Modvat credit cannot be denied for a seller's procedural lapses when duty was paid and substantive conditions were met.

Modvat credit could not be denied where duty had actually been paid on the inputs and the buyer had used them in manufacture, because the purchaser and seller are separate tax entities and the buyer is not ordinarily bound by the seller's independent procedural defaults. A hundred per cent EOU restriction under Rule 100H(2) applied to the EOU itself, not to a non-EOU buyer claiming credit under Rule 57A. A merely defective invoice form, being within the seller's control and procedural in nature, could not defeat credit when substantive conditions were satisfied; the denial of credit and penalty were therefore unsustainable.

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Issues: Whether modvat credit could be denied to the purchaser on the ground that the seller was a hundred per cent export-oriented unit and had committed regulatory breaches, and whether a defect in the form of the invoice justified disallowance of credit when duty had actually been paid and the inputs were used in manufacture.

Analysis: The decisive facts were not in dispute: the assessee purchased carbon black as input, the seller had actually paid duty on the goods, and the assessee used the inputs in the manufacture of its final products. The Court held that the purchaser and seller are independent tax entities and the buyer cannot be visited with the seller's procedural defaults unless the statute expressly so provides. Rule 100H(2) of the Central Excise Rules, 1944 restricted the credit entitlement of the hundred per cent EOU itself, but did not disable a non-EOU buyer from claiming credit under Rule 57A when duty had in fact been paid on the inputs. The Court further held that the form of invoice was within the seller's domain, and a defect that was merely procedural could not defeat credit where the substantive conditions were satisfied. Reliance was placed on the liberal construction of the Modvat scheme and on the departmental circular discouraging denial of credit for minor procedural lapses.

Conclusion: Modvat credit could not be denied to the assessee merely because the seller was a hundred per cent EOU or because the invoice was issued in an allegedly incorrect form; the disallowance and penalty were unsustainable.

Final Conclusion: The adjudication withdrawing credit and imposing penalty was set aside, and the assessee's entitlement to the input credit was protected on the basis of actual duty payment and substantive compliance.

Ratio Decidendi: Credit under the Modvat scheme cannot be denied to a buyer who has satisfied all substantive conditions, merely because the seller committed independent procedural defaults or issued an invoice in a form beyond the buyer's control.

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