Reengineering or structural alteration of an imported complete machine by adding integral parts that create a distinct, marketable commodity (even if core function remains) constitutes manufacture. Mere labeling or convenience-oriented modifications do not automatically preclude excise liability; substance of change (parts, structure, identity, marketability) governs.

2025 INSC 1130
IN THE SUPREME COURT OF INDIA
Civil Appeal Nos. 9418–9420 of 2016
M/s Quippo Energy Ltd. —v— Commissioner of Central Excise, Ahmedabad–II
Bench: J. J.B. Pardiwala and J. K.V. Viswanathan.
Date of Judgment: 19th September, 2025.

1. Subject / Statute — Central Excise Act, 1944; Central Excise Tariff Act, 1985 (Section/Chapter Notes); definition of “manufacture” under Section 2(f).

2. Facts (short) — Assessee imported complete gas generating sets (“Gensets”) and, for lease-based supply, mounted them inside steel containers and fitted additional components (radiator, silencer, ventilation fans, oil tank, pumps, piping, cable trays, control panel, testing, etc.) producing “Containerized Gensets” / “Power Packs”. Department contended that the process amounted to “manufacture” and classified the finished units under sub-heading 8502.2090; duty, penalties and confiscation were imposed. CESTAT held process amounts to manufacture (but set aside extended period/penalties); appeals arose.

3. Issue — Whether placing an imported Genset within a steel container and fitting it with the listed components/parts amounts to “manufacture” within the meaning of Section 2(f) of the Central Excise Act, 1944.

4. Legal test / Principle — The Court reiterated the settled two-fold test drawn from prior authority: (i) Transformation test — whether by the process a different commercial commodity emerges (the identity of the original commodity ceases to exist; a new name/character/use arises); and (ii) Marketability test — whether the transformed product is marketable as such. Both prongs must be read conjunctively and applied contextually; transformation is primary. Processes that merely remove foreign matter or effect only convenience/value-addition without change of essential character do not amount to manufacture.

5. Parts v. Accessories — A ‘part’ is an integral/constituent component without which the article cannot perform its primary function; an ‘accessory’ is non-essential and adds secondary convenience. Classification of appended items as ‘parts’ or ‘accessories’ is a factual enquiry.

6. Application / Holding — The Court found that containerization plus fitting of integral components produced a product with different constituent elements, structure and functional utility (notably portability and leasing suitability) and therefore satisfied the transformation test. The components affixed were held to be ‘parts’ (not mere accessories) because the Genset would not function as a containerized unit without them. The finished “Power Pack” was admittedly marketable. Both tests satisfied → the activity constitutes manufacture under Section 2(f)(i) of the Central Excise Act, 1944. Consequently, the units are dutiable and properly classifiable under sub-heading 8502.2090.

7. Reliefs / Disposition — Appeals dismissed on merits; however, the Court set aside demands for the extended period of limitation, confiscation and penalties/redeemption fine on facts (assessee acted bona fide; had sought departmental clarification). CENVAT credit to be allowed subject to verification while quantifying duty for the normal period.

8. Ratio / Practical Rule — Reengineering or structural alteration of an imported complete machine by adding integral parts that create a distinct, marketable commodity (even if core function remains) constitutes manufacture. Mere labeling or convenience-oriented modifications do not automatically preclude excise liability; substance of change (parts, structure, identity, marketability) governs.

9. Notable authorities applied / considered — Union of India v. Delhi Cloth & General Mills; J.G. Glass; Servo-Med Industries; S.R. Tissues; Satnam Overseas; Maruti Suzuki (as discussed and applied in reasons).

10. Significance — Clarifies that creation of a containerized/packaged variant of an imported machine can give rise to excisable manufacture where the additions produce a new identifiable marketable commodity; emphasizes fact-specific enquiry — parts v. accessory, transformation and marketability — and confirms that bona fide approach to department may mitigate extended limitation/penalties.

— Result: Appeals dismissed; duties for normal period sustained; demands for extended period, confiscation and penalties set aside; CENVAT credit to be considered while quantifying duty.

2025 INSC 1130 REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS. 9418-9420 OF 2016

M/S QUIPPO ENERGY LTD. ...APPELLANT

VERSUS

COMMISSIONER OF CENTRAL EXCISE AHMEDABAD – II ...RESPONDENT

J U D G M E N T 

Civil Appeal Nos. 9418-9420 of 2016 Page 1 of 39

J.B. PARDIWALA, J.:

For the convenience of exposition, this judgment is divided into the

following parts:

INDEX

A. FACTUAL MATRIX...............................................................2

B. SUBMISSIONS ON BEHALF OF THE PARTIES.....................11

(i) Submissions on behalf of the Appellant .................................. 11

(ii) Submissions on behalf of the Respondent............................... 13

C. ISSUE TO BE DETERMINED...............................................14

D. ANALYSIS..........................................................................15

(i) What amounts to “manufacture” under the Act, 1944? ........... 15

(ii) Whether the activity undertaken by the Appellant amounts to

“manufacture”?....................................................................... 24

E. CONCLUSION ....................................................................39

Civil Appeal Nos. 9418-9420 of 2016 Page 2 of 39

1. These appeals under Section 35L(b) of the Central Excise Act,

1944 (for short, the “Act, 1944”) are at the instance of an

assessee and are directed against the Final Order dated

15.10.2015 (for short, the “Impugned Order”) passed by the

Customs, Excise and Service Tax Appellate Tribunal West Zonal

Bench (for short, the “CESTAT”) at Ahmedabad in Appeal

bearing Nos. E/640/2009-DB, E/1284,1285/2009-DB &

E/557/2012-DB respectively, by which all the three appeals

filed by the assessee came to be partly allowed by setting aside:

(i) the demand of duty with interest for the extended period of

limitation and (ii) the imposition of fine, penalty and

confiscation of goods. However, the CESTAT in the impugned

order held that the activities undertaken by the assesseeappellant to set up the “Containerized Gensets” would amount

to “manufacture” and the same are liable to be classified under

the sub-heading No. 8502.2090 of the Schedule to the Central

Excise Tariff Act, 1985 (for short, the “Act, 1985”). Accordingly,

the demand of duty along with interest for the period other than

the extended period was upheld.

A. FACTUAL MATRIX

2. The appellant is engaged in the business of providing

containerised gas generating sets known as the Power Packs on

a lease basis.

3. To carry out the above business, the appellant imported Gas

Generating Sets (for short, “Gensets”) consisting of an engine

(prime mover) coupled with an alternator on a common base

frame. The Gensets are imported along with the standard

accessories and total electronic management system. At the

time of import, the Customs Authorities assessed the Gensets 

Civil Appeal Nos. 9418-9420 of 2016 Page 3 of 39

under the sub-heading 8502.2090 of the Schedule to the

Customs Tariff Act, 1975, categorising them as “Generating sets

with spark-ignition combustion piston engines of an output

exceeding 3.5 kVA”.

4. Since the Gensets were to be provided on a lease basis, the

appellant considered it unfeasible to install them at customer

premises. This was because, in cases of non-renewal of the

lease, the Genset would have to be relocated to the premises of

a new customer.

