Ship-breaking Modvat credit restriction cannot extend to foreign-origin material absent proof of coverage under the notification.

The ship-breaking credit restriction in proviso (3) of Notification No. 177/86-C.E. applied only to inputs from ships, boats and other floating structures manufactured in India. Because the material was shown to have come from foreign-origin ships and the department did not rebut that position, the restriction could not be extended to deny Modvat credit. Credit on duty actually paid and supported by gate passes was therefore admissible, and the penalty had no once the credit claim succeeded.

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Issues: Whether the restriction under proviso (3) of Notification No. 177/86-C.E. dated 1-3-1986 applied to ship-breaking material obtained from foreign-origin ships, and whether the appellant was consequently entitled to full Modvat credit and relief from penalty.

Analysis: The dispute turned on the scope of proviso (3) of Notification No. 177/86-C.E. dated 1-3-1986, which restricted credit in respect of inputs obtained from breaking up of ships, boats and other floating structures manufactured in India. The appellant asserted that the material was obtained from foreign-origin ships, and that assertion was not rebutted by the department. In the absence of evidence showing that the proviso extended to materials from foreign-origin ships, the restriction of Rs. 500 per MT could not be applied. Once the credit on duty actually paid and supported by gate passes was held admissible, the foundation for penalty also disappeared.

Conclusion: The restriction under proviso (3) did not apply to the appellant's foreign-origin ship-breaking material, full Modvat credit was admissible, and the penalty could not be sustained.

Final Conclusion: The impugned order was set aside and the appellant obtained relief on the credit and penalty issues.

Ratio Decidendi: A credit restriction in a notification governing ship-breaking inputs applies only to the category of materials expressly covered by the notification, and cannot be extended to foreign-origin ship-breaking material in the absence of proof bringing it within the restricted class.

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