COMMR.OF CUS.CEN.EXC.SER.TAX RAJKOT v. NARSIBHAI KARAMSIBHAI .
Integrated Manufacturing Process: Supreme Court Clarifies Excise Duty Exemption Based on Continuous Production Chain Involving Multiple Units and Power Usage in Textile Processing.
Court: Supreme Court of India
Citation: 2025 INSC 1374
Decision Date: 02-12-2025
List of Laws
Central Excise Act, 1944; Section 35-L of the Central Excise Act, 1944; Section 2(f) of the Central Excise Act, 1944; Notification No.5/1998-CE; Customs, Excise and Service Tax Appellate Tribunal (CESTAT)
Case Brief
- Facts: Bhagyalaxmi Processor Industry and Famous Textile Packers (Unit No.1 and Unit No.2 respectively) were found processing cotton fabrics with the aid of power without adhering to the procedures under the Central Excise Act, 1944. A search revealed both units were in a common premises with shared electricity connections. Unit No.1 used machines like bail packing, mercerizing, and bleaching machinery, while Unit No.2 used squeezing and stentering machines. The Commissioner of Customs and Central Excise issued a show cause notice alleging that both units were not entitled to exemption from paying customs duty.
- Procedural Posture: The Commissioner initially held both units jointly and severally liable for duty, interest, and penalty. CESTAT set aside this order, stating joint liability couldn't be fixed and remanded the case. After reconsideration, the Commissioner reaffirmed the duty demand against Unit No.1. CESTAT then set aside the Commissioner's order, leading the Commissioner of Customs, Central Excise & Service Tax to appeal to the Supreme Court under Section 35-L(b) of the Central Excise Act, 1944.
- Issue: Did the CESTAT err in concluding that the conversion of grey fabrics to cotton fabrics did not include an integral process of stentering undertaken with the aid of power, thereby entitling Unit No.1 to the benefit of Exemption Notification No.5/1998-CE? Specifically, should the distinct processes undertaken by Unit No. 1 and Unit No. 2 be considered a continuous and integrated process of manufacture?
- Holding: Yes, the Supreme Court held that the CESTAT erred. The court quashed the CESTAT's order and restored the Order-in-Original passed by the Commissioner, Central Excise.
- Reasoning: The Supreme Court reasoned that manufacture involves a series of distinct, integrally connected processes. The court emphasized that the cumulative effect of these processes, to which the raw material is subjected, results in the manufactured product. The court found that the CESTAT incorrectly focused on the distinct identities of the two units, ignoring that both were involved in a continuous process of manufacturing cotton fabrics from grey fabrics. The court stated that the process of stentering, even if undertaken by Unit No.2, was an integral part of the overall manufacturing process. The court cited the definition of "manufacture" under Section 2(f) of the Central Excise Act, 1944, and relied on previous decisions, including Standard Fireworks Industries, Sivakasi and another Vs. Collector of Central Excise, to support its conclusion that if any process in the conversion of raw material to a finished article involves the use of power, the entire manufacturing activity is considered to be with the aid of power, disqualifying the units from claiming exemption.