5. In such circumstances, to avoid inconvenience during shifting

and to provide for ease of transportation, the appellant placed

the Genset in a steel container. Further, in order to ensure the

functioning of the Genset within the container, the appellant

indigenously procured components such as radiator, ventilation

fan, air filter unit, oil tank, pipes, pumps, valve, silencer and

fitting items and fixed them to the container. The appellant has

described the process as follows:

(i) Using jacks and rollers, the imported equipment is first rolled

into a steel transport container and properly positioned on

anti- vibrating mounting pad.

(ii) Remote radiator is lifted by crane and properly positioned

onto the roof of the container. Further, it is arrested on the roof

with suitable sized nuts, bolts and washers.

(iii) Lube Oil Tank is lifted by crane and moved onto the roof of

the container. It is properly placed on the mounting channels

and locked on the roof top by suitable nuts, bolts and

washers.

(iv) For the purpose of HT, LT, Water and Lube Oil pipe lining on

the roof of the container, necessary fittings like pipes,

reducers, valves, tee, elbows, flanges, etc. are fitted. 

Civil Appeal Nos. 9418-9420 of 2016 Page 4 of 39

(v) Similar process is done for HT, LT, Water, DM Water and Lube

Oil line inside the container. Pumps, 3-way valve etc. are

located inside the container.

(vi) Ventilation fans and cowls are thereafter mounted.

(vii) The silencer is lifted by crane and located on the rooftop at

the appropriate position.

(viii) Necessary Cable Trays are placed inside and outside the

container. Proper earthing is done.

(ix) Control panel and other electrical items are properly placed

inside the container. Cabling with all other accessories is

done.

(x) All pipings are de-assembled. Pipings are then caustic

cleaned, hydraulic test is done thereon and painted.

(xi) Testing process involves hydraulic testing of piping for

leakage and electrical testing of all electrical connections.

6. As per the appellant, the role of each individual component is

as follows:

Component

Name

Purpose

Ventilation Fan This supplies ambient air to the generating

set to cool down the heat which surrounds

it because of the internal working of the

engine. This has no role to play in

generation of electricity.

Air Filter Unit This prevents dust from entering internal

parts of engine. It is common knowledge

that process of combustion needs oxygen

that is available in air. This is called

consumable and is being replaced from

time to time. Thus, Air Filter unit has no

role to play in generation of electricity. That

work is performed only by the imported

Gas Genset

Oil Tank Lubricant oil which kept in a pan beneath

engine of Gas Genset is circulated to

various moving parts for proper 

Civil Appeal Nos. 9418-9420 of 2016 Page 5 of 39

lubrication. Oil tank is required to

replenish the oil in the pan and thus has

no role to play in generation of electricity.

Electricity is generated only by the

imported Gas Genset.

Pumps These pumps are used to move fluids from

one location to another. They are used to

carry water. Fitting of pump to Gas Genset

does not give rise to new product with

distinct name, character or use.

Valve It is a flow control device and have no

participation as such in generation of

electricity

Silencer &

Radiator

Silencer helps in controlling the noise

produced by exhaust gases during

operation. Therefore, silencer has no role

to play in Generation of Electricity by Gas

Genset.

While generating electricity the internal

parts of Gas Generator becomes very hot

due to process of combustion. Radiator

merely helps in radiating heat into the air

and cooling the engine. Coolant flows

through the generator block and then to

the radiator. In many cases, chiller is used

instead of radiator to extract heat that is

otherwise thrown into the environment.

Thus, radiator has no role to play in

generation of electricity. That work is

performed only by the imported gas

genset.

Pipes, Flanges,

Nut-bolts, Gasket

These are used for fitting of the above

items.

7. The appellant vide letter dated 22.11.2007 explained to the

Deputy Commissioner of Central Excise, Ahmedabad about the

activities carried out by it and sought an opinion as regards its

liability under the Act, 1944. Thereafter, on 17.07.2008 the

officers of Central Excise (Preventive), Ahmedabad-II visited the

appellant’s factory and examined the process undertaken by it. 

Civil Appeal Nos. 9418-9420 of 2016 Page 6 of 39

8. The Assistant Commissioner of Central Excise, Ahmedabad-II,

vide its letter dated 19.08.2008 informed the appellant that the

activities undertaken by it would amount to “manufacture” by

virtue of Notes 4 and 6 of Section XVI of the Schedule to the Act,

1985, respectively.

9. The appellant in the aforesaid context filed an appeal before the

Commissioner (Appeals), questioning the communication of the

Assistant Commissioner of Central Excise. The Commissioner

(Appeals) vide order dated 27.03.2009 dismissed the appeal.

10. A Show Cause Notice dated 19.11.2008 was issued proposing

demand of duty along with interest and levy of penalty on the

Power Packs cleared during the period from November 2006 to

July 2008. The said Show Cause Notice was adjudicated by the

Commissioner of Central Excise, Ahmedabad and vide the

Order-in-Original No.10/Commissioner/RKS/AHD-II/2009

dated 28.04.2009 the demand and penalty were confirmed.

11. Thereafter, six Show Cause Notices were issued proposing

demand of duty along with interest and levy of penalty on the

Power Packs cleared during the period from August 2008 to

March 2011. The said Show Cause Notices were adjudicated

and vide the Order-in-Original No. 01 to

06/COMMR/RAJU/AHD-II/2012 dated 29.03.2012 the

demand and penalty were confirmed.

12. In the aforementioned Orders-in-Original, the respective

authorities have held that the “Containerized Genset” i.e., the

“Power Pack” has a distinct name, character and use and is

capable of being sold and marketed. Thereby, the activity

undertaken by the appellant satisfies the conditions of 

Civil Appeal Nos. 9418-9420 of 2016 Page 7 of 39

“manufacture” as defined under Section 2(f) of the Act, 1944.

Consequently, the said goods are classifiable under the subheading No.8502.2090 of the Schedule to the Act, 1985 and are

liable for Central Excise duty.

13. The appellant filed appeals before the CESTAT against the order

passed by the Commissioner (Appeals) dated 27.03.2009, the

Order-in-Original dated 28.04.2009 and the Order-in-Original

dated 29.03.2012 respectively.

14. The CESTAT while disposing of the appeals filed by the

appellant held as under:

“13. .......It is submitted that the Gensets imported by

the Appellant remains essentially the same. We have

already observed that in the present case, the

imported Gensets after certain process sold as Power

Pack, different and distinct nature. As per statement

of Shri Divyesh Shah, the Gensets imported by the

Appellant is incomplete machine, can be used into

complete form after assembly of various

accessories/components. Note 6 of the Section XVI of

Customs Tariff Act provides that the conversion of an

incomplete or unfinished article into complete or

finished goods shall amount to manufacture. It is

evident from the record that the activities undertaken

by the Appellant are incidental to the completion of

manufacture of Power Pack, and without such

activities Power Pack cannot be used by the

customers Section 2(f) of Central Excise Act, 1944, the

definition of manufacture includes the process

incidental to the completion of a manufactured

product. Heading 85.02 covers Electric Generating

Sets and Rotary Connectors". Sub-heading

8502.2090 covers "Generating sets with sparkignition internal combustion piston engines" other

than Electric portable generators of an output not

exceeding 3.5 KVA. As per Notes of Chapter 85 of

HSN, Generating Sets consisting of the generator and

its prime mover which are mounted (or designed to be

mounted) together as one unit or on a common base. 

