Committed Error In Bifurcating Continuous Process Of Manufacture: Supreme Court Quashes CESTAT’s Order

The Supreme Court has quashed an Order passed by the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Ahmedabad, saying that it committed an error in bifurcating the continuous process of manufacture.

The Court was hearing a Civil Appeal filed by the Commissioner of Customs, Central Excise & Service Tax, Rajkot under Section 35-L (b) of the Central Excise Act, 1944 (CEA), challenging the Order of the CESTAT.

The two-Judge Bench comprising Justice P.S. Narasimha and Justice Atul S. Chandurkar observed, “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.”

The Bench said 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.

Additional Solicitor General (ASG) Raghavendra P. Shankar and Senior Advocate Nisha Bagchi represented the Appellant, while Advocate Ashish Batra represented the Respondents.

Facts of the Case

On the basis of information received by its intelligence agency, Bhagyalaxmi Processor Industry (Unit No.1) and Famous Textile Packers (Unit No.2) were processing cotton fabrics with the aid of power but without following any of the procedures laid down under the CEA as well as the Rules framed thereunder. The preventive staff carried out a search of both the Units in 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 along with other employees of both the Units, the Commissioner, Customs and Central Excise issued a show cause notice (SCN) on the premise that both the Units were not entitled to exemption from paying customs duty. Vide Order, 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 CEA. The said Units being aggrieved by the Order, filed an Appeal before the CESTAT and the said Order was set aside. The proceedings were remanded for reconsideration. The Commissioner imposed a penalty under Section 11 AC of CEA. Both the Units being aggrieved by the said adjudication again approached the CESTAT by filing two Appeals. The CESTAT set aside the Commissioner’s Order and allowed both the Appeals. Being aggrieved, the Commissioner was before the Apex Court.

Reasoning

The Supreme Court after hearing the contentions of the counsel, noted, “… 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.”

The Court added that a particular activity may be subordinate but related to the further process of manufacture which is thus the end result of one or more processes through which the original commodity passes and then becomes the final product.

“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 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”, it observed.

The Court remarked that 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 CEA.

“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”, it also said.

Conclusion

The Court further noted that 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 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”, it concluded.

Accordingly, the Apex Court allowed the Appeal and quashed the CESTAT’s Order.

Cause Title- Commissioner of Customs, Central Excise & Service Tax, Rajkot v. Narsibhai Karamsibhai Gajera & Ors. (Neutral Citation: 2025 INSC 1374)

Appearance:

Appellant: ASG Raghavendra P. Shankar, Senior Advocate Nisha Bagchi, and AOR Gurmeet Singh Makker.

Respondents: AOR Nikhil Jain, Advocates Ashish Batra, Wattan Sharma, and Divya Jain.

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