Commr.Of Cus.Cen.Exc.Ser.Tax Rajkot vs Narsibhai Karamsibhai

2025 INSC 1374 REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS.3405-3407 OF 2012

COMMISSIONER OF CUSTOMS, CENTRAL EXCISE & SERVICE TAX, RAJKOT APPELLANT VERSUS NARSIBHAI KARAMSIBHAI GAJERA & ORS. RESPONDENT

JUDGMENT

ATUL S. CHANDURKAR, J.

1. This appeal under Section 35-L (b) of the Central Excise Act,

1944 (for short, “the Act of 1944”) as it stood prior to its amendment

by Act 25 of 2014 takes exception to the Order dated 5.10.2011

passed by the Customs, Excise and Service Tax Appellate Tribunal,

Ahmedabad (for short, “the CESTAT”). By the said order, the CESTAT

has set aside the Order-in-Original dated 27.09.2006 passed by the

Commissioner of Customs and has discharged the show cause notice

dated 14.07.2003 that was issued to the respondent Nos. 2 and 3

herein.

2. It is the case of the appellant that on the basis of information Signature Not Verified

received by its intelligence agency, Bhagyalaxmi Processor Industry Digitally signed by KAPIL TANDON Date: 2025.12.02 18:05:12 IST Reason: Civil Appeal Nos.3405-3407 of 2012 Page 1 of 17 (hereinafter, Unit No.1) and Famous Textile Packers (hereinafter, Unit

No.2) were processing cotton fabrics with the aid of power but without

following any of the procedures laid down under the Act of 1944 as

well as the Rules framed thereunder. The preventive staff carried out

a search of both the Units on 21.01.2003 and executed a panchnama.

It was noted that the factory premises of both the Units were situated

in a common premises within the same compound. Both the Units

were having industrial electricity connection as well domestic lighting

connection. In Unit No.1, a bail packing machine with an electric

motor, a mercerizing machine as well as bleaching machinery were

found installed. In the premises of Unit No.2, a squeezing machine

with electric motor as well as a stentering machine fitted with oil

engine and driers operated with the aid of electric power were found.

In the electric room, there were five electric meters of which two

electric meters were for industrial connection, two other meters were

for domestic lighting purposes while one meter was for the diesel

generator set. After taking a stock and recording the statements of the

partners of Unit Nos.1 and 2 along with other employees of both the

Units, the Commissioner, Customs and Central Excise issued show

cause notice dated 14.07.2003 on the premise that both the Units

were not entitled to exemption from paying customs duty. He made a

Civil Appeal Nos.3405-3407 of 2012 Page 2 of 17 demand of excise duty under Section 11-A(1), interest on the amount

of duty under Section 11 A B and penalty under Section 11 A C of the

Act of 1944. Both the Units were called upon to submit their reply to

the same.

3. Reply to the show cause notice was submitted on 15.12.2005

denying the contents thereof. It was asserted 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. The Commissioner of Central Excise considered the

entire material and vide Order dated 29.07.2004 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.

The said Units being aggrieved by the aforesaid order preferred

an appeal before the CESTAT. Vide its order dated 01.07.2005, the

CESTAT held that the joint and several liability of each Unit could not

have been fixed. It therefore set aside the Order-in-Original dated

29.07.2004 and remanded the proceedings to the Commissioner for

reconsideration.

4. After remand, the Commissioner, Central Excise reconsidered

the entire material. After assessing the evidence on record, he held

that the statements recorded on 21.01.2003 were sought to be

Civil Appeal Nos.3405-3407 of 2012 Page 3 of 17 retracted by the partners of Unit Nos.1 and 2 after a period of almost

six months. There was no protest lodged by the noticees immediately

after the said statements were recorded and hence the retraction was

by way of an afterthought. He further found that the presence of

electric motors had been noted in the panchnama and that there had

been high consumption of electricity and fuel by Unit No.1. There was

no explanation furnished by Unit No.1 in that regard. It was thus held

that 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. 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

Civil Appeal Nos.3405-3407 of 2012 Page 4 of 17 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 Commissioner also

imposed penalty on it under Section 11 AC of the Act of 1944.

