Manufacturing without aid of power. Entire process though by distinct units to be seen – SC

Entire manufacturing process though by distinct units relevant for exemption from excise duty on account of manufacture without aid of power.

In a recent judgment, Hon’ble Supreme Court has held that entire manufacturing process of conversion of grey fabrics into cotton fabrics though by distinct units is to be seen for entitlement of exemption from excise duty on account of manufacture without aid of power.

ABCAUS Case Law Citation:
4901 (2025) (12) abcaus.in SC

The Unit No. 1 of the assessee had claimed the benefit of exemption from excise duty claiming that no process of manufacture was carried on with the aid of power. The Unit relied on the Notification No. 5/1998-CE and especially Entry No.106 which provided exemption to cotton fabrics processed without the aid of power or steam. As per Explanation, for the purpose of the cotton fabrics subjected to the process of colour fixation by passing steam over such fabrics shall be deemed to have been processed without the aid of steam.

The Commissioner of Customs & Central Excise received information that the assessee was processing cotton fabrics with the aid of power but claiming exemption.

It was found that the assessee had two units. Unit No.1 was receiving grey cotton fabrics for processing. The said fabrics were being bleached and mercerized by Unit No.1 with the aid of power. The mercerized and bleached fabrics in wet condition were transferred to Unit No.2 where the fabrics were squeezed for removing extra water and thereafter were processed for stentering. Thereafter, the fabrics were again brought back to the premises of Unit No.1 for bailing/folding on the machines installed at Unit No.1 that was operated with the aid of electric motor. On the completion of this process, the fabrics were packed and returned to the customers.

A show cause notice was issued to the assessee on the premise that both the Units were not entitled to exemption from paying customs duty and a demand was made for the excise duty.

It was held that since the entire process from receiving the fabrics till their bailing/folding was a continuous process, the same was completed with the aid of electricity. Hence, the Units were not entitled to claim any exemption under the said Notification.

The liability to pay duty on the finished fabrics while removing the same after the process of bailing and folding was of Unit No.1. The show cause notice was accordingly adjudicated against Unit No.1 and the demand as made therein was confirmed against Unit No.1.

The said Units being aggrieved by the aforesaid order preferred an appeal before the CESTAT.

The CESTAT held that when the wet fabrics were cleared from Unit No.1 and sent to Unit No.2, the said activity was non-excisable. It further held that distinct activities of mercerizing and bleaching were being carried out at Unit No.1 while the activities of stentering and hydro extraction/ drier was carried out at Unit No. 2. Both the Units were distinct partnership concerns and the clubbing of their activities was not justified.

Before the Hon’ble Supreme Court the Revenue contended that the conversion of grey fabrics to a finished product was subjected to “process” with the aid of power. it was submitted that if there was use of any power at any of the numerous processes that were required to convert the raw material into a finished article, the manufacture would be with the use of power.

The Hon’ble Supreme Court opined that the CESTAT fell in error while coming to the conclusion that the conversion of grey fabrics to cotton fabrics did not include an integral process of stentering undertaken with the aid of power and thus the benefit of the Exemption Notification was available to Unit No.1.

The Hon’ble Supreme Court observed 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.

The Hon’ble Supreme Court opined that the CESTAT misdirected itself while emphasizing upon the distinct identities of the two Units and in the process ignoring the fact that both the Units were together involved in the process of manufacture of cotton fabrics from grey fabrics.

The Hon’ble Supreme Court noted that the CESTAT 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 Hon’ble Supreme Court held that the order of the Commissioner rightly considered the entire process of manufacture which is conversion of grey fabrics into cotton fabrics for being cleared by Unit No.1 as one and had thus fastened liability on it.

As a result, the Hon’ble Supreme Court quashed the order passed by the CESTAT.

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