The question of what constitutes “manufacture” under excise law has been a recurring point of litigation in India. With globalised trade and the increasing import of semi-finished or pre-fabricated goods, a vital issue emerges: when do value-added processes on imported goods amount to “manufacture” for the purpose of levying excise duty?
This issue was squarely addressed by the Supreme Court of India in M/s Quippo Energy Ltd. v. Commissioner of Central Excise, Ahmedabad-II (Civil Appeal Nos. 9418-9420 of 2016, decided on 19 September 2025). The Court clarified that processes such as placing imported Gensets (gas generating sets) in steel containers and fitting them with additional components created a new, distinct and marketable product—“Power Packs”—thereby amounting to “manufacture” under Section 2(f) of the Central Excise Act, 1944.
This article explores the statutory framework, judicial evolution, the facts and reasoning in Quippo Energy, and broader implications for businesses engaged in value addition to imported goods.
Statutory Framework of “Manufacture” under the Excise Law
Definition under the Central Excise Act, 1944
Section 2(f) of the Central Excise Act, 1944 defines “manufacture” expansively to include:
- Processes incidental or ancillary to the completion of a manufactured product;
- Processes specified in the Section or Chapter Notes of the Schedule to the Central Excise Tariff Act, 1985; and
- In respect of certain goods, packing, repacking, labelling or relabelling, or any treatment that renders the product marketable to the consumer.
Thus, the law does not confine manufacture to traditional fabrication but extends it to ancillary or incidental processes. Yet, the line between “mere processing” and “manufacture” remains subtle and contested.
Charging Section
Section 3 of the Central Excise Act imposes duty on goods produced or manufactured in India. The definition of “manufacture” is, therefore, critical: if a process qualifies as manufacture, excise duty applies; if not, the process escapes taxation.
Judicial Evolution of the “Manufacture” Test
Over decades, Indian courts have evolved key principles to determine whether a process amounts to manufacture.
Union of India v. Delhi Cloth & General Mills Co. Ltd., 1962 Supp (1) SCR 366 – Manufacture is the bringing into existence of a new substance; mere processing is insufficient. A change must produce an article with a distinctive name, character or use.
Union of India v. J.G. Glass Industries Ltd. & Ors., (1998) 2 SCC 32 – Introduced the two-fold test:
- Does a new commercial commodity come into existence or does the original commodity lose its identity?
- Is the original commodity of no commercial use but for the process?
Servo-Med Industries Pvt. Ltd. v. Commissioner of Central Excise, Mumbai, (2015) 14 SCC 47 – Clarified that both prongs of the J.G. Glass test must be satisfied: mere enhancement of usability without transformation into a new product is not manufacture.
Commissioner of Central Excise v. S.R. Tissues Pvt. Ltd. & Anr., (2005) 6 SCC 310 – Cutting jumbo rolls of tissue into napkins or toilet paper is not a manufacture, as essential characteristics remained unchanged.
Commissioner of Central Excise, New Delhi v. Satnam Overseas Ltd., (2015) 13 SCC 166 – Mixing rice with dehydrated vegetables and spices did not create a new product; the essential character as “rice” remained.
Maruti Suzuki India Ltd. v. Commissioner of Central Excise, (2015) 13 SCC 186 – Electro Deposition Coating for anti-rust protection was not a manufacture; it only enhanced shelf life without creating a new product.
These rulings collectively laid down the transformation test (a new product with a distinct name, character or use must emerge) and the marketability test (the product must be marketable as such).
The Quippo Energy Case (2025)
Factual Background
M/s Quippo Energy imported gas-generating sets (Gensets) comprising engines and alternators. For logistical ease, portability, and customer leasing purposes, the company:
- Placed Gensets into steel containers;
- Added components like radiators, oil tanks, silencers, ventilation fans, pumps, valves, and control panels;
- Conducted hydraulic and electrical testing;
Marketed the final product as “Power Packs” (containerised gensets).
Customs authorities initially classified the Gensets under tariff heading 8502.2090 (generating sets). But the excise authorities held that the conversion into Power Packs amounted to “manufacture”, making them dutiable under excise law.
Issue
Whether placing imported Gensets in steel containers and adding components constitutes “manufacture” under Section 2(f) of the Central Excise Act, 1944?
Appellant’s Arguments
- Imported Gensets were complete and functional; additions merely enhanced usability.
- No transformation occurred; both Gensets and Power Packs generated electricity.
- Accessories like radiators and silencers were non-essential and thus not “parts.”
- Both tests (transformation and marketability) must be satisfied; here, transformation was absent.
Respondent’s Arguments
- Imported Gensets were not functional until containerised with parts.
- Power Pack had a distinct name, character, and market identity, different from imported Gensets.
- Components like radiators and ventilation fans were not mere accessories but integral parts without which Power Packs could not function.
Supreme Court’s Analysis
The Supreme Court undertook a detailed survey of precedents and applied the two-fold test.
(1) Transformation Test
- The Court rejected the appellant’s “mere accessory” argument.
- It held that components added (radiators, silencers, oil tanks, etc.) were parts, essential for the Power Pack’s functioning.
- Structurally and functionally, Power Packs were distinct commodities from imported Gensets.
- Importantly, the transformation imparted portability to Gensets—a new functional utility absent at 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.”
Thus, the transformation test was satisfied.
(2) Marketability Test
- The Power Packs, not the imported Gensets, were marketed and leased to customers.
- They had an established commercial identity in trade.
- Hence, the marketability test was also satisfied.
(3) Distinction from Earlier Cases
- Unlike S.R. Tissues (where tissue remained tissue) or Satnam Overseas (rice remained rice), the process here created a structurally distinct product.
- Unlike Servo-Med, where sterilisation did not change syringes, containerisation created a different commodity with new attributes.
Key Highlights of the Decision
Justice J.B. Pardiwala and Justice K.V. Viswanathan stated:
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.
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.
Both the transformation test and the marketability test stand fulfilled. The process of placing the Genset within the steel container and fitting it with additional, integral components brings into existence a new, distinct, and marketable commodity. This process amounts to ‘manufacture’ under Section 2(f) of the Act, 1944.
Thus, excise duty is applied.
Key Principles Emerging from Quippo Energy
- Parts v. Accessories: Essential components enabling functioning are parts, not accessories. Their addition may transform the commodity.
- Functional Utility: Even if the end-use (electricity generation) is unchanged, imparting a new functional attribute (e.g., portability) constitutes transformation.
- Structural Distinction: A mere change in form may not be manufacture, but where structural engineering alters the product’s identity, manufacture occurs.
- Market Identity Matters: The product recognised and traded in the market (Power Pack v. Genset) determines excisability.
Conclusion
The Supreme Court’s ruling in Quippo Energy (2025) provides crucial clarity: value-added processes on imported goods may qualify as “manufacture” where they result in a new, distinct, and marketable product.
The decision affirms the centrality of the transformation test and the marketability test, reinforcing the principle that excise duty attaches not to mere processing but to processes that create a new commercial identity.
For businesses, the message is clear—adding significant functional, structural, or market identity to imports may trigger excise liability. For policymakers, the judgment underscores the need for balance between revenue considerations and promoting ease of doing business in India’s globalised trade environment.
Important Link
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