SC: Cotton Fabric Processing Using Power Across Interlinked Units Amounts to Manufacture; CESTAT Order Set Aside

The dispute arose from a 2003 investigation into two adjoining processing units, both operating within a common compound. Officials found that although the units claimed exemption for processing cotton fabrics “without the aid of power” under Notification No. 5/98-CE, several machines powered by electricity or diesel were in use. Unit No. 1 housed a bail packing machine and mercerizing and bleaching machinery with electric motors, whereas Unit No. 2 operated squeezing and stentering machines powered either by electric motors or oil engines. The Commissioner issued a show cause notice alleging that both units were manufacturing cotton fabrics using power and were liable to pay excise duty with interest and penalty.

Initially, the commissioner confirmed the joint liability of both units, but the CESTAT remanded the matter. Upon reconsideration, the Commissioner held that the entire process, from bleaching and mercerising at Unit No.1 to squeezing and stentering at Unit No. 2 and finally bailing/packing back at Unit No.1, was a continuous, power-aided manufacturing activity. Unit No.1 was held liable for duty. However, the CESTAT set aside this order, treating the units as completely independent. It is this decision that the Revenue challenged before the Supreme Court.

Main Issue: Whether the processes undertaken by Unit No.1 and Unit No.2 formed a single, integrated, power-aided manufacturing activity, thereby disqualifying the claim for exemption under Entry 106 of Notification No.5/98-CE.

SC Held: The Supreme Court held that the CESTAT committed a fundamental error by treating the two units as independent for the purposes of exemption, despite the manufacturing sequence showing a seamless transfer of wet fabrics between them. Referring to previous case laws on “process” and “manufacture” under Section 2(f) of the Central Excise Act, the Court reiterated that manufacture involves a series of integrally linked processes. If any part of that chain uses power, the entire manufacture is considered power-assisted. The Court observed that bleaching and mercerising at Unit No. 1, squeezing and stentering at Unit No. 2, and bailing/packing back at Unit No. 1 made a continuous sequence.

The Court found that the Commissioner had rightly taken a holistic view of the evidence, including the undisputed presence of electric motors, high electricity consumption, and the integrated flow of work between the two units. The Supreme Court quashed the CESTAT’s 2011 order and restored the Commissioner’s Order-in-Original in full.

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