It Is Not the Addition of Accessories but the Emergence of a Distinct Product That Constitutes Manufacture: Supreme Court Reaffirms Legal Test under Excise Law

“The imported Genset and the Power Pack are two different commodities with distinct constituent elements, structure and functional utility”— Today, On September 19, 2025, the Supreme Court categorically holding that the process of placing imported gas generator sets (Gensets) into steel containers, along with additional components, results in a new product known as “Power Pack” and constitutes “manufacture” under Section 2(f)(i) of the Central Excise Act, 1944.

In dismissing the appeal filed by Quippo Energy Ltd., the Supreme Court laid down that mere retention of the same functional end-use does not preclude the emergence of a distinct commercial product if the form, structure, and operational utility have been transformed.

“What emerges is a transformed product, not a renamed Genset”: SC rejects Quippo’s defence of logistical convenience

The case revolved around the appellant’s practice of importing spark-ignition gas Gensets and, instead of installing them permanently, housing them inside steel containers fitted with radiators, fans, oil tanks, silencers, cabling systems, and control panels, converting them into containerized Gensets branded as “Power Packs”. These were leased to customers who required mobile power solutions.

Quippo contended that these additions merely enhanced the logistics and usability of the imported Genset and did not change the essential nature of the product. According to them, the Genset retained its identity, functionality, and name—and therefore, no manufacture had occurred.

The Revenue disagreed, asserting that what emerged after the process was not the same product, but a marketable, containerized system with distinct commercial identity and utility. The CESTAT agreed with the Revenue’s position, holding that manufacture had taken place, though it struck down the extended limitation period and penalties. The appellant then approached the Supreme Court.

“Transformation test and marketability test both stand fulfilled”: Supreme Court Applies Two-Pronged Doctrine

At the heart of the Court’s analysis was the meaning of “manufacture” under Section 2(f) of the Act. The Bench, led by Justice J.B. Pardiwala, reaffirmed the two-fold legal test laid down in J.G. Glass Industries and Servo-Med Industries:

“There has first to be a transformation in the original article which transformation brings about a distinctive or different use in the article… and such transformed product must be marketable as such.”

The Court noted that although the imported Genset could generate electricity on its own, the additional components—radiators, silencers, fans, pumps—were not mere accessories but essential “parts” of the finished product, the Power Pack.

“These additional components are not optional; without them, the Genset cannot function effectively inside the steel container. Therefore, they are integral to the Power Pack and not mere accessories for convenience.”

The Bench rejected the argument that no new commercial product had emerged.

“What is important is not whether electricity is still being generated, but whether the manner in which it is generated, and the structure in which it is housed, has undergone a fundamental transformation.”

“Structure and character have changed—even if the end-use remains”: SC distinguishes from prior non-manufacture cases

The appellant relied on earlier rulings such as Servo-Med, S.R. Tissues, and Satnam Overseas, which held that mere sterilization, cutting, or mixing did not result in manufacture. However, the Supreme Court distinguished those precedents:

“In S.R. Tissues, the character of the tissue paper remained unchanged despite the change in size. In Servo-Med, sterilization merely enabled safer use, but did not change the syringe or needle. In this case, however, the imported Genset becomes part of a structurally distinct, functionally upgraded system.”

The Court also warned against interpreting the “but for the process” test mechanically:

“If applied literally, even flour milled from wheat grain would not be manufacture, as wheat itself is marketable. The second limb of the test must be applied contextually—not as a rigid rule.”

“A new commercial product known to the market has emerged”—Court upholds Excise Duty Liability

Observing that the Power Pack was the product being delivered to customers and not the bare Genset, the Court held:

“The Genset at the time of the import was in a form suitable for permanent installation. The process undertaken by the appellant imparts the core functional utility of portability—a defining attribute from which the final product derives its identity and character.”

Accordingly, the Court held that the process met both the transformation and marketability criteria and amounted to manufacture under the law.

“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.”

The appeals were dismissed, and the Tribunal’s order upholding the classification of the Power Pack under Heading 8502.2090 of the Central Excise Tariff Act was affirmed.

The Supreme Court has once again reinforced that “manufacture” is not a question of nomenclature or convenience, but of transformation and commercial identity. If the original goods are transformed into a new product with distinct characteristics, and if the resulting product is marketable, then the process falls squarely within the ambit of manufacture.

In doing so, the Court has expanded the jurisprudence on excise duty liability—particularly for cases where the addition of components results in operational transformation, even if the core function (like power generation) remains.

Date of Decision: September 19, 2025