Commr.Of Cus.Cen.Exc.Ser.Tax Rajkot vs. Narsibhai Karamsibhai .

REPORTABLE
2025 INSC 1374

IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS.3405-3407 OF 2012

COMMISSIONER OF CUSTOMS,
CENTRAL EXCISE & SERVICE TAX,
RAJKOT APPELLANT
VERSUS
NARSIBHAI KARAMSIBHAI GAJERA & ORS. RESPONDENT

J U D G M E N T

ATUL S. CHANDURKAR, J.
1. This appeal under Section 35-L (b) of the Central Excise Act,
1944 (for short, “the Act of 1944”) as it stood prior to its amendment
by Act 25 of 2014 takes exception to the Order dated 5.10.2011
passed by the Customs, Excise and Service Tax Appellate Tribunal,
Ahmedabad (for short, “the CESTAT”). By the said order, the CESTAT
has set aside the Order-in-Original dated 27.09.2006 passed by the
Commissioner of Customs and has discharged the show cause notice
dated 14.07.2003 that was issued to the respondent Nos. 2 and 3
herein.
2. It is the case of the appellant that on the basis of information
Signature Not Verified
Digitally signed by
KAPIL TANDON
Date: 2025.12.02
18:05:12 IST
Reason:
received by its intelligence agency, Bhagyalaxmi Processor Industry

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(hereinafter, Unit No.1) and Famous Textile Packers (hereinafter, Unit
No.2) were processing cotton fabrics with the aid of power but without
following any of the procedures laid down under the Act of 1944 as
well as the Rules framed thereunder. The preventive staff carried out
a search of both the Units on 21.01.2003 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 of Unit Nos.1 and 2 along with other employees of both the
Units, the Commissioner, Customs and Central Excise issued show
cause notice dated 14.07.2003 on the premise that both the Units
were not entitled to exemption from paying customs duty. He made a

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demand of excise duty under Section 11-A(1), interest on the amount
of duty under Section 11 A B and penalty under Section 11 A C of the
Act of 1944. Both the Units were called upon to submit their reply to
the same.
3. Reply to the show cause notice was submitted on 15.12.2005
denying the contents thereof. It was asserted that cotton fabrics were
being processed without the aid of any power and hence the Units
were entitled to exemption in view of Entry No.106 of Notification
No.5/98-CE. The Commissioner of Central Excise considered the
entire material and vide Order dated 29.07.2004 held that both the
Units were jointly and severally liable to pay the amount of duty with
interest as well as penalty under the Act of 1944.
The said Units being aggrieved by the aforesaid order preferred
an appeal before the CESTAT. Vide its order dated 01.07.2005, the
CESTAT held that the joint and several liability of each Unit could not
have been fixed. It therefore set aside the Order-in-Original dated
29.07.2004 and remanded the proceedings to the Commissioner for
reconsideration.
4. After remand, the Commissioner, Central Excise reconsidered
the entire material. After assessing the evidence on record, he held
that the statements recorded on 21.01.2003 were sought to be

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retracted by the partners of Unit Nos.1 and 2 after a period of almost
six months. There was no protest lodged by the noticees immediately
after the said statements were recorded and hence the retraction was
by way of an afterthought. He further found that the presence of
electric motors had been noted in the panchnama and that there had
been high consumption of electricity and fuel by Unit No.1. There was
no explanation furnished by Unit No.1 in that regard. It was thus held
that Unit No.1 was receiving grey cotton fabrics for processing. The
said fabrics were being bleached and mercerized by Unit No.1 with
the aid of power. The mercerized and bleached fabrics in wet
condition were transferred to Unit No.2 where the fabrics were
squeezed for removing extra water and thereafter were processed for
stentering. Thereafter, the fabrics were again brought back to the
premises of Unit No.1 for bailing/folding on the machines installed at
Unit No.1 that was operated with the aid of electric motor. On the
completion of this process, the fabrics were packed and returned to
the customers. Since the entire process from receiving the fabrics till
their bailing/folding was a continuous process, the same was
completed with the aid of electricity. Hence, the Units were not entitled
to claim any exemption under the said Notification. The liability to pay
duty on the finished fabrics while removing the same after the process

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of bailing and folding was of Unit No.1. The show cause notice was
accordingly adjudicated against Unit No.1 and the demand as made
therein was confirmed against Unit No.1. The Commissioner also
imposed penalty on it under Section 11 AC of the Act of 1944.
5. Both the Units being aggrieved by the said adjudication again
approached the CESTAT by filing two appeals. Both the appeals were
heard together and the CESTAT by its judgment dated 28.09.2011
proceeded to hold that when the wet fabrics were cleared from Unit
No.1 and sent to Unit No.2, the said activity was non-excisable. It
further held that distinct activities of mercerizing and bleaching were
being carried out at Unit No.1 while the activities of stentering and
hydro extraction/ drier was carried out at Unit No.2. Both the Units
were distinct partnership concerns and the clubbing of their activities
was not justified. It therefore held that the finding recorded by the
Commissioner that the processes undertaken at Unit Nos.1 and 2
were liable to be clubbed for deciding accessibility and liability of Unit
No.1 to pay duty was incorrect. It further held that the subsequent
affidavits retracting the statements made during the panchnama
ought to have been taken into consideration. It thereafter held that the
allegation that there was usage of power during the process of
mercerizing at Unit No.1 was incorrect. On that basis, the CESTAT

