Rebate claim not admissible if it is clearly established that inputs were purchased from fake/non-existent firms.

Case:- DIWAN BROTHERS Vs UNION OF INDIA

Citation:- 2013 (295) E.L.T. 387 (Guj.)

Brief facts:- Petitioner was an exporter-manufacturer. During the course of its activities, the petitioner purchased certain raw materials for manufacturing of cloth. The petitioner claimed rebate. Since the adjudicating authority was of the opinion that rebate could not be granted, he issued show cause notice dated 18th July, 2006. In the notice, it was pointed out that there was a large scam unearthed in Surat regarding fraudulent rebate claims where the exporters had submitted bogus bills and documents. It was stated that during the investigation of fraudulent rebate claim cases, other modus operandi was also detected. It was noticed that number of persons who had obtained registrations as manufacturers had issued various central excise duty paying invoices without any movement of goods and in fact no goods were sold by them. It was, therefore, stated that as per the Department, the petitioner had purchased the goods from various firms which were either declared fake or had purchased the goods from fake, bogus or non-existent firms. The petitioner was, therefore, put to notice why the rebate claim of Rs. 14,49,000/- should not be rejected and penalty under Rule 15(2) of the Cenvat Credit Rules should not be imposed.
The petitioner opposed the show cause notice and raised several contentions. A detailed reply through the petitioner’s advocate was sent on 16th May 2007. It was primarily contended that proper documents for claiming rebate were filed and actual export was made and rebate therefore in any case cannot be denied.
The adjudicating authority repelled the contentions of the petitioner and passed order on 22nd June, 2007 rejecting the rebate claim.
Aggrieved by the order of the adjudicating authority, the petitioner approached the appellate authority. The Appellate Commissioner dismissed the appeal and confirmed the order of the adjudicating authority making following observations:
“5.4 The order in original records that M/s. Shri Hari Enterprise is fake/fictitious/bogus and has been declared as such vide Alert Circular of the Commissioner of Central Excise, Surat-I. The appellant has taken the stand that M/s. Hari Enterprises took registration on 10-12-2003 and surrendered the registration on 14-5-2004. Their plea is that panchnama dated 12-2-2005 drawn on the premises of M/s. Hari Enterprise is not sufficient evidence to conclude that the said supplier is fake/fictitious/non-existent. However, appellant have neither made explicit claim that M/s. Hari Enterprise is real or genuine firm nor disclosed the identity of the person with whom they claim dealings running into several lakhs of rupees. The Alert Circular is well publicized and is in public domain. If M/s. Hari Enterprise was a real person, it would have surfaced and challenged the Circular. Further appellant could file an affidavit and disclose its identity. Appellant could file an affidavit of M/s. Hari Enterprise to establish its existence. Nothing of this sort has been done. Under these circumstances it is reasonable to conclude that M/s. Hari Enterprise is a bogus, fictitious, fake unit with no real identity.
5.5 One of the contention of the appellant is that rebate is payable once goods manufactured are exported and duty is paid at the time of removal. The appellant has quoted five judgments in support of its case. I have carefully gone through the judgments cited. The judgments provide authority for the preposition that technical and procedural infractions should not come in the way of grant of rebate. The case in hand involves procurements from fictitious person under Central Excise invoices written by unknown person. The citation quoted by the appellant have no bearing on the issue in hand. It is not a simple case of removal of processed fabric for export on payment of duty. It is necessary to examine the facts in totality. As per records grey fabrics are shown procured from M/s. Hari Enterprise, a fictitious person. The supplier of grey fabrics is fictitious and the documents (invoices) are fraudulent. The whole transaction starting with procurements of grey fabrics upto clearances of export goods is vitiated. In essence the duty on export goods is paid out of credit earned on fraudulent invoices of the grey fabrics. Effectively the appellant is seeking refund of duty reflected on the fraudulent invoices which was never paid. Obviously it shall be unlawful to allow rebate of duty reflected on such fraudulent document.”

