Ships stores exemption confined to existing vessels; paints for ships under construction fell outside the relief and penalty was deleted.

An exemption for ships stores was interpreted broadly as covering goods consumed or utilised on board an existing vessel, but not goods supplied for use in ships under construction. Paints used on operating naval ships qualified for the exemption, while paints for vessels under construction did not, so the duty demand survived only to that extent. Penalty was found unwarranted because the clearance was made on naval certification and the dispute arose from a later legal distinction on the scope of the notification; the penalty was deleted.

---

---

Issues: (i) Whether paints supplied for use on Indian Naval ships were eligible for exemption as goods supplied as stores for consumption on board a vessel where the goods were used in ships under construction or for maintenance of existing ships; (ii) whether the penalty imposed on the assessee was sustainable.

Issue (i): Whether paints supplied for use on Indian Naval ships were eligible for exemption as goods supplied as stores for consumption on board a vessel where the goods were used in ships under construction or for maintenance of existing ships.

Analysis: The expression "ships stores" was treated broadly, and the phrase "consumption" was understood in the sense of utilisation. The notification, however, was read as referring to a vessel already in existence, and the benefit was held not extendable to goods supplied for use in a ship under construction. Paints used on existing naval ships were within the exemption, while paints used for ships under construction were outside it. End-use certificates issued by the naval authorities did not alter this limitation.

Conclusion: The exemption was admissible only for paints used on existing naval ships and not for paints used in ships under construction; the demand was sustained only to that extent.

Issue (ii): Whether the penalty imposed on the assessee was sustainable.

Analysis: The clearance of goods was made on the basis of naval certification and the controversy arose from a later legal distinction regarding the scope of the notification. In these circumstances, the imposition of penalty was not justified.

Conclusion: The penalty was set aside.

Final Conclusion: The exemption claim succeeded only in part, the duty demand was reduced accordingly, and the penalty was deleted.

Ratio Decidendi: An exemption for goods supplied as stores for consumption on board a vessel applies only where the goods are used on a vessel already in existence, and does not extend to goods supplied for use in ships under construction; a penalty may be unsustainable where the dispute turns on a bona fide interpretation of the exemption.

---