Stores exemption does not cover engines for ships under construction; duty upheld and penalty reduced on facts.

An exemption for "stores" consumed on board ships did not extend to diesel engines supplied to a shipyard for fitment in ships under construction, because the engines were components used to bring the vessel into existence rather than goods used in an existing vessel; the duty demand was therefore upheld. Penalty under central excise law was also justified because the record showed knowledge of the actual end use despite the goods being projected as stores, but the quantum was moderated on the facts and reduced.

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Issues: (i) Whether diesel engines supplied to a shipyard for fitment in ships under construction were covered by the exemption for stores for consumption on board ships of the Indian Navy or Coast Guard under Notification No. 64/95-C.E.; (ii) Whether penalty under central excise law was leviable and, if so, to what extent.

Issue (i): Whether diesel engines supplied to a shipyard for fitment in ships under construction were covered by the exemption for stores for consumption on board ships of the Indian Navy or Coast Guard under Notification No. 64/95-C.E.

Analysis: The expression "stores" was not defined in the Central Excise Act, and the meaning could not be enlarged by borrowing the definition of "stores" from the Merchant Shipping Act, 1958, especially where that definition was tied to a different statutory context. The relevant exemption had to be construed on its own terms. Applying the meaning of stores as goods used in a vessel or aircraft, including fuels, spare parts and other articles, the engines in question were components meant to bring the vessel into existence only after fitment and were not goods used in an existing vessel. They therefore did not answer the description of stores for consumption on board ship.

Conclusion: The exemption was not available and the duty demand was justified.

Issue (ii): Whether penalty under central excise law was leviable and, if so, to what extent.

Analysis: The record showed that the appellant knew the engines were meant for use in ship construction, despite projecting them as stores. The purchase orders and surrounding circumstances indicated clear awareness of the true end use. The certificate relied upon by the appellant was ambiguous and did not displace that knowledge. At the same time, the penalty was considered capable of moderation on the facts.

Conclusion: Penalty was warranted, but it was reduced to Rs. 20 lakhs.

Final Conclusion: The demand of duty was upheld, while the penalty was sustained only in reduced form, resulting in partial relief to the appellant.

Ratio Decidendi: An exemption for "stores" for use on board ship does not extend to engines supplied as components for fitment in ships under construction, and penalty may be sustained where the assessee knowingly misdescribes the true use of the goods, though the quantum may be reduced on the facts.

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