Civil Appeal Nos. 9418-9420 of 2016 Page 8 of 39

In the present case, the activities of fixing of antivibrating mounting pad, radiator, Lube Oil Tank,

Ventilation, fans, silencers, Cable Trays, Control

Panel and other electrical items, hydraulic test

processing etc, are mounted together as one unit on a

common base, known as Power Pack and also

Containerized Gensets.

14. According to the Appellant, the Gensets imported

by them were capable of generating electricity, and

the Gensets itself is marketed. But, it is seen from the

record that the process undertaken by the Appellant

on the imported Gensets for the industrial customers.

Thus, the industrial customer would buy Power Pack

rather than Gensets. The imported Gensets and

Power Pack are known separately in the trade and

parlance. It is also noted that the use of both the items

are for different purposes. In our considered view, the

process undertaken by the Appellant would

constitute manufacture as it emerges a new

commodity in the market.

xxx xxx xxx

16. In case of Laminated Packing Pvt Ltd (supra) the

Hon’ble Supreme Court considered that manufacture

is bringing into the goods as known in the Excise law

i.e. known in the market having distinct and separate

and identifiable function. In the present case, we

have also noticed the photograph of the products of

the Gensets and the Power Pack are different and

distinct items. The learned Advocate contended that

the imported Gensets is covered under the subheading 8502.2090 of the First Schedule to Customs

Tariff Act "Generating sets with Spark - Ignition

Combustion System Engine" of an output not

exceeding 3.5 KVA." It is submitted that the Customs

Department had assessed the goods as complete

electric generating sets and classification under the

same heading under the Central Excise Tariff Act,

1985, cannot be sustained. We find that the identical

issue was raised before the Hon'ble Supreme Court in

the case of Laminated Packings Pvt. Ltd (supra). It

has been observed that the goods belongs to the same

entry is also not relevant because even if the goods 

Civil Appeal Nos. 9418-9420 of 2016 Page 9 of 39

belong to the same entry, the goods are different

identifiable goods known as such in the market. If

that is so, the manufacture occurred and if

manufacture takes place, it is dutiable. The said

decision would squarely apply in the present case

and the Power Pack is rightly classified under subheading No.8502.2090 of Central Excise Tariff Act,

1985.

17. However, we find force in the submissions of the

learned Advocate that the extended period of

limitation cannot be invoked. On perusal of the

records, we find that the Appellant by letter

dt.22.11.2007, informed the Assistant Commissioner

of Central Excise for a clarification on any possible

liability of Central Excise duty. The Appellant also

pursued the matter before the Department. There is

no material on record of suppression of facts with

intent to evade payment of duty. The Hon'ble Gujarat

High Court in the case of Gujarat Glass Pvt. Ltd

(supra) observed that the Assessee on his own

brought to the notice of the Department the fact about

the clearance of the goods to its sister unit without

duty before the date of visit of the officers. The

Assessees conduct was candid and therefore, bona

fide. There is no evidence of intentional evasion.

18. In the case of Anand Nishikawa Company ltd Vs

CCE Meerut 2005 (185) EL T 149 (SC), the Hon'ble

Supreme Court observed that there was no deliberate

attempt of non-disclosure of excise duty. No claim as

to "suppression of facts" would be entertained for the

purpose of invoking extended period of limitation

within the meaning of proviso to Section 11A(1) of the

Act. It is also noted that Hon’ble Supreme Court in

series of cases, has held that the extended period of

limitation, would not be invoked in the case of

revenue neutrality as the CENVAT Credit is available

against the demand of duty.

19. We find that the Appellant acted under a bona

fide belief that the activities undertaken by them

would not amount to manufacture. It is the case of

interpretation of the provisions of law and therefore,

the imposition of penalties on the Appellants are not 

Civil Appeal Nos. 9418-9420 of 2016 Page 10 of 39

warranted. It is noted that the goods were available

for confiscation. It is well settled that if the goods are

available, the same cannot be confiscated.

Accordingly, the confiscation of goods and imposition

of penalty cannot be sustained.

20. In view of the above discussions. we hold that the

activities undertaken by the Appellant would amount

to manufacture and Power Pack also known as

"Containerized Gensets" would be classifiable under

sub-heading No.8502.2090 of the Schedule to the

Central Excise Tariff Act, 1985 and the demand of

duty alongwith interest for the normal period is

upheld. The adjudicating authority is directed to

extend CENVAT Credit benefit, while quantifying

duty, subject to verification of record. The demand of

duty with interest for the extended period of limitation

and confiscation and imposition of redemption fine

and penalties are set aside. The appeal filed by the

Appellant company is disposed of in the above terms.

The appeal filed by the Appellant No.2 Shri Montu

Patwa, General Manager (F&A) is allowed. The

applications for extension of stay order are dismissed

as infructuous.”

15. Thus, the CESTAT held that the process undertaken by the

appellant would amount to “manufacture” on the following

grounds:

a. The Power Packs are different and distinct in nature from

the imported Gensets, and the activities undertaken by the

appellant are incidental to the completion of manufacturing

Power Packs. Thus, these activities would amount to

“manufacture” under Section 2(f) of the Act, 1944, which

brings under the ambit of “manufacture” any process

incidental or ancillary to the completion of a manufactured

product;

b. Imported Gensets and the Power Packs are known

separately in trade and parlance and both items are used 

Civil Appeal Nos. 9418-9420 of 2016 Page 11 of 39

for different purposes. Thus, the process undertaken by the

appellant would constitute “manufacture” as it leads to the

emergence of a new product in the market; and

c. Imported Gensets are incomplete machines and can be

used in complete form after assembly of various

components procured by the appellant. Note 6 of Section

XVI of the Act, 1985 provides that conversion of an

incomplete or finished goods falling under that section shall

amount to “manufacture”.

16. In such circumstances referred to above, the appellant is here

before this Court with the present appeals.

B. SUBMISSIONS ON BEHALF OF THE PARTIES

(i) Submissions on behalf of the Appellant

17. Ms. Charanya Lakshmikumaran, the learned counsel appearing

for the appellant, submitted the following:

a. A process would amount to “manufacture” if the following

two-fold test, as explained by this Court in a catena of

judgments, is satisfied: (i) Whether by the said process a

different commercial commodity comes into existence or

whether the identity of the original commodity ceases to

exist (Transformation Test); and (ii) Whether the

commodity which was already in existence would be of no

commercial use but for the said process (Marketability

test).

b. The two limbs must be satisfied cumulatively. As held by

this Court in Servo-Med Industries Pvt Ltd v.

Commissioner of Central Excise, Mumbai reported in

(2015) 14 SCC 47, fulfilment of any one of these limbs is 

Civil Appeal Nos. 9418-9420 of 2016 Page 12 of 39

not conclusive if the other limb of the test is not satisfied.

