Credit available even on documents which do not cover or accompany the consignment if the other conditions are fulfilled. Read/Download the Judgement
This is a very old case which started in November 1996. It got settled by the CESTAT New Delhi, only a few days ago on 17th September. After almost 18 years.
This is not a complicated case at all. It involves Modvat credit (Cenvat came later) availed by the manufacturer-assessee on imported raw material. These raw materials were directly sent to their Gurgaon factory in November 1996. However the Bills of entry were made out in favour of their Head Office at Kanpur. Incidentally, at the Kanpur address, they also have another factory. Through an error, their Kanpur factory availed against the bills of entry without actually receiving the goods (which were received in Kanpur) on 23.3.1997.
On noticing the error two days later, on 25.3.1997 (two days after availing credit), the assessee reversed the credit and prepared fresh invoices under the erstwhile Rule 52A in favour of Gurgaon. The information for preparing the invoice was drawn from the packing list and Bill of Entry which was in favour of their HO address. On the basis of these invoices, the factory at Gurgaon availed Modvat credit. The credit was taken later on in March 1997 even though the goods were received in November 1996.
Arguments before the Tribunal
Before the Hon’ble CESTAT New Delhi Bench, the assessee argued that there is no dispute that the raw material actually reached the destination where it was to be used. They reversed the credit in Kanpur as soon as it was noticed and followed the other procedures and are eligible for modvat credit. The credit was availed at Gurgaon only later. They also argued that CBEC Circular dated 29.2.1996 allows endorsement of Bills of Entry from Registered office/Head Office to the manufacturing unit for enable credit. They claimed their lapse was merely technical.
The Revenue’s objection simply was the goods never moved along with 16 invoices issued by the Head Office and as such these documents are not valid documents for Modvat credit.
The Tribunal has aptly described this as a technical issue and allowed the assessee’s appeal while observing that the assessee had also filed the reconciliation statement to prove actual use. The Revenue did not dispute these facts. They merely disputed that the documents were not “covering” documents which accompanied the consignment and hence not valid.
Our Observations :
Does this case deserve to be put through litigation?
Quite obviously not. It would have sufficed to investigate verify correctness of the document, and whether goods were actually received, whether double credit was availed and goods were consumed. This would have been adequate instead of creating work for the adjudicating /appellate authorities, Tribunal and advocates.
What really happened?
But wait, what really happened? The obvious goof-up was from Procurement. The Bills of entry for goods meant for Gurgaon were addressed to Kanpur. Is this something very rare? No! This happens. Not frequently, but it does happen. Mostly because of lack of controls, SOS supply situations, poor and ambiguous instructions over phone etc.
Apart from this what happened? The answer to this comes through two somewhat obscure facts embedded in the Tribunal order. Though the goods were received in November 1996, the credit was availed at Kanpur only four months later on 23rd Mar 1997 through a belated error. This could be because sometimes Bills of entry are received late. But neither did Gurgaon where the goods where physically received take the credit for the entire intervening four months. We don't know if this was pointed out by Gurgaon. If not there is an issue there. Then within two days of availing wrong credit at Kanpur, the error gets noticed, reversed, invoices prepared and sent to Gurgaon.
Actually, there is nothing is wrong with any of this. That stands proved by the outcome in Tribunal. But the point being made here is, if there was any error committed, there are better ways of dealing with the same.
Why did this case go through litigation?
There is probably a reason for this. While the credit was availed at Gurgaon in Mar 1997, the notice is issued only on 4th Feb 2002. Much beyond the normal period of limitation and just around a month before the 5 year extended expired. Obviously, they missed the normal time limit. Quite naturally, the extended period would have been invoked alleging malafides, suppression of facts, mis-declaration and so on. This meant there was no time for any pondering. They had to issue the notice. This means the verification of the returns and documents were inadequate and got missed out. In 1997 to my recollection returns and accompanying documents were being checked.
So what is the flaw in the procedure approach?
One error has been already accepted by the assessee, the second one if credit was availed in Kanpur four months after receiving it and they were availing credit without first verifying that the material was physically received or not. Secondly, the Gurgaon factory had a backlog of credit on these consignments for around four months. Keeping credits pending for 4 months is a cash flow disaster. Apparently since this is dubbed as an “error” it was quite was normal and went unnoticed.
What about the department's actions?
Instead of issuing a notice, it would have been more appropriate for the department to investigated this? If they counter-checked facts by speaking with the company officials and thorough a check for actual receipt of goods on which credit was availed they would have convinced themselves. They could have also called for a reconciliation of the credit availed with physical receipts in their books. Since the company by their own admission took credit without receipt this again could have resolved the issue. Issuing a notice was only an upward delegation of the work going ultimately right upto the Tribunal.
What the Tribunal did is something even the adjudicating officer or Commissioner Appeals could have done. Only it should be properly justified. There is no need to fear audit, reprisal etc. when one is doing the right thing.
What was the net result?
A matter which could have been resolved in months dragged on for 18 years. It clogged the appellate system stealing time from the Tribunal which is already hard pressed. It is precisely such cases that delays the judicial process which precipitate the need for laws to extract a pre-deposit 17.5% for appeals before Tribunal.
Aren’t supervising officers accountable for such mishaps in their jurisdiction?