Integrated Textile Processing Using Power Bars Excise Exemption: Supreme Court Clarifies Scope of “Manufacture” Under the Central Excise Act

The Supreme Court has held that where the conversion of grey cotton fabrics into finished cotton fabrics involves a series of interlinked and continuous processes undertaken across two separate units, the use of power at any stage of such integrated manufacturing chain disentitles the manufacturer from claiming excise duty exemption available for processing “without the aid of power.” Setting aside the Customs, Excise and Service Tax Appellate Tribunal’s (CESTAT) order, the Court clarified that exemption notifications under the Central Excise Act, 1944 must be interpreted by examining the cumulative manufacturing process rather than isolating individual stages or treating related units as independent when their activities together culminate in the final excisable product.

Case Background

The dispute arose from proceedings initiated by the Commissioner of Customs, Central Excise and Service Tax, Rajkot, against two textile processing units—Bhagyalaxmi Processor Industry (Unit No.1) and Famous Textile Packers (Unit No.2). Acting on intelligence inputs, preventive officers conducted a search of both units on 21 January 2003. The units were located within the same compound and were engaged in processing cotton fabrics.

During the inspection, various machines operated with electric power were found installed across both units, including mercerizing, bleaching, squeezing, stentering, and bailing machines. Statements of partners and employees were recorded, and electricity consumption patterns were noted. On the basis of these findings, a show cause notice dated 14 July 2003 was issued alleging that cotton fabrics were processed with the aid of power, rendering the units ineligible for excise duty exemption under Notification No. 5/1998-CE, particularly Entry No. 106.

What the Lower Authorities Held

The Commissioner initially confirmed the demand of excise duty, interest, and penalty against both units. On appeal, the CESTAT set aside the order on the ground that joint and several liability could not be fastened on both units and remanded the matter for reconsideration.

Upon remand, the Commissioner re-adjudicated the case and held that the entire process—from bleaching and mercerizing at Unit No.1, through squeezing and stentering at Unit No.2, and finally bailing and packing at Unit No.1—constituted a continuous manufacturing process undertaken with the aid of power. Consequently, exemption was denied and duty demand was confirmed against Unit No.1.

The CESTAT, however, reversed this finding in its order dated 28 September 2011. It held that the activities of the two units were distinct, that wet fabrics cleared from Unit No.1 to Unit No.2 were non-excisable, and that power usage at Unit No.2 could not be attributed to Unit No.1. On this basis, it allowed the appeals and set aside the Commissioner’s order.

The Supreme Court’s Reasoning

The Supreme Court examined whether the CESTAT was correct in treating the processes undertaken at the two units as independent and in granting the benefit of exemption under Notification No. 5/1998-CE. The Court’s analysis centred on the statutory definition of “manufacture” under Section 2(f) of the Central Excise Act, 1944 and the settled jurisprudence governing exemption notifications.

Emphasising that manufacture involves a series of processes whose cumulative effect results in a commercially distinct product, the Court reiterated that each process need not independently result in manufacture. What is relevant is whether the processes are integrally connected and whether the final product could emerge without undertaking each of them.

The Court relied on earlier decisions, including Standard Fireworks Industries v. Collector of Central Excise and Collector of Central Excise v. Rajasthan State Chemical Works, to reaffirm that the use of power at any stage of manufacture—even if such stage appears ancillary or is carried out outside the main factory—defeats a claim of manufacture without the aid of power.

(i) Whether processes at two separate units could be clubbed

The Court rejected the CESTAT’s emphasis on separate ownership, billing, and machinery. It held that these factors were irrelevant where the processes undertaken by both units formed a continuous and integrated chain resulting in the manufacture of cotton fabrics. The physical proximity of the units and seamless movement of semi-processed goods reinforced the conclusion that the activities were interlinked.

(ii) Whether use of power at Unit No.2 affected exemption claimed by Unit No.1

The Court held that the absence of a confirmed demand against Unit No.2 was immaterial. Since the final excisable product was cleared from Unit No.1 after undergoing power-assisted stentering at Unit No.2, the entire manufacturing process had to be considered as one. Use of power at Unit No.2 thus directly impacted the eligibility of Unit No.1 for exemption.

(iii) Treatment of retracted statements and factual findings

The Court agreed with the Commissioner that belated retractions of statements recorded during inspection lacked credibility. It held that the CESTAT erred in disregarding contemporaneous evidence such as panchnama records, machine installations, and electricity consumption data.

Statutory Interpretation

Interpreting Section 2(f) of the Central Excise Act, the Court reiterated that “manufacture” includes any process incidental or ancillary to the completion of a manufactured product. The statutory definition deliberately adopts an expansive approach, capturing within its fold all activities integrally connected with the emergence of the final product.

Entry No. 106 of Notification No. 5/1998-CE grants exemption to cotton fabrics processed without the aid of power or steam. The Court held that this entry must be construed strictly and in harmony with the statutory definition of manufacture. Where any essential process in the chain employs power, the exemption becomes unavailable regardless of where or by whom that process is undertaken.

Why This Judgment Matters

This decision reinforces a substance-over-form approach in excise law, particularly in the context of exemption notifications. It cautions manufacturers against structuring operations across multiple units to artificially segregate power-assisted processes in an attempt to claim exemptions. For tax authorities and practitioners, the ruling provides clarity on when activities may be clubbed and how integrated manufacturing chains should be assessed.

The judgment also strengthens the evidentiary value of contemporaneous inspection records and underscores the limited weight accorded to delayed retractions. It will significantly influence litigation involving textile processors and other industries relying on “without the aid of power” exemptions.

Final Outcome

The Supreme Court conclusively allowed the civil appeals filed by the Commissioner of Customs, Central Excise and Service Tax. In doing so, the Court set aside the order dated 05 October 2011 passed by the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), which had granted exemption to the respondent units and nullified the duty demand. The Court restored in full the Order-in-Original dated 27 September 2006 passed by the Commissioner, holding that it correctly appreciated the factual record, applied the settled principles governing “manufacture” under the Central Excise Act, 1944, and rightly denied the benefit of exemption under Notification No. 5/1998-CE.

The Court affirmed that the processes undertaken by Unit No.1 and Unit No.2 constituted a single, continuous, and integrated manufacturing activity carried out with the aid of power, and that the final liability to duty was correctly fastened on Unit No.1, from whose premises the finished cotton fabrics were cleared. It further held that the CESTAT had erred in bifurcating the manufacturing process and in interfering with the well-reasoned findings of the adjudicating authority.

• The order of the CESTAT dated 05 October 2011 was quashed and set aside.
• The demand of excise duty along with interest and penalty, as confirmed by the Commissioner against Unit No.1 under the Order-in-Original dated 27 September 2006, was restored.
• The civil appeals were allowed, with the parties directed to bear their own costs.

Case Details

• Case Title: Commissioner of Customs, Central Excise & Service Tax, Rajkot v. Narsibhai Karamsibhai Gajera & Ors.
• Citation: 2025 INSC 1374
• Court & Bench: Supreme Court of India; Justices Pamidighantam Sri Narasimha and Atul S. Chandurkar
• Date of Judgment: December 02, 2025