cannot be invoked solely on the basis of failure to conduct due diligence under the Cenvat Credit Rules, 2004, in the absence of any evidence showing participation of the assessee in supplier-side fraud.

The appeals were filed by Krishna Art Silk Cloth Private Limited and its Director, arising out of proceedings initiated after the Central Goods and Services Tax authorities found that the company had availed Cenvat credit on grey fabrics supplied through merchants and traders during February 2004 to February 2005. During audit and verification of ER-1 returns, the department concluded that the credit was availed on invoices issued by non-existent or bogus manufacturers of grey fabrics.

A Show Cause Notice proposed recovery of credit with interest and penalties, invoking the extended period under Section 11A(1) of the Central Excise Act, 1944. The adjudicating authority confirmed the demand in 2008. The Commissioner (Appeals) later upheld the confirmation, which resulted in multiple rounds of remand and re-adjudication before the matter once again reached the Tribunal.

Appearing for the appellants, Dev Wadhwa argued that the Tribunal had already recorded in an earlier round that the case was covered by the Gujarat High Court decision in Prayagraj Dyeing and Printing Mills Private Limited v. Union of India (2013), where it was affirmed that the principle of extended limitation is inapplicable in the absence of positive evidence of evasion.

It was submitted that the appellants functioned only as a job-worker, receiving grey fabrics through traders on endorsed invoices and returning processed fabrics on payment of duty. The appellants neither purchased the goods nor had any direct dealings with the manufacturers who were later declared fictitious.

The counsel contended that failure to conduct due diligence under Rule 7(2) of the Cenvat Credit Rules, 2004 might affect the merits of credit admissibility, but it could not amount to suppression or fraud to justify the extended period.

Representing the Revenue, Aakash Singh argued that investigation had clearly established that the suppliers were fictitious and non-existent, and that the appellant availed credit without verifying the legitimacy of the suppliers or the physical receipt of the goods. It was further contended that the failure to undertake verification amounted to fraudulent availment of credit and justified the invocation of the extended period under Section 11A(1) of the Central Excise Act, 1944.

The Bench comprising Judicial Member Dr. Ajaya Krishna Vishvesha held that while the appellant had not taken adequate steps to verify the authenticity of the duty-paid inputs, this lapse did not automatically justify the extended period of limitation. The Tribunal noted that the case was factually identical to Prayagraj Dyeing and Printing Mills (supra), where it was held that extended limitation is unavailable in the absence of material showing that the assessee was a party to the underlying fraud.

The Tribunal observed that invoices issued by manufacturers later found untraceable are voidable documents, not forged documents, and transactions based on them may still confer the protection available to a “holder in due course for valuable consideration.”

The Tribunal ruled that there was no evidence demonstrating that the appellants or its Director had conspired with the non-existent suppliers or had any knowledge of the fraud committed by them. On this basis, it ruled that the extended period was wrongly invoked and the resultant demand, interest, and penalties could not be sustained. The entire order of the Commissioner (Appeals) was set aside.

Thus, the appeals were allowed.

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