Modvat credit cannot be denied to a recipient by disputing the supplier's deemed credit after assessed clearances.

Modvat credit on pile cut fabrics could not be denied to the recipient merely because the suppliers were said to have wrongly availed deemed credit under the relevant notification. The recipient had taken credit on invoices showing duty payment, and the suppliers' clearances had already been assessed and cleared at their end. In those circumstances, the department could not indirectly reopen the suppliers' assessment in proceedings against the recipient, especially when the suppliers themselves were not proceeded against. Credit was therefore confined to the duty actually paid on the inputs, and denial of Modvat credit on the basis of the suppliers' deemed credit was unsustainable.

---

---

Issues: Whether Modvat credit could be denied to the recipient of pile cut fabrics on the footing that the suppliers had wrongly availed the benefit of deemed credit under the relevant notification, despite the goods having been cleared under assessment and duty payment at the suppliers' end.

Analysis: The recipient assessee took credit on the strength of invoices showing duty payment on pile cut fabrics received from the suppliers. The dispute turned on whether the department could disallow credit at the recipient's end by questioning the suppliers' availment of the notification benefit. Since the suppliers were not proceeded against and the clearances had already been assessed after granting the notification benefit, the assessment at the stage of clearance could not be reopened indirectly in the hands of the recipient taking credit. The credit available to the assessee was therefore confined to the duty actually paid on the inputs, and the attempt to deny credit by treating the suppliers' deemed credit as inadmissible to the recipient was unsustainable.

Conclusion: The denial of Modvat credit to the assessee was not sustainable and was set aside.

---