Does a continuous manufacturing chain across separate job-work units using power at any stage negate exemption under Entry 106 of Notification No. 5/98-CE?

Summary

Practical Impact

What’s New / What Lawyers Should Note

• Integrated multi-stage processes across separate job-work units must be clubbed to determine “manufacture” for exemption claims.
• Any use of power in any stage of the integrated chain—however ancillary—voids the “without aid of power” exemption under Entry 106.
• Distinct legal personalities or separate billing do not break the continuity of the manufacturing chain.
• Retraction affidavits to panchnama statements cannot disregard contemporaneous machine‐inspection records of power use.
• This decision is binding authority for quashing or defending exemption claims under indirect tax notifications.

Summary of Legal Reasoning

1. Statutory Definition: Section 2(f) pre-2017 defines “manufacture” to include any process incidental or ancillary to completion of a manufactured product.
2. Nature of Process: Citing Collector of Central Excise, Jaipur, the Court held that “process” includes all integrally connected operations even if subordinately linked.
3. Cumulative Chain Test: If distinct processes—bleaching, mercerizing, squeezing, stentering, bailing and packing—are essential steps for final conversion, they form one integrated manufacture.
4. Exemption Construction: Entry 106 of Notification No. 5/98-CE grants exemption only if no process is carried on with power; any power use in the integrated chain disqualifies it.
5. Application: Evidence of electric motors, high power consumption, and admitted power use in stentering establish disqualification. Independent identities of units irrelevant.
6. Precedent Application: Reaffirmed Standard Fireworks and Impression Prints; applied the integral‐process test to uphold the Commissioner’s demand.

Arguments by the Parties

Appellant (Commissioner of Customs, Central Excise & Service Tax)

• Panchnama and electricity records show power-driven bleaching, mercerizing, stentering and bailing.
• All processes are integrally connected; conversion of grey to cotton fabrics is a single manufacture under Sec. 2(f).
• Any power use in the chain defeats Entry 106 exemption.
• Relied on Standard Fireworks and Impression Prints to support integral‐process interpretation.

Respondents (Units 1 & 2)

• Distinct partnership concerns with separate ownership, machinery, billing and payments.
• Unit 1 never used power during its job work; affidavits retract panchnama statements.
• Independent processes should not be clubbed; benefit of exemption rightly granted by CESTAT.

Factual Background

Bhagyalaxmi Processor Industry (Unit 1) and Famous Textile Packers (Unit 2) operated on a shared compound. A search in January 2003 recorded electric motors on bleaching, mercerizing, squeezing and stentering machines. Unit 1 received grey fabrics, bleached and mercerized them, then sent wet goods to Unit 2 for squeezing and stentering. The dry fabrics returned to Unit 1 for bailing and packing before clearance. A show cause notice alleged power-assisted manufacture, duty demand and penalty under the Central Excise Act. CESTAT allowed the job-workers’ appeals; the Supreme Court restored the Commissioner’s order.

Statutory Analysis

• Section 2(f), Central Excise Act, 1944: Defines “manufacture” to include incidental or ancillary processes integral to the final product.
• Notification No. 5/98-CE, Entry 106: Exempts cotton fabrics “processed without the aid of power or steam.”
• Interpretation: “Process” is construed broadly to cover all integrally connected operations; any use of power at any stage of the continuous chain negates the exemption.

Alert Indicators

• ✔ Precedent Followed