Integrated Manufacturing Chain Test for “Without Aid of Power” Exemptions: Commentary on COMMR. OF CUS., CEN. EXC. & SER. TAX, RAJKOT v. NARSIBHAI KARAMSIBHAI GAJERA (2025 INSC 1374)

Integrated Manufacturing Chain Test for “Without Aid of Power” Exemptions: Supreme Court’s Ruling in Commissioner of Customs, Central Excise & Service Tax, Rajkot v. Narsibhai Karamsibhai Gajera & Ors. (2025 INSC 1374)

Citation: 2025 INSC 1374
Court: Supreme Court of India (Civil Appellate Jurisdiction)
Coram: Pamidighantam Sri Narasimha, J. and Atul S. Chandurkar, J.
Date of Judgment: 2 December 2025
Appeal: Civil Appeal Nos. 3405–3407 of 2012 under Section 35‑L(b), Central Excise Act, 1944 (pre‑2014 amendment)

1. Introduction

This decision addresses a recurring and commercially significant question under central excise law: when an exemption is available only if goods are “processed without the aid of power or steam”, can an assessee still claim the exemption if some integral parts of the processing are carried out, with the aid of power, in another unit that is legally distinct and separately owned?

The Supreme Court, in Commissioner of Customs, Central Excise & Service Tax, Rajkot v. Narsibhai Karamsibhai Gajera & Ors., re‑affirms and sharpens the principle that:

  • “Manufacture” is a series of processes; and
  • if any integral process in that series is carried out with the aid of power, the manufacture as a whole is treated as being with the aid of power, even if different processes are performed in different units under different ownership.

The case arose from the textile processing industry, involving two partnership firms situated in the same compound:

  • Unit No. 1: Bhagyalaxmi Processor Industry
  • Unit No. 2: Famous Textile Packers

Both units processed cotton fabrics on a job-work basis. Unit No. 1 claimed exemption under Notification No. 5/98‑CE (Entry 106) on the footing that it “processed” cotton fabrics without the aid of power. The Department contended that the overall chain of processes, including stentering with power in Unit No. 2, amounted to manufacture with the aid of power, thereby disqualifying the exemption claim.

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Ahmedabad, had accepted the assessee’s position, primarily on the ground that the two units were distinct partnership concerns and, for Unit No. 1 itself, there was no proven use of power. The Supreme Court overruled the CESTAT, restoring the Commissioner’s Order‑in‑Original, and in doing so laid down an important clarification on how “use of power” is to be assessed when manufacturing processes are split across multiple entities.

2. Background and Factual Matrix

2.1 Statutory and Notification Framework

The case turns on the interplay between:

  • Section 2(f), Central Excise Act, 1944 (definition of “manufacture”, as it stood prior to the 2017 amendment); and
  • Notification No. 5/98‑CE, dated 2 June 1998, Entry 106 (exemption for cotton fabrics processed without the aid of power or steam).

Section 2(f) defined “manufacture” expansively, to include:

  • any process incidental or ancillary to the completion of a manufactured product;
  • certain processes specified in the Tariff; and
  • certain packing and labelling processes which render goods marketable.

The Court underscores the well‑established position that manufacture involves a series of processes, and any process which is integrally connected with the attainment of the final commercial product, such that but for that process manufacture would be impossible or commercially inexpedient, is a process “in or in relation to manufacture”.

Entry 106 of Notification No. 5/98‑CE provided:

S. No. Chapter/Heading Description of Goods Rate Conditions
106 52.07, 52.08 or 52.09 Cotton fabrics processed without the aid of power or steam
Explanation: For the purpose of this entry, cotton fabrics subjected to the process of colour fixation by passing steam over such fabrics shall be deemed to have been processed without the aid of steam. 		Exempt —

Thus, the core condition for exemption was that the cotton fabrics must be “processed without the aid of power or steam”, subject to a specific relaxation for colour fixation by steam. The controversy is whether the assessee’s fabrics satisfied this condition.

