Imported Goods Transformed into Distinct Products Considered ‘Manufacture’ Under Excise Law: Supreme Court

Introduction

The meaning of “manufacture” as per the Central Excise Act, 1944 has frequently been the source of litigation, thus requiring the courts to demarcate to a fine line between mere processing and making a new product. The Supreme Court in M/s Quippo Energy Ltd. v. Commissioner of Central Excise, Ahmedabad II[1] made a noteworthy observation that converting imported gas-generating sets (Gensets) into containerized “Power” Packs is manufacture under Section 2(f) of the Act, thus attracting excise duty. The court stated placing the Gensets into steel containers and fixing the important accessories has resulted in a different product than the Gensets, with a different character, identity, and marketability.

Facts

The appellant, M/s Quippo Energy Ltd., was engaged in providing containerized Gensets on lease. For this purpose, it imported Gensets comprising an engine coupled with an alternator mounted on a base frame. These imported units were assessed by customs under sub-heading 8502.2090 of the Customs Tariff Act, 1975, as complete generating sets. As the business was leasing and frequent re-shifting of the equipment between customer premises, fixed installation of Gensets was not feasible. In order to overcome this, the appellant conceived a means of encasing the Gensets in steel containers to render them portable and easily movable.

To make the containers work efficiently, the appellant bought and installed different parts like radiators, ventilating fans, air filters, oil tanks, silencers, pipes, pumps, and control panels. The conversion made the imported Gensets into independent “Power Packs” for leasing purposes.  The appellant maintained that these additions were merely for logistical convenience and did not alter the essential character of the Gensets as electricity generators.

The excise authorities disagreed and took the view that the activity amounted to manufacture, as it resulted in a distinct and marketable commodity. A series of show-cause notices were issued demanding excise duty, interest, and penalty. While the Tribunal set aside penalties and extended period demands, it upheld the finding that the process amounted to manufacture and confirmed duty for the normal period. The appellant then approached the Supreme Court.

Issue

The key issue before the Supreme Court was whether the act of placing imported Gensets in steel containers and attaching additional items such as radiators, oil tanks, and mufflers amounted to manufacture under the definition outlined in Section 2(f) of the Central Excise Act, 1944. The task of deciding this was for the Supreme Court to apply existing judicial tests of transformation and marketability by determining if the process had resulted in the emergence of a new product with a different name, identity, or character.

Arguments

The appellant argued that the imported Gensets were complete machines capable of generating electricity. It was asserted that placing them in a container and then attaching elements to it as expected, did not change their essential character. The appellant argued that these modifications were undertaken strictly for logistical ease and did not create a new commodity for resale. The appellant pointed out that the operating words “Power Pack” referred to a trade description for the same product. The appellant stated that the tests for transformation and marketability had not been established. The appellant pointed out that merely because this product may have become a more marketable form of product, did not therefore establish that the transformation test alone had been met. In any event, the ultimate end use for the product (the generation of electricity) remained unchanged by the addition of components to the generator. Precedent cases included Delhi Cloth & General Mills; S.R. Tissues and Satnam Overseas, where the courts held that changes which did not change the essential character of a product did not constitute manufacture.

The Revenue contended that the imported generator set couldn’t work as it was in the container without the additional parts. Those parts were not optional accessories, but standard parts that made up the generator set in the functioning of the Power Pack. Once the generator set was fitted with those components, it became a transportable self-contained unit with new identity, character, and commercial viability. The Revenue pointed out that under Section 2(f) of the Act and Note 6 of the General Section of the Central Excise Tariff Act, it was manufactured to manufacture an incomplete article into a completed article. The Revenue also argued that the Power Packs were separate marketable products and met both prongs of the judicial test.

Judgment

The Supreme Court rejected the appeal and confirmed the Tribunal’s conclusion that the activity was considered manufacture. The Court held that Section 2(f) of the Central Excise Act, 1944, defines manufacture to include processes ancillary to or incidental to the final stage of a product’s completion. The Court also reaffirmed the Servo-Med Industries two-pronged test – whether a different and new product is produced (transformation test); and whether the product can be marketed (marketability test).

While the Genset at the time of import was suitable for permanent installation, after undergoing the process, it was converted into a portable, self-contained Power Pack suitable for leasing. This new portability gave the product a distinct identity and functional utility. The Court rejected the appellant’s claim that the added components were accessories, explaining that they were essential parts without which the Power Pack could not operate inside the container.

The Court also found the marketability test satisfied, explaining it was the Power Packs, and not the imported Gensets, that were actually leased to customers. The Court pointed out that a product’s use is not alone determinative of identity; the structure and functional change is no less a factor. After establishing that both tests were satisfied, the Court concluded this amounted to manufacture under Section 2(f) of the Act and sustained the demand for excise duty for the normal period.

Analysis

The ruling is important because it established the principle that transformation may take place even if the essential purpose of a product remains unchanged. The Genset and Power Pack both had the primary purpose of generating electricity for other use, and the Court held that the fundamental differences in portability and containerization constituted a transformation of the product’s identity and commercial character.

The Court also made a distinction between accessories and parts to demystify what parts were or were not changed. It defined that a part is a built-in component without which the product cannot finish its intended function, whereas accessories are add-ons that provide convenient usage. Applying this reasoning, the radiator, fan, and oil tank were essential components of the Power Pack, supporting the finding that the product had undergone a substantial transformation.

This ruling is consistent with previous decisions, such as Delhi Cloth Mills and J.G Glass, where the Court stressed the need for change and marketability. It also distinguishes S.R. Tissues and Satnam Overseas, where the goods changed but maintained their original character through processing. The Court clarified that while there are two tests to satisfy, a change in end use is not a requirement for transformation, but rather a change in functional utility or a change in structure.

Conclusion

The Supreme Court’s ruling in M/s Quippo Energy Ltd. upholds the importance of manufacture beyond significant changes in end-use, rotating specifically to structural changes and functional changes that result in a wholly new product suitable for market. The ruling delineates both parts and accessories without minimizing necessary alterations.

[1] CIVIL APPEAL NOS. 9418-9420 OF 2016.