The Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has clarified that the denial of Cenvat credit based exclusively on third-party investigations and untested statements violates fundamental principles of natural justice and statutory procedure. This ruling reinforces the requirement for direct, corroborative evidence linking the assessee to fraudulent invoicing, setting a critical precedent for tax adjudication in supply chain fraud cases.
Background & Facts
The Dispute
The appellant, M/s. Ghankun Steels Pvt. Ltd., a manufacturer of Sponge Iron and MS Ingots based in Raipur, Chhattisgarh, was assessed for improper availing of Cenvat credit amounting to Rs. 28,40,329 during the financial years 2012-13 and 2013-14. The Revenue alleged that the appellant had claimed input tax credit on invoices issued by non-existent entities - M/s. Rakti Trading Pvt. Ltd., M/s. Yes Commtrade (India) Pvt. Ltd., M/s. Supreme Multi Trade Pvt. Ltd., and M/s. Singh Mineral & Infra Tech - which were allegedly part of a larger racket involving fake invoicing and circular funding. The proprietor of the appellant, Shri Bimal Kishore Khetan, was also named as a co-appellant in a parallel appeal.
Key Facts
- The appellant used raw materials including Iron Ore, Coal, Sponge Iron, Pig Iron, Dolomite, MS Waste & Scrap, and Silico Manganese in its manufacturing process
- All Cenvat credit claims were supported by tax invoices issued by the alleged non-existent entities
- The invoices contained all mandatory details as per Rule 9 of the Cenvat Credit Rules, 2004
- The appellant had no direct business relationship with the suppliers beyond invoice-based transactions
- The department did not conduct a search at the appellant’s premises
- No Panchnama was prepared at the appellant’s location
- The appellant submitted all purchase invoices and records upon summons
- The department relied entirely on statements recorded under Section 14 of the Central Excise Act, 1944 from third parties, including Shri Pradeep Kumar Agrawal (Proprietor of M/s. Supreme Multi Trade Pvt. Ltd.) and transporters
- Transporters named on invoices denied having transported the goods
- The department did not investigate excess production, power consumption, sale proceeds, or dispatch records of the appellant
- No penalty was imposed on M/s. High Tide Infra Project Pvt. Ltd., the original target of the investigation
Procedural History
- 2012-13 & 2013-14: Financial years under scrutiny for Cenvat credit availed
- 09.05.2015: Panchnama conducted at premises of M/s. Supreme Multi Trade Pvt. Ltd. (third party)
- 01.10.2015 & 19.02.2016: Statements recorded from Shri Pradeep Kumar Agrawal under Section 14 of the Central Excise Act
- 11.05.2017: Show Cause Notice No. 111/2015-16 issued to eight co-noticees including the appellant
- 13.14.2018: Order-in-Original No. 39/2017 passed by the Adjudicating Authority confirming demand of Rs. 28,40,329 and imposing penalty
- 26.09.2018: Order-in-Appeal No. BHO-EXCUS-002-APP-382 to 383-18-19 passed by Commissioner (Appeals), Raipur, dismissing the appeal
- 20.01.2026: Hearing before CESTAT, Principal Bench, New Delhi
- 19.05.2026: Final Order pronounced by Dr. Rachna Gupta, Member (Judicial)
The Parties' Positions
For the Appellant
- Argued that the demand was based solely on third-party evidence
- Contended that the statements of third parties were not subjected to cross-examination
- Highlighted that no search or seizure was conducted at their premises
- Submitted that they acted in good faith, relying on invoices issued by registered dealers
- Cited multiple tribunal and high court precedents holding that third-party evidence alone cannot sustain a demand
- Emphasized that the department had not investigated any direct link between the appellant and the alleged fraud
For the Respondent
- Maintained that the invoices were fake and issued by non-existent entities
- Relied on statements of transporters and third-party dealers to establish the absence of physical movement of goods
- Argued that the money trail showed circular payments to fictitious entities
- Contended that the appellant’s failure to verify the genuineness of suppliers amounted to negligence
- Relied on Commissioner of C.Ex. & CGST, Udaipur v. Prem Jain Ispat Udyog Pvt. Ltd. (2022) to assert that credit cannot be allowed where input suppliers did not manufacture goods
Relief Sought
The appellants sought: (1) Setting aside of the Order-in-Appeal dated 26.09.2018; (2) Cancellation of the demand of Rs. 28,40,329; (3) Cancellation of any penalty imposed; and (4) Restoration of the Cenvat credit already utilized.
The Legal Issue
Can Cenvat credit be denied to an assessee solely on the basis of third-party statements and fake invoices issued by registered dealers, without proving the assessee’s knowledge of the fraud or providing corroborative evidence of clandestine activity?