In the facts of the present case, both the limbs of the above

test are not satisfied.

c. The transformation test is not satisfied as the product

remains a Genset performing the function of generating

electricity and does not transform into another distinct

commodity, whereby its original identity as a Genset ceases

to exist. The various accessories attached to the container

serve the sole purpose of making the generating set fit to

work within a container box (for logistical purposes). Mere

enhancement of the functionality with the use of these

accessories will not detract from the fact that the product

continues to remain a generating set and can generate

electricity without such accessories. Thus, the process does

not transform the imported Genset into a different

commercial commodity. The term ‘Power Pack’ is merely a

trade name given by the appellant, and the use and

character of the product imported remains the same.

d. The imported Gensets were complete and functional

Gensets in themselves and it would be incorrect to say that

the addition of accessories leads to completing an

incomplete machine.

e. The marketability test is also not satisfied, as it cannot be

said that the product, in its imported form, served no

purpose without the activity undertaken by the appellant.

It was capable of generating electricity and was

commercially available for such purpose de hors the

accessories.

f. Without prejudice to the aforesaid even if it were to be held

that the second test is satisfied in the present case, i.e., by 

Civil Appeal Nos. 9418-9420 of 2016 Page 13 of 39

way of containerization and adding accessories the Genset

becomes marketable for a customer, this test has to be

simultaneously and cumulatively satisfied along with the

first test. However, the transformation test is not satisfied

in the present case, as there was no transformation of the

imported Genset into a different and distinct product.

Thus, the activity undertaken by the appellant would not

amount to “manufacture”.

18. In such circumstances referred to above, the learned counsel

prayed that there being merit in her appeal, the impugned order

be set aside.

(ii) Submissions on behalf of the Respondent

19. Ms. Nisha Bagchi, the learned senior counsel appearing for the

Revenue, submitted the following:

a. The findings recorded in the impugned order have been

arrived at after considering all the relevant material and

applying the established test for determining

“manufacture”. Thus, the impugned order is unassailable

in law as well as on the facts.

b.The Genset in its imported form is not functional. It is

undisputed that the appellant is not selling the imported

Genset as such. The Genset is containerized using various

locally procured parts to transform it into a functional

Power Pack. The Power Pack is a different product having a

distinct character, name and use and is marketable as

such. The test of no commercial use without further

process is satisfied, and the fact of “manufacture” stands

established. The present dispute falls within the fourth 

Civil Appeal Nos. 9418-9420 of 2016 Page 14 of 39

category enunciated in Servo-Med (supra), i.e., where the

goods are transformed into marketable, different/new

goods after a particular process. Thus, “manufacture”

could be said to have taken place as contemplated under

Note 6 of Section XVI of the Schedule to the Act, 1985 and

Section 2(f) of the Act 1944, respectively, thereby attracting

the levy of Central Excise duty.

c. Further, emphasis was laid on the fact that “part” of an

article is something necessary for the completion of that

article. It is an integral, constituent or component part,

without which the article to which it is to be joined would

not function as such an article. On the other hand, an

“accessory” is something that is not necessary for the

functioning of an article. In this context, the

characterisation of components such as radiator,

ventilation fan, etc., by the appellant as ‘accessories’ is

wholly untenable. The Genset, once placed in the

container, would not function without these components,

and thus these components should rightly be termed as

‘parts’ of the Power Pack.

C. ISSUE TO BE DETERMINED

20. Having heard the learned counsel appearing for the parties and

having gone through the materials on record, the following

question falls for our consideration:

• Whether the 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 would amount to

“manufacture” under Section 2(f) of the Act, 1944?

Civil Appeal Nos. 9418-9420 of 2016 Page 15 of 39

D. ANALYSIS

(i) What amounts to “manufacture” under the Act, 1944?

21. Before adverting to the rival submissions canvassed on either

side, we must look into a few provisions of the Act, 1944. Section

2(f) defines the term “manufacture”. The same reads as follows:

“2. Definitions.— In this Act, unless there is

anything repugnant in the subject or context,—

xxx xxx xxx

(f) “manufacture” includes any process—

(i) incidental or ancillary to the completion of a

manufactured product;

(ii) which is specified in relation to any goods

in the Section or Chapter Notes of the Fourth

Schedule as amounting to manufacture; or,

(iii) which in relation to the goods specified in

the Third Schedule, involves packing or

repacking of such goods in a unit container or

labelling or re-labelling of containers including

the declaration or alteration of retail sale price

on it or adoption of any other treatment on the

goods to render the product marketable to the

consumer and the word “manufacture” shall

be construed accordingly and shall include not

only a person who employs hired labour in the

production or manufacture of excisable goods,

but also any person who engages in their

production or manufacture on his own

account;”

22. The term “manufacture” assumes vital importance as under the

Act, 1944, the event of taxation is at the point of manufacturing.

Section 3 of the Act, 1944, which is the charging section, lays

down that the excise duty is to be levied on goods which are 

Civil Appeal Nos. 9418-9420 of 2016 Page 16 of 39

produced or manufactured in India. This is because excise duty

is primarily a duty on the goods produced or manufactured

within the country.

23. Sub-clause (i) of Section 2(f) is inclusive, and “manufacture”

has been defined to include any process incidental or ancillary

to the completion of the manufactured product. Sub-clause (ii)

of Section 2(f) stipulates that “manufacture” would include any

process which has been specified in the Section/Chapter notes

of the Schedule to the Act, 1985, as amounting to

“manufacture”. In other words, if a process is declared as

amounting to “manufacture” in the section or chapter notes, it

would come within the definition of Section 2(f) and become

liable to excise duty.

24. At first blush, Section 2(f)(i) may suggest that any process

undertaken on the goods in question would fall within the ambit

of “manufacture”. However, this Court has consistently held

that such a broad interpretation would be erroneous. The

courts must try to appreciate the nuanced yet critical

distinction that the law draws between mere ‘processing’ on the

one hand, and ‘manufacturing’ on the other. The following

paragraphs of the decision of this Court in Union of India v.

Delhi Cloth & General Mills reported in 1962 SCC OnLine

SC 148, would help in elucidating this very important

distinction between processing and manufacturing:

“13. The other branch of Mr. Pathak's argument is

that even if it be held that the respondents do not

manufacture "refined oil" as is known to the market

they must be held to manufacture some kind of

"non-essential vegetable oil" by applying to the raw

material purchased by them, he processes of

neutralisation by alkali and bleaching by activated 

Civil Appeal Nos. 9418-9420 of 2016 Page 17 of 39

earth and/or carbon. According to the learned

Counsel "manufacture" is complete as soon as

by the application of one or more processes,

the raw material undergoes some change. To

say this is to equate "processing" to

"manufacture" and for this we can find no

warrant in law. The word "manufacture" used

a as verb is generally understood to mean as

"bringing into existence a new substance" and

does not mean merely "to produce some

change in a substance", however minor in

consequence the change may be. This distinction

is well brought about in a passage thus quoted in

Permanent Edition of Words and Phrases, Vol. 26,

from an American Judgment. The passages runs

thus :-

'Manufacture' implies a change, but

every change is not manufacture and

yet every change of an article is the

result of treatment, labour and

manipulation. But something more is

necessary and there must be

transformation; a new and different

article must emerge having a distinctive

name, character or use.

xxx xxx xxx

15. These definitions make it clear that to become

"goods" an article must be something which can

ordinarily come to the market to be bought and

sold.

