MODVAT credit cannot be denied for supplier's hidden duty default when invoice conditions and reasonable care are satisfied.

Deemed MODVAT credit under Rule 57A(6) could not be denied where inputs were received directly under invoices declaring duty payment and correctly stating invoice price, because the notification's conditions were satisfied. The supplier's alleged short-payment of duty was a lapse at the seller's end and was not itself a ground to refuse credit under the prescribed scheme. The buyer's obligation was only to take all reasonable steps on the basis of the accompanying documents; it was not required to conduct independent departmental verification of actual duty payment by the supplier. On those terms, compliance with the notification entitled the assessee to credit.

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Issues: (i) Whether the manufacturer of final products was entitled to deemed MODVAT credit under the notification when the supplier of inputs had allegedly not paid the full duty, though the invoice declared duty payment; (ii) whether the assessee was required to independently verify from the department that the duty had actually been paid, or whether taking reasonable steps as indicated in the documents was sufficient.

Issue (i): Whether the manufacturer of final products was entitled to deemed MODVAT credit under the notification when the supplier of inputs had allegedly not paid the full duty, though the invoice declared duty payment.

Analysis: The credit scheme under Rule 57A(6) operated through a notification that deemed duty to have been paid on specified inputs and permitted credit subject to the stated conditions. The relevant notification required that the inputs be received directly from the factory of the manufacturer under cover of an invoice declaring that the appropriate duty of excise had been paid, and also required correct declaration of invoice price. The factual basis showed that the inputs were directly received, the invoice declared duty payment, and the invoice price was correctly stated. The alleged short payment by the supplier was a lapse at the seller's end and was not one of the conditions prescribed for denial of credit under the notification.

Conclusion: The assessee was entitled to the deemed MODVAT credit, and denial of credit was not justified on the facts.

Issue (ii): Whether the assessee was required to independently verify from the department that the duty had actually been paid, or whether taking reasonable steps as indicated in the documents was sufficient.

Analysis: The proviso to Rule 57A(6) required the manufacturer to take all reasonable steps to ensure that the inputs acquired were goods on which the appropriate duty, as indicated in the accompanying documents, had been paid. The Court held that this obligation did not extend to making departmental verification of actual payment of duty by the supplier. Once the prescribed procedure was followed and the documents showed duty payment, insisting on further verification would go beyond the notification and impose an impracticable burden not contemplated by the rule.

Conclusion: Reasonable care based on the accompanying documents was sufficient, and no further departmental verification was required.

Final Conclusion: The notification had to be applied according to its express conditions, and since those conditions were satisfied, the assessee could not be denied deemed MODVAT credit merely because the supplier later turned out to have short-paid duty.

Ratio Decidendi: Where a MODVAT credit notification requires receipt of inputs under an invoice declaring duty payment and obliges the buyer only to take reasonable steps based on the accompanying documents, credit cannot be denied for the supplier's undisclosed duty default if the buyer has complied with the prescribed conditions.

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