Naval supply exemption applies to goods reaching the Indian Navy directly or through an intermediary, but not to vessels under construction.

Rigid polyurethane foam boards, sections and sheets supplied directly to the Indian Navy, or through a procurement agency that certified onward supply to the Navy, fell within the exemption for goods supplied as stores for consumption on board naval vessels. The exemption did not extend to goods intended for vessels still under construction, because the wording contemplated a vessel already in existence. On the facts, the penalty was set aside and the unresolved supplies to other buyers were remanded for fresh consideration.

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Issues: (i) Whether rigid polyurethane foam boards, sections and sheets supplied directly to the Indian Navy or through a procurement agency were eligible for exemption under Notification No. 64/95 dated 16-3-95; (ii) Whether the exemption could extend to supplies made for use in vessels not yet in existence and whether penalty was sustainable.

Issue (i): Whether rigid polyurethane foam boards, sections and sheets supplied directly to the Indian Navy or through a procurement agency were eligible for exemption under Notification No. 64/95 dated 16-3-95.

Analysis: The notification exempted goods supplied as stores for consumption on board vessels in the Indian Navy. Supplies made directly to the Navy, and supplies made to a procurement agency which in turn supplied the goods to the Navy as certified, fell within the scope of the exemption. The reasoning applied the earlier view that direct nexus with the Navy supply chain was sufficient where the goods ultimately reached the Navy without undergoing a total change in character.

Conclusion: The exemption was available in respect of supplies made directly to the Indian Navy and supplies made to M/s. Vibgyor Trading Company which in turn supplied to the Indian Navy.

Issue (ii): Whether the exemption could extend to supplies made for use in vessels not yet in existence and whether penalty was sustainable.

Analysis: The benefit of the notification could not be extended where the goods were intended for use in ships under construction, because the expression relating to use on board a vessel contemplated a ship already in existence. The record showed that this aspect had not been examined by the authorities below for all supplies. On penalty, the facts did not justify its continuance.

Conclusion: The matter was remanded for fresh decision on supplies to the remaining buyers, and the penalty was set aside.

Final Conclusion: The exemption was upheld for direct supplies to the Navy and supplies through M/s. Vibgyor Trading Company, the remaining dispute was sent back for reconsideration, and the penalty was annulled.

Ratio Decidendi: For exemption under a notification covering goods supplied as stores for consumption on board naval vessels, the benefit extends to goods ultimately supplied to the Navy through an intermediary but does not extend to goods meant for use in vessels still under construction.

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