16. This consideration of the meaning of the word

"goods" provides strong support for the view that

'manufacture' which is liable to excise duty under

the Central Excises and Salt Act, 1944, must be the

"bringing into existence of a new substance known

to the market." " But," says the learned Counsel,

"look at the definition of 'manufacture' in the

definition clause of the Act and you will find

that 'manufacture' is defined thus :

'Manufacture' includes any process incidental 

Civil Appeal Nos. 9418-9420 of 2016 Page 18 of 39

or ancillary to the completion of a

manufactured product (s. 2(f))". We are unable

to agree with the learned Counsel that by

inserting this definition of the word

"manufacture" in s. 2(f) the legislature

intended to equate "processing" to

"manufacture" and intended to make mere

"processing" as distinct from "manufacture" in

the same sense of bringing into existence of a

new substance known to the market, liable to

duty. The sole purpose of inserting this definition

is to make it clear that at certain places in the Act

the word 'manufacture' has been used to mean a

process incidental to the manufacture of the article.

Thus in the very item under which the excise duty

is claimed in these cases, we find the words : "in or

in relation to the manufacture of which any process

is ordinarily carried on with the aid of power". The

definition of 'manufacture' as in s. 2(f) puts it

beyond any possibility of controversy that if power

is used for any of the numerous process that are

required to turn the raw material into a finished

article known to the market the clause will be

applicable; and an argument that power is not used

in the whole process of manufacture using the word

in its ordinary sense, will not be available. It is only

with this limited purpose that the legislature, in our

opinion, inserted this definition of the word

'manufacture' in the definition section and not with

a view to make the mere "processing" of goods as

liable to excise duty.”

(Emphasis Supplied)

25. As per this Court’s decision in Delhi Cloth & General Mills

(supra) 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. This test, as laid down by this Court in Delhi Cloth & 

Civil Appeal Nos. 9418-9420 of 2016 Page 19 of 39

General Mills (supra), has been extensively applied by this

Court in its subsequent rulings.

26. In Union of India & Ors v. J.G Glass Industries Ltd & Ors

reported in (1998) 2 SCC 32, 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. The relevant observations

made by this Court are reproduced as follows:

“16. On an analysis of the aforesaid rulings, a twofold test emerges for deciding whether the process

is that of "manufacture". First, whether by the

said process a different commercial

commodity comes into existence or whether

the identity of the original commodity ceases

to exist; secondly, whether, the commodity

which was already in existence will serve no

purpose but for the said process. In other

words, whether the commodity already in

existence will be of no commercial use but for

the said process. In the present case, the plain

bottles are themselves commercial commodities

and can be sold and used as such. By the process

of printing names or logos on the bottles, the basic

character of the commodity does not change. They

continue to be bottles. It cannot be said that but for

the process of printing, the bottles will serve no

purpose or are of no commercial use.”

(Emphasis Supplied)

Civil Appeal Nos. 9418-9420 of 2016 Page 20 of 39

27. This Court in J.G. Glass (supra) established a two-fold test to

ascertain if an activity constitutes “manufacture”:

a. Fundamental Change Test: The first criterion is to determine

if the process results in a new commercial item being

created, or if the original item’s identity is fundamentally

altered or ceases to exist. This means assessing whether a

transformation occurs such that a distinct product with a

new name, identity, character, or use emerges;

b. But for the process Test: The second criterion evaluates

whether the product that existed before the process would

be commercially useless or serve no purpose without

undergoing that specific process. In other words, if the preexisting commodity would lack any commercial utility were

it not for the process, this condition is met.

28. This Court in Servo-Med (supra) undertook extensive analysis

and discussed its various previous judgments to clarify the

issue as to what constitutes a manufacturing activity. The Court

classified the existing case law into the following distinct

categories for the purpose of examining the different aspects of

the term “manufacture” under the Act, 1944:

a. When transformation occurs/does not occur: In this

category, the Court discussed instances where goods are

transformed into something different and/or new, which

typically indicates “manufacture”, as against instances

where changes/processes do not lead to transformation into

a new product.

b. Retaining of essential character: In this category, the Court

discussed instances where the activity did not amount to

“manufacture” as the goods remained essentially the same 

Civil Appeal Nos. 9418-9420 of 2016 Page 21 of 39

after a particular process, with the original article

continuing to hold its core identity despite changes.

c. “But for the process” test / no commercial user without

further process: In this category, the Court evaluated

instances where a product in existence would serve no

commercial purpose without undergoing a specific process,

and whether undertaking such a process would amount to

“manufacture”.

29. This Court in Servo-Med (supra) also discussed the ratio of the

judgment in J.G Glass (supra), more particularly as to how the

‘but for the process’ test ought to be understood and applied.

The relevant observation is reproduced as follows:

“24. It is important to understand the correct ratio

of the judgment in the J.G. Glass case. This

judgment does not hold that merely by application

of the second test without more manufacture comes

into being. The Court was at pains to point out that

a twofold test had emerged for deciding whether

the process is that of manufacture. The first test is

extremely important-that by a process, a different

commercial commodity must come into existence as

a result of the identity of the original commodity

ceasing to exist. The second test, namely that

the commodity which was already in existence

will serve no purpose but for a certain process

must be understood in its true perspective. It

is only when a different and/or finished

product comes into existence as a result of a

process which makes the said product

commercially usable that the second test laid

down in the judgment leads to manufacture.

Thus understood, this judgment does not lead

to the result that merely because the

unsterilized syringe and needle is of no

commercial use without sterilization, the

process of sterilization which would make it

commercially usable would result in the

sterilization process being a process which 

Civil Appeal Nos. 9418-9420 of 2016 Page 22 of 39

would amount to manufacture. If the original

commodity i.e. syringes and needles continue

as such post sterilization, the second test

would not lead to the conclusion that the

process of sterilization is a process which

leads to manufacture. This is because, in all

cases, there has first to be a transformation in the

original article which transformation brings about a

distinctive or different use in the article.”

 (Emphasis supplied)

Thus, this Court in Servo-Med (supra) has held that both the

prongs of the two-prong test must be fulfilled in order for an

activity to amount to “manufacture”. The ‘but for the process’

test cannot be applied in isolation, without first establishing

that the fundamental test of transformation has been satisfied.

30. While we are in respectful agreement with the above extracted

observations of this Court in Servo-Med (supra), we believe a

further clarification is necessary as regards the application of

the two pronged test laid down in J.G. Glass (supra). If the

second wing of the J.G. Glass test—namely, that the original

commodity would serve no purpose but for the said process

were to be applied as a rigid and universal mandate, it would

lead to manifest absurdity. To illustrate this, we may give a

simple example of a flour mill that processes wheat grain into

flour. The wheat grain, which is the input, is a perfectly

marketable commodity in its own right; it can be sold as seed

or used as animal feed. If one were to apply the second test as

propounded in J.G. Glass (supra) in a mechanical manner, the

inescapable conclusion would be that since the wheat grain was

in itself a marketable commodity, the process of milling it into

flour would not amount to “manufacture”, as the second prong

of the test is not being satisfied.

Civil Appeal Nos. 9418-9420 of 2016 Page 23 of 39

31. 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

(supra) 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 (supra) test must be judged on the facts and

circumstances of each individual case, and the same cannot be

brandished as a universal rule.

32. This Court in Servo-Med (supra) categorised the entire case law

into four categories. In paragraph 27, the Court lists them out

as follows:

“27. The case law discussed above falls into four

neat categories.

