2025 (12) TMI 320 - SC - Central Excise

Power-Aided Stentering Disqualifies Cotton Fabric Units from Exemption under Entry 106 of Notification 5/98-CE due to Integrated Manufacturing Process

Commissioner of Customs, Central Excise & Service Tax, Rajkot Versus Narsibhai Karamsibhai Gajera & Ors.

SC held that manufacture of processed cotton fabrics involved an integrated, continuous series of operations across two units, including stentering with ... Process amounting to manufacture or not - conversion of grey fabrics to cotton fabrics include an integral process of stentering undertaken with the aid of power or not - eligibility for benefit from exemption under Entry 106 of N/N. 5/98-CE - HELD THAT:- In Standard Fireworks Industries, Sivakasi and another [1987 (2) TMI 65 - SUPREME COURT], the manufacturers of fireworks sought to claim refund of duty 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 [1991 (9) TMI 73 - SUPREME COURT] 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 diesel pumps. From the 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. 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 - 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 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 - Appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the processes applied to grey cotton fabrics at two separate units - bleaching and mercerizing at one unit, and squeezing and stentering at another - collectively constitute 'manufacture' with the aid of power, thereby disentitling the processed fabrics from exemption under Entry 106 of Notification No. 5/98-CE. 1.2 Whether, for determining 'manufacture' and eligibility to exemption, the processes undertaken at the two distinct partnership units could be clubbed as one continuous and integrated manufacturing process, notwithstanding their separate legal identities and the dropping of demand against one of them. 1.3 Whether the CESTAT was justified in isolating the activities of each unit, treating them as independent and non-clubbable, and thereby extending the benefit of the exemption notification to the unit from which the final goods were cleared. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Manufacture with aid of power and applicability of Entry 106 of Notification No. 5/98-CE Legal framework 2.1 The Court referred to Section 2(f) of the Central Excise Act, 1944 (pre-2017 amendment), defining 'manufacture' to include any process: (i) incidental or ancillary to completion of a manufactured product; (ii) specified in the Tariff as amounting to manufacture; and (iii) in relation to certain goods, involving packing, repacking, labelling or other treatment to render goods marketable. 2.2 Entry 106 of Notification No. 5/98-CE was reproduced, granting exemption to 'cotton fabrics processed without the aid of power or steam,' with an Explanation deeming colour fixation by passing steam over fabrics to be without the aid of steam. 2.3 The Court relied on prior decisions interpreting 'manufacture' and 'process' in exemption notifications: (i) Standard Fireworks Industries, holding exemption inapplicable where any process in relation to manufacture is carried on with aid of power, even if outside the factory; and (ii) Collector of Central Excise v. Rajasthan State Chemical Works, explaining that manufacture involves a series of processes, each step integrally connected with the final product, and that any essential or subordinate activity in relation to manufacture is also a 'process.' Interpretation and reasoning 2.4 Applying the above principles, the Court reiterated that manufacture is the cumulative effect of various integrally connected processes to which raw material is subjected, and each essential step in that chain is a 'process in relation to the manufacture.' 2.5 Factually, the show cause notice and the Order-in-Original recorded that: (a) Unit No. 1 received grey fabrics and carried out bleaching and mercerizing; (b) the bleached/mercerized fabrics in wet condition were moved to Unit No. 2 for squeezing and stentering, the latter being carried out with the aid of power; and (c) the dry fabrics were then returned to Unit No. 1 for bailing/folding and packing, after which they were cleared as cotton fabrics. 2.6 The Court considered all these activities-bleaching, mercerizing, squeezing, stentering, and bailing/packing-as forming one continuous chain of processes in the conversion of grey fabrics into finished cotton fabrics. Each operation was integrally connected; without any one of them, the manufacture or processing of the final product would be impossible or commercially inexpedient. 2.7 In particular, stentering with the aid of power at Unit No. 2 was found to be an integral part of that chain of manufacture. Following the ratio of Standard Fireworks and Rajasthan State Chemical Works, the use of power at any essential stage in relation to manufacture rendered the overall manufacture as being 'with the aid of power' for the purpose of applying the exemption notification. 