Cenvat credit denial cannot rest on uncorroborated third-party statements without cross-examination and independent evidence.

Cenvat credit on imported scrap could not be denied where the allegation of diversion rested mainly on inconsistent third-party statements and transport records, without independent corroboration such as seizure of diverted goods, proof of alternative procurement, or other material showing the inputs never reached the factory. The statements could not safely be relied upon against the assessee without cross-examination, absent statutory or exceptional reasons to deny that opportunity. On that basis, the denial of credit and the consequential penalties were held unsustainable.

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Issues: Whether Cenvat credit could be denied and penalties sustained on the allegation that imported scrap had not been received in the factory and had been diverted en route, when the case rested mainly on third-party statements and transport documents.

Analysis: The allegation of non-receipt of inputs was founded on statements of a transport-related third party and on loading and container-return records. The third-party statements were inconsistent on the movement of goods after unloading at Bhiwandi, and the assessee denied diversion. In such circumstances, the adverse statements could not safely be relied upon without cross-examination, particularly when they were not supported by independent corroboration such as seizure of diverted goods, proof of alternate procurement, or other material showing that the inputs never reached the factory. The reasoning also drew support from the principle that statements used against an assessee must ordinarily be tested by cross-examination unless statutory or exceptional reasons justify denial.

Conclusion: The denial of Cenvat credit and the consequential penalties were not sustainable; the appeals were allowed.

Ratio Decidendi: Third-party statements alleging diversion or non-receipt of inputs cannot, by themselves, sustain denial of credit or penalty unless they are corroborated by independent evidence and the assessee is afforded a fair opportunity of cross-examination where such statements are relied upon.

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