(1) Where the goods remain exactly the same even

after a particular process, there is obviously no

manufacture involved. Processes which remove

foreign matter from goods complete in themselves

and/or processes which clean goods that are

complete in themselves fall within this category.

(2) Where the goods remain essentially the same

after the particular process, again there can be no

manufacture. This is for the reason that the original

article continues as such despite the said process

and the changes brought about by the said process.

(3) Where the goods are transformed into something

different and/or new after a particular process, but

the said goods are not marketable. Examples

within this group are the Brakes India case and 

Civil Appeal Nos. 9418-9420 of 2016 Page 24 of 39

cases where the transformation of goods having a

shelf life which is of extremely small duration. In

these cases also no manufacture of goods takes

place.

(4) Where the goods are transformed into

goods which are different and/or new after a

particular process, such goods being

marketable as such. It is in this category that

manufacture of goods can be said to take

place.”

 (Emphasis Supplied)

33. A close reading of the four categories referred to above would

indicate that this Court in Servo-Med (supra) has also laid down

a two pronged test for the purpose of determining whether an

activity amounts to “manufacture”. The two-fold test is: (i)

Transformation test (Whether a distinct product with a new

name, identity, character, or use emerges?); and (ii)

Marketability test (Whether the transformed product is

marketable as such?).

(ii) Whether the activity undertaken by the Appellant

amounts to “manufacture”?

34. We now proceed to apply the test laid down in Servo-Med

(supra) for the purpose of answering the following two

questions:

a. Whether the Imported Gensets have undergone a

transformation into Power Packs, i.e. whether the imported

Gensets and the Power Packs are distinct/different

products, each with their own separate character, identity,

or use?; and 

Civil Appeal Nos. 9418-9420 of 2016 Page 25 of 39

b. Whether the Power Packs can be considered to be

marketable?

35. The dispute between the parties before us primarily lies with

respect to the transformation test. It is the case of the appellant

that no transformation has occurred and there is no change in

the character, identity or name as: (i) the function and end use

of both the imported Gensets and Power Packs remains the

same i.e., generating electricity; and (ii) placing the Genset

inside the steel container and fitting it with various accessories

is only for logistical purposes and the same merely enhances

functionality.

36. In Servo-Med (supra), the question before this Court was

whether the process of sterilizing syringes and needles would

amount to “manufacture” under the Act, 1944. Answering in the

negative, the Court held as follows:

“28. The instant case falls within the first category

aforementioned. This is a case of manufacture of

disposable syringes and needles which are used

for medical purposes. These syringes and

needles, like in the J.G. Glass case and unlike

the Brakes India case, are finished or

complete in themselves. They can be used or

sold for medical purposes in the form in which

they are. The fact that medically speaking they are

only used after sterilization would not bring this

case within the ratio of the Brakes India case. All

articles used medically in, let us say, surgical

operations, must of necessity first be sterilized.

xxx xxx xxx

30. The added process of sterilization does not

mean that such articles are not complete articles in

themselves or that the process of sterilization

produces a transformation in the original articles 

Civil Appeal Nos. 9418-9420 of 2016 Page 26 of 39

leading to new articles known to the market as

such. A surgical equipment such as a knife

continues to be a surgical knife even after

sterilization. If the Department were right, every

time such instruments are sterilized, the same

surgical instrument is brought forth again and

again by way of manufacture and excisable duty is

chargeable on the same. This would lead to an

absurd result and fly in the face of common sense.

If a surgical instrument is being used five times a

day, it cannot be said that the same instrument has

suffered a process which amounts to manufacture

in which case excise duty would be liable to be paid

on such instruments five times over on any given

day of use. Further, what is to be remembered here

is that the disposable syringe and needle in

question is a finished product in itself. Sterilization

does not lead to any value addition in the said

product. All that the process of sterilization

does is to remove bacteria which settles on the

syringe's and needle's surface, which process

does not bring about a transformation of the

said articles into something new and

different. Such process of removal of foreign

matters from a product complete in itself

would not amount to manufacture but would

only be a process which is for the more

convenient use of the said product. In fact, no

transformation of the original articles into

different articles at all takes place. Neither

the character nor the end use of the syringe

and needle has changed post-sterilization.

The syringe and needle retains its essential

character as such even after sterilization.”

(Emphasis Supplied)

According to this Court in Servo-Med (supra), the syringes and

needles even before sterilization were complete and finished

articles and all that the process of sterilization did was to

remove the foreign particles which settled on the surfaces of

such needles and syringes. Neither the character nor the end 

Civil Appeal Nos. 9418-9420 of 2016 Page 27 of 39

use of the syringe and needle changed post sterilisation.

Consequently, no transformation had occurred.

37. In Commissioner of Central Excise-I, New Delhi v. S.R

Tissues Pvt Ltd & Anr., reported in (2005) 6 SCC 310, the

question before this Court was whether the cutting/slitting of

jumbo rolls of tissue paper into various sizes suitable for use as

toilet papers, table napkins or facial tissues would amount to

“manufacture” in terms of Section 2(f) of the Act, 1944. The

Court held as follows:

“12. At the outset, we may point out that the

assessee is one of the downstream producers. The

assessee buys duty-paid jumbo rolls from M/s

Ellora Paper Mills and M/s Padamjee Paper Mills.

There are different types of papers namely, tissue

paper, craft paper, thermal paper, writing paper,

newsprints, filter paper etc. The tissue paper is the

base paper which is not subjected to any treatment.

The jumbo rolls of such tissue papers are bought by

the assessee, which undergoes the process of

unwinding, cutting/slitting and packing. It is

important to note that the characteristics of

the tissue paper are its texture, moisture

absorption, feel etc. In other words, the

characteristics of table napkins, facial

tissues and toilet rolls in terms of texture,

moisture absorption capacity, feel etc. are the

same as the tissue paper in the jumbo rolls.

The said jumbo rolls cannot be conveniently

used for household or for sanitary purposes.

Therefore, for the sake of convenience, the

said jumbo rolls are required to be cut into

various shapes and sizes so that it can be

conveniently used as table napkins, facial

tissues, toilet rolls etc. However, the end-use

of the tissue paper in the jumbo rolls and the

end-use of the toilet rolls, the table napkins

and the facial tissues remains the same,

namely, for household or sanitary use. The

predominant test in such a case is whether 

Civil Appeal Nos. 9418-9420 of 2016 Page 28 of 39

the characteristics of the tissue paper in the

jumbo roll enumerated above is different from

the characteristics of the tissue paper in the

form of table napkin, toilet roll and facial

tissue. In the present case, the tribunal was right

in holding that the characteristics of the tissue

paper in the jumbo roll are not different from the

characteristics of the tissue paper, after slitting and

cutting, in the table napkins, in the toilet rolls and

in the facial tissues.

13 . In the case of Brakes India Ltd. v. Supdt. of

Central Excise & Others this Court has very aptly

brought out the test of character or end-use by

observing as follows:

" If by a process, a change is effected in a

product, which was not there previously,

and which change facilitates the utility of the

product for which it is meant, then the

process is not a simple process, but a

process incidental or ancillary to the

completion of a manufactured product. It will

not be safe solely to go by a test as to

whether the commodity after the change

takes in a new name, though in stated

circumstances, it may be useful to resort to

it. This may prove to be deceptive

sometimes, for it will suit the manufacturer

to retain the same name to the end product

also. The 'character or use' test has been

given due importance by pronouncements of

the Supreme Court. When adopting a

particular process, if a transformation takes

place, which makes the product have a

character and use of its own, which it did not

bear earlier, then the process would amount

to manufacture under section 2 irrespective

of the fact whether there has been a single

process or have been several processes."

