End-use exemption for Navy warships and Cenvat reversal defeated the separate 8% demand under Rule 6

An exemption under Notification No. 64/95-C.E. was available for goods supplied to a shipyard for use in constructing warships for the Indian Navy, because the decisive requirement was the intended end use and the prescribed Navy certificate, not direct supply to the Navy. The decision treated the supply to Mazagaon Dock for manufacture of warships as within the notification. It also held that, where Cenvat credit attributable to exempt clearances had been reversed at the time of removal, the reversal was equivalent to non-availment of credit and a further demand of 8% under Rule 6(3)(b) of the Cenvat Credit Rules, 2002 could not be sustained.

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Issues: (i) Whether exemption under Notification No. 64/95-C.E. was available for goods supplied to a shipyard for use in construction of warships of the Indian Navy. (ii) Whether, upon reversal of the Cenvat credit attributable to exempted clearances, demand of 8% under Rule 6(3)(b) of the Cenvat Credit Rules, 2002 could still be sustained.

Issue (i): Whether exemption under Notification No. 64/95-C.E. was available for goods supplied to a shipyard for use in construction of warships of the Indian Navy.

Analysis: The exemption entry covered goods supplied for use in construction of warships of the Indian Navy and required production of a certificate from the Indian Navy before clearance. The decisive condition was the intended end use, not direct supply to the Navy. The goods were supplied to Mazagaon Dock for manufacture of Indian Navy warships, and the earlier authorities distinguishing direct supply to the Navy were held inapplicable on the facts.

Conclusion: The exemption was available to the assessee.

Issue (ii): Whether, upon reversal of the Cenvat credit attributable to exempted clearances, demand of 8% under Rule 6(3)(b) of the Cenvat Credit Rules, 2002 could still be sustained.

Analysis: The assessee had reversed the credit attributable to inputs used in exempted goods at the time of clearance, which was treated as equivalent to non-availment of credit. In addition, the retrospective amendment to Rule 6 supported reversal of actual credit attributable to exempt goods, making the demand for 8% unsustainable.

Conclusion: The demand under Rule 6(3)(b) was not sustainable.

Final Conclusion: The impugned order was set aside and the assessee was held entitled to the exemption, with no survival of the demand based on Rule 6(3)(b).

Ratio Decidendi: Where an exemption notification is conditioned on the intended use of goods in construction of Indian Navy warships, direct supply to the Navy is not necessary if the prescribed certificate and end-use are established; further, reversal of attributable Cenvat credit amounts to compliance sufficient to defeat a separate demand for a fixed percentage under the reversal rule.

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