Exemption for naval stores denied on ships under construction, with cum-duty recomputation, Modvat credit review, and no penalty.

Goods supplied as stores for ships under construction did not fall within Notification No. 64/95-CE, which was confined to goods for consumption on board vessels of the Indian Navy or Coast Guard, so the exemption was denied. Once duty became payable, the assessable value had to be recomputed on a cum-duty basis to the extent duty was embedded in the price, and Modvat credit was allowable in principle subject to verification of duty-paying documents. Penalty was not sustained on the facts, and its restoration was declined.

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Issues: (i) whether the benefit of exemption under Notification No. 64/95-CE dated 16.3.1995 was available to goods supplied as stores for consumption on board vessels when the supply was for ships under construction; (ii) whether the assessable value was required to be treated as cum-duty price and whether Modvat credit could be allowed; and (iii) whether penalty was warranted.

Issue (i): whether the benefit of exemption under Notification No. 64/95-CE dated 16.3.1995 was available to goods supplied as stores for consumption on board vessels when the supply was for ships under construction.

Analysis: The exemption was confined to goods supplied for consumption on board a vessel of the Indian Navy or Coast Guard. Goods supplied for ships under construction did not satisfy the notification. The record did not establish that the control panels were not meant for ships under construction.

Conclusion: The exemption was not available, and the finding was against the assessee.

Issue (ii): whether the assessable value was required to be treated as cum-duty price and whether Modvat credit could be allowed.

Analysis: When duty is held payable after denial of exemption, the price has to be taken as cum-duty price to the extent duty element is embedded in it. The claim for Modvat credit was also allowable in principle, subject to verification of the relevant duty-paying documents.

Conclusion: The assessee was entitled to cum-duty benefit and to Modvat credit subject to verification.

Issue (iii): whether penalty was warranted.

Analysis: On the facts, the case was not considered fit for penal action, and restoration of penalty was declined.

Conclusion: Penalty was not imposed, and the assessee succeeded on this issue.

Final Conclusion: The denial of exemption was upheld, but the duty liability was sent back for recomputation with cum-duty adjustment and consideration of Modvat credit, while penalty was rejected.

Ratio Decidendi: Goods supplied for ships under construction do not qualify for an exemption limited to stores for consumption on board operational naval vessels, and where duty becomes payable, the price must be recomputed on a cum-duty basis with consequential credit benefits examined on proof.

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