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proceeded to set aside the order of the Commissioner and allowed
both the appeals. Being aggrieved, the Commissioner of Customs,
Central Excise and Service Tax has come up in appeal.
6. Mr. Raghavendra P. Shankar, learned Additional Solicitor
General appearing for the appellant submitted that the CESTAT
misread Entry No.106 of the Exemption Notification dated 02.06.1998
for arriving at the conclusion that grey fabrics had been processed to
cotton fabrics without the aid of power by Unit No.1. According to him,
the grey fabrics were initially bleached and mercerized at Unit No.1.
Thereafter the fabrics in wet condition were shifted to Unit No.2 and
subjected to squeezing and stentering. The dry fabrics were
thereafter returned to Unit No.1 where they were bailed and packed
after which the cotton fabrics were cleared. The conversion of grey
fabrics to a finished product was subjected to “process” with the aid
of power. Referring to the decisions in CCE Vs. Rajasthan State
1 2
Chemical Works and Impression Prints Vs. CCE , it was
submitted that if there was use of any power at any of the numerous
processes that were required to convert the raw material into a
finished article, the manufacture would be with the use of power. Each

1
1991 INSC 235
2
2005 INSC 377

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of the activities carried out at Unit Nos.1 and 2 were integrally
connected leading to the final product and hence it could not be said
that the cotton fabrics were manufactured without the aid of power.
The CESTAT had failed to be taken into consideration the various
processes undertaken on the initial grey fabrics till the time of the final
product was prepared. Referring to the Panchnama that was
prepared by the Inspection team, it was submitted that the use of
power during the course of stentering was clearly admitted. Even the
CESTAT did not disturb the said finding. However, by wrongfully
holding that the process undertaken at Unit No.2 was not connected
to the process undertaken at Unit No.1, it proceeded to arrive at a
wrong conclusion. It was thus clear that the benefit of exemption was
not available specially when the process of stentering was integrally
connected with the manufacture of cotton fabrics from grey fabrics.
As the conclusion drawn by the CESTAT was contrary to the legal
position settled by this Court, it could not be said that it had taken a
possible view of the matter. A case was therefore made out to interfere
with the findings recorded by the CESTAT. Reliance was also placed
on the decision in Standard Fireworks Industries, Sivakasi and
3
another Vs. Collector of Central Excise . It was thus urged that the

3
(1987) 1 SCC 600

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order passed by the CESTAT be set aside and the Order-in-Original
passed by the Commissioner be restored.
7. On the other hand, Mr. Ashish Batra, learned counsel for the
respondents supported the order passed by the CESTAT and
submitted that the benefit of the Exemption Notification dated
02.06.1998 had been rightly granted to Unit No.1. He submitted that
Unit No.1 and Unit No.2 were independent in their activities and were
merely carrying out respective job works. There was no unity of
ownership of the two Units. Though show cause notice was issued to
both the Units, the Commissioner proceeded to uphold the demand
only against Unit No.1. Even if it was presumed that there was use of
power in the process of stentering at Unit No.2, as the show cause
notice against it had been dropped, the activities in question carried
out at Unit Nos.1 and 2 could not have been clubbed. The CESTAT
rightly held that insofar as Unit No.1 was concerned, there was no use
of power. It was then submitted that the statements alleged to have
been recorded during the course of recording the Panchnama had
been retracted by filing affidavits. The CESTAT rightly ignored the
earlier statements and recorded a correct finding that there was no
use of power during the entire process of manufacture. The CESTAT
being the final fact finding authority and the conclusion recorded by it

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being one based on the material on record, there was no case for
interference with the said findings. To substantiate this contention, the
learned counsel relied upon the decision in Steel Authority of India
4
Ltd. Vs. Directorate General of Anti-Dumping & Allied Duties . It
was thus submitted that there was no merit in the appeal as filed and
the same was liable to be dismissed.
8. We have heard the learned counsel for the parties at length and
with their assistance we have perused the documentary material on
record. Having given due consideration to the same, we are of the
considered view that the CESTAT fell in error while coming to the
conclusion that the conversion of grey fabrics to cotton fabrics did not
include an integral process of stentering undertaken with the aid of
power and thus the benefit of the Exemption Notification was
available to Unit No.1.
9. At the outset, it would be necessary to refer to the definition of
the expression “manufacture” as defined in Section 2(f) of the Act of
1944 prior to its amendment by Act 18 of 2017. The same reads as
under:-
“2(f) ‘Manufacture’ includes any process:-
(i) incidental or ancillary to the completion of a manufactured
product;


