Supreme Court Holds Integrated Multi-Unit Processing With Use of Power Amounts to Manufacture; Restores Duty Demand on Cotton Fabrics

Case Name: Commissioner of Customs, Central Excise & Service Tax, Rajkot v. Narsibhai Karamsibhai Gajera & Others
Citation: 2025 INSC 1374
Date of Judgment/Order: 02 December 2025
Bench: P. Sri Narasimha, J.; Atul S. Chandurkar, J.

Held: The Supreme Court held that the CESTAT erred in treating the activities of Unit No.1 and Unit No.2 as independent processes and in granting exemption under Notification No. 5/98-CE. The Court ruled that bleaching, mercerising, squeezing, stentering, drying, bailing and packing formed an integrated, continuous chain of manufacture converting grey fabrics into cotton fabrics, and that the use of power at any essential stage—particularly stentering—was sufficient to deny the exemption. It emphasized that the statutory definition of “manufacture” under Section 2(f) includes all interlinked processes necessary for the emergence of the final product, regardless of separate ownership or location of units. By ignoring the integrated nature of operations and focusing only on distinct identities of the units, the CESTAT committed a legal error.

Summary: The Commissioner initiated proceedings after inspections revealed that two adjoining textile units processed cotton fabrics using machines powered by electricity and oil engines. Following show cause notices and adjudication, duty and penalty were imposed on Unit No.1. On appeal, the CESTAT held that the two units acted independently and that activities such as stentering at Unit No.2 should not be clubbed with the mercerising and bleaching at Unit No.1. The CESTAT relied on separate ownership, machinery, billing, and job-work structures to grant the exemption. Before the Supreme Court, the appellant argued that manufacture involves a series of closely connected processes and that use of power at any essential stage renders the exemption inapplicable. The Court reviewed Standard Fireworks, Rajasthan State Chemical Works, and related authorities to reaffirm that “process” includes any activity integrally connected with the final product. It found that Unit No.1 and Unit No.2 together executed essential stages of manufacturing cotton fabrics from grey material, and that the CESTAT erred in bifurcating what was functionally a single manufacturing chain simply because units had different owners.

Decision: The Supreme Court allowed the appeal, quashed the CESTAT order dated 05 October 2011, and restored the Commissioner’s Order-in-Original dated 27 September 2006 fastening duty and penalty on Unit No.1. The Court held that the integrated process constituted manufacture using power and therefore disentitled the units from claiming exemption under Notification No. 5/98-CE. Parties were left to bear their own costs, and all pending applications stood disposed of.