X has hit the money here - this isn't about which is more true to the survival horror genre, it's about which one is just a plain better game. Criticizing RE4 for not being straight up survival horror is like criticizing GTA3 for not being a top down shooter - they dared to change the game style, and it worked to fantastic effect.
Silent Hill 3 is not a bad game. It's straight up survival horror, and it makes no apologies. It's fuckin' scary (but, I'm a pussy when it comes to video games, so). It's got a fantastic horror atmosphere and tells a brilliant horror story, something often forgotten in horror, where more often than not, "horror" is defined as cheap scares and a guy with an ax rather than a truly masterful horror story, which SH3 manages. One of its failing, though not significant, and partially necessary, is that it's hard to follow for new players, which is part of being a sequel, but oftentimes this is avoidable with recaps and such. It's a significant graphical, audio, and production improvement over its predecessors as well. However, the game utterly fails to innovate, and its control system is honestly motion sickness inducing at times.
And now, I turn to Resident Evil 4. It is one of the best reviewed games of recent times, with it being considered an easy contender for 2005 Game of the Year, and introduced a new gameplay style that made it not only a hit with present RE fans, but able to tap the massive audience previously unwilling to explore Resident Evil titles. Metacritic has it at a 96, which is fucking high on Metacritic. It was named the best Gamecube game of all time, and voted #1 all-time by IGN Readers (admittedly not the most intelligent crop, but there you are). It was named Game of the Year for PS2, and both versions of the game got perfect GI scores. Tons of more Game of the Year and such awards follow. It's sold nearly 4 million copies worldwide, which is well over 10 times what SH3 pulled in. It had a solid story and good characters, with great design and cinematic sequences. It's new style dared to innovate the RE series, and the gambit was rewarded with tremendous success.
In short, Silent Hill 3 is a better pure survival horror, and Resident Evil 4 is a better pure game.