2001 (10) TMI 162 - AT - Central Excise

Summary

Issues Involved:
1. Eligibility of Modvat credit on additional duty of customs paid on fuel, oil, and other stores contained in ships imported for breaking.
2. Interpretation and applicability of the Ministry of Finance Circulars dated 23-10-1997 and 3-7-1996.
3. Classification of ship stores under the Customs Tariff.
4. Imposition of penalties on ship-breakers for taking Modvat credit.

Detailed Analysis:

1. Eligibility of Modvat Credit:
The primary issue was whether ship-breakers could take Modvat credit for the additional duty of customs paid on fuel, oil, and other stores (referred to as bunkering stores) contained in ships imported for breaking. The ship-breakers argued that these stores were part of the ship, and thus, the duty paid on them should be available as Modvat credit. The Assistant Commissioner denied this credit, stating that fuel and oil are not inputs for the activity of ship-breaking and hence not eligible for Modvat credit. The Commissioner (Appeals) overturned this decision, allowing the credit, which led to the department's appeal.

2. Interpretation and Applicability of Circulars:
The judgment examined two key circulars from the Ministry of Finance. The Circular dated 23-10-1997 suggested that the entire ship, including stores, should be considered as an input, making the duty paid on these stores eligible for Modvat credit. However, the earlier Circular dated 3-7-1996, which included the opinion of the World Customs Organisation, indicated that ship stores like fuel and oil should be classified under their own headings and not as part of the ship under Heading 89.08. The Tribunal found the 1997 Circular's terminology confusing and unclear, ultimately determining that the removal of stores is not an act of manufacture and thus, no excise duty is liable on them.

3. Classification of Ship Stores:
The Tribunal clarified that ship stores, including fuel and oil, are not classifiable under Heading 89.08 as part of the ship for breaking up. Instead, these stores should be classified under their respective headings. The Tribunal emphasized that the removal of these stores is not part of the manufacturing process of breaking up the ship and hence, they cannot be considered as inputs eligible for Modvat credit.

4. Imposition of Penalties:
The Tribunal agreed with the Commissioner (Appeals) on not imposing penalties on the ship-breakers. It noted that the Board's circular was ambiguously worded, which could have led to the ship-breakers' interpretation. There was no evidence that the ship-breakers knowingly defied the law. Therefore, the penalties imposed by the Assistant Commissioner were set aside.

Conclusion:
The Tribunal concluded that the respondents (ship-breakers) were not entitled to take credit for the duty paid on fuel, oil, and other stores (except for fuel and oil contained in the ship's engine and machinery). The Tribunal restored the Assistant Commissioner's orders denying the credit but upheld the Commissioner (Appeals)'s decision to set aside the penalties. The appeals were allowed in part.