2.2 The Two Units and Their Operations

On the basis of intelligence input, the Department’s preventive staff searched the premises on 21.01.2003. Both units operated in the same compound and shared an electrical room with multiple meters (industrial connection, domestic lighting and generator).

Machinery and activity profile, as found:

  • Unit No. 1 – Bhagyalaxmi Processor Industry
    • Located in the common premises.
    • Equipped with:
      • A bale/bail packing machine with electric motor;
      • A mercerizing machine;
      • Bleaching machinery.
    • Engaged in receiving grey cotton fabrics for processing.
    • Processes found:
      • Bleaching of fabrics;
      • Mercerizing;
      • Final bailing/folding and packing of the processed cotton fabrics.
  • Unit No. 2 – Famous Textile Packers
    • Also located in the same compound, adjacent to Unit No. 1.
    • Equipped with:
      • A squeezing machine with electric motor;
      • A stentering machine fitted with oil engine and driers operated with the aid of electrical power.
    • Processes found:
      • Squeezing/hydro‑extraction of wet fabrics to remove excess water;
      • Stentering and drying.

The Commissioner, after detailed factual evaluation (including power consumption patterns), reconstructed the process flow as follows:

  1. Unit No. 1 receives grey cotton fabrics from customers.
  2. At Unit No. 1, these fabrics are bleached and mercerized.
  3. The fabrics, in wet condition, are then transferred to Unit No. 2.
  4. At Unit No. 2, fabrics undergo:
    • Squeezing/hydro‑extraction with an electrically‑driven machine; and
    • Stentering with driers operated with the aid of electrical power.
  5. The fabrics, now dry, are brought back to Unit No. 1.
  6. At Unit No. 1, fabrics are subjected to bailing/folding on electrically‑operated machinery, and then packed and cleared to customers as processed cotton fabrics.

The Department’s case was that this entire chain constitutes a continuous and integrated process of manufacture of cotton fabrics from grey fabrics and that power is indisputably used at several stages (particularly at Unit No. 2 and in certain machines at Unit No. 1), thereby disqualifying the exemption.

2.3 Departmental Proceedings and Parallel Litigation History

The chronology is as follows:

  1. Search & Panchnama (21.01.2003)
    • Preventive staff carry out search and draw a panchnama.
    • Statements of partners and employees of both units recorded.
  2. Show Cause Notice (14.07.2003)
    • Issued by Commissioner of Customs and Central Excise to both units.
    • Allegation: units were processing cotton fabrics with the aid of power without following excise procedures; exemption under Notification No. 5/98‑CE (Entry 106) not available.
    • Proposed:
      • Demand of excise duty under Section 11A(1);
      • Interest under Section 11AB;
      • Penalty under Section 11AC of the Act.
  3. Reply of Assessees (15.12.2005)
    • Contentions:
      • Processing of cotton fabrics was conducted without use of power so far as excisable “processing” was concerned.
      • They were entitled to full exemption under Entry 106.
      • Statements recorded at the time of panchnama were later retracted by affidavits.
  4. First Order‑in‑Original (29.07.2004) – Pre‑remand
    • Commissioner holds both units jointly and severally liable for duty, interest and penalty.
  5. First CESTAT Order (01.07.2005)
    • CESTAT sets aside the Commissioner’s order.
    • Reason: Joint and several liability of two independent units was untenable.
    • Case remanded to Commissioner for fresh adjudication and separate consideration of each unit’s liability.
  6. Second Order‑in‑Original (27.09.2006) – Post‑remand
    • Commissioner, on reconsideration, holds:
      • Retraction of statements after about six months, without immediate protest, is an afterthought.
      • Panchnama and other evidence reveal existence and use of electric motors and high consumption of power and fuel.
      • Processing chain:
        • Bleaching and mercerizing at Unit No. 1;
        • Squeezing and stentering with power at Unit No. 2;
        • Return to Unit No. 1 for bailing/folding on powered machines and final packing.
    • Findings:
      • Entire processing from receipt of grey fabrics to despatch of finished fabrics was a continuous process using power.
      • Exemption under Entry 106 not available.
      • Liability fastened only on Unit No. 1 (the unit clearing the final processed fabrics).
      • Duty demand, interest and penalty under Section 11AC confirmed against Unit No. 1.
  7. Second CESTAT Order (28/05.10.2011)
    • Appeals by both units allowed; Commissioner’s post‑remand order set aside.
    • Key CESTAT conclusions:
      • When wet fabrics were cleared from Unit No. 1 to Unit No. 2, that clearance was non‑excisable.
      • Activities clearly divisible:
        • Unit No. 1 – bleaching and mercerizing (claimed without power);
        • Unit No. 2 – stentering and hydro‑extraction/drying (with power).
      • Both units are separate partnership firms; no common partners, separate machinery and separate billing.
      • Therefore, their activities could not be “clubbed” to deny exemption to Unit No. 1.
      • Subsequent affidavits retracting statements made at the time of panchnama ought to have been accepted.
      • CESTAT ultimately held that there was no use of power in the manufacturing process of Unit No. 1 and that the benefit of Entry 106 was available.
  8. Appeal to Supreme Court
    • Revenue appealed under Section 35‑L(b) against the CESTAT’s final order.

