TMI Blog2001 (10) TMI 162X X X X Extracts X X X X X X X X Extracts X X X X ..... Almost without exception, the contract entered into between the purchaser and the seller specifies that the ship is to be brought to Alang by the sellers and then delivered to the buyer. The ships that are to be broken almost invariably sail into the port under their own motive power. The ships therefore contain in addition to fuel and oil required for running the ship's engine and other machinery, food, drink and other stores for consumption by the crew. 3.Before the ship is broken up, the fuel and stores are removed on payment of appropriate duty of customs, including additional duty of customs. The question for consideration in these appeals is whether the ship-breaker could take such duty as Modvat credit to be used towards payment of duty on goods and materials obtained by breaking up of ship. 4.The matter appears to have its genesis in the Circular dated 23-10-1997 of the Ministry of Finance and therefore it is necessary to reproduce it in full : "In the budget of 1995, ship breaking activity was defined as an activity of manufacture by virtue of Note 7 in Section XV of the Schedule to the Central Excise Tariff Act, 1985. Consequent to these two questions arose: (i) W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peals before us. We are not concerned with the other issue which arose in the adjudication and appeal proceedings relating to the levy of special additional duty of customs. The department's appeals do not challenge the Commissioner's finding in this regard. 6.The orders of the Assistant Commissioner are similarly worded and contain the same reasoning. The Assistant Commissioner has advanced the following reasons for his conclusion. Note 9 to Section XV provides that the process of breaking of a ship or a floating structure for obtaining materials amounts to manufacture. The value of the ship that is assessed to duty does not include the value of the fuel and oil which are separately cleared on payment of duty. The fuel and oil "is not an input for the purpose of the activity of ship breaking and therefore the CVD paid on such remaining bunkers and oils would not be entitled for Modvat credit". He has imposed penalty on his finding that the ship breaker was not entitled to take credit in the light of such a clear position in law. The Commissioner (Appeals)'s common order disposes of appeals against all the 36 orders. The reasoning that the Commissioner (Appeals) advances for sett ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would be regarded as forming an integral part of the vessel and classifiable under Heading 89.08 but other remaining fuel, oil and ship stores were classifiable in their own appropriate heading. The Commissioner (Appeals) finds that, on the principle that a later judgment of a court is to be applied in preference to an earlier judgment of the same court on the same issue, the latter Circular of 23-10-1997 takes precedence over this circular of 1996. 8.The department's appeal first urges that the Circular dated 28-3-1997 provides that the bunker stores and foodstuffs are not inputs and therefore duty paid on them is not available as credit. It relies heavily upon the Circular 37/96, dated 3-7-1996 indicating the opinion of the World Customs Organisation as to the classification of the fuel oil and other stores. It contends that the unvarying practice, formalised in the memorandum of undertaking between the Gujarat Maritime Board (which has leased the yards where the ships are broken up by the ship breakers) and the Ship Breakers' Association also provides that the ship's tanks containing oil and fuel tank, etc., should be emptied and evacuated before breaking up of the vessel com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the other. 12.We will now consider the two circulars of the Board. They essentially seek to answer the same question - whether the goods which are imported as a result of ship breaking which do not fall for classification under Section XV of the Tariff would be treated as excisable goods and are liable to excise duty and whether the additional duty of customs paid on them would be available as Modvat credit or the credit will have to be restricted to the extent of inputs contained in goods and materials falling under Section XV of the Tariff. We will first consider the latter circular. The circular says that the goods and materials recovered from the ship breaking which are not classified under Section XV "are non-excisable goods and there is no entry in the Tariff which describe the ambit of obtaining these items as an activity of manufacturing". The entire ship, including the goods ship's stores and consumables, would be therefore classifiable under heading 89.08. Hence the provisions of Rule 57C will not apply in the case of non-excisable goods. 13.We must confess that the terminology employed in the circular is confusing and unclear. It appears to us that the second que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facture of such goods and excisable goods. 14.It is therefore not possible to see how the contents of the circular provided any support for the proposition that Modvat credit can be taken of the duty paid on the stores. The circular itself says that the entire ship except ship stores are classifiable under Heading 89.08 clearly indicating that such stores are not classifiable under Heading 89.08. 15.The earlier Circular No. 37/96 which reproduces the opinion of the World Customs Organisation, had dealt with the classification of the ship stores such as spare parts, food stuff, alcohol and other beverages and bunkers, fuel oil, engine oil. The Circular dated 27-10-1997 is with reference to Central Excise duty. For the true meaning of the term "ship stores" we have to consider the provisions of Customs Act, 1962. Sub-section (38) of Section 2 of the Act defines "stores" to mean "goods for use in a vessel or aircraft and includes fuel and spare parts and other articles of equipment, whether or not for immediate fitting". 'Stores' therefore includes the goods that we are concerned with - fuel oil, and other foodstuffs, etc. Therefore the words "ship's stores" in the Board's Circula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agraph 5 of the Supreme Court judgment referred to by Mr. A.D. Maru were concerned with the interpretation of the word 'raw material' occurring in Bihar Finance Act, 1981. In paragraph 4 of the judgment the Court relied upon its own judgment in Collector v. Jay Engineering Works Ltd. - 1989 (39) E.L.T. 169 whether name-plates used by the manufacturer of fans would be inputs of fan for the purpose of Notification 201/79. The Court said that the use of the word indicated that the benefit of the Notification 201/79 was intended for every item which is raw material in the widest sense made wider by using the expression "input". The decision therefore is not really relevant to the facts before us. 21.Apart from that it obviously cannot be said that fuel oil and foodstuff's are input required for manufacture of scrap. They are not used directly or indirectly in or in relation to the emergence of scrap. Scrap can emerge without these being present. On the other hand their presence may immune the emergence of scrap. 22.Accordingly we hold that respondents were not entitled to take credit of the duty paid on the fuel, oil and other oil, food stuffs (other than the fuel, oil contained in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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