High Court Lacks Jurisdiction To Decide 'Excisability' Of Goods; Appeals Lie Only To Supreme Court Under Central Excise Act: Supreme Court

"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. To hold otherwise would be to sever what is inherently a continuous chain of fiscal adjudication into fragments, which the legislature could never have intended." Supreme Court, in a significant ruling dated May 27, 2026, held that the High Court lacks the jurisdiction under Section 35G of the Central Excise Act, 1944, to decide disputes regarding the taxability or excisability of goods.

A bench of Justice J.B. Pardiwala and Justice R. Mahadevan observed that such issues are intrinsically linked to the "rate of duty" and "valuation for assessment," making them appealable only to the Supreme Court under Section 35L of the Act.

The case arose from a dispute involving M/s Alupro Building Systems Pvt. Ltd., which imported Aluminum Composite Panels (ACPs) and cut/grooved them for installation on building facades. The Revenue claimed this process amounted to "manufacture" under Section 2(f), a view initially rejected by the CESTAT but later upheld by the High Court of Karnataka. The Supreme Court set aside the High Court's judgment, ruling both on the lack of jurisdiction and on the merits of the "manufacture" claim.

The primary questions before the court were whether the High Court had the jurisdiction under Section 35G to decide on the excisability of goods and whether the process of cutting, grooving, or routing aluminum panels as per specific measurements amounts to "manufacture" under Section 2(f) of the Act.

Excisability Intrinsically Linked To Rate Of Duty

The Court analyzed the interplay between Sections 35G and 35L, noting that Section 35G 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" from the High Court’s appellate jurisdiction. The bench noted that the word "any" gives this exclusion a wide sweep.

The Court rejected the argument that excisability is distinct from the "rate of duty." It held that these two questions are sequentially and logically interdependent. The bench emphasized that the levy of excise duty presupposes that the goods are excisable, making taxability a direct precursor to any assessment of duty.

"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."

2014 Amendment To Section 35L Is Clarificatory And Retrospective

The bench examined the insertion of sub-section (2) in Section 35L by the Finance (No. 2) Act, 2014, which explicitly states that questions regarding "rate of duty" include the determination of taxability or excisability. The Court held that this amendment did not create a new legal position but merely made explicit what was already implicit in the statute.

The Court clarified that procedural or declaratory amendments that resolve conflicting interpretations are presumed to be retrospective. Since the amendment sought to remove uncertainty and prevent High Courts from taking conflicting views on fiscal questions with all-India ramifications, it must be treated as clarificatory and retrospective in nature.

"By inserting sub-section (2), the legislature put an end to uncertainty, and reaffirmed the position that was always inherent in the scheme of Sections 35G and 35L, respectively."

Mere Cutting And Grooving To Suit Specific Dimensions Is Not Manufacture

Turning to the merits, the Court applied the two-fold test for "manufacture" under Section 2(f): the transformation test and the marketability test. It observed that for an activity to constitute manufacture, a new commercial product with a distinct name, character, or use must emerge.

The bench found that cutting ACPs into smaller rectangular or square panels and grooving them for fixing does not alter their fundamental character. The panels remain ACPs; they are merely adapted in dimension and shape for specific installation requirements. The Court characterized these steps as installation activities rather than manufacturing.

"The process of cutting, grooving, and bending does not alter the fundamental nature of identity of the ACP, it merely adapts its dimensions and shape for a specific use."

Revenue Must Discharge Burden Of Proving Marketability

The Court emphasized that the burden of proving that a process results in a marketable product lies entirely on the Revenue. Marketability cannot be presumed based on the fact that a process was undertaken or that the assessee had paid duty in the past under a mistaken belief.

The bench noted that the Revenue failed to produce any evidence from trade parlance or market inquiries to show that cut-to-size panels were recognized as distinct commercial goods. Since the transformation test failed and marketability was not established, the activity could not be termed as "manufacture."

"The conclusion must flow from the evidence and not from assertion, assumption, or the mere fact of a process having been undertaken."

The Supreme Court concluded that the High Court had erred in exercising jurisdiction and in holding the activity to be manufacture. The appeal was allowed, and the High Court's judgment was set aside, restoring the order of the CESTAT in favor of the assessee.

Date of Decision: 27 May 2026