3. Issues Before the Supreme Court

Though not set out as formal questions, the judgment clearly engages with the following legal issues:

  1. Integrated Process vs Segregated Units: For the purpose of an exemption conditioned on “processing without the aid of power or steam”, should the Court look at:
    • only the operations performed in the particular assessee‑unit claiming exemption; or
    • the entire chain of processes that convert grey fabrics into processed cotton fabrics, even when those processes are spread across legally distinct units?
  2. Effect of Use of Power at Any Stage: If any integral stage in the manufacturing process is carried on with the aid of power (e.g., stentering at Unit No. 2), does that suffice to treat the entire manufacture as being with the aid of power and thereby disqualify the exemption?
  3. Relevance of Separate Ownership/Partnership and Separate Billing: Can the fact that the two units are different partnership concerns, with no common partners and separate job‑work bills, prevent clubbing of their processes for determining whether the exemption condition is satisfied?
  4. Impact of Demand Being Dropped Against One Unit: Does the dropping or non‑confirmation of demand against Unit No. 2 render its powered processes irrelevant when assessing Unit No. 1’s eligibility for exemption?
  5. Scope of Interference with CESTAT Findings Under Section 35‑L(b): When CESTAT is the final fact‑finding body, under what circumstances is the Supreme Court justified in interfering with its conclusion in an appeal under Section 35‑L(b)?

4. Summary of the Supreme Court’s Decision

The Supreme Court allowed the Revenue’s appeal, holding that the CESTAT had erred in law in segregating the processes of the two units and in treating Unit No. 1’s operations as “processing without the aid of power.” The key holdings are:

  • Manufacture as a series of integrally connected processes: Manufacture of cotton fabrics from grey fabrics involves multiple distinct processes. When these processes are integrally connected in a continuous chain, each essential step is a “process in or in relation to manufacture”.
  • Use of power at any integral stage is fatal to the exemption: If in the course of that integrated manufacturing chain any process—even undertaken in another unit owned by a different entity—uses power, the manufacture is treated as being “with the aid of power”, and the exemption under Entry 106 is not available.
  • Separate legal identity of units is irrelevant for this purpose: Whether Unit No. 1 and Unit No. 2 are separate partnership concerns, with different partners, separate machinery and separate billing, is immaterial to the question whether the cotton fabrics, as finally cleared from Unit No. 1, were processed without the aid of power.
  • Dropping the demand against Unit No. 2 does not sanitize the manufacturing process: The fact that the Commissioner did not ultimately confirm demand against Unit No. 2 does not make its use of power legally irrelevant. What matters is what actually happened in the course of manufacture.
  • CESTAT misapplied settled legal principles: CESTAT’s approach of:
    • artificially bifurcating the continuous manufacturing process, and
    • treating Unit No. 1’s operations in isolation
    was held to be contrary to binding precedent (such as Standard Fireworks and Rajasthan State Chemical Works), and therefore not a “possible view”.
  • Restoration of Commissioner’s order: The Court quashed CESTAT’s order dated 05.10.2011 and restored the Commissioner’s Order‑in‑Original dated 27.09.2006, thereby upholding the duty, interest, and penalty imposed on Unit No. 1. Each party was left to bear its own costs.

