Mere Assembly Of Imported Modular Parts Without Essential Transformation Does Not Amount To Manufacture Under Central Excise Act: Supreme Court

"Revenue cannot, upon one and the same set of facts, treat the goods as complete machines for the purpose of levying customs duty including CVD, and as incomplete articles for the purpose of attracting Note 6. Nor does Rule 2(a) of the General Rules for the Interpretation of the Schedule carry the matter further." Supreme Court, in a significant ruling dated August 5, 2026, held that the activity of grouping, pinning, and plugging imported modular components of photocopiers to meet customer specifications does not amount to "manufacture" under Section 2(f) of the Central Excise Act, 1944, or Note 6 to Section XVI of the Central Excise Tariff Act, 1985, when the goods were already imported and assessed to customs duty as complete machines.

A bench of S.V.N. Bhatti and N.V. Anjaria, JJ., observed that mere processing or kitting of imported components that does not bring into existence a new commercial commodity with a distinct character, name, or use cannot attract excise duty.

M/s Xerox India Ltd. imported parts, modules, and accessories of photocopiers and digital multi-functional printers in complete knocked down or semi-knocked down condition from foreign warehouses. The Revenue issued show-cause notices demanding central excise duty, alleging that the assembly of these imported modules at the company's warehouses in Hyderabad and Rampur amounted to manufacture under Section 2(f) of the Central Excise Act read with Note 6 to Section XVI of the Central Excise Tariff Act. The Commissioner of Central Excise confirmed the demand, but the Customs, Excise and Service Tax Appellate Tribunal set it aside, holding that no manufacturing activity took place.

The primary question before the court was whether the grouping and fitting together of imported modules to meet customer requirements at the assessee's warehouse amounts to manufacture under Section 2(f) of the Central Excise Act. The court was also called upon to determine whether Note 6 to Section XVI of the Central Excise Tariff Act applies when completed modular goods are cleared from a warehouse.

Court Reaffirms Classic Transformation Test

The bench undertook a detailed historical doctrinal review of the definition of "manufacture" under Section 2(f) of the Central Excise Act, tracing the evolution from the foundational principle established in Union of India v. Delhi Cloth and General Mills Co. Ltd. to modern precedents like Servo-Med Industries Private Limited v. Commissioner of Central Excise. The court reiterated that manufacture implies a transformation where a new and different article must emerge having a distinctive name, character, or use, and that mere processing or packaging will not suffice.

"Any Or Every Process Does Not Amount To Manufacture"

The bench emphasized that the inclusive definition of manufacture under Section 2(f) encompasses processes incidental or ancillary to completion, but this inclusion does not turn ordinary assembly or kitting into manufacturing unless a distinct commercial commodity emerges. Citing the categorization in Servo-Med, the court noted that goods remaining essentially the same post-process escape the net of excise levy regardless of the degree of labour, skill, or expense expended upon them.

"Mere Assembly Of Separately Procured Components Can Constitute Manufacture, Provided The Assembled Whole Answers To A Distinctive Name, Character Or Use."

The court distinguished prior precedents relied upon by the Revenue, such as M/s Narne Tulaman Manufacturers Pvt. Ltd. and Quippo Energy Ltd., pointing out that those cases involved actual physical transformation or integration of distinct components creating entirely new machinery like weighbridges or containerized power packs, which was absent in the simple modular kitting of photocopiers.

Incongruity In Revenue's Dual Stand on Classification - Court Condemns Contradictory Stance on Imported Modules

The bench strongly criticized the Revenue's contradictory approach of classifying and assessing the imported photocopier kits as complete machines under Tariff Heading 8471 for customs duty and countervailing duty, while simultaneously treating them as incomplete or unfinished articles under Note 6 to Section XVI of the Central Excise Tariff Act to demand domestic excise duty.

"The Revenue cannot, upon one and the same set of facts, treat the goods as complete machines for the purpose of levying customs duty including CVD, and as incomplete articles for the purpose of attracting Note 6."

The court clarified that Rule 2(a) of the General Rules of Interpretation of the Schedule serves solely as a classification rule to determine where an unassembled article having the essential character of a finished article is to be placed, but it does not answer whether a process performed on such article legally constitutes manufacture.

Burden of Proof Unfulfilled by Revenue - Inspection Omission and Lack of Empirical Evidence

The court highlighted that the Revenue failed to discharge its evidentiary burden, drawing conclusions without inspecting the premises or capturing any physical manufacturing process through modern technological evidence. The record established that major components like the High Capacity Feeder and Duplex Automatic Document Feeder were factory-fitted abroad, and the warehouse activities were limited to inspection, testing, and kitting as per customer orders.

"The Revenue need not traverse on a winding journey to explain what it wants to establish. It is required to merely justify that there is excisable activity resulting in the excisable duty demanded through the SCN..."

The bench affirmed the findings of the Tribunal as well-reasoned and grounded in evidence, concluding that the simple process of unpacking, plugging, and pinning modules together did not alter the fundamental identity of the imported goods.

Appeals Dismissed by Supreme Court

Concluding that the essential requirements of Section 2(f) of the Central Excise Act and Note 6 to Section XVI of the Central Excise Tariff Act were not established, the Supreme Court dismissed all civil appeals filed by the Revenue and upheld the relief granted to the assessee.

Date of Decision: 05 August 2026