Deemed Modvat credit on ship-breaking scrap allowed, but only while turnover stayed within the exemption limit.

Ship-breaking scrap was treated as eligible for deemed Modvat credit because the relevant Rule 57G(2) order contained no express exclusion for such inputs, and exclusions from other credit orders could not be read into it. The Board's contrary circular was not accepted as a basis to deny the statutory benefit. The deemed credit facility, however, remained confined to units within the exemption structure of Notification No. 1/93, so it continued only until the value of clearances exceeded the prescribed turnover limit. The interpretation of the credit scheme was held to control despite the objection that this turnover point was not stated in the show cause notice.

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Issues: (i) Whether ship-breaking scrap was excluded from deemed Modvat credit under the second proviso to Rule 57G(2) of the Central Excise Rules, 1944; and (ii) whether the deemed credit facility ceased once the assessee crossed the Rs. 75 lakhs value of clearances under Notification No. 1/93.

Issue (i): Whether ship-breaking scrap was excluded from deemed Modvat credit under the second proviso to Rule 57G(2) of the Central Excise Rules, 1944.

Analysis: The enabling proviso deemed specified inputs as duty-paid except where the stocks lay in a factory, customs area, or warehouse. Goods arising from ship-breaking were held not to originate from any of those prohibited sources merely because ship-breaking yards were treated as customs areas. The absence of a separate exclusion in the relevant deemed credit order was treated as significant, and exclusions found in other orders could not be imported into the order under consideration. The Board's contrary circular was not accepted as a valid basis to deny the statutory benefit.

Conclusion: The assessees were entitled to deemed Modvat credit on ship-breaking scrap.

Issue (ii): Whether the deemed credit facility ceased once the assessee crossed the Rs. 75 lakhs value of clearances under Notification No. 1/93.

Analysis: The benefit was confined to units availing the exemption under Notification No. 1/93, and the Tribunal applied the governing interpretation that deemed credit could continue only so long as the unit remained within the prescribed turnover limit. The objection that this point was absent from the show cause notice was rejected as immaterial to the interpretation of the credit order and the notification scheme.

Conclusion: The deemed credit benefit was available only up to the stage when the value of clearances did not exceed Rs. 75 lakhs.

Final Conclusion: The appeals were disposed of by allowing deemed credit on ship-breaking scrap, but only within the turnover ceiling applicable under Notification No. 1/93.

Ratio Decidendi: A deemed credit order issued under Rule 57G(2) must be construed according to its own exclusions, and no additional restriction can be read into it unless expressly provided; however, the benefit remains confined to the turnover limits inherent in the relevant exemption notification.

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