5. Detailed Legal Analysis

5.1 Definition of “Manufacture” and the Concept of “Process”

The Supreme Court reproduces the then applicable definition of “manufacture” in Section 2(f) of the Central Excise Act. The judgment then relies extensively on earlier authoritative pronouncements to reaffirm that:

  • Manufacture “involves a series of processes”—not a single act.
  • Each stage or operation that the raw material passes through, which is integral to bringing about the final product, constitutes a “process in or in relation to manufacture”.
  • If but for a particular process, manufacture would be impossible or commercially inexpedient, that process is certainly one “in relation to manufacture”.

Quoting from the three‑Judge Bench decision in Collector of Central Excise, Jaipur v. Rajasthan State Chemical Works, the Court reiterates:

  • A “process” is a continuous or regular action leading to a definite result.
  • It may consist only of “handling” or may involve transformation; in either case, it can be a process “in relation to manufacture” if it is a necessary step towards the final product.
  • Even operations that are subordinate or preparatory but essential to further manufacturing are included.

Applied to the present case, bleaching, mercerizing, squeezing, stentering, drying and final bailing/folding together constitute a series of interlinked processes that convert grey fabrics into marketable processed cotton fabrics.

5.2 Scope of Exemption Under Notification No. 5/98‑CE, Entry 106

The exemption is available only where cotton fabrics are “processed without the aid of power or steam”. Two things follow:

  1. The focus is on how the fabrics are processed in fact, not on the nominal description of the unit or its billing patterns.
  2. If any essential part of the processing chain is conducted with the aid of power (other than the narrow exception for steam used solely for colour fixation), the condition for exemption fails.

The Court emphasizes that the entire course of processing that converts grey fabrics into finished cotton fabrics must be examined as a single continuum. Segregating the process unit‑wise, when in fact the processing is interdependent and sequential, is impermissible.

5.3 Precedent: Standard Fireworks Industries, Sivakasi v. Collector of Central Excise

In Standard Fireworks Industries, Sivakasi (1987), the assessees manufactured fireworks and claimed exemption on the footing that the manufacturing process in the fireworks factory itself was carried on without the aid of power. Power, however, was used in:

  • shredding paper; and
  • cutting steel wires

which were inputs or components used in making the fireworks.

The Supreme Court rejected the exemption claim, holding that:

  • The relevant criterion is whether, in relation to manufacture of the final product, any process is carried on with the aid of power.
  • Ancillary processes (such as cutting steel wires and treating paper), though performed outside the main manufacturing premises, were processes in relation to manufacture and thus counted for determining the applicability of the exemption.

The present Court draws an analogy: just as powered operations on paper and wires outside the fireworks factory sufficed to deny the “without aid of power” exemption, so too here, powered squeezing and stentering in Unit No. 2 constitute processes in relation to the manufacture of processed cotton fabrics cleared from Unit No. 1.

5.4 Precedent: Rajasthan State Chemical Works (Collector of C. Ex., Jaipur v. Rajasthan State Chemical Works)

In this three‑Judge Bench decision, the issue concerned manufacture of common salt from brine. Brine was pumped into salt pans using diesel pumps. The exemption notification applied where no process of manufacture was carried on with the aid of power.

Key principles reiterated there and quoted here:

  • Series of processes: Manufacture involves a series of processes, each of which may or may not produce visible change at an intermediate stage, but the cumulative effect is the emergence of a commercially new product.
  • Integral connection: Any particular process is “in relation to manufacture” if it is so integrally connected to the ultimate production that, without it, manufacture would be impossible or commercially inexpedient.
  • Wide meaning of “process”: The word “process” has a broad and inclusive meaning; it covers any continuous or regular activity or handling that leads to the accomplishment of a result, not necessarily involving material transformation at every stage.