4
2017 INSC 356

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(ii) which is specified in relation to any goods in the section or
Chapter notes of the First Schedule to the Central Excise Tariff
Act, 1985 as amounting to manufacture; or

(iii) which in relation to the goods specified in the Third
Schedule, involves packing or repacking of such goods in a
unit container or labelling or re-labelling of containers including
the declaration or alteration of retail sale price on it or adoption
of any other treatment on the goods to render the product
marketable to the consumer;

and the word “manufacture” shall be construed accordingly
and shall include not only a person who employs hired labour
in the production or manufacture of excisable goods, but also
any person who engages in their production or manufacture
on his own account.”

Since, Unit No.1 seeks the benefit of Notification No.5/1998-CE
and especially Entry No.106 therein, the same is reproduced
hereunder:-

10. Before adverting to the factual aspects, it would be necessary
to bear in mind the settled legal position on the aspect “manufacture”
and “process” in the context of Exemption notifications under the Act
of 1944. In Standard Fireworks Industries, Sivakasi and another
(supra), the manufacturers of fireworks sought to claim refund of duty

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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 (supra) 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

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diesel pumps. After referring to the definition of the expression
“manufacture” under the Act of 1944, it was observed as under:-
“13. Manufacture thus involves series of processes. Process
in manufacture or in relation to manufacture implies not only
the production but the various stages through which the raw
material is subjected to change by different operations. It is the
cumulative effect of the various processes to which the raw
material is subjected to ( sic that the) manufactured product
emerges. Therefore, each step towards such production
would be a process in relation to the manufacture. Where any
particular process is so integrally connected with the ultimate
production of goods that but for that process manufacture or
processing of goods would be impossible or commercially
inexpedient, that process is one in relation to the manufacture.
14. The natural meaning of the word 'process' is a mode of
treatment of certain materials in order to produce a good
result, a species of activity performed on the subject matter in
order to transform or reduce it to a certain stage. According to
Oxford Dictionary one of the meanings of the word 'process' is
“a continuous and regular action or succession of actions
taking place or carried on in a definite manner and leading to
the accomplishment of some result". The activity
contemplated by the definition is perfectly general requiring
only the continuous or quick succession. It is not one of the
requisites that the activity should involve some operation on
some material in order to ( sic effect) its conversion to some
particular stage. There is nothing in the natural meaning of the
word 'process' to exclude its application to handling. There
may be a process which consists only in handling and there
may be a process which involves no handling or not merely
handling but use or also use. It may be a process involving the
handling of the material and it need not be a process involving
the use of material. The activity may be subordinate but one
in relation to the further process of manufacture.
20. A process is a manufacturing process when it brings out a
complete transformation for the whole components so as to
produce a commercially different article or a commodity. But,
that process itself may consist of several processes which may
or may not bring about any change at every intermediate
stage. But the activities or the operations may be so integrally
connected that the final result is the production of a
commercially different article. Therefore, any activity or
operation which is the essential requirement and is so related
to the further operations for the end result would also be a

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process in or in relation to manufacture to attract the relevant
clause in the exemption notification. In our view, the word
'process' in the context in which it appears in the aforesaid
notification includes an operation or activity in relation to
manufacture.”

The decision in Standard Fireworks Industries, Sivakasi
and another (supra) was referred to and a similar view of the matter
was taken.
11. From the aforesaid 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.
In the present case, the show cause notice indicates that Unit
No.1 was receiving grey fabrics which were thereafter bleached and
mercerized at the said Unit. The fabric in wet condition was then
shifted to Unit No.2 and subjected to squeezing and stentering. The

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dry fabrics were thereafter returned to Unit No.1 where they were
bailed and packed. It was thereafter that the cotton fabrics were
finally cleared. The CESTAT while allowing the appeals preferred by
both the Units came to the conclusion that the distinct processes
carried out at Unit Nos.1 and 2 could not have been clubbed
together. It held that both the Units were independently working on
their own account and thus their activities were not liable to be
clubbed together. For reaching that conclusion, the CESTAT was
impressed by the fact that there was no commonality between the
partners of both the Units, the machinery employed in both the Units
were different, the job work bills were separately raised by both the
Units and that the payments were separately made by them.
12. In our view, 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. 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

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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. What is to
be seen is whether the distinct processes undertaken by the two Units
formed part of a continuous chain that culminated into the final
product or not? If 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 Act of 1944.
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.
13. 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

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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. 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.

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14. For the aforesaid reasons, 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. The Civil Appeal is thus allowed leaving the parties
to bear their own costs.


…………………………………………..J.
[PAMIDIGHANTAM SRI NARASIMHA]



………………..………………………..J.
[ATUL S. CHANDURKAR]


NEW DELHI,
DECEMBER 02, 2025.

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