"Manufacture" - Customs Excise - Conversion of grey fabrics into cotton fabrics, No exemption if part of the process uses of power

Supreme Court Overturns CESTAT Ruling on Central Excise Exemption for Textile Units Integrated Manufacturing Process with Power Usage Disqualifies Units from Duty Exemption

In a significant ruling, the Supreme Court of India has overturned the decision of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) in the case involving the Commissioner of Customs, Central Excise & Service Tax and Narsibhai Karamsibhai Gajera. The apex court ruled that the integrated manufacturing process of cotton fabrics, involving the use of power at any stage, disqualifies the units from claiming exemption under the Central Excise Notification No.5/1998-CE.

The appeal was heard by Justices Pamidighantam Sri Narasimha and Atul S. Chandurkar, who concluded that the CESTAT had erred in its interpretation of the manufacturing process and the applicability of the exemption notification. The Supreme Court emphasized that the manufacturing of cotton fabrics from grey fabrics involves a continuous and interlinked process where power usage at any stage negates the eligibility for duty exemption.

The case originated from a show cause notice issued to Bhagyalaxmi Processor Industry and Famous Textile Packers, which were processing cotton fabrics with the aid of power without adhering to the procedures under the Central Excise Act, 1944. The units were initially held liable by the Commissioner of Central Excise for duty payment. However, the CESTAT later ruled in favor of the units, holding that their activities were distinct and not liable to be clubbed for duty assessment.

The Supreme Court, however, found that the entire manufacturing process was interlinked, with power being used in critical stages such as mercerizing, bleaching, squeezing, and stentering. The court noted that the exemption under Entry No.106 of Notification No.5/1998-CE is not applicable if any part of the manufacturing process involves the use of power, regardless of the distinct identities of the units involved.

The judgment underlines the principle that the cumulative effect of all manufacturing processes, especially when power is involved, determines the eligibility for exemptions. The court restored the original order by the Commissioner of Central Excise, thus reaffirming the duty liability of the units.

This ruling serves as a crucial precedent in interpreting the applicability of exemption notifications in cases involving integrated manufacturing processes and highlights the importance of adhering to statutory requirements in the manufacturing sector.

Bottom Line:

Central Excise - Exemption Notification - Conversion of grey fabrics into cotton fabrics - Entire manufacturing process, including processes carried out with the aid of power, to be considered cumulatively for determining liability - Distinct identities of units irrelevant when processes are interlinked and integral to manufacture.

Statutory provision(s): Central Excise Act, 1944 Section 2(f), Section 35-L(b), Notification No.5/1998-CE, Entry No.106.

Commissioner of Customs, Central Excise & Service Tax v. Narsibhai Karamsibhai Gajera, (SC) : Law Finder Doc Id # 2816599