The present Bench expressly adopts this reasoning to conclude that:

  • bleaching, mercerizing, squeezing, stentering, drying and bailing/folding are interdependent stages in the manufacture of cotton fabrics from grey fabrics; and
  • stentering and drying with the aid of power at Unit No. 2 are integral and indispensable processes in relation to manufacture of the final product cleared from Unit No. 1.

5.5 Precedent: Impression Prints v. Collector of Central Excise

Counsel for the Revenue cited Impression Prints v. CCE to reinforce the proposition that where power is used at any stage of the manufacturing process for converting grey fabrics into processed fabrics, the exemption for “without aid of power” cannot be claimed.

Although the present judgment does not extensively discuss the facts of Impression Prints, the reference fits within the larger line of textile processing cases where:

  • various operations (bleaching, dyeing, printing, stentering, calendaring, finishing, etc.) are treated as components of a single manufacturing chain; and
  • use of power at any such stage is sufficient to render the finished processed fabrics “manufactured with the aid of power”.

The present decision is consistent with and reinforced by that line of authority.

5.6 Respondents’ Reliance on Steel Authority of India Ltd. v. DGAD and the Court’s Response

The respondents relied on Steel Authority of India Ltd. v. Directorate General of Anti‑Dumping & Allied Duties primarily to contend that:

  • CESTAT is the final fact‑finding authority; and
  • the Supreme Court should not ordinarily interfere with findings based on appreciation of evidence.

The Supreme Court, however, distinguishes the present case. The Court underscores that:

  • The appeal is under Section 35‑L(b), which permits the Supreme Court to consider substantial questions relating to determination of duty, including availability of exemptions.
  • The CESTAT’s error here was not merely an alternative appreciation of factual material; it was a misapplication of settled legal tests concerning:
    • what constitutes “manufacture” and “process in relation to manufacture”; and
    • how to apply the “use of power” condition to an integrated manufacturing chain.

Since the Tribunal’s view was contrary to binding precedent (including Standard Fireworks and Rajasthan State Chemical Works), it could not be seen as a permissible or plausible interpretation of law. Intervention by the Supreme Court was therefore justified.

5.7 Critique of CESTAT’s Reasoning

The Supreme Court identifies several specific errors in the CESTAT’s approach:

  1. Artificial Emphasis on Separate Legal Identities:
    CESTAT placed decisive weight on:
    • difference in partners of Units 1 and 2;
    • different machinery;
    • separate job‑work bills and payments.
    The Court holds that while such factors may be relevant in other contexts (e.g., clubbing clearances for small‑scale exemption), they are not directly relevant for determining whether fabrics cleared from Unit No. 1 were in fact “processed without the aid of power”.
  2. Ignoring the Integrated Nature of the Manufacturing Chain:
    The Court notes that:
    • Grey fabrics enter Unit No. 1;
    • intermediate processing occurs in Unit No. 2 with power; and
    • finished fabrics emerge and are cleared from Unit No. 1.
    These are not independent commercial activities; they are sequential steps in a continuous, integrated manufacturing operation. The CESTAT erred by artificially “slicing” the chain at the boundaries of the two units.
  3. Failure to Appreciate Legal Irrelevance of Dropped Demand Against Unit No. 2:
    The CESTAT held that since the Commissioner did not confirm the demand against Unit No. 2 in the post‑remand order, the use of power at Unit No. 2’s stentering process could not affect Unit No. 1’s exemption claim.

    The Supreme Court firmly rejects this logic. The question is not whether Unit No. 2 was subjected to duty, but whether, factually and legally, the finished cotton fabrics cleared from Unit No. 1 underwent any powered process in the course of their manufacture. The answer is clearly yes.

