Exemption for naval stores in ship construction denied on merits, while demand was confined by limitation and penalty was deleted.

Goods supplied for use in a warship under construction do not qualify as "stores for consumption on board" a vessel under Notification No. 64/95-C.E., because the phrase "on board" applies only to a vessel already in existence. The exemption was therefore unavailable on merits. The extended limitation period under Section 11A of the Central Excise Act was also not available where Naval certificates and supporting invoices, purchase orders, and related documents were already before the department at assessment; recovery was confined to the normal period. In light of that limitation finding, penalty was not justified and was set aside.

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Issues: (i) Whether goods supplied for use in a warship under construction were entitled to exemption under Notification No. 64/95-C.E. as stores for consumption on board a vessel of the Indian Navy. (ii) Whether the demand was barred by limitation under Section 11A of the Central Excise Act, 1944. (iii) Whether penalty was sustainable.

Issue (i): Whether goods supplied for use in a warship under construction were entitled to exemption under Notification No. 64/95-C.E. as stores for consumption on board a vessel of the Indian Navy.

Analysis: The exemption applied only when the goods were supplied for consumption on board a vessel already in existence. Goods used as fitments in a ship under construction could not be treated as stores for consumption on board a vessel. The phrase "on board" was construed as referring to a vessel that had already come into existence.

Conclusion: The exemption was not available to the goods supplied for use in the ship under construction, and this issue was decided against the assessee.

Issue (ii): Whether the demand was barred by limitation under Section 11A of the Central Excise Act, 1944.

Analysis: The exemption was claimed on the basis of certificates issued by Naval authorities, and the relevant invoices, purchase orders, and allied documents were available with the department at the time of assessment. In these circumstances, the extended period was not available, though the normal period could still be applied.

Conclusion: The demand was held to be barred by limitation for the period beyond six months prior to the show cause notice, and this issue was decided partly in favour of the assessee.

Issue (iii): Whether penalty was sustainable.

Analysis: In view of the facts and circumstances and the limitation finding, there was no justification for penalty.

Conclusion: The penalty was set aside, and this issue was decided in favour of the assessee.

Final Conclusion: The exemption claim failed on merits, but the demand was restricted by limitation and the penalty was deleted, resulting in a partial relief to the assessee.

Ratio Decidendi: The exemption for stores supplied for consumption on board a vessel applies only to goods supplied for use on an already existing vessel, and the extended limitation period cannot be invoked where the department had material facts before it at assessment.

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