Legal Review and Analysis of Commissioner of Customs Central Excise & Service Tax Rajkot vs Narsibhai Karamsibhai Gajera & Ors 2025 INSC 1374
Case Synopsis
Name & Citation: Commissioner of Customs, Central Excise & Service Tax, Rajkot vs. Narsibhai Karamsibhai Gajera & Ors. (2025 INSC 1374)
Essence: The Supreme Court held that for claiming an excise duty exemption conditional on "processing without aid of power," the entire series of integrally connected processes—even if split between legally distinct entities—must be considered as a whole. 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.
1. Case Identification & Citation
Judgment Name: Commissioner of Customs, Central Excise & Service Tax, Rajkot vs. Narsibhai Karamsibhai Gajera & Ors.
Citation: 2025 INSC 1374
Court: Supreme Court of India
Bench: Justice Pamidighantam Sri Narasimha and Justice Atul S. Chandurkar
Civil Appeal Nos.: 3405-3407 of 2012
2. Relevant Laws & Legal Provisions
This judgment interprets the following key statutory frameworks governing central excise duty and exemptions:
Central Excise Act, 1944 ("the Act"):
Section 2(f): Definition of "manufacture," which includes any process incidental or ancillary to the completion of a manufactured product.
Section 11A: Provisions for recovery of duty not levied or short-levied.
Section 11AB: Liability to pay interest.
Section 11AC: Imposition of penalty.
Section 35-L(b): Provision for appeal to the Supreme Court from any order of the Appellate Tribunal.Exemption Notification No. 5/98-CE (Entry No. 106): Grants exemption from excise duty to "Cotton fabrics processed without the aid of power or steam."
Key Precedents Applied: The judgment relies on settled principles from Standard Fireworks Industries, Sivakasi vs. Collector of Central Excise (1987) 1 SCC 600 and Collector of Central Excise, Jaipur vs. Rajasthan State Chemical Works 1991 INSC 235 to interpret the scope of "manufacture" and "process" in the context of exemption notifications.
3. Details of the Case
A. Factual Background
The case involved two industrial units, Bhagyalaxmi Processor Industry (Unit No. 1) and Famous Textile Packers (Unit No. 2), operating from a common premises. Based on intelligence, the Revenue Department conducted a search on January 21, 2003, and found machinery (including a mercerizing machine, bleaching machinery, a stentering machine, and driers) operated with electric power. A show-cause notice was issued 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 Unit No. 1, holding that the processes at both units were integrated. The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) set aside this order, ruling that the two units were distinct entities performing separate job works, and the process at Unit No. 1 (claimed to be without power) could not be clubbed with the process at Unit No. 2 (which used power). The Revenue Department appealed this decision to the Supreme Court.
B. Issue Before the Supreme Court
The core legal issue was whether, for claiming the exemption under Notification No. 5/98-CE for "cotton fabrics processed without the aid of power," the assessing authority should consider the entire series of processes undertaken by distinct legal entities to convert grey fabric into finished cotton fabric, or evaluate each entity's activity in isolation.
C. Ratio Decidendi (The Court's Reasoning & Decision)
The Supreme Court allowed the Revenue's appeal and reversed the CESTAT's order. Its reasoning is as follows:
Interpretation of "Manufacture" and "Process": The Court reaffirmed that "manufacture" under Section 2(f) of the Act involves a series of processes. The exemption notification must be interpreted in this context. Relying on precedents like Standard Fireworks, the Court held that if any process in the integrated chain of production is carried out with the aid of power, the benefit of the exemption is lost. The test is whether the various processes are integrally connected, leading to the final marketable product.
Integral Connection Overrides Separate Legal Identity: The Court held that the CESTAT erred by focusing on the separate legal identities, ownership, and billing practices of the two units. The critical question was the nature of the activity. The facts established a continuous, integrated process: Unit No. 1 (bleaching & mercerizing) → Unit No. 2 (squeezing & stentering with power) → back to Unit No. 1 (bailing & packing). These steps were interdependent and essential for converting grey fabric into finished cotton fabric. Therefore, the processes had to be clubbed together for determining eligibility for exemption.
Non-confirmation of Demand Against Unit No. 2 is Immaterial: The Court rejected the argument that since the demand was not confirmed against Unit No. 2, its use of power was irrelevant. The liability was correctly fastened on Unit No. 1 because it received the final product after the integrated process and cleared it. The stage at which power was used within the integrated chain was not determinative; its mere use anywhere in the chain disqualified the entire production from exemption.
4. Core Legal Principle and In-Depth Analysis
Title: The Integrated Process Doctrine: Substance Over Form in Excise Exemptions
Core Issue and the Supreme Court's Addressing: This judgment clarifies a fundamental principle in excise law: the determination of whether a "process" uses power for an exemption claim must be based on the commercial and practical reality of production, not the legal structuring of business entities.
A. Reaffirming the "Series of Processes" Test: The Court moved beyond a simplistic, step-by-step analysis. It emphasized that "manufacture" is the cumulative effect of multiple procedures. By invoking the definition under Section 2(f) and the precedent in Rajasthan State Chemical Works, the Court underscored that any activity integrally connected to the final production is a "process" in relation to manufacture. If power is used in any such integral activity, the condition of "processed without the aid of power" is not fulfilled.
B. Piercing the Corporate Veil in Excise Law: While the units had separate partnerships, machinery, and invoices, the Court looked at the substantive unity of the production flow. The physical proximity, the sequential and necessary movement of material, and the fact that the final product emerged only after the last step demonstrated a single, unified manufacturing operation. This approach prevents the artificial fragmentation of processes to avail exemptions not intended by law.
C. Policy Rationale: Preventing Avoidance and Ensuring Legal Certainty: The ruling serves a critical anti-avoidance function. It closes a potential loophole where a manufacturer could split an integrated power-driven process into two contracts (one "without power" and one "with power") to claim an exemption. The judgment ensures that the exemption, meant for genuinely manual or non-mechanized processes, is not misused. It directs authorities and tribunals to examine the functional unity and commercial expediency of the production chain.
Final Outcome Synthesis:
The Supreme Court allowed the Revenue's appeal.
The order of the CESTAT was quashed and set aside.
The Order-in-Original passed by the Commissioner of Central Excise, which confirmed the duty demand and penalty against Unit No. 1 (Bhagyalaxmi Processor Industry), was restored.
5. (MCQs) Based on the Judgment
Question 1: According to the Supreme Court's ruling in Commissioner of Customs vs. Narsibhai Gajera, when determining eligibility for an excise exemption for goods "processed without the aid of power," what is the primary factor to consider?
a) The legal ownership and separate registration of the units involved in different stages.
b) Whether the final clearing unit has used power in its specific process.
c) The integral connection and continuity of all processes leading to the final product, irrespective of the entity performing them.
d) The specific stage at which power is used and whether duty is demanded from that particular unit.
Question 2: In the aforementioned case, the Supreme Court held that the use of power in the stentering process at Unit No. 2 disqualified Unit No. 1 from exemption because?
a) Both units were owned by the same family members.
b) The processes at both units were part of an integrally connected chain of manufacture culminating in the final product cleared by Unit No. 1
c) Unit No. 1 was financially controlling Unit No. 2.
d) The exemption notification explicitly forbids job work arrangements.
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