  4. Retraction of Statements and Evidence of Use of Power:
    While the CESTAT accepted retraction affidavits, the Commissioner had found that:
    • retractions came after about six months and appeared to be an afterthought; and
    • independent evidence, including panchnama entries and electricity/fuel consumption patterns, supported the use of power.
    Moreover, the Court notes that even the CESTAT did not dispute the use of power in the stentering process at Unit No. 2. The central factual premise—power was used in an integral process—thus remained intact.

On this basis, the Supreme Court characterises CESTAT’s conclusion as legally untenable and restores the Commissioner’s determination.

5.8 The “Manufacturer” and Allocation of Liability

An important, though implicit, strand in the reasoning is the allocation of liability:

  • Unit No. 1 was the unit from which the final processed cotton fabrics were cleared.
  • It was therefore the appropriate person to be treated as the “manufacturer” for the purposes of levy and collection of duty on the final product.
  • Even if Unit No. 2 carried out a significant powered process (stentering, drying) as job worker, that does not absolve Unit No. 1 of the consequence that the goods it clears have in fact been manufactured with the aid of power.

This conceptually aligns with the consistent view in excise law that the person who causes goods to be manufactured and clears them, where manufacture is distributed across multiple job workers, is generally accountable for the excise consequences of the entire manufacturing chain.

6. Complex Concepts Simplified

6.1 “Manufacture” and “Process in Relation to Manufacture”

In simple terms:

  • Manufacture is not a single act; it is the overall transformation of raw materials into a different commercial product.
  • Processes in relation to manufacture are all the steps that are necessary or essential to achieve this transformation. Even if a step does not visibly change the goods, it can still be part of manufacture if, without it, the goods cannot be properly made or marketed.

Example: For salt, pumping brine into pans is a process in relation to manufacture, even though no chemical change takes place at that stage.

6.2 “Without the Aid of Power or Steam”

An exemption conditioned on processes being carried out “without the aid of power or steam” does not mean:

  • that only the final visible stage must be without power; or
  • that powered steps done outside the main factory can be ignored.

Instead, it means:

  • throughout the series of processes that bring about the final product, no integral step should use power (subject to specific exceptions carved out in the notification).

Thus, if bleaching is manual but stentering is done with an electrically driven machine, the finished fabric has been manufactured with the aid of power.

6.3 Panchnama and Retraction of Statements

A panchnama is a written record prepared at the time of search or inspection, documenting what was found (including machinery, stock, meters, etc.). Statements may also be recorded from persons present.

If these statements are later retracted:

  • The timing and manner of retraction matter. A retraction made promptly, with clear reasons, may be more credible.
  • A retraction made after several months, without prior protest, is often viewed with suspicion as an afterthought, particularly if the original statement is corroborated by other evidence (like physical machinery and power consumption data).

In this case, the Commissioner preferred the original statements and corroborating evidence, a view ultimately endorsed by the Supreme Court.

6.4 Clubbing of Units vs Clubbing of Processes

It is important to distinguish:

  • Clubbing of units (for example, for small scale industry exemption), which examines common ownership, financial control, etc.; from
  • Clubbing of processes for determining how goods were actually manufactured.

Here, the Court is not “clubbing units” in the sense of treating them as one entity for exemption thresholds. Instead, it is examining the full manufacturing chain of the product, regardless of legal boundaries between entities, to see whether any integral process used power.

6.5 CESTAT’s Role and Supreme Court’s Appellate Power Under Section 35‑L(b)

CESTAT is generally the final fact‑finding tribunal in customs and excise matters. The Supreme Court normally intervenes under Section 35‑L(b) where:

  • a substantial question of law arises (e.g., interpretation of an exemption notification); or
  • the Tribunal’s findings are vitiated by misapplication of settled legal principles.

In this case, the Supreme Court found that the CESTAT’s approach to:

  • the meaning of “manufacture” and “process”; and
  • the effect of use of power at any integral stage

was in clear conflict with binding precedent, justifying appellate interference.

