Summary
The Supreme Court restored the Commissioner's order denying a textile processing unit the exemption for 'cotton fabrics processed without the aid of power or steam'. Bleaching and mercerising at one unit, stentering with power at an adjoining unit, and baling at the first unit were integrally connected steps in one manufacture, so the use of power at any stage defeated the exemption. The fact that the two units were separately owned made no difference.
Issues
- Whether processes carried out at two separately owned units in the same premises could be treated together as one process of manufacture for deciding entitlement to the exemption for cotton fabrics processed without the aid of power.
- Whether the use of power in stentering at the second unit disentitled the first unit, which cleared the finished fabrics, from the exemption, even though the demand against the second unit had not been confirmed.
- Whether the CESTAT's findings warranted interference in a statutory appeal under Section 35-L(b) of the Central Excise Act, 1944.
Provisions considered
- Section 2(f) (as it stood before amendment by Act 18 of 2017), Central Excise Act, 1944Read with the precedents as covering every process incidental or ancillary to completion of the product; where the processes are so interlinked that the end product cannot emerge without each of them, the whole activity is 'manufacture'. (¶¶ 9, 10, 11, 12)
- Entry No. 106, Notification No. 5/98-CE dated 02.06.1998The exemption for cotton fabrics processed without the aid of power or steam was held unavailable because stentering, an integral process in converting grey fabrics into cotton fabrics, was done with the aid of power. (¶¶ 8, 9, 13)
- Section 35-L(b) (before amendment by Act 25 of 2014), Central Excise Act, 1944The appeal was maintained under this provision, and interference was held justified because the CESTAT had wrongly split up a continuous process of manufacture. (¶¶ 1, 13)
Held
- Manufacture involves a series of processes whose cumulative effect produces the final product. Any process so integrally connected with the final production that, without it, manufacture would be impossible or commercially inexpedient is a process in relation to manufacture, even if it is subordinate. Following Standard Fireworks Industries and Rajasthan State Chemical Works, an exemption conditioned on no process being carried on with the aid of power is lost if power is used at any such integral stage. (¶¶ 10, 11)
- The question is whether the distinct processes form a continuous chain culminating in the final product, not whether they were done by distinct entities. Grey fabrics were bleached and mercerised at Unit No.1, squeezed and stentered at the adjoining Unit No.2, and returned to Unit No.1 for baling and packing before clearance, so the whole chain was 'manufacture' under Section 2(f) even though the units had different partners, machinery and billing. (¶¶ 11, 12)
- Stentering at Unit No.2 was done with the aid of power, so the cotton fabrics cleared by Unit No.1 were not processed without the aid of power and Entry No.106 of Notification No.5/98-CE did not apply. That the demand against Unit No.2 was not confirmed was irrelevant, since the final product was cleared from Unit No.1. (¶¶ 8, 13)
- Because the CESTAT bifurcated a continuous process of manufacture, its conclusion was open to interference under Section 35-L(b), and the principle in Steel Authority of India on deference to the fact-finding tribunal did not apply. (¶ 13)
Result
Civil appeals allowed; the CESTAT's order set aside and the Commissioner's Order-in-Original fixing the liability on Unit No.1 restored; parties to bear their own costs.