2025 (9) TMI 1157 - SC - Central Excise

Imported genset transformed by containerization and added components is 'manufacture' under Section 2(f)(i), liable for excise

M/s. Quippo Energy Ltd. Versus Commissioner of Central Excise Ahmedabad – II

SC held the process of placing the imported genset into a steel container and fitting it with additional integral components constituted 'manufacture' ... Process amounting to manufacture or not - process of placing the Genset within a steel container and fitting the steel container with components such as radiator, ventilation fan, air filter unit, oil tank, pipes, pumps, valve and silencer - Marketability - HELD THAT:- As per this Court’s decision in Delhi Cloth & General Mills [1962 (10) TMI 1 - SUPREME COURT] for an activity to amount to “manufacture” and not be considered as merely ‘processing’ it has to produce a ‘transformation’ of the subject article i.e, a new and different article must emerge having a distinctive name, character or use. In Union of India & Ors v. J.G Glass Industries Ltd & Ors [1997 (12) TMI 110 - SUPREME COURT], this Court was dealing with the question whether printing on glass bottles amounts to “manufacture” within the meaning of Section 2(f) of the Act, 1944. The Court accepted the contention of the respondents that the activity of printing names or logos on the bottles did not change the basic character of the commodity and that the plain bottles in themselves were commercial commodities and could be sold and used as such. Thus, the Court held that printing on glass bottles did not amount to “manufacture” under Section 2(f) of the Act, 1944. Even in the facts of the present case, it is the contention of the appellant that the imported Genset had commercial utility even without the activity being undertaken. This argument, when pedantically read with this Court’s clarification in Servo-Med [2015 (5) TMI 292 - SUPREME COURT] that both prongs of the test have to be satisfied, would mean that just because the subject article had commercial utility prior to it being subjected to the process, the process undertaken would not lead to “manufacture” even if it was transformative in nature. Such an interpretation would be patently erroneous. In order to avoid such absurdity, it is important that the applicability of the second wing of the J.G. Glass test must be judged on the facts and circumstances of each individual case, and the same cannot be brandished as a universal rule. In the facts of the present case, it is convinced that the steel container and the other additional components do transform the imported Genset and bring into existence a distinct product which has its own character and identity. On a preliminary analysis itself, it is amply evident that the constituent components of the imported Genset are very different from the constituent components of the Power Pack. The appellant argued that mere addition of extra components would not transform the imported Genset as all the additional components are in the nature of mere accessories being attached for the sake of convenience and utility. Consequently, the addition of these components would not transform the imported Genset into a different and distinct product. The contention of the appellant that the end-use of both products is merely the ‘generation of electricity’ is an oversimplification that conflates the core function of a product with its functional utility. The Genset at the time of the import was in a form that was suitable/intended for permanent installation. The process undertaken by the appellant imparts the core functional utility of portability to the Genset, a utility that was non-existent in the product at the time of its import. This is not a minor, value-added feature, it is the defining attribute from which the final product derives its entire identity and character - The imported Genset and the Power Pack are two different commodities with distinct constituent elements, structure and functional utility. Marketability - HELD THAT:- No evidence has been adduced by the appellant to suggest that the Power Packs are not marketable. On the contrary, it is an admitted position, clear from the record, that it is these very Power Packs that are the subject of the lease agreements and are delivered to the ultimate customer. Thus, no serious question regarding the marketability of the final product remains, it is an established and undisputed fact. In the facts of the present case, both the transformation test and the marketability test stand fulfilled. The process of placing the Genset within the steel container and fitting that container with additional, integral components brings into existence a new, distinct, and marketable commodity. This process would thus amount to “manufacture” under Section 2(f)(i) of the Act, 1944. Consequently, the appellant is liable to pay excise duty on the goods manufactured. Appeal dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the process of placing a generating set within a steel container and fitting it with components such as radiator, ventilation fan, air filter unit, oil tank, pipes, pumps, valves and silencer amounts to 'manufacture' under Section 2(f) of the Central Excise Act, 1944. 2. If such process amounts to 'manufacture', whether the resulting product is classifiable as a distinct excisable good and thereby liable to Central Excise duty under the relevant tariff heading. 3. Whether extended period of limitation, confiscation and penalties are invocable in the factual matrix where the assessee sought departmental clarification and acted bona fide. ISSUE-WISE DETAILED ANALYSIS - I. What amounts to 'manufacture' under the Act, 1944? Legal framework: Section 2(f) defines 'manufacture' to include any process incidental or ancillary to completion of a manufactured product, processes specified in Section/Chapter Notes, and certain packaging/processing for marketability; Section 3 levies excise on goods produced or manufactured in India. Precedent treatment: The Court relied on the established jurisprudence distinguishing mere 'processing' from 'manufacture' requiring transformation into a new article 'known to the market' with distinctive name, character or use (principles drawn from Delhi Cloth & General Mills and subsequent cases). J.G. Glass articulated a two-fold test (transformation and 'but for' or marketability), and Servo-Med clarified that both limbs must be read conjunctively and categorized case-law into four categories identifying when manufacture arises. Interpretation and reasoning: The Court reaffirmed the two-pronged inquiry: (i) whether a different commercial commodity emerges (identity/character/use altered); and (ii) whether the resultant