Central Excise Exemption For Cotton Fabrics Not Available If Any Interlinked Process Uses Power : Supreme Court

The Supreme Court has held that manufacturers cannot claim central excise duty exemption for processed cotton fabrics if power is used at any stage of the manufacturing chain, even when the work is carried out through separate units. The Court restored a duty and penalty demand that had been set aside by the Customs, Excise and Service Tax Appellate Tribunal (CESTAT).

To claim excise duty exemption for 'cotton fabrics' processed without the aid of power or steam, the manufacturing stages must be completely independent; if the final product cannot emerge without each interlinked process, including those involving power, the exemption cannot be availed.

“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? If the various processes were so interlinked with each other that the end product in the form of cotton fabrics could not be brought about without undertaking each individual process to which the final product was subjected to, it would be clear that the entire activity of undertaking the various processes amounted to “manufacture” for the purposes of Section 2(f) of the Act of 1944.”, observed a bench of Justices PS Narasimha and Atul S. Chandurkar, while allowing the Commissioner of Custom's appeal, and restoring the excise duty liability upon the Respondents-companies, who processed grey cotton fabric into finished fabric through a sequential chain, where Bleaching and Mercerizing of cotton was claimed to be done without power, and Squeezing and Stentering of the cotton was admittedly done with the use of the power.

The Court held that to claim the excise duty exemption under the Central Excise Act, 1944 (“Act”), the entire processing must be carried out without the 'aid of power'. Since the processes of squeezing and stentering involved the use of power and were integral to producing the final fabric, the Court ruled that the exemption could not be granted.

The dispute arose between two independent partnership firms, i.e., Bhagyalaxmi Processor Industry (Unit-1) and Famous Textile Packers (Unit-2,) which operated from the same compound in Rajkot and jointly handled different stages of processing grey cotton fabric into finished fabric.

The workflow was divided into a sequential chain: Unit-1 carried out bleaching and mercerizing, which it claimed were performed without the use of power; Unit-2 handled the subsequent squeezing and stentering processes, where it admitted to using power; and finally, the fabric returned to Unit-1 for bailing, folding, and packing.

Unit-1 claimed an exemption from payment of excise duty, asserting that cotton fabrics were being processed without the aid of any power and hence the Units were entitled to exemption in view of Entry No.106 of Notification No.5/98-CE issued under the Act, which is available for “cotton fabrics processed without the aid of power or steam.”

The Commissioner of Central Excise held that both the Units were jointly and severally liable to pay the amount of duty with interest as well as penalty under the Act of 1944. Following this, an appeal was filed before the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), which had ruled in favour of the Respondents, granting them the exemption, accepting their argument that they were distinct entities with separate ownership, machinery, and billing.

Aggrieved by the CESTAT decision, the Commissioner of Central Excise appealed to the Supreme Court.

Setting aside the CESTAT order, the judgment authored by Justice Chandurkar held that to claim the benefit of the exemption, the entire processing must be carried out without the aid of power. Since the squeezing and stentering of the cotton fabric were admittedly done using power, the fact that bleaching and mercerizing at Unit-1 were performed without power made no difference. The Court reasoned that these stages were interlinked and indispensable to producing the final fabric. In effect, the Court concluded that the transformation of grey cotton into finished fabric amounted to 'manufacture'.

“It was thus clear that the benefit of exemption was not available specially when the process of stentering was integrally connected with the manufacture of cotton fabrics from grey fabrics. As the conclusion drawn by the CESTAT was contrary to the legal position settled by this Court, it could not be said that it had taken a possible view of the matter. A case was therefore made out to interfere with the findings recorded by the CESTAT.”, the court held.

“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 court added.

Accordingly, the appeal was allowed.

Cause Title: COMMISSIONER OF CUSTOMS, CENTRAL EXCISE & SERVICE TAX, RAJKOT VERSUS NARSIBHAI KARAMSIBHAI GAJERA & ORS.

Citation : 2025 LiveLaw (SC) 1161

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Appearance:

For Appellant(s) : Mr. Raghavendra P Shankar, A.S.G.(arguing counsel) Ms. Nisha Bagchi, Sr. Adv. Mr. Gurmeet Singh Makker, AOR Mr. Karan Lahiri, Adv. Mr. Digvijay Dam, Adv. Mr. B K Satija, Adv. Mr. Gaurang Bhushan, Adv.

For Respondent(s) :Mr. Ashish Batra, Adv.(arguing counsel) Mr. Wattan Sharma, Adv. Mr. Nikhil Jain, AOR