5. Both the Units being aggrieved by the said adjudication again

approached the CESTAT by filing two appeals. Both the appeals were

heard together and the CESTAT by its judgment dated 28.09.2011

proceeded to hold 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. It therefore held that the finding recorded by the

Commissioner that the processes undertaken at Unit Nos.1 and 2

were liable to be clubbed for deciding accessibility and liability of Unit

No.1 to pay duty was incorrect. It further held that the subsequent

affidavits retracting the statements made during the panchnama

ought to have been taken into consideration. It thereafter held that the

allegation that there was usage of power during the process of

mercerizing at Unit No.1 was incorrect. On that basis, the CESTAT

Civil Appeal Nos.3405-3407 of 2012 Page 5 of 17 proceeded to set aside the order of the Commissioner and allowed

both the appeals. Being aggrieved, the Commissioner of Customs,

Central Excise and Service Tax has come up in appeal.

6. Mr. Raghavendra P. Shankar, learned Additional Solicitor

General appearing for the appellant submitted that the CESTAT

misread Entry No.106 of the Exemption Notification dated 02.06.1998

for arriving at the conclusion that grey fabrics had been processed to

cotton fabrics without the aid of power by Unit No.1. According to him,

the grey fabrics were initially bleached and mercerized at Unit No.1.

Thereafter the fabrics in wet condition were shifted to Unit No.2 and

subjected to squeezing and stentering. The dry fabrics were

thereafter returned to Unit No.1 where they were bailed and packed

after which the cotton fabrics were cleared. The conversion of grey

fabrics to a finished product was subjected to “process” with the aid

of power. Referring to the decisions in CCE Vs. Rajasthan State

Chemical Works1 and Impression Prints Vs. CCE2, 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. Each

1 1991 INSC 235 2 2005 INSC 377

Civil Appeal Nos.3405-3407 of 2012 Page 6 of 17 of the activities carried out at Unit Nos.1 and 2 were integrally

connected leading to the final product and hence it could not be said

that the cotton fabrics were manufactured without the aid of power.

The CESTAT had failed to be taken into consideration the various

processes undertaken on the initial grey fabrics till the time of the final

product was prepared. Referring to the Panchnama that was

prepared by the Inspection team, it was submitted that the use of

power during the course of stentering was clearly admitted. Even the

CESTAT did not disturb the said finding. However, by wrongfully

holding that the process undertaken at Unit No.2 was not connected

to the process undertaken at Unit No.1, it proceeded to arrive at a

wrong conclusion. 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. Reliance was also placed

on the decision in Standard Fireworks Industries, Sivakasi and

another Vs. Collector of Central Excise3. It was thus urged that the

3 (1987) 1 SCC 600

Civil Appeal Nos.3405-3407 of 2012 Page 7 of 17 order passed by the CESTAT be set aside and the Order-in-Original

passed by the Commissioner be restored.

7. On the other hand, Mr. Ashish Batra, learned counsel for the

respondents supported the order passed by the CESTAT and

submitted that the benefit of the Exemption Notification dated

02.06.1998 had been rightly granted to Unit No.1. He submitted that

Unit No.1 and Unit No.2 were independent in their activities and were

merely carrying out respective job works. There was no unity of

ownership of the two Units. Though show cause notice was issued to

both the Units, the Commissioner proceeded to uphold the demand

only against Unit No.1. Even if it was presumed that there was use of

power in the process of stentering at Unit No.2, as the show cause

notice against it had been dropped, the activities in question carried

out at Unit Nos.1 and 2 could not have been clubbed. The CESTAT

rightly held that insofar as Unit No.1 was concerned, there was no use

of power. It was then submitted that the statements alleged to have

been recorded during the course of recording the Panchnama had

been retracted by filing affidavits. The CESTAT rightly ignored the

earlier statements and recorded a correct finding that there was no

use of power during the entire process of manufacture. The CESTAT

being the final fact finding authority and the conclusion recorded by it

Civil Appeal Nos.3405-3407 of 2012 Page 8 of 17 being one based on the material on record, there was no case for

interference with the said findings. To substantiate this contention, the

learned counsel relied upon the decision in Steel Authority of India

Ltd. Vs. Directorate General of Anti-Dumping & Allied Duties4. It

was thus submitted that there was no merit in the appeal as filed and

the same was liable to be dismissed.

