Central Excise Act, 1944 – s.2(f) – Central Excise Tariff Act, 1985 – Appellant is engaged in the business of providing containerised gas generating sets known as the Power Packs on a lease basis – In order to carry out the said business, the appellant imported Gas Generating Sets (Gensets) consisting of an engine coupled with an alternator on a common base frame – For convenience, 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 Assistant Commissioner of Central Excise 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 Central Excise Tariff Act, 1985 – The appeal against the said letter before the Commissioner (Appeals), came to be dismissed – Subsequently, several show cause notices issued to the appellant proposing demand of duty along with the interest and levy of penalty on the Power Packs cleared during the period from November 2006 to July 2008 – Ultimately, the said demand and penalty were confirmed – Appeal against the same came to be dismissed by CESTAT – The CESTAT held that the process undertaken by the appellant would amount to “manufacture” – Correctness: Held: This court in Servo-Med has 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?) – 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 – 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 – As far as the second limb of the test is concerned, held, that 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 – 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. [Paras 33, 41, 43, 51, 52] Words and Phrases – ‘parts’ and ‘accessories’ – Whether the components attached to the steel container would constitute as ‘parts’ or ‘accessories’ of the Power Pack: Held: 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 – 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 – 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 – Further, the change in the form of the imported Genset after undergoing the process is drastic and substantial – 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 – Thus, 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. [Paras 45, 46, 47, 49, 50]
As published in the Supreme Court Reports, Supreme Court of India. Headnotes prepared by: Ankit Gyan. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
This page is for informational and research purposes only and does not constitute legal advice. Consult a qualified advocate for advice specific to your situation.