The Supreme Court has clarified that the entire series of integrally connected processes, even if split between legally distinct entities, must be considered as a whole, for claiming an excise duty exemption conditional on “processing without aid of power”. The Court ruled that the use of power at any critical stage in the integrated manufacturing chain nullifies the exemption, upholding the principle of substance over form in fiscal statutes.
As all the activities commencing from bleaching and mercerising, 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 Court ruled that the entire activity of undertaking the various processes amounted to “manufacture” for the purposes of Section 2(f) of the Central Excise Act, 1944.
The Court therefore opined that the CESTAT had erred in concluding 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, declined the benefit of the Exemption Notification No. 5/98-CE related to the Cotton Fabric, to the industrial unit.
Reference was made to the settled legal position on the aspect of “manufacture” and “process” in the context of Exemption notifications under the Central Excise Act, in the case of Standard Fireworks Industries, Sivakasi vs. Collector of Central Excise [(1987) 1 SCC 600], where it was held that the Exemption Notification No.5/1998-CE was applicable only when, in relation to the manufacture of the goods, no process was ordinarily carried on with the aid of power.
A Two-Judge Bench comprising Justice Pamidighantam Sri Narasimha and Justice Atul S. Chandurkar observed that manufacture 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 processes should be integrally connected, leading to the ultimate final product. The Bench also pointed out that a particular activity may be subordinate but related to the further process of manufacture.
Pointing out that the CESTAT misdirected itself while emphasising the distinct identities of the two Units and in the process ignored the fact that both the Units were together involved in the process of manufacture of cotton fabrics from grey fabrics, the Bench elaborated that after the grey fabrics were bleached, they were taken to Unit 2 for squeezing and then the dry fabrics were brought back to Unit 1 for being bailed and packed. Accordingly, the Bench restored the demand duty and penalty that was set aside by the CESTAT.
Briefly, the dispute pertains to the two industrial units, i.e., Bhagyalaxmi Processor Industry (Unit 1) and Famous Textile Packers (Unit 2), operating from a common premises, where the Revenue Department conducted a search, based on an intelligence, and found machinery operated with electric power. This led to the issuance of a show-cause notice alleging that the units were processing cotton fabrics with the aid of power and were thus not eligible for the exemption under Notification No. 5/98-CE.
The Commissioner of Central Excise, after adjudication, confirmed the demand for duty, interest, and penalty against Bhagyalaxmi Processor Industry, holding that the processes at both units were integrated. The CESTAT, however, ruled that the two units were distinct entities performing separate job works, and the process at Bhagyalaxmi Processor Industry (claimed to be without power) could not be clubbed with the process at Famous Textile Packers (which used power). This has the bone of appeal of the Revenue Department before the Supreme Court.
Case Relied On:
Standard Fireworks Industries, Sivakasi vs. Collector of Central Excise [(1987) 1 SCC 600]
Appearances:
Additional Solicitor General (ASG) Raghavendra P. Shankar and Senior Advocate Nisha Bagchi, for the Appellant/ Revenue
Advocate Ashish Batra, for the Respondent/ Taxpayer
