Deemed credit on non-duty-paid ship-breaking scrap was disallowed, though penalties and confiscation were reduced as excessive.

Deemed credit was held inadmissible on ship-breaking scrap lying in stock where the inputs had not suffered central excise duty, because the governing clarification excluded non-duty-paid scrap from the re-rollable materials scheme. The Tribunal also held that, although the credit was wrongly taken, the penalties and confiscation were excessive on the facts. It therefore reduced the penalty and set aside confiscation of plant and machinery, granting partial relief on the consequential measures while sustaining denial of credit.

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Issues: (i) Whether deemed credit was admissible on ship-breaking scrap lying in stock when no central excise duty had been paid on the inputs; (ii) whether the penalties and confiscation imposed for taking such credit were sustainable.

Issue (i): Whether deemed credit was admissible on ship-breaking scrap lying in stock when no central excise duty had been paid on the inputs.

Analysis: The dispute arose under the deemed credit scheme for re-rollable materials. The goods in question were ship-breaking scrap on which no central excise duty had been paid because of the exemption notification. The circular issued by the Board clarified that deemed credit could not be allowed on scrap that had not suffered duty. The credit taken by the appellants was contrary to that clarification and the applicable excise rule governing deemed credit.

Conclusion: The denial of deemed credit was upheld, against the assessee.

Issue (ii): Whether the penalties and confiscation imposed for taking such credit were sustainable.

Analysis: Although the taking of credit was found to be contrary to the governing clarification and detrimental to revenue, the dispute turned on interpretation of the exemption and deemed credit provisions. The Tribunal found the penalties and confiscation to be excessive in the facts of the case, and therefore interfered with the quantum of penalty as well as the confiscatory order.

Conclusion: The penalties were reduced and the confiscation of plant and machinery was set aside, partly in favour of the assessee.

Final Conclusion: The assessee did not succeed on the admissibility of deemed credit, but obtained substantial relief on the consequential penal and confiscatory measures.

Ratio Decidendi: Deemed credit cannot be allowed on inputs that have not suffered excise duty, and while deliberate contravention may justify penalty, the sanction must remain proportionate to the nature of the dispute and the surrounding facts.

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