14. Applying the above tests, we hold that no

new product had emerged on winding,

cutting/slitting and packing. The character

and the end-use did not undergo any change

on account of the abovementioned activities 

Civil Appeal Nos. 9418-9420 of 2016 Page 29 of 39

and, therefore, there was no manufacture on

first principles.”

(Emphasis Supplied)

In S.R. Tissues (supra), this Court dealt with a fact situation

wherein the form and shape of the subject article were being

changed to facilitate the convenience of use. However, such a

change in form did not lead to a change in either its character

or use i.e., both the character and use of the product remained

the same before and after undergoing the process.

38. In Satnam Overseas Ltd v. Commercial of Central Excise,

New Delhi, reported in (2015) 13 SCC 166, the assessee was

engaged in packing combination of mixture of raw rice,

dehydrated vegetables and spices in the name of ‘Rice and

Spice’. The department contended that this process of mixing

raw rice, dehydrated vegetables and spices amounted to

“manufacture” as per Section 2(f) of the Act, 1944. The Court

held that there was no transformation into a new commodity

and thus the process did not amount to “manufacture”. The

relevant observation reads thus:

“11. The first judgment which we want to mention,

which was cited by Ms. Charanya, is Crane Betel

Nut Powder Works v. Commissioner of Customs,

Central Excise, Tirupathi. In the said case the

Assessee was engaged in the business of

marketing betel nuts in different sizes after

processing them by adding essential/non-essential

oils, menthol, sweetening agent etc. Initially, the

Assessee cleared the goods under Chapter Subheading 2107 of the Central Excise Tariff and was

paying duty accordingly. However, the Assessee

filed a revised classification declaration Under Rule

173B of the Central Excise Rules, 1944, with effect

from 17th July, 1997, claiming classification of its

product under Chapter Sub-heading 0801.00 of the 

Civil Appeal Nos. 9418-9420 of 2016 Page 30 of 39

Central Excise Tariff. It was contended by the

Assessee that the crushing of betel nuts into

smaller pieces with the help of machines and

passing them through different sizes of sieves to

obtain goods of different sizes/grades and

sweetening the cut pieces did not amount to

manufacture in view of the fact that mere crushing

of betel nuts into smaller pieces did not bring into

existence a different commodity which had a

distinct character of its own.

12. Though the authorities below had decided

against the Assessee, this Court reversed the said

view holding that the said process would not

amount to 'manufacture' as the process involving

manufacture does not always result in the creation

of a new product. In the instant case

notwithstanding the manufacturing process, it

could not be said that a transformation had taken

place resulting in the formation of a new product.

The relevant portion of the judgment is reproduced

below:

31. In our view, the process of manufacture

employed by the Appellant company did not

change the nature of the end product, which

in the words of the Tribunal, was that in the

end product the 'betel nut remains a betel

nut'. The said observation of the Tribunal

depicts the status of the product prior to

manufacture and thereafter. In those

circumstances, the views expressed in the

D.C.M. General Mills Ltd. (supra) and the

passage from the American Judgment

(supra) become meaningful. The observation

that manufacture implies a change, but

every change of not manufacture and yet

every change of an article is the result of

treatment, labour and manipulation is

apposite to the situation at hand. The

process involved in the manufacture of

sweetened betel nut pieces does not result in

the manufacture of a new product as the end

product continues to retain its original

character though in a modified form.

Civil Appeal Nos. 9418-9420 of 2016 Page 31 of 39

What is to be highlighted is that even after the

betel nut which had been cut to different sizes

and had undergone the process, the Court did

not treat it as 'manufacture' within the

meaning of Section 2(f) of the Act on the

ground that the end product was still a betel

nut and there was no change in the essential

character to that article even when it was the

result of treatment, labour and manipulation,

inasmuch as even after employing the same it

had not resulted in the manufacture of a new

product as the end product continued to

retain its original character.

13. Another judgment which was referred to by

learned Counsel for the Appellant is Commissioner

of Central Excise v. Laljee Godhoo and Co. Vide this

judgment the Court affirmed the view taken by the

CEGAT, holding that the process of subjecting raw

asafoetida (hing) resulting in formation of

compounded asafoetida does not amount to

manufacture, even when this process has

undergone chemical change, because of the reason

that the said chemical change had not brought even

after it underwent a process, any new product as

the product remained the same at starting and

terminal points of the process....

14.....Again the test which was applied was

that essential character of the product did not

change and, therefore, it would not amount to

manufacture. It was so held even when gum

arabic as well as wheat flour were mixed in

the process. A pertinent aspect which was

noted was that mixing of these articles did not

result in chemical reaction with asafoetida.

15. Last judgment to which we would like to refer

to is Deputy Commissioner Sales Tax (Law), Board

of Revenue (Taxes), Ernakulam v. PIO Food

Packers. In that case, the process undertaken by

the Assessee was to wash the pineapple, after

purchase, and then remove inedible portion, the

end crown as well as skin and inner core. After

removing those inedible portions the pineapple fruit

used to be sliced and the slices were filled in canes 

Civil Appeal Nos. 9418-9420 of 2016 Page 32 of 39

after adding sugar as preservative. Thereafter,

canes would be sealed under temperature and then

put in a boiled water for sterilisation. Identical

question was posed viz. whether this process

amounted to 'manufacture'. Giving the answer in

the negative, the Court held that even when

with each process suffered, the original

commodity experienced a change, such a

change would not amount to 'manufacture'

unless it seized to be the original commodity

and a new and distinct article was produced

therefrom....

xxx xxx xxx

17. It follows from the above that mere addition

in the value, after the original product has

undergone certain process, would not bring it

within the definition of 'manufacture' unless

its original identity also under goes

transformation and it becomes a distinctive

and new product.

18. When we apply the aforesaid principle to the

facts of this case, it is clear that mere addition of

dehydrated vegetables and certain spices to

the raw rice, would not make it a different

product. Its primary and essential character

still remains the same as it is continued to be

known in the market as rice and is sold as rice

only. Further, this rice, again, remains in raw

form and in order to make it edible, it has to

be cooked like any other cereal. The process

of cooking is even mentioned on the pouch

which contains cooking instructions. Reading

thereof amply demonstrates that it is to be

cooked in the same form as any other rice is

to be cooked. Therefore, we do not agree with the

CEGAT that there is a transformation into a new

commodity, commercially known as distinct and

separate commodity.”

(Emphasis Supplied)

Thus, Satnam Overseas (supra) clarified that the addition of

elements to a subject article would in itself not lead to 

Civil Appeal Nos. 9418-9420 of 2016 Page 33 of 39

“manufacture”, as long as the essential character of the subject

article is being retained.

