MODVAT credit cannot rest on retracted statements alone when invoices, banking payments, records, and cross-examination are lacking.

MODVAT credit could not be denied where the Revenue relied mainly on retracted transporter statements and an inconclusive RTO report, while the invoices were genuine, payments were made through banking channels, and the goods were recorded in statutory records. Because the relied-upon witnesses were not made available for cross-examination despite an earlier remand direction, the untested statements could not be treated as the sole basis for disallowing credit. On those facts, the penalties also could not be sustained.

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Issues: Whether MODVAT credit could be denied and penalties sustained on the basis of transporter statements and an RTO report when the invoices were genuine, payments were made through banking channels, the goods were recorded in statutory records, and cross-examination of the relied-upon witnesses was not granted.

Analysis: The denial of credit rested mainly on statements of transporters and a limited RTO report. The statements were retracted, the transporters did not appear for cross-examination, and the earlier remand had specifically required an opportunity of cross-examination. The supplier's statements supported actual supply through brokers and transport arrangements, the invoices had been defaced by the department, and the transactions were recorded in the appellant's records and supported by cheque payments. The RTO material covered only part of the consignments and did not conclusively establish non-receipt or diversion of goods. In these circumstances, untested and uncorroborated statements could not form the sole basis for disallowing credit.

Conclusion: MODVAT credit could not be denied and the penalties could not be sustained.

Ratio Decidendi: A demand for reversal of MODVAT credit cannot be sustained solely on retracted and untested witness statements or an inconclusive transport verification report, especially where the documentary record shows genuine invoices, banking payments, and receipt entries, and cross-examination of relied-upon witnesses has been denied.

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