Ship-breaking Cenvat credit on imported vessel stores was upheld as part of the deemed manufacturing input process.
In ship-breaking operations, the imported vessel together with onboard stores is treated as the input for the deemed manufacturing process under the Central Excise Tariff framework. Cenvat credit was held admissible on additional duty of customs paid on fuel oil, marine gas oil and lubricating oil found on the ship, because their removal at the start of breaking is part of the manufacturing activity and not a separate, disconnected process. Credit could not be denied merely because those items are separately classifiable or because the goods ultimately obtained from them are non-excisable. The revenue challenge failed and the order allowing credit was sustained.
Issues: Whether Cenvat credit of additional duty of customs paid on fuel oil, marine gas oil and lubricating oil available on ships imported for breaking was admissible to the ship-breaking unit.
Analysis: The process of obtaining goods and materials by breaking up ships is treated as manufacture under section note 9 of Section XV of the Central Excise Tariff Act, 1985. The entire imported ship, including the stores on board, forms the input for the ship-breaking activity. Fuel and oils found on the ship are inevitably removed at the commencement of breaking for safe and efficient operation, and their removal is not a separate activity divorced from the manufacturing process. Credit cannot be denied merely because those items are classifiable separately or because the goods obtained from them are non-excisable. The circular relied upon also supports admissibility of credit on the duty paid on such stores.
Conclusion: Cenvat credit on the duty paid on fuel oil, marine gas oil and lubricating oil was admissible, and the department's challenge failed.
Final Conclusion: The impugned order allowing credit was sustained and the revenue appeal was dismissed.
Ratio Decidendi: In ship-breaking cases, the imported ship along with its onboard stores constitutes the input for the deemed manufacturing process, and Cenvat credit on duty paid on those stores cannot be denied merely because they are separately classifiable or are removed before the main breaking operation.
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