Modvat credit on capital goods cannot be denied for a supplier's short-paid duty when goods arrive on duty-paying documents.

Modvat credit on capital goods could not be denied to the recipient merely because the supplier had initially short-paid duty, where the goods were received on duty-paying documents and were used in manufacture. The recipient was not required to verify the correctness of duty payment at the supplier's end, because the scheme provided no mechanism for such verification. Any short-payment dispute lay in the supplier's assessment and recovery proceedings, and the later payment of the duty removed the basis for denial. The denial of credit was therefore set aside and the credit upheld.

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Issues: Whether Modvat credit on capital goods can be denied to the recipient merely because the supplier had not paid the entire duty at the time of clearance, when the capital goods were received on duty-paying documents and the short-paid duty was later discharged.

Analysis: Credit on capital goods under the Modvat scheme is based on receipt of the goods against duty-paying documents and their use in manufacture. The recipient is not required to verify the correctness of duty payment at the supplier's end, as the scheme provided no mechanism for such verification. Any dispute regarding short payment or non-payment of duty by the supplier lies within the jurisdiction of the supplier's assessment and recovery. Since the alleged short-paid duty was in any event subsequently paid, the foundation for denial of credit no longer survived.

Conclusion: Modvat credit could not be denied to the appellant on the ground of the supplier's initial short payment of duty. The denial was set aside and the credit was upheld in favour of the appellant.

Ratio Decidendi: Under the Modvat scheme, a recipient cannot be denied credit merely because the supplier's duty payment was later found deficient, so long as the recipient received the goods on duty-paying documents and the supplier's short payment is a matter for action against the supplier.

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