Supreme Court: Placing Genset Within Steel Container & Fitting It With Additional Components For New Commodity Is ‘Manufacture’ Under Central Excise Act

The Supreme Court held that the process of placing the Genset within the steel container and fitting that container with additional components which brings into existence a new commodity, amounts to ‘manufacture’ under Section 2(f)(i) of the Central Excise Act, 1944 (CEA).

The Court was deciding Civil Appeals preferred by a company, challenging the Final Order of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Ahmedabad.

The two-Judge Bench comprising Justice J.B. Pardiwala and Justice K.V. Viswanathan observed, “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.”

The Bench said that the steel container and the other additional components transform the imported Genset and bring into existence a distinct product which has its own character and identity.

Advocate Charanya Lakshmikumaran appeared for the Appellant while Senior Advocate Nisha Bagchi appeared for the Respondent.

Facts of the Case

The Appellant company (assessee) was engaged in the business of providing containerised gas generating sets known as the Power Packs on a lease basis. To carry out the said business, it imported Gas Generating Sets (Gensets) consisting of an engine (prime mover) coupled with an alternator on a common base frame. At the time of import, the customs authorities assessed the Gensets under the Customs Tariff Act, 1975 (CTA), categorising them as “Generating sets with spark-ignition combustion piston engines of an output exceeding 3.5 kVA”. The Appellant considered it unfeasible to install Gensets at customer premises as they were to be provided on a lease basis. 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, it 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. Thereafter, the Appellant vide letter sought an opinion from the Deputy Commissioner of Central Excise regarding the liability under CEA. Subsequently, the Assistant Commissioner of Central Excise informed 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 Central Excise Tariff Act, 1985, respectively. Being aggrieved, the Appellant filed an Appeal before the Commissioner (Appeals), which was dismissed. Later, show-cause notices (SCNs) were issued and the Appellant filed Appeals, which were partly allowed. Hence, the case was before the Apex Court.

Court’s Observations

The Supreme Court in the above regard, noted, “… 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?).”

The Court remarked that in this 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.

“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 manufacturing processes, it is impossible to lay down one universal definition for these terms”, it said.

The Court was of the view 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”, it added.

The Court further noted that the additional components should be considered as ‘parts’ of the Power Pack and the Appellant itself 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 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”, it also observed.

The Court enunciated that the change in the form of the imported Genset after undergoing the process is drastic and substantial.

“… 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”, it elucidated.

Furthermore, the Court said that 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 devoid of any merit.

“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”, it remarked.

Conclusion

The Court held that the test of transformation is satisfied in the facts of the case and the imported Genset and the Power Pack are two different commodities with distinct constituent elements, structure and functional utility.

“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”, it concluded.

Accordingly, the Apex Court dismissed the Appeals.

Cause Title- M/s Quippo Energy Ltd. v. Commissioner of Central Excise Ahmedabad – II (Neutral Citation: 2025 INSC 1130)

Appearance:

Appellant: AOR R. Parthasarathy, Advocates Charanya Lakshmikumaran, N. Jain, Ayush Agarwal, Swastik Mishra, Neha choudhary, Umang Motiyani, and Medha Sinha.

Respondent: Senior Advocate Nisha Bagchi, ASG Raghavendra P Shankar, AOR Gurmeet Singh Makker, Advocates Arunima Dwivedi, Karan Lahiri, Bhuvan Kapoor, and Ishan Sharma.

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