The Supreme Court has cancelled the order passed by CESTAT Ahmedabad, holding that the tribunal wrongly divided what was actually a continuous and uninterrupted manufacturing process.
New Delhi: The Supreme Court has cancelled an order issued by the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) in Ahmedabad, concluding that the tribunal erred in separating the continuous manufacturing process.
This decision arose from a Civil Appeal filed by the Commissioner of Customs, Central Excise & Service Tax in Rajkot, under Section 35-L (b) of the Central Excise Act, 1944 (CEA), challenging CESTAT’s ruling.
The two-Judge Bench, consisting of Justice P.S. Narasimha and Justice Atul S. Chandurkar, stated,
“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. The Order-in-Original rightly considers the entire process of manufacture which is conversion of grey fabrics into cotton fabrics for being cleared by Unit No.1 as one and has thus fastened liability on it. A case for interference under Section 35-L (b) of the Act of 1944 has thus been made out. In these facts therefore the ratio of the decision in Steel Authority of India (supra) cannot be made applicable to the case in hand.”
The Bench remarked that CESTAT misinterpreted the situation by focusing too much on the distinct identities of both Units, overlooking that they collaboratively participated in the manufacturing process of cotton fabrics from grey fabrics.
The conflict emerged when Unit No.1 and Famous Textile Packers (Unit No.2) were discovered processing cotton fabrics without adhering to the regulations established by the Act.
During an inspection, authorities noted machinery powered by electricity and a considerable consumption of both electricity and fuel.
Consequently, a show cause notice was issued in 2003, stating that the units were not eligible for exemptions under Notification No. 5/98-CE, Entry 106, and demanding the payment of excise duty, interest, and penalties.
Initially, the Commissioner of Central Excise deemed both units responsible; however, CESTAT later overturned this decision. The Tribunal determined that Unit No.1 and Unit No.2 operated as separate entities and that their processes could not be combined.
Additionally, it accepted retracted statements from the units asserting that they did not utilize power, thereby granting them the benefit of exemption.
The Additional Solicitor General, appearing for the revenue, argued that the activities of both Units were integrally connected.
Grey fabrics were bleached and mercerized at Unit No.1, then wet fabrics were transferred to Unit No.2 for squeezing and stentering, and finally returned to Unit No.1 for bailing and packing.
This continuous process, he said, involved use of power and therefore exemption under Notification 5/98-CE did not apply. The revenue cited past Supreme Court judgments, including Standard Fireworks Industries, CCE vs Rajasthan State Chemical Works, and Impression Prints vs CCE, which held that if any integral process uses power, exemption cannot be claimed.
After considering the arguments from both counsels, the Supreme Court remarked,
“It can be seen that 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. But for each individual process, the manufacture or processing of the goods would be impossible.”
The Court further noted that while a certain activity may be subordinate, it is still related to the overall manufacturing process, which represents the culmination of one or more processes that the original commodity undergoes to become the final product.
The Court highlighted that,
“It has come on record that after the grey fabrics were bleached and mercerized at Unit No.1, they were taken to Unit No.2 which was an adjoining Unit within the same premises. After the wet fabrics were subjected to squeezing and stentering at Unit No.2, the dry fabrics were brought back to Unit No.1 for being bailed and packed. 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 emphasized that the interconnectedness of the various processes dictates that the final product in the form of cotton fabrics could not be achieved without each individual process being executed.
It concluded that the entire operation, involving the various processes, constituted manufacture according to Section 2(f) of the CEA.
The Court added,
“Viewed in this context, it is clear that Unit No.1 received grey fabrics which were thereafter subjected to various processes by Unit Nos.1 and 2 cumulatively resulting in the final product which was then cleared by Unit No.1.”
The Court further noted that CESTAT had suggested that the use of power at Unit No.2 for the stentering process would not affect the demand since it had not been confirmed against that unit.
This, the Court argued, overlooked the necessity of considering the entire manufacturing process, which concluded with Unit No.1 receiving the final product after integrated processing at Unit No.2.
The demand not being confirmed against Unit No.2 was deemed irrelevant in light of the fact that manufacturing had collectively taken place at both Units, leading to the clearance of the final product from Unit No.1.
Thus, the Court found no reason to interfere with the Commissioner’s order, which it deemed correct based on the available evidence.
Consequently, the Apex Court allowed the Appeal, quashing the CESTAT’s Order.
The Supreme Court 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 subsequently set aside the CESTAT order dated 5.10.2011 and reinstated the original order of the Commissioner dated 27.09.2006, directing that each party bear its own costs.
The Appellant was represented by Additional Solicitor General Raghavendra P. Shankar and Senior Advocate Nisha Bagchi, while Advocate Ashish Batra represented the Respondents.
Case Title: Commissioner of Customs, Central Excise & Service Tax, Rajkot v. Narsibhai Karamsibhai Gajera & Ors. (Neutral Citation: 2025 INSC 1374)
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