The Supreme Court of India has held that distinct manufacturing processes undertaken by separate units, when integrally connected and forming a continuous chain resulting in a final product, must be viewed cumulatively for the purpose of excise duty liability. The Bench, comprising Justice Pamidighantam Sri Narasimha and Justice Atul S. Chandurkar, set aside the order of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) which had bifurcated the activities of two units, thereby granting them an exemption benefit.
Case Background
The case arose from an investigation by the intelligence agency involving Bhagyalaxmi Processor Industry (Unit No. 1) and Famous Textile Packers (Unit No. 2). Both units were situated in a common premise within the same compound. A search conducted on January 21, 2003, revealed that Unit No. 1 housed bail packing, mercerizing, and bleaching machinery, while Unit No. 2 contained a squeezing machine and a stentering machine operated with the aid of electric power.
The Commissioner of Customs and Central Excise issued a show cause notice alleging that the units were processing cotton fabrics with the aid of power and were thus not entitled to the exemption under Entry No. 106 of Notification No. 5/98-CE. This notification exempted cotton fabrics processed without the aid of power.
The Commissioner initially held both units jointly and severally liable. After a remand by the CESTAT, the Commissioner re-adjudicated the matter, holding that Unit No. 1 received grey fabrics which were bleached and mercerized, then sent to Unit No. 2 for squeezing and stentering (using power), and finally returned to Unit No. 1 for bailing and packing. The Commissioner concluded that the entire process was continuous and completed with the aid of electricity, confirming the demand against Unit No. 1.
The respondents approached the CESTAT again. By an order dated October 5, 2011, the CESTAT set aside the Commissioner’s order, holding that the units were distinct partnership concerns and their activities could not be clubbed. It ruled that Unit No. 1 did not use power for mercerizing and bleaching, and the activity of clearing wet fabrics to Unit No. 2 was non-excisable. The Revenue appealed this decision to the Supreme Court.
Arguments of the Parties
Mr. Raghavendra P. Shankar, learned Additional Solicitor General appearing for the Revenue, argued that the CESTAT misread Entry No. 106 of the Exemption Notification. He contended that the conversion of grey fabrics to a finished product involved a “process” with the aid of power, specifically the stentering at Unit No. 2. Relying on CCE Vs. Rajasthan State Chemical Works (1991) and Impression Prints Vs. CCE (2005), he submitted that “if there was use of any power at any of the numerous processes that were required to convert the raw material into a finished article, the manufacture would be with the use of power.”
Mr. Ashish Batra, learned counsel for the respondents, supported the CESTAT’s findings. He argued that the units were independent with no unity of ownership. He submitted that even if power was used in stentering at Unit No. 2, the activities could not be clubbed as the show cause notice against Unit No. 2 had been dropped. He emphasized that the CESTAT, as the final fact-finding authority, correctly held that Unit No. 1 did not use power.
Court’s Analysis
The Supreme Court examined the definition of “manufacture” under Section 2(f) of the Central Excise Act, 1944. The Court referred to the precedent in Standard Fireworks Industries, Sivakasi and another Vs. Collector of Central Excise, where it was held that if any process in the manufacture of goods is carried on with the aid of power, the exemption is not available.
The Court observed:
“Manufacture has been held to involve a series of distinct processes. It is the cumulative effect of the various processes to which the raw material is subjected after which the manufactured product emerges. The requirement is that the individual process should be integrally connected with each other leading to the ultimate final product.”
Analyzing the facts, the Bench noted that the process commenced with bleaching and mercerizing at Unit No. 1, proceeded to squeezing and stentering at Unit No. 2, and concluded with bailing and packing at Unit No. 1.
The Court held that the CESTAT “misdirected itself while emphasizing upon the distinct identities of the two Units.” The Bench stated:
“When all these activities commencing from bleaching and mercerizing thereafter leading to squeezing and stentering and culminating into the product being bailed and packed being integral processes in the conversion of grey fabrics into cotton fabrics, the fact that the Units undertaking these processes were exclusive to each other would hardly make any difference.”
The Court further clarified that the non-confirmation of demand against Unit No. 2 was irrelevant because “the entire process of manufacture has to be taken into consideration with the end product falling into the hands of Unit No. 1 after it was subjected to an integrated process at Unit No. 2.”
Decision
The Supreme Court allowed the appeal filed by the Commissioner of Customs, Central Excise & Service Tax. The Court quashed and set aside the CESTAT order dated October 5, 2011, and restored the Order-in-Original passed by the Commissioner dated September 27, 2006.
The Court concluded:
“The CESTAT thus committed an error in bifurcating the continuous process of manufacture to come to the conclusion that each Unit though undertaking a distinct process of manufacture, the activities of one Unit could not be clubbed with the other.”
Case Details:
- Case Title: Commissioner of Customs, Central Excise & Service Tax, Rajkot vs Narsibhai Karamsibhai Gajera & Ors.
- Case No.: Civil Appeal Nos. 3405-3407 of 2012 (2025 INSC 1374)
- Bench: Justice Pamidighantam Sri Narasimha and Justice Atul S. Chandurkar