Still not satisfied, the petitioner approached the Government by filing revision. The Revisional Authority also dismissed the petitioner’s revision making following observations :-
“8. The applicant has pleaded that they procured grey fabrics from the supplier registered under Rule 12B of the Central Excise Rules, 2002 and got the same processed from processor on job work basis. He has discharged the obligation of satisfying himself about the identity and address of supplier since the valid Central Excise registration certificate was issued to supplier of grey fabrics by the department. In this regard, it is observed that during investigation by department the supplier of grey fabrics was found non-existent and accordingly vide Alert Circular issued by Commissioner of Central Excise, Surat-I, the said unit was declared as fictitious. Nobody came forward to claim that the supplier of grey fabrics was not a fake unit. Even, the applicant has not challenged the said circular by arranging appearance of persons concerned or producing any affidavit from such persons to claim the existence of said unit. As such the whole transaction becomes bogus which appears to be created on paper for availing rebate claims fraudulently. The applicant facilitated the availment of wrong credit by processor on the basis of bogus invoices of grey fabrics endorsed by him. The duty paid out of such wrongly availed Cenvat credit cannot be treated as payment of duty on export goods as no actual Cenvat credit was available. As such the rebate claim is not admissible under Rule 18 of Central Excise Rules, 2002.
9. Applicant had been pleading that goods are exported and duty was paid and he made the payment by cheque to the suppliers of grey fabrics so rebate cannot be denied. In this regard, it is observed that unless and until duty paid character of exported goods is proved the rebate cannot granted. The cheque payment whose exact details are not available for scrutiny cannot establish the existence of supplier when investigation conducted by Central Excise has categorically revealed the said suppliers of grey fabrics are fake and bogus.”

Therefore, the appellant is before the High Court.

Appellant’s contentions:- Counsel for the petitioner submitted that at least one of the suppliers, namely Shri Hari Enterprises was very much in existence. At the instance of the petitioner, the adjudicating authority had during adjudication proceedings called for a report from the Range Superintendent who had made following report :
“In this regard, the verification of above invoices from Serial No. 01 to 19 have been found correct and in order. However, the verification in r/o Serial No. 20 to 32 (13 invoices) could not be physically carried out since all relevant records and documents have been submitted to HQs (Prev), Vapi in connection with some investigation. As per the ER-1 return of M/s. Filatex India Ltd. for the month of December, 2003, submitted to this office, the invoices issued for Dec. 2003 is shown as from SI. No. 6272 to 7171. Further, the invoices issued by the said unit bears a direction to deliver the goods from RAMA FILAMENT P. LTD. Plot No. 183/184, Vill. Joulua, BARDOLI ROAD, SURAT, which may please be noted. (Sample copy of invoice enclosed).”
Counsel further submitted that in any case, the petitioner had exported the goods and therefore, the petitioner’s rebate claim cannot be denied. Heavy reliance was placed on a decision of this Court in the case of Commissioner of C. Ex. & Customs v. D.P. Singh - 2011 (270)E.L.T.321 (Guj.).

Respondent’s contentions:- The adjudicating authority repelled the contentions of the petitioner and passed order on 22nd June, 2007 rejecting the rebate claim. It was held that the petitioner had taken Cenvat credit, namely on the inputs, viz. grey fabrics received from M/s. Gajanand Textiles located at Plot No. 7301 in GIDC Sachin and one M/s. Jagruti Textiles located at Ajanta Park Society, Surat and one Poonam Dyeing & Printing Mills, Pandesara, Surat. It was held that M/s. Gajanand Textiles was already declared as fake/bogus/non-existing firm. It was so declared in alert Circular dated 22-9-2005. With respect to Poonam Dyeing and Printing Mills, he held that the goods were purchased from M/s. Shree Hari Enterprises which in turn was declared fake and non-existing. With respect to Jagruti Textiles, it was held that upon verification, the report was negative. He, therefore, concluded that the petitioner should have taken reasonable steps to ensure correctness of the goods being duty paid and the burden lied on the petitioner to demonstrate that he had taken such care. In the present case, the petitioner had not taken any reasonable steps before taking credit. It was noticed that the invoice issued by Gajanand Textiles, Jagruti Textiles and Poonam Dyeing & Printing Mills and Qaswa Textiles were fake and fictitious and simply paper transactions to facilitate the petitioner to avail Cenvat credit for the duty described in the invoices which was not at all paid previously. It was, in short, held that the credit was claimed on the strength of fake invoices of the above suppliers.