commodity is marketable or the original commodity would be of no commercial use but for the process. The Court cautioned against rigid or mechanical application of the second limb (marketability) such that ordinary downstream manufacture would escape tax merely because inputs were marketable pre-process (illustrative wheat/flour example). The Court adopted Servo-Med's four-category schema to situate different factual patterns and emphasized the factual, case-specific nature of 'character' and 'identity'. Ratio vs. Obiter: Ratio - the two-fold test (transformation and marketability) as the correct legal yardstick; clarification that marketability test cannot be mechanistically applied to negate transformation. Obiter - illustrative examples (wheat/flour) and expanded commentary on the interplay between the two limbs. Conclusion: Manufacture for excise purposes requires factual satisfaction of transformation into a distinct commodity combined with marketability; mere enhancement of convenience, removal of foreign matter, or form-change without change of essential character will not suffice. ISSUE-WISE DETAILED ANALYSIS - II. Whether the activity undertaken amounts to 'manufacture'? Legal framework: Application of Section 2(f)(i) and Note 6 of Section XVI of the tariff schedule concerning conversion of incomplete/unfinished articles into finished goods. Precedent treatment: The Court applied principles from Servo-Med, J.G. Glass, S.R. Tissues, Satnam Overseas, Maruti Suzuki and other authorities analyzing transformation, retention of essential character, and marketability; distinguished cases where form-change or cleaning did not change essential character. Interpretation and reasoning: The Court undertook a fact-specific inquiry and concluded that: a. The assembly of the imported generating set into a steel container with multiple additional components reengineers the imported article to impart portability and containerized functionality that did not exist at import; this is not mere cosmetic or convenience change but a structural and functional transformation. b. The components fitted (radiator, ventilation fan, air filter, oil tank, pumps, valves, silencer, cable trays, control panels, hydraulic testing, mounting pads, etc.) are properly characterized as 'parts' rather than mere 'accessories' because they are integral to the Power Pack's ability to generate electricity within the containerized configuration; without them the Power Pack would not function in that form. c. The final product (Power Pack/Containerized Genset) possesses distinct constituent elements, structure and functional utility (notably portability and containerized deployment) differing from the imported generating set, and is known and marketed as such (marketability satisfied). d. The Court rejected the contention that common end-use (generation of electricity) precludes transformation: identical end-use does not preclude manufacture where the nature, identity, constituent elements and utility (e.g., portability) materially differ. Ratio vs. Obiter: Ratio - on the facts, the process satisfies both transformation and marketability tests and thus amounts to 'manufacture' under Section 2(f); characterization of added components as parts supporting transformation is integral to the ratio. Obiter - general observations on part vs accessory and examples distinguishing prior cases. Conclusion: The process of containerization and fitting of integral components transforms the imported generating set into a new, marketable commodity (Power Pack), and constitutes 'manufacture' under Section 2(f)(i) read with tariff Notes (including Note 6 of Section XVI). ISSUE-WISE DETAILED ANALYSIS - III. Classification and fiscal consequences Legal framework: Classification under the Customs/Central Excise Tariff as electric generating sets (heading 85.02 and sub-heading 8502.2090) where goods of generator and prime mover mounted together as one unit are classifiable as generating sets. Precedent treatment: CESTAT's reasoning applying tariff notes and prior Supreme Court rulings on identity/marketability was endorsed by the Court on the facts. Interpretation and reasoning: Given that the Power Pack is a distinct, containerized generating set mounted as a unit with prime mover and additional integral parts, it falls within the relevant tariff description for generating sets and is thus dutiable as manufactured goods under the specified sub-heading. Ratio vs. Obiter: Ratio - classification as generating sets under the relevant heading follows from the factual finding of manufacture; ancillary observations on tariff notes are supportive but factual. Conclusion: The resulting product is classifiable under the relevant tariff entry for generating sets and liable to excise duty accordingly; CENVAT credit is to be extended subject to verification during quantification. ISSUE-WISE DETAILED ANALYSIS - IV. Extended limitation, confiscation and penalties Legal framework: Provisons permitting extended period of limitation where suppression of facts with intent to evade duty; confiscation and penalties depend on mens rea and factual concealment. Precedent treatment: Reliance on jurisprudence holding that where assessee acts bona fide and seeks departmental clarification, extended limitation and penalties are inappropriate (Anand Nishikawa and related authorities). Interpretation and reasoning: The Court found that the assessee had informed authorities, sought clarification, cooperated with departmental inquiries and there was no evidence of intentional suppression or evasion. The conduct was bona fide and issues were matters of law/interpretation rather than concealment. Ratio vs. Obiter: Ratio - extended period of limitation, confiscation and penalties cannot be invoked in this factual matrix; extension of benefit of doubt on limitation and penalties is part of the operative decision. Obiter - general comments on revenue neutrality and CENVAT credit relevance to limitation issues. Conclusion: Demand of duty for the normal period is upheld; demand for extended period, confiscation, redemption fines and penalties are set aside; adjudicating authority to allow CENVAT credit subject to verification. OVERALL CONCLUSION The Court holds that the containerization and fitting of integral components amounts to 'manufacture' under Section 2(f) read with tariff Notes; the resulting Power Pack is a distinct, marketable commodity classifiable under the generating-sets tariff entry and liable to excise duty for the normal period. Extended limitation, confiscation and penalties are not sustainable on the facts where the assessee acted bona fide and sought clarification; CENVAT credit to be extended subject to verification.