Supreme Court rules that excise duty exemption for goods "processed without aid of power" is not available if any integral process in the manufacturing chain uses power, even if performed by separate units.
(i) WHETHER UNITS CLAIMING EXEMPTION UNDER NOTIFICATION NO.5/1998-CE (ENTRY NO.106) FOR "COTTON FABRICS PROCESSED WITHOUT THE AID OF POWER" CAN CLAIM BENEFIT IF ANY INTEGRAL PROCESS IN THE MANUFACTURING CHAIN USES POWER?
(ii) WHETHER THE ENTIRE MANUFACTURING PROCESS FROM RAW MATERIAL TO FINISHED PRODUCT MUST BE CONSIDERED AS A WHOLE FOR DETERMINING ELIGIBILITY FOR EXCISE DUTY EXEMPTION?
(iii) WHETHER SEPARATE MANUFACTURING UNITS OPERATING IN A CONTINUOUS PROCESS CAN BE TREATED AS A SINGLE MANUFACTURING CHAIN FOR EXCISE DUTY PURPOSES?
(iv) WHETHER THE CESTAT ERRED IN BIFURCATING THE CONTINUOUS MANUFACTURING PROCESS AND GRANTING EXEMPTION BASED ON SEPARATE UNIT OPERATIONS?
(i) NO - The exemption under Notification No.5/1998-CE (Entry No.106) is not available if any integral process in the manufacturing chain uses power, regardless of whether different units perform different processes.
(ii) YES - The entire manufacturing process from raw material to finished product must be considered as a whole for determining eligibility for excise duty exemption. The cumulative effect of all processes must be examined.
(iii) YES - When separate manufacturing units operate in a continuous, integrated process leading to a final product, they must be treated as a single manufacturing chain for excise duty purposes.
(iv) YES - The CESTAT committed an error by bifurcating the continuous process of manufacture and treating separate units as independent operations when they were integrally connected in the manufacturing chain.
Search & Panchnama: Preventive staff searches Bhagyalaxmi Processor Industry (Unit 1) and Famous Textile Packers (Unit 2), finds machinery using power
Show Cause Notice: Commissioner issues notice alleging units not entitled to exemption due to power usage
Order-in-Original: Commissioner holds units liable to pay duty with interest and penalty
First CESTAT Order: Sets aside order and remands case for reconsideration of joint liability
Re-adjudication Order: Commissioner confirms demand against Unit 1 only, imposes penalty
CESTAT Final Order: Allows appeals, sets aside Commissioner's order, grants exemption to units
Supreme Court Ruling: "No excise duty exemption if any manufacturing step uses power" - sets aside CESTAT order, restores Commissioner's order
| Legal Provision | What It Means | Application in This Case |
|---|---|---|
| Notification 5/1998-CE Entry 106 Exemption for cotton fabrics |
Exempts cotton fabrics processed without aid of power or steam | Not applicable if ANY process in chain uses power |
| Section 2(f) Central Excise Act Definition of "Manufacture" |
Includes any process incidental or ancillary to completion | Broad interpretation covers all processes in chain |
| Section 35-L(b) Central Excise Act Appeal to Supreme Court |
Allows appeal against CESTAT order on substantial question of law | Invoked due to misinterpretation of exemption notification |
| Standard Fireworks Case (1987) 1 SCC 600 |
Exemption not available if any process uses power | Applied - power usage in ANY process disqualifies exemption |
Includes any process incidental or ancillary to completion of manufactured product, any specified process in tariff notes, and packing/treatment to render product marketable.
A continuous and regular action or succession of actions taking place in definite manner leading to accomplishment of result. Can include handling, use, or transformation of materials.
Document recording search and seizure proceedings, prepared in presence of independent witnesses (panchas), used as evidence in excise and customs proceedings.
Customs, Excise and Service Tax Appellate Tribunal - specialized tribunal for appeals against orders of Commissioner of Customs and Central Excise.
"Manufacture involves a series of distinct processes. It 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 process should be integrally connected with each other leading to the ultimate final product. But for each individual process, the manufacture or processing of the goods would be impossible."
This judgment establishes that excise duty exemptions requiring "processing without aid of power" must be interpreted strictly. If ANY integral process in the manufacturing chain uses power, the exemption is not available, regardless of whether different units perform different processes or whether the units have separate ownership.
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