39. In Maruti Suzuki India Ltd v. Commissioner of Central

Excise, reported in (2015) 13 SCC 186, the appellant’s primary

contention was that the process of Electro Deposition Coating

of various spare parts such as bumpers, grills, etc, did not

amount to “manufacture” as the same was in the nature of antirust and was merely done to increase the shelf life of the said

spare parts. Agreeing with the appellant, the Court held as

follows:

“17. On the facts of the present case, we have first,

therefore, to arrive at whether there is

"manufacture" at all and only subsequently does

the question arise as to if this is so, what is the

valuation of the processed goods and whether duty

is payable upon them. We have found on facts that

for the purposes of the proviso to Rule 57F(ii), the

inputs that were not ultimately used in the

final product but were removed from the

factory for home consumption remain the

same despite ED coating and consequent value

addition. We follow the law laid down in S.R

Tissues Pvt. Ltd.'s case and state that on

account of mere value addition without more

it would be hazardous to say that

manufacture has taken place, when in fact, it

has not. It is clear, therefore, that the inputs

procured by the Appellants in the present case,

continue to be the same inputs even after ED

coating and that Rule 57F(ii) proviso would

therefore apply when such inputs are removed from

the factory for home consumption, the duty of

excise payable being the amount of credit that has

been availed in respect of such inputs under Rule

57A.”

(Emphasis supplied)

Civil Appeal Nos. 9418-9420 of 2016 Page 34 of 39

40. At first glance, it may seem that the observations in various

decisions discussed above fortify the appellant’s stance that no

transformation could have occurred from placing imported

Genset into a steel container and fitting the steel container with

multiple additional components. The appellant may legitimately

argue, in the facts of the present case, like in the

aforementioned cases: (i) no change in end use of the subject

article is occurring [Servo-Med (supra)]; (ii) merely form is being

changed for the sake of convenience [S.R Tissues (supra)] and

utility [Maruti Suzuki (supra)]; and (iii) the additional elements

do not change the character of the good [Satnam Overseas

(supra)]. Consequently, undertaking the necessary process

would not amount to “manufacture” under Section 2(f) of the

Act, 1944.

41. However, such contention should fail. In all the aforementioned

cases, the character or use of the subject article did not change,

and hence, there was no transformation. In S.R Tissues

(supra), the change in form of the tissue roll did not lead to a

change in the characteristics of the tissue. Similarly, in Satnam

Overseas (supra), the additional elements did not change the

essential characteristics of the subject article. However, in the

facts of the present case, the change in the form/structure and

the addition of new components to the imported Genset has

transformed it and brought into existence a different product,

i.e. the Power Pack, which has its own distinct character and

identity.

42. Determining the ‘character’ and ‘identity’ of goods is an

inherently fact-specific inquiry, necessitating assessment on a

case-to-case basis. Given the vast diversity of products and 

Civil Appeal Nos. 9418-9420 of 2016 Page 35 of 39

manufacturing processes, it is impossible to lay down one

universal definition for these terms.

43. In the facts of the present case, we are 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.

44. At this juncture, it is necessary to determine whether these

components attached to the steel container would constitute as

‘parts’ or ‘accessories’ of the Power Pack. This is crucial because

if these additional components are ‘parts’ of the Power Pack, it

would establish beyond doubt that the imported Genset has

undergone transformation as its constituent elements are very

different from that of the Power Pack.

45. The judicial understanding of the terms ‘part’ and ‘accessory’

respectively is as presented below:

a. A part is an integral/ constituent component which renders

the article complete and functional i.e., the article would not

be able to fulfill its primary function without this component.

[See Saraswati Sugar Mills v. Commissioner of Central 

Civil Appeal Nos. 9418-9420 of 2016 Page 36 of 39

Excise, Delhi- III, reported in (2014) 15 SCC 625, and M/s

Steel Authority of India Ltd. v. Commissioner of Central

Excise, reported in 2022 SCC OnLine SC 1232];

b. An accessory on the other hand is a component which while

not being essential to the primary functioning of the article,

is used in conjunction with the article and adds

supplemental/secondary value by providing for additional

beauty, elegance, comfort or convenience of use in relation

to that article. [See Commissioner of Central Excise, Delhi

v. Insulation Electrical Private Limited reported in

(2008) 12 SCC 45].

To illustrate, an air conditioner installed in a car would not be

considered a ‘part’ of that car. This is because the car can

effectively perform its primary function of transportation even

without an air conditioner. Conversely, the air conditioner

would be classified as an ‘accessory’ because it enhances

comfort and convenience when utilised with the car. It provides

supplemental/secondary value by enabling the ability to control

the temperature within the car. On the other hand, a steering

wheel would be considered as a ‘part’ of the car because without

a steering wheel the car would not be able to perform its primary

function, i.e., transportation.

46. Applying the above enunciated judicial understanding of ‘parts’

and ‘accessories’ to the facts of this case, it becomes evident

that the additional components should be considered as ‘parts’

of the Power Pack. The appellant itself has admitted to the fact

that once the Genset is placed in the steel container, these

additional components, such as the radiator, ventilator fan and

air filter unit, are required for its effective functioning. However,

according to the appellant, these components do not have a 

Civil Appeal Nos. 9418-9420 of 2016 Page 37 of 39

direct role in generating the electricity. Even if that be the case,

it cannot be denied that these components play an equally vital

role in facilitating such generation of electricity. It would be safe

to assume that without these additional components, the Power

Pack would not produce electricity within the steel container

and thereby be able to fulfil its primary function. Thus, these

additional components are not mere ‘accessories’ attached for

the sake of convenience.

47. Further, the change in the form of the imported Genset after

undergoing the process is drastic and substantial. Unlike in S.R

Tissues (supra) wherein the tissue roll was itself cut/slit into

different forms, what is happening in the present case is not

mere restructuring of the imported Genset. Rather, the Genset

is being reengineered so that it can function within a container.

In order to facilitate the same a number of additional

components are being added, and they are all recognisable as

‘parts’ of the Power Pack. In fact, the pictorial representations

of the imported Genset and Power Pack itself indicates that

structurally there is a profound distinction between both the

products. In such circumstances, the fact that the process was

undertaken merely for the sake of logistical purposes would not

change the undeniable fact that the imported Genset has been

transformed into a different product.

48. The appellant’s submission that the Genset was complete and

functional at the time of import and the end-use of both the

imported Genset and the Power Pack is the same i.e., generation

of electricity, is also devoid of any merit. There is a serious

dispute between the parties as to whether or not the Genset at

the time of import was complete and functional. Even if we 

Civil Appeal Nos. 9418-9420 of 2016 Page 38 of 39

assume it was complete and functional, that still would not help

in driving home the appellant’s contention. This is because the

core end-use of a subject article might remain the same pre and

post application of the process and yet it might have undergone

a transformation into a different product.

49. 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.

50. We have no doubt in our mind that the test of transformation

is satisfied in the facts of the present case. The imported Genset

and the Power Pack are two different commodities with distinct

constituent elements, structure and functional utility.

51. We now turn to the final test of marketability. 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.

Civil Appeal Nos. 9418-9420 of 2016 Page 39 of 39

E. CONCLUSION

52. 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.

53. For all the foregoing reasons, the appeals fail and are hereby

dismissed.

….………………………….…. J.

(J.B. PARDIWALA)

….………………………….…. J.

(K.V.VISWANATHAN)

New Delhi.

September 19, 2025.