7. Impact and Significance of the Judgment

7.1 Clarifying the “Integrated Manufacturing Chain” Test

The central contribution of this decision is to crystallise, in the textile job‑work context, the “integrated manufacturing chain” test for “without aid of power” exemptions:

  • The exemption is to be tested not unit‑wise or entity‑wise but process‑chain‑wise.
  • Where the manufacture of goods involves several interconnected processes carried out in different units, the use of power at any essential stage in any unit is sufficient to deny the exemption to the unit clearing the final product.

This shuts the door on attempts to:

  • partition manufacturing operations between multiple firms in a way that formalistically isolates powered processes in one unit while another claims to clear “power‑free” goods; and
  • argue that the exemption applies merely because the final processing unit itself does not use power for certain operations, even though earlier or parallel processes, integral to manufacture, did.

    7.2 Implications for the Textile Processing Industry

    The textile sector frequently uses job‑work arrangements where:

    • one unit carries out bleaching/mercerizing;
    • another performs stentering, dyeing, printing, or calendaring; and
    • a third undertakes final finishing and packing.

    After this judgment:

    • Any claim that fabrics have been “processed without the aid of power” must be evaluated by looking at the entire commercial processing route—not just the claiming unit’s internal operations.
    • The “final clearer” (here, Unit No. 1), which markets the processed fabrics, cannot insulate itself from the use of power in upstream or parallel job‑work processes that are integral to the final product.

    7.3 Broader Effect on “Without Aid of Power” Exemptions

    Beyond textiles, the judgment has general applicability to any exemption that hinges on non‑use of power. When processes are outsourced or split:

    • businesses cannot rely on the formal separateness of contractors or job‑workers to claim that their own “unit” operates without power, if in substance the goods they sell result from a power‑aided manufacturing chain;
    • tax authorities are entitled to look through corporate and partnership boundaries and examine the actual series of operations that bring about the finished product.

    7.4 Guidance for CESTAT and Lower Adjudicating Authorities

    The judgment sends a clear message to adjudicators and the CESTAT:

    • In cases involving “manufacture” and “use of power”, factual appreciation must remain grounded in the legal framework laid down by the Supreme Court.
    • Artificial segmentation of integrated processes based on:
      • separate ownership,
      • separate registrations or billing, or
      • administrative convenience
      cannot override substantive legal tests.

    Where CESTAT’s analysis departs from this legal framework, its findings are vulnerable to challenge under Section 35‑L(b).

    8. Conclusion

    The Supreme Court’s ruling in Commissioner of Customs, Central Excise & Service Tax, Rajkot v. Narsibhai Karamsibhai Gajera & Ors. is a significant reaffirmation and elaboration of the jurisprudence on:

    • the meaning of “manufacture” as a series of integrated processes;
    • the broad ambit of “process in or in relation to manufacture”; and
    • the strict interpretation of exemptions that hinge on “processing without the aid of power or steam”.

    The Court holds unequivocally that:

    • When grey fabrics are converted into processed cotton fabrics through a chain of bleaching, mercerizing, squeezing, stentering, drying and final folding/packing, these are not independent, isolated activities but parts of a single manufacturing continuum.
    • If any integral process in that continuum uses power—such as stentering with powered driers—the manufacture as a whole is treated as being with the aid of power.
    • The separate legal identity of units, absence of common partners, separate billing and the dropping of demand against one unit do not alter the substantive character of the manufacturing process.

    In restoring the Commissioner’s Order‑in‑Original and overturning the CESTAT’s contrary view, the Supreme Court not only resolves the dispute at hand but also provides clear guidance for future cases where manufacturing processes are disaggregated across multiple units. The judgment reinforces that, for excise purposes, substance prevails over form and the integrated reality of manufacture prevails over artificial segmentation when determining eligibility for exemptions conditioned on non‑use of power.

Case Details

Year: 2025
Court: Supreme Court Of India

Judge(s)

Justice Atul Sharachchandra ChandurkarJustice Pamidighantam Sri Narasimha

Advocates

GURMEET SINGH MAKKER

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