Modvat credit cannot rest on untested third-party statements; fair cross-examination and documentary compliance defeated the demand.

Modvat credit demand based mainly on third-party statements recorded behind the assessee's back could not stand where no effective opportunity for cross-examination was given. The untested statements were therefore unreliable, especially after remand had been directed for that purpose and no proper steps were taken to secure witness attendance. The record also showed statutory accounts, entry and use of inputs in manufacture, defacement of duty-paid documents, and payment by account-payee cheque, which supported the genuineness of the transactions. On that basis, the Department failed to prove that the gate passes were fictitious, and the demand was not sustainable.

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Issues: Whether the demand of Modvat credit could be sustained when the Department's case rested on third-party statements recorded behind the assessee's back and the assessee was denied an effective opportunity to cross-examine those witnesses.

Analysis: The demand was founded principally on statements of consignor-related persons said to show that the gate passes were fictitious. The matter had earlier been remanded specifically to afford cross-examination, yet on remand the witnesses did not appear and no effective follow-up was undertaken to secure their attendance. The statements, therefore, remained untested by cross-examination. Where adjudication is based on third-party statements, fair procedure requires an effective opportunity to challenge those statements. If that opportunity is denied, the statements cannot be relied upon against the assessee. Independently, the record showed maintenance of prescribed statutory records, entry of the inputs in the relevant accounts, use of the inputs in manufacture, defacement of the duty-paid documents, and payment by account-payee cheque, all of which supported the genuineness of the transactions. In these circumstances, the Department failed to discharge the burden of proving that the gate passes were fictitious.

Conclusion: The demand could not be sustained and the appeal succeeded in favour of the assessee.

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