8. We have heard the learned counsel for the parties at length and

with their assistance we have perused the documentary material on

record. Having given due consideration to the same, we are of the

considered view 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.

9. At the outset, it would be necessary to refer to the definition of

the expression “manufacture” as defined in Section 2(f) of the Act of

1944 prior to its amendment by Act 18 of 2017. The same reads as

under:-

“2(f) ‘Manufacture’ includes any process:-

(i) incidental or ancillary to the completion of a manufactured product;

4 2017 INSC 356

Civil Appeal Nos.3405-3407 of 2012 Page 9 of 17

(ii) which is specified in relation to any goods in the section or Chapter notes of the First Schedule to the Central Excise Tariff Act, 1985 as amounting to manufacture; or

(iii) which in relation to the goods specified in the Third Schedule, involves packing or repacking of such goods in a unit container or labelling or re-labelling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer;

and the word “manufacture” shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account.”

Since, Unit No.1 seeks the benefit of Notification No.5/1998-CE

and especially Entry No.106 therein, the same is reproduced

hereunder:-

S.No. Chapter or Description of goods Rate Conditions heading no.

or sub heading no.

106. 52.07, 52.08 Cotton fabrics processed without the or 52.09 aid of power or steam 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

10. Before adverting to the factual aspects, it would be necessary

to bear in mind the settled legal position on the aspect “manufacture”

and “process” in the context of Exemption notifications under the Act

of 1944. In Standard Fireworks Industries, Sivakasi and another

(supra), the manufacturers of fireworks sought to claim refund of duty

Civil Appeal Nos.3405-3407 of 2012 Page 10 of 17 on the ground that they were exempted from its payment as the

manufacturing process was carried out without the aid of power. It

was found that during the course of manufacture of fireworks, no

power was used. Power was however used for the shredding of paper

and cutting of steel wires. The steel wires as well as the paper were

part of the manufacturing process and used while preparing the

fireworks. In that context, this Court held that the Exemption

Notification was applicable only when in relation to the manufacture

of the goods, no process was ordinarily carried on with the aid of

power. The cutting of the steel wires and the treatment of paper were

processes adopted during the manufacture of the fireworks. These

processes were carried on with the aid of power, though outside the

factory. On that basis the appellants therein were held not entitled to

the exemption from payment of duty.

A Bench of three learned Judges in Collector of Central

Excise Jaipur (supra) considered a similar Exemption Notification

that granted exemption when no process of manufacture was carried

on with the aid of power. Therein, the issue pertained to the process

of manufacture of common salt from brine in the salt pans. During the

course of manufacture, brine was pumped into the salt pans using

Civil Appeal Nos.3405-3407 of 2012 Page 11 of 17 diesel pumps. After referring to the definition of the expression

“manufacture” under the Act of 1944, it was observed as under:-

“13. Manufacture thus involves series of processes. Process in manufacture or in relation to manufacture implies not only the production but the various stages through which the raw material is subjected to change by different operations. It is the cumulative effect of the various processes to which the raw material is subjected to (sic that the) manufactured product emerges. Therefore, each step towards such production would be a process in relation to the manufacture. Where any particular process is so integrally connected with the ultimate production of goods that but for that process manufacture or processing of goods would be impossible or commercially inexpedient, that process is one in relation to the manufacture.

14. The natural meaning of the word 'process' is a mode of treatment of certain materials in order to produce a good result, a species of activity performed on the subject matter in order to transform or reduce it to a certain stage. According to Oxford Dictionary one of the meanings of the word 'process' is “a continuous and regular action or succession of actions taking place or carried on in a definite manner and leading to the accomplishment of some result". The activity contemplated by the definition is perfectly general requiring only the continuous or quick succession. It is not one of the requisites that the activity should involve some operation on some material in order to (sic effect) its conversion to some particular stage. There is nothing in the natural meaning of the word 'process' to exclude its application to handling. There may be a process which consists only in handling and there may be a process which involves no handling or not merely handling but use or also use. It may be a process involving the handling of the material and it need not be a process involving the use of material. The activity may be subordinate but one in relation to the further process of manufacture.