Arguments Presented
For the Appellant
The appellant relied on multiple precedents including Grace Casting Ltd. v. Commissioner of C.Ex. & S.T., Jyoti Industries v. Commissioner of C.Ex., and Anj Metal Recycling Pvt. Ltd. v. Commissioner of C.Ex. to argue that third-party evidence, without cross-examination or independent corroboration, cannot form the basis of a tax demand. It further cited Surya Wires Pvt. Ltd. v. Principal Commissioner, CGST and G-Tech Industries v. Union of India to assert that statements under Section 14 of the Central Excise Act, 1944 are inadmissible unless the procedure under Section 9D is followed - which requires the affected party to be given an opportunity to cross-examine the deponent. The appellant emphasized that it had acted with due diligence: the invoices were valid on their face, registration numbers were authentic, and no red flags were apparent. The department’s failure to investigate excess production, power consumption, or sale proceeds rendered the allegations speculative.
For the Respondent
The department contended that the pattern of transactions - fictitious suppliers, circular fund flows, and transporter denials - collectively established fraud. It relied on Prem Jain Ispat Udyog Pvt. Ltd. to argue that when input suppliers do not manufacture or supply goods, the credit availed is inherently invalid, regardless of the assessee’s knowledge. It further argued that the appellant’s failure to conduct due diligence on suppliers amounted to contributory negligence, and that the burden of proving the genuineness of transactions lay with the assessee.
The Court's Analysis
The Tribunal undertook a rigorous analysis of the evidentiary standards applicable to Cenvat credit disputes. It observed that the department’s entire case rested on statements recorded under Section 14 of the Central Excise Act, 1944 from third parties - none of whom were made available for cross-examination by the appellant.
"Cross-examination is a most relevant tool of justice delivery system so as to undo the bias, if any. It is otherwise a statutory mandate flowing from Section 9D of Central Excise Act, 1944."
The Tribunal emphasized that Section 9D(2) mandates that statements recorded under Section 14 are admissible only if the affected party is given an opportunity to cross-examine the deponent, unless the deponent is dead, untraceable, or otherwise unavailable. The department’s refusal to permit cross-examination, without any valid justification, rendered the statements legally inadmissible.
The Tribunal further cited Ambika International, G-Tech Industries, and Bajrangbali Ingots & Steel Pvt. Ltd. to affirm that allegations of clandestine removal or fraudulent invoicing cannot be sustained without concrete, corroborative evidence such as excess production records, power consumption data, dispatch records, or sale proceeds. The absence of any such evidence against the appellant was fatal to the department’s case.
"Merely because the company issuing invoice was found non-existent, the appellant could not be denied the availment of Cenvat Credit thereupon unless and until his involvement in terms of his knowledge about such non-existence and about the invoice to be bogus is not proved on record."
The Tribunal also relied on Commissioner of Central Excise v. Juhi Alloys Ltd. and Adhi Alloys Pvt. Ltd. v. CCE, Ludhiana, holding that it is impractical to require an assessee to verify the operational status of every supplier. As long as the invoices comply with Rule 9 of the Cenvat Credit Rules, 2004, and the assessee has no reason to suspect fraud, the credit must be allowed.
The Tribunal noted the inconsistency in the department’s approach: while the appellant was penalized, the original source of the fraudulent invoices - M/s. High Tide Infra Project Pvt. Ltd. - was not even penalized, undermining the credibility of the entire investigation.
The Verdict
The appeals were allowed. The Tribunal set aside the Order-in-Appeal dated 26.09.2018 and the Order-in-Original dated 13.14.2018. The demand of Rs. 28,40,329 for improper Cenvat credit was cancelled. Any penalty imposed on the appellants was also set aside. The Cenvat credit already availed and utilized by the appellant was restored. The department was directed to take necessary steps to reverse the demand and adjust the credit in the appellant’s account within 45 days of the order.
What This Means For Similar Cases
Third-Party Evidence Alone Is Not Sufficient
- Practitioners must challenge any tax demand based solely on statements from third parties or fake invoices
- The burden remains on the department to prove the assessee’s knowledge of fraud or involvement in the scheme
- Absence of direct evidence linking the assessee to the fraud invalidates the demand
Cross-Examination Is Mandatory Under Section 9D
- Any reliance on Section 14 statements without offering cross-examination is procedurally invalid
- Failure to grant cross-examination renders the evidence inadmissible, regardless of its apparent reliability
- Practitioners must raise this objection at the adjudication stage to preserve the issue for appeal
Due Diligence by Assessee Is Presumed
- If invoices comply with Rule 9 of the Cenvat Credit Rules, 2004, and no red flags are apparent, the assessee is presumed to have acted in good faith
- The department cannot impose a duty on the assessee to verify the operational status of every registered supplier
- This protects legitimate businesses from being penalized for systemic fraud by third parties
No Penalty Without Direct Link
- Penalty cannot be imposed unless the department proves mens rea or connivance by the assessee
- The absence of search, seizure, or confessional statements against the assessee is a strong defense
- Practitioners should insist on production of all investigation records to test the chain of evidence
