The Supreme Court has held that when multiple units undertake interlinked power-aided processes culminating in the manufacture of cotton fabrics, the entire chain of operations must be treated as a single integrated process of manufacture, thereby disentitling the assessee from claiming exemption meant for manufacture without the aid of power under Notification No. 5/98-CE.
The Court observed that bleaching, mercerizing, squeezing, stentering and bailing were integral and continuous processes converting grey fabrics into finished cotton fabrics, and therefore power used at any stage—such as stentering—attracted excise liability. Even though the processes were split between two partnership units, they functioned within the same premises, in a coordinated manner, and formed one continuous manufacturing process.
The Bench held that the CESTAT erred by treating the two units as independent merely because of distinct ownership and machinery. What mattered was the commercial and functional interdependence of the activities—without any single process, the final product could not emerge. Clubbing of operations was therefore justified.
It was further held that the retraction of inculpatory statements after a significant delay lacked credibility, and the Panchnama clearly showed the use of electrically operated machinery. Thus, exemption was correctly denied and duty demand with penalty restored against Unit No.1. 58392012_2025-12-02
Holding thus, the Bench comprising Justices Pamidighantam Sri Narasimha and Atul S. Chandurkar set aside the CESTAT’s order and restored the Order-in-Original confirming duty and penalties.
Background
The Commissioner had issued a show-cause notice alleging use of power in processing grey cotton fabrics at two adjoining units operated by the respondents. After adjudication and remand, the Commissioner held that both units together executed the full chain of manufacture with the aid of power, and confirmed duty on Unit No.1 under Sections 11A(1), 11AB, and 11AC of the Central Excise Act, 1944. The CESTAT later set aside that decision, leading to the present appeal.
Supreme Court’s Conclusion
- Conversion of grey fabrics into cotton fabrics involved multiple integrated processes using power
- Distinct ownership of units is irrelevant when processes are interdependent
- Exemption for manufacture without power is not available
- Order-in-Original restored, CESTAT judgment quashed
Case Title: Commissioner of Customs, Central Excise & Service Tax, Rajkot v. Narsibhai Karamsibhai Gajera & Ors.
Citation: 2025 INSC 1374