In a hearing that stretched through the morning, the Supreme Court on Monday set aside a decade-old tribunal ruling and reinstated the excise duty demand against a Rajkot-based textile processor. The bench found that the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) had adopted a “misdirected approach” by splitting a single chain of manufacturing into isolated activities.
Background
The case stems from a 2003 search at two adjoining textile processing units-Bhagyalaxmi Processor Industry (Unit 1) and Famous Textile Packers (Unit 2). Officers seized records and noted machinery such as bleaching machines, mercerizing units, squeezing machines and a stentering machine, many powered by electricity or fuel. The department alleged that both units were processing grey cotton fabric using power, yet claiming exemption meant only for non-power operations. A show-cause notice followed soon after.
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While the Commissioner confirmed the duty demand and penalty in 2006, the CESTAT later reversed it, holding that the two units were independent, and that Unit 1 alone could not be saddled with liability for processes undertaken by Unit 2.
Court’s Observations
During the hearing, the bench repeatedly questioned the logic behind treating the two units as “hermetically sealed compartments” when the fabric moved between them in wet condition mid-process.
Justice Atul S. Chandurkar remarked, “Once the grey fabric enters Unit 1 and leaves only as finished cotton fabric, every process in between must be seen as one continuous operation.”
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The Court noted that bleaching, mercerizing, squeezing, stentering and final bailing were sequential and interdependent. Even if the ownership differed, the “manufacture” under law includes all processes integrally connected to create the final product.
The bench also said the tribunal wrongly ignored evidence showing power usage during key stages. “The bench observed, ‘Stentering with electricity cannot be divorced simply because the duty was not confirmed on Unit 2. Manufacture must be viewed cumulatively.’”
Retracted statements, filed six months later through affidavits, were also treated with skepticism. The Court held that such delayed retractions could not wipe out the panchnama findings.
Decision
Concluding that the tribunal had split a single manufacturing chain into “artificial islands”, the Supreme Court quashed the CESTAT’s 2011 order and restored the Commissioner’s original duty and penalty order dated 27 September 2006. The appeal by the Customs Commissioner was allowed, with parties left to bear their own costs.
Case Title: Commissioner of Customs, Central Excise & Service Tax, Rajkot vs. Narsibhai Karamsibhai Gajera & Others
Case No.: Civil Appeal Nos. 3405–3407 of 2012
Case Type: Civil Appeal (Excise Duty/Exemption Dispute)
Decision Date: December 02, 2025