Manufacture by assembly and licence-based exemption cannot be denied on an unacted-upon misstatement in the application.

Assembly of imported and indigenous components into ultrasound scanners was treated as manufacture because the process created a new product with a distinct commercial identity; "substantial manufacturing" did not require the importer to manufacture a substantial part of the components itself. An alleged misstatement in the licence application about the extent and value of indigenous components did not defeat exemption where the application required only an estimate, the licensing authority did not cancel the licence, and the customs authorities could not rely on an unacted-upon allegation of misrepresentation to deny the benefit.

---

---

Issues: (i) Whether assembly of imported and indigenous components into ultrasound scanners amounted to manufacture and satisfied the requirement of substantial manufacturing activity under the duty exemption scheme. (ii) Whether the alleged misstatement in the licence application about the extent and value of indigenous components disentitled the appellants to exemption under the customs notification.

Issue (i): Whether assembly of imported and indigenous components into ultrasound scanners amounted to manufacture and satisfied the requirement of substantial manufacturing activity under the duty exemption scheme.

Analysis: The scheme required that the inputs be used for export production and that the conversion of raw materials into the resultant product involve substantial manufacturing activities. Assembly of components into a commercially distinct finished machine was treated as manufacture. The expression "substantial manufacturing" was held not to mean that a substantial part of the components themselves must be manufactured by the importer; it was sufficient if the process, including assembly, brought about a new product having a distinct commercial identity.

Conclusion: The assembly process amounted to manufacture and the finding that no manufacturing activity had been undertaken could not be sustained.

Issue (ii): Whether the alleged misstatement in the licence application about the extent and value of indigenous components disentitled the appellants to exemption under the customs notification.

Analysis: The application did not require a binding declaration of the exact quantity or value of indigenous components to be used, and the stated value was only an estimate. The licensing authority had neither cancelled the licence nor taken any action on the alleged misrepresentation. Once the advance licence had been issued and remained unchallenged by the licensing authority, the customs authorities could not deny the exemption on the basis of an alleged misrepresentation in the application.

Conclusion: The alleged misrepresentation did not disentitle the appellants from the benefit of the exemption notification.

Final Conclusion: The duty demand, penalty, and adverse order were unsustainable, and the appeals succeeded with dismissal of the show cause notice.

Ratio Decidendi: Assembly of components into a new commercially distinct product can constitute manufacture, and exemption under an advance licence scheme cannot be denied by customs on an alleged misrepresentation that was neither acted upon by the licensing authority nor resulted in cancellation of the licence.

---