2.8 The Court held that the CESTAT erred in concluding that the processed fabrics at Unit No. 1 were manufactures 'without the aid of power' merely because, viewed in isolation, certain processes at Unit No. 1 might not have used power. The correct enquiry was whether, in relation to the manufacture of the final cotton fabrics, any process in the chain used power. Conclusions 2.9 The conversion of grey fabrics into cotton fabrics involved an integrated series of processes, including stentering with the aid of power at Unit No. 2. Consequently, the manufacture of cotton fabrics was with the aid of power. 2.10 Since a process in relation to the manufacture of the final goods was admittedly carried out with the aid of power, the goods did not satisfy the condition 'processed without the aid of power or steam' in Entry 106 of Notification No. 5/98-CE. 2.11 Unit No. 1 was, therefore, not entitled to the benefit of exemption under the said Entry. Issue 2: Clubbing of processes across two separate units for determining manufacture and exemption Interpretation and reasoning 2.12 The CESTAT, in allowing the appeals, had laid emphasis on: (a) separate partnership concerns for each unit; (b) absence of common partners; (c) different machinery in each unit; and (d) separate job work bills and payments, and on that basis refused to club the activities of both units for determining excisability and eligibility to exemption. 2.13 The Court held that this approach misdirected itself by focusing on the distinct legal identities of the units instead of the nature of the processes and their role in the chain of manufacture. The critical test was whether the processes undertaken at both units formed part of a continuous and integrated chain culminating in the final product, not whether the entities were separately constituted. 2.14 On the facts found in the Order-in-Original, the two units operated in a common premises, and the grey fabrics moved physically from one unit to the other and back, undergoing sequential processes (bleaching/mercerizing ? squeezing/stentering ? bailing/packing) before clearance as cotton fabrics. This sequence was a single continuous manufacturing activity in relation to the same goods. 2.15 The Court therefore treated the processes at both units as one composite manufacturing process for the purposes of Section 2(f) and the exemption notification. The exclusivity or independence of the partnership concerns, and distinct billing patterns, were held immaterial to this characterization of the manufacturing chain. Conclusions 2.16 For determining whether the goods were 'processed without the aid of power,' the processes at both units had to be clubbed and considered as one continuous and integrated manufacturing process. 2.17 The CESTAT's refusal to club these activities, on the ground of distinct legal identities and separate job work arrangements, was legally erroneous. Issue 3: Effect of dropping demand against one unit and correctness of CESTAT's interference with the Order-in-Original Interpretation and reasoning 2.18 The CESTAT held that, since the demand was not confirmed against Unit No. 2, the use of power at Unit No. 2 during stentering could not affect the eligibility of Unit No. 1 to the exemption; it thus treated the power-based process at Unit No. 2 as irrelevant for Unit No. 1's liability. 2.19 The Court rejected this reasoning, stating that the non-confirmation of demand against Unit No. 2 did not alter the character of the overall manufacturing process. For the purposes of Section 2(f) and the exemption notification, the focus had to be on the entirety of the processes that the goods actually underwent before clearance, irrespective of on whom the demand was ultimately fastened. 2.20 Once it was established that the fabrics cleared from Unit No. 1 had undergone stentering with the aid of power at Unit No. 2 as part of the same manufacturing chain, the fact that demand was dropped against Unit No. 2 could not be invoked to treat the goods as 'processed without the aid of power.' 2.21 The Court found that the Commissioner's Order-in-Original had correctly appreciated the evidence and applied the law on integrated processes and use of power, and that the CESTAT had interfered by artificially bifurcating a continuous manufacturing process and misapplying the settled legal principles. Conclusions 2.22 The non-confirmation or dropping of demand against Unit No. 2 was irrelevant to the characterization of the overall process as manufacture with aid of power and to the liability of Unit No. 1. 2.23 The CESTAT erred in setting aside the Order-in-Original by treating the processes of each unit as independent and ignoring the integrated nature of manufacture; its view was contrary to settled legal principles on 'process' and 'manufacture.' 2.24 The Order-in-Original, fastening duty and penalty liability on Unit No. 1 on the basis that the cotton fabrics were manufactured with the aid of power and hence not exempt, was correctly restored by the Court.