Supreme Court Holds Sequential Textile Processes Across Two Units Amount to Manufacture with Use of Power; Restores Commissioner’s Demand

A Bench of Justice Pamidighantam Sri Narasimha and Justice Atul S. Chandurkar heard an appeal under Section 35-L(b) of the Central Excise Act, 1944 challenging an order of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Ahmedabad which had set aside the Commissioner’s adjudication and discharged show cause notices directed at two textile job‑work units claiming exemption for fabrics “processed without the aid of power”.

The Court allowed the appeal, quashed the CESTAT order dated 05.10.2011 and restored the Order‑in‑Original dated 27.09.2006 passed by the Commissioner of Customs, Central Excise & Service Tax, Rajkot. The Court held that the bleaching and mercerizing at Unit No.1, followed by squeezing and stentering at Unit No.2, and final bailing/packing at Unit No.1 formed an integrated chain of processes which cumulatively amounted to “manufacture” and that use of power in any integral process defeated the exemption under Notification No.5/98‑CE (Entry No.106). The Court noted that the CESTAT erred in separating the distinct legal identities of the partnership concerns and ignoring the cumulative nature of the processes. The Court, in its reasoning, observed: “From the aforesaid decisions, 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. A particular activity may be subordinate but related to the further process of manufacture. Manufacture thus is the end result of one or more processes through which the original commodity passes and then becomes the final product.” The Court further emphasised the factual test: “What is to be seen is whether the distinct processes undertaken by the two Units formed part of a continuous chain that culminated into the final product or not?”

Background

The dispute arose from a preventive search conducted on 21.01.2003 at two adjoining concerns operating within a common compound — Bhagyalaxmi Processor Industry (Unit No.1) and Famous Textile Packers (Unit No.2). The panchnama recorded presence of an electric bail‑packing machine, mercerizing and bleaching equipment in Unit No.1 and squeezing, stentering and driers (with an oil engine and electric power) in Unit No.2. Five electric meters were found in the electric room. On the basis of these records and recorded statements, the Commissioner issued a show cause notice on 14.07.2003 alleging that grey cotton fabrics were being processed with the aid of power and therefore were not entitled to exemption under Entry No.106 of Notification No.5/98‑CE. The Commissioner adjudicated on 29.07.2004 holding Unit No.1 liable to pay duty with interest and penalty.

On appeal, the CESTAT initially remanded for reconsideration. Following remand, the Commissioner again confirmed demand against Unit No.1. The CESTAT later allowed appeals by both units, holding their activities distinct, accepting affidavits retracting earlier statements, and concluding that wet fabrics sent from Unit No.1 to Unit No.2 involved non‑excisable activity and that Unit No.1 had processed fabrics without aid of power. The Commissioner appealed to this Court.

The Supreme Court examined statutory definition of “manufacture” under Section 2(f) (pre‑2017 amendment), Entry No.106 of the exemption notification, and precedents including Standard Fireworks and Collector of Central Excise, Jaipur. Applying the settled principle that “manufacture” may involve a series of integrally connected processes and that any process integrally necessary to achieve the final product attracts excise liability if carried on with aid of power, the Court found that bleaching/mercerizing, squeezing/stentering and bailing/packing constituted a continuous manufacturing chain. The Court held that CESTAT had erred in treating the two units’ separate legal identities as dispositive and in declining to consider use of power in the cumulative process. Resultantly, the CESTAT order was quashed and the Commissioner’s original order restored. No interim directions were recorded; parties were left to bear their own costs.

Case Details: Case No.: Civil Appeal Nos. 3405‑3407 of 2012 (2025 INSC 1374) Case Title: Commissioner of Customs, Central Excise & Service Tax, Rajkot v. Narsibhai Karamsibhai Gajera & Ors. Appearances: For the Petitioner(s): Mr. Raghavendra P. Shankar, Additional Solicitor General of India For the Respondent(s): Mr. Ashish Batra, Advocate