Supreme Court rejects Split view of Manufacturing Process Leading to One Final Product, upholds Excise Duty Demand on Cotton Processor [Read Order]

In a recent ruling, the Supreme Court has held that when multiple units collectively contribute to a continuous and integrated manufacturing process that results in one final product, excise duty cannot be avoided by treating these units as separate and independent entities.

The Court restored the excise duty demand on a cotton processing unit after finding that power was used at various stages of the manufacturing chain, disqualifying the assessee from claiming exemption under the relevant notification.

Justice Pamidighantam Sri Narasimha and Atul S. Chandurkar observed that “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.”

The facts of the case are that it involved two adjacent units Bhagyalaxmi Processor Industry (Unit 1) and Famous Textile Packers (Unit 2), which processed grey cotton fabrics into finished cotton fabrics.

Although the units claimed they operated independently and processed fabrics without the aid of power, investigations revealed the use of electric motors, stentering machines, bleaching machinery and other power-based equipment across both premises.

The Commissioner of Central Excise had initially confirmed the duty demand, holding that both units were jointly involved in a power-aided manufacturing process.

The CESTAT, however, set aside this order, deciding that the activities of the two units could not be clubbed because they belonged to different partnership firms, issued separate job-work bills and had no shared ownership. The Tribunal held that Unit 1 alone was entitled to exemption since no power was allegedly used in its processes.

The apex court, reversing the Tribunal’s findings, held that the CESTAT had misdirected itself by focusing solely on the separate identities of the units instead of examining the integrated nature of the manufacturing process.

In addition, the court observed that “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.”

According to the apex bench,even if power is used at a single essential stage by any unit involved, the entire activity is considered “manufacture with the aid of power,” making the exemption unavailable.

The Supreme Court further criticized the CESTAT’s dependency on repudiated claims of the partners, noting that the retractions came months later without immediate objection and after the panchnama clearly recorded the machinery and power usage data. Based on the evidence, the Court decided that the Commissioner had correctly established the utilization of electricity and the integrated nature of the operations.

The Court noted that the conversion of grey fabrics into finished cotton fabrics involved bleaching and mercerising at Unit 1, squeezing and stentering at Unit 2 using power, and final bailing and packing back at Unit 1, all forming a continuous, interlinked chain essential to producing the finished product.

Accordingly, the Supreme Court quashed the CESTAT order and restored the Commissioner’s original demand and penalties.

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