Reasoning of judgment:- Having thus heard the learned counsel for the petitioner and having perused the documents on record, the Bench was of the opinion that the authorities had examined the case in detail and no interference was called for. Firstly, several issues of facts had been gone into, examined and conclusions had been arrived at on the basis of evidence on record. Such conclusions were not pointed out to be perverse. No interference in exercise of powers under Article 226/227 of the Constitution, therefore, could be made.
Basically the issue was whether the petitioner had purchased the inputs which were duty paid. It may be true that the petitioner manufactured the finished goods and exported the same. However that, by itself would not be sufficient to entitle the petitioner to the rebate claim. In the present case, when the authorities found inputs utilized by the petitioner for manufacturing export products were not duty paid, the entire basis for seeking rebate would fall. In this case, particularly when it was found that several suppliers who claimed to have supplied the goods to the petitioner were fake, bogus or non-existent, the petitioner could not be claimed rebate merely on the strength of exports made.
The judgment of this court in the case of Commissioner of C. Ex. & Customs v. D.P. Singh (supra) was easily distinguishable. Facts in that case were that one M/s. Roman Overseas had purchased certain goods from M/s. Unique Exports for manufacturing export goods. On the goods so purchased, Roman Overseas had availed Cenvat credit as passed on to it by M/s. Unique Exports as such finished product was eventually exported. On the basis of such exports, Roman Overseas claimed rebate. It was, however, found that Unique Exports had passed on the Cenvat credit on the goods on which duty was not paid. It was specifically held that there was no allegation even in the show cause notice against M/s. Roman Overseas that it was part of such fraud or had knowledge about the same. It was further held that there was no ground against Roman Overseas that it had not taken necessary care as required under law to ensure that the goods were duty paid. In fact, the Commissioner of Appeals and the Government both had held on facts that M/s. Roman Overseas had taken all necessary care. It was on this background that this Court held that the rebate claim was rightly granted by the Appellate Authority and the Revisional Authority.
In the present case, facts were different. The petitioner had claimed to have purchased inputs from suppliers who are found to be fake. The petitioner could not take shelter that it had no knowledge or claim total innocence. In fact, the Appellate Authority, in connection with the existence of M/s. Hari Enterprise noted that said Hari Enterprise took registration on 10th December, 2003 and surrendered the same on 14-5-2004 and when panchnama was drawn on 12-2-2005, no one was found at the site. The petitioner had also made no explicit claim that M/s. Hari Enterprise was a real or genuine firm and had not disclosed the identity of the person with whom they claimed to have dealt with business running into lakhs of rupees. It was further observed that if M/s. Hari Enterprise was a real person, it would have surfaced and challenged the alert circular and that the petitioner could have filed an affidavit to disclose the Identity of the person. None of these was done.
Before closing, it may be noticed that in the case of Sheela Dyeing & Printing Mills P. Ltd. v. C.C.E. & C, Surat- 2008 (232)E.L.T.408 (Guj.),a Division Bench of this Court had examined the statutory provisions pertaining to reasonable steps to be taken by the manufacturer. It was observed as under :
“11. Thus, “reasonable steps” as envisaged under the aforesaid provision are that the manufacturer or producer taking CENVAT credit on the inputs or capital goods received by him should satisfy himself about the identity and address of the manufacturer or supplier, as the case may be, who has issued the documents specified in rule 7, either from his personal knowledge; or on the strength of a certificate given by a person with whose handwriting or signature he is familiar; or on the strength of a certificate issued to the manufacturer or supplier, by the Superintendent of Central Excise within whose jurisdiction such manufacturer has his factory or the supplier has his place of business.”
In totality of the facts and circumstances, the Bench was of the opinion that three authorities had examined the petitioner’s rebate claim and found that the goods were purchased from non-existent and fictitious parties and Cenvat credit was wrongly availed. No case for rebate was therefore made out. They saw no reason to interfere.

Decision:- Petition was dismissed.

Comment:- The analogy drawn from this case is that if the whole transaction starting with procurements of raw material up to clearances of export goods is in doubt due to the fact that several suppliers who claimed to have supplied the goods to petitioner were either fake, bogus or non-existent then a mere fact that the petitioner manufactured the finished goods and exported the same, by itself would not be sufficient to entitle it to the rebate claim. Moreover, certain firms were also specified as fake and non-existent vide Alert Circulars issued by Board and so the business entity cannot take shelter that it had no knowledge or claim total innocence.

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