20. A process is a manufacturing process when it brings out a complete transformation for the whole components so as to produce a commercially different article or a commodity. But, that process itself may consist of several processes which may or may not bring about any change at every intermediate stage. But the activities or the operations may be so integrally connected that the final result is the production of a commercially different article. Therefore, any activity or operation which is the essential requirement and is so related to the further operations for the end result would also be a

Civil Appeal Nos.3405-3407 of 2012 Page 12 of 17 process in or in relation to manufacture to attract the relevant clause in the exemption notification. In our view, the word 'process' in the context in which it appears in the aforesaid notification includes an operation or activity in relation to manufacture.”

The decision in Standard Fireworks Industries, Sivakasi

and another (supra) was referred to and a similar view of the matter

was taken.

11. 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.

In the present case, the show cause notice indicates that Unit

No.1 was receiving grey fabrics which were thereafter bleached and

mercerized at the said Unit. The fabric in wet condition was then

shifted to Unit No.2 and subjected to squeezing and stentering. The

Civil Appeal Nos.3405-3407 of 2012 Page 13 of 17 dry fabrics were thereafter returned to Unit No.1 where they were

bailed and packed. It was thereafter that the cotton fabrics were

finally cleared. The CESTAT while allowing the appeals preferred by

both the Units came to the conclusion that the distinct processes

carried out at Unit Nos.1 and 2 could not have been clubbed

together. It held that both the Units were independently working on

their own account and thus their activities were not liable to be

clubbed together. For reaching that conclusion, the CESTAT was

impressed by the fact that there was no commonality between the

partners of both the Units, the machinery employed in both the Units

were different, the job work bills were separately raised by both the

Units and that the payments were separately made by them.

12. In our view, 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. It has come on record

that after the grey fabrics were bleached and mercerized at Unit No.1,

they were taken to Unit No.2 which was an adjoining Unit within the

same premises. After the wet fabrics were subjected to squeezing and

stentering at Unit No.2, the dry fabrics were brought back to Unit No.1

for being bailed and packed. When all these activities commencing

Civil Appeal Nos.3405-3407 of 2012 Page 14 of 17 from bleaching and mercerizing thereafter leading to squeezing and

stentering and culminating into the product being bailed and packed

being integral processes in the conversion of grey fabrics into cotton

fabrics, the fact that the Units undertaking these processes were

exclusive to each other would hardly make any difference. 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.

Viewed in this context, it is clear that Unit No.1 received grey fabrics

which were thereafter subjected to various processes by Unit Nos.1

and 2 cumulatively resulting in the final product which was then

cleared by Unit No.1.

13. The CESTAT while considering the aspect of use of power by

the two Units has observed that the process of stentering at Unit No.2

with the use of power would not make any difference as the demand

had not been confirmed against it. This approach ignores the fact that

Civil Appeal Nos.3405-3407 of 2012 Page 15 of 17 the entire process of manufacture has to be taken into consideration

with the end product falling into the hands of Unit No.1 after it was

subjected to an integrated process at Unit No.2. The demand against

Unit No.2 not being confirmed would not be relevant in these facts

when it is clear that the process of manufacture was cumulatively

undertaken at Unit Nos.1 and 2 and that the final product was being

cleared from Unit No.1. We therefore find that even on this count, the

order passed by the Commissioner did not call for any interference as

it had taken a correct view on the basis of the material on record. 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 Order-in-Original

rightly considers the entire process of manufacture which is

conversion of grey fabrics into cotton fabrics for being cleared by Unit

No.1 as one and has thus fastened liability on it. A case for

interference under Section 35-L (b) of the Act of 1944 has thus been

made out. In these facts therefore the ratio of the decision in Steel

Authority of India (supra) cannot be made applicable to the case in

hand.

Civil Appeal Nos.3405-3407 of 2012 Page 16 of 17

14. For the aforesaid reasons, the order passed by the CESTAT

dated 05.10.2011 is quashed and set aside and the Order-in-Original

passed by the Commissioner, Central Excise dated 27.09.2006

stands restored. The Civil Appeal is thus allowed leaving the parties

to bear their own costs.

…………………………………………..J. [PAMIDIGHANTAM SRI NARASIMHA]

………………..………………………..J. [ATUL S. CHANDURKAR]

NEW DELHI, DECEMBER 02, 2025.

Civil Appeal Nos.3405-3407 of 2012 Page 17 of 17