Cenvat credit on duty-paid inputs cannot be denied to the recipient merely because the supplier's duty liability is disputed.

Cenvat credit on duty-paid inputs received and used in manufacture cannot be denied to the recipient manufacturer merely because the supplier's duty liability is later disputed by the department. Once the inputs are received as duty-paid goods and the Rule conditions are satisfied, the recipient's credit remains admissible, even if the supplier's assessment is questioned. A personal penalty founded solely on that disallowance also cannot survive when the credit demand fails. The credit denial was therefore unsustainable, and the connected penalty was set aside.

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Issues: (i) Whether cenvat credit could be denied to the recipient manufacturer on duty paid inputs procured against invalidated advance authorization merely because the supplier's duty liability was disputed by the department. (ii) Whether the personal penalty survived once the demand and credit disallowance were found unsustainable.

Issue (i): Whether cenvat credit could be denied to the recipient manufacturer on duty paid inputs procured against invalidated advance authorization merely because the supplier's duty liability was disputed by the department.

Analysis: The inputs were received in the factory for use in manufacture, and the supplier had discharged duty on them. On that basis, the conditions for availing credit under the Cenvat Credit Rules, 2004 were satisfied. The recipient's credit could not be denied by questioning, at its end, whether the duty was properly payable by the supplier. The reasoning was consistent with the settled principle that once duty is paid and the goods are received as duty paid inputs, the recipient manufacturer is entitled to credit, even if the supplier's assessment is later asserted to be erroneous. The issue was also treated as covered by the earlier decisions relied upon.

Conclusion: The cenvat credit was admissible and the denial was unsustainable.

Issue (ii): Whether the personal penalty survived once the demand and credit disallowance were found unsustainable.

Analysis: The penalty was founded on the same disallowance of credit. After the demand itself failed, no independent basis remained to sustain the penalty, which was consequential in nature.

Conclusion: The personal penalty was set aside.

Final Conclusion: The appeals succeeded and the assessee was held entitled to the credit, with the connected penalty also falling with the demand.

Ratio Decidendi: Where duty-paid inputs are received and used in manufacture, the recipient manufacturer's cenvat credit cannot be denied by disputing the supplier's duty liability at the recipient's end; any penalty based solely on such denial also cannot survive.

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