Adapting Aluminum Panels For Construction Is Installation, Not 'Manufacture'; High Court Can't Decide Excisability: Supreme Court

"Process of cutting, grooving, and bending does not alter the fundamental nature of identity of the Aluminum Composite Panel; it merely adapts its dimensions and shape for a specific use and amounts to no more than preparation, sizing, and installation." Supreme Court, in a significant ruling dated May 27, 2026, held that the activity of cutting and grooving Aluminum Composite Panels (ACPs) to facilitate their fixing onto building facades does not amount to "manufacture" under Section 2(f) of the Central Excise Act, 1944.

A bench comprising Justice J.B. Pardiwala and Justice R. Mahadevan observed that merely adapting a product's dimensions for a specific architectural requirement does not bring into existence a new commercial commodity with a distinct identity.

The appellant, a construction contractor, imported Aluminum Composite Panels in standard sizes and undertook the job of fixing them on the exterior facades of buildings. This process involved cutting the panels into required sizes and making grooves on the back side (routing) to enable them to be fixed onto frames at the site. The Revenue issued a Show Cause Notice contending that these processes resulted in the "manufacture" of a new product, a view eventually upheld by the Karnataka High Court, leading to the present appeal.

The primary question before the Court was whether the High Court had the jurisdiction under Section 35G to decide the issue of "excisability" of goods. The Court was also called upon to determine whether the process of cutting and grooving aluminum panels for specific measurements amounts to "manufacture" under Section 2(f) of the Act, 1944.

High Court Lacks Jurisdiction Over Questions Of Excisability

The Supreme Court first addressed the maintainability of the appeal before the High Court, noting that Section 35G of the Act, 1944, explicitly excludes orders relating to the "determination of any question having a relation to the rate of duty of excise or to the value of goods for purposes of assessment." The bench observed that the legislature intended to channel such disputes exclusively to the Supreme Court under Section 35L to ensure national uniformity in fiscal adjudication.

Excisability Is Directly Connected To Rate Of Duty

The Court rejected the argument that the question of excisability is distinct from the question of the rate of duty. It held that the two are sequentially and logically interdependent, as the levy of excise duty presupposes that the goods are excisable. The bench noted that a decision on excisability has ramifications in rem, affecting all assessees dealing in those particular goods, which warrants a centralized appellate review by the Apex Court.

"The decision on excisability of goods is a precursor to the determination of any question having a relation to the rate of excise duty or to the value of goods for the purpose of assessment."

Amendment To Section 35L Is Clarificatory And Retrospective

The Court analyzed the insertion of sub-section (2) in Section 35L by the Finance Act, 2014, which clarified that the "rate of duty" includes the determination of taxability or excisability. The bench held that this amendment did not create a new legal position but merely gave statutory expression to what was already implicit in the scheme of the Act. Consequently, the amendment is declaratory and carries retrospective effect.

Two-Fold Test To Determine Manufacture

Turning to the merits of the "manufacture" claim, the Court reiterated the two-fold test established in precedents like Servo-Med Industries and J.G. Glass. For a process to constitute manufacture, it must satisfy two conditions: first, the emergence of a new product with a distinct identity, character, or use (Transformation Test); and second, the transformed goods must be marketable as a separate commodity (Marketability Test).

"It is only when a change or series of changes result in new and distinct goods that manufacturing is said to take place. If goods retain their substantial identity, they are processed and not manufactured."

Superficial Changes For Installation Do Not Pass Transformation Test

The Court found that the essential character of the ACP remains unchanged after being cut or grooved. The bench noted that the panels enter the process as ACPs and emerge as ACPs, albeit in modified shapes to fit a specific building's design. These activities were characterized as "installation activities" rather than manufacturing, as the material properties and commercial character remained identical.

Comparison To Cutting Cloth Or Crushing Stones

Drawing parallels from previous rulings, the Court noted that just as cutting a piece of cloth into shapes or crushing dolomite lumps into chips does not create a new commodity, cutting aluminum panels does not amount to manufacture. The bench emphasized that the location of the activity—whether at the factory or the site—does not elevate a preparation process to the level of manufacture.

"The process of grooving or routing does not alter the material properties or the commercial character of the ACPs in any manner whatsoever. The form and shape are being changed merely to facilitate its use."

Burden Of Proving Marketability Lies On Revenue

The Court underscored that the Revenue must affirmatively demonstrate marketability through objective evidence and cannot rely on mere assertions. It held that since the ACP panels did not undergo any fundamental transformation, the question of their marketability as a distinct product pales into insignificance. The bench criticized the High Court for failing to address the Revenue's failure to discharge this burden of proof.

The Supreme Court concluded that the High Court erred in assuming jurisdiction over a matter involving excisability and further erred in holding that the adaptation of panels for construction amounted to manufacture. The Court held that "superficial changes" made to facilitate the use of goods do not create a distinct commercial product. Consequently, the appeal was allowed, and the impugned judgment of the High Court was set aside.

Date of Decision: May 27, 2026