The Supreme Court has held that merely grouping, plugging, pinning and configuring imported photocopier modules according to customer requirements—described as “kitting”—does not amount to manufacture attracting central excise duty. 

A Bench comprising Justice S.V.N. Bhatti and Justice N.V. Anjaria held that the Revenue failed to establish that Xerox India carried out any manufacturing activity at its warehouses in Hyderabad and Rampur. Consequently, the Court upheld the Customs, Excise and Service Tax Appellate Tribunal’s (CESTAT) decision setting aside excise demands raised against the company.

The litigation arose from show cause notices issued by the Central Excise Department alleging that Xerox India imported photocopier parts, modules and accessories in CKD/SKD condition and assembled them at its warehouses into fully functional photocopier machines before selling them to customers.

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The department contended that the activity undertaken at the warehouses constituted “manufacture” under Section 2(f) of the Central Excise Act read with Note 6 to Section XVI of the Central Excise Tariff Act. Based on this premise, the Department raised excise duty demands exceeding ₹17.86 crore for the Hyderabad warehouse, besides interest and penalties against company officials. 

According to the Department, imported modules had no independent utility and only became commercially functional photocopiers after being assembled in accordance with customer specifications. It argued that this transformation created a new excisable product.

The assessee however, consistently maintained that no manufacturing process was undertaken. It asserted that the machines were imported as complete photocopiers in modular form only to facilitate safe transportation. The company explained that its warehouses merely grouped together the imported modules corresponding to a customer’s order, assigned identification numbers and dispatched them without undertaking any physical assembly. 

The CESTAT had found that the Revenue’s case lacked factual foundation. It observed that there was no evidence showing that the imported modules were physically assembled at the warehouses.

Instead, the Tribunal concluded that the company merely grouped imported components into complete sets corresponding to customer orders, while actual assembly occurred at customer premises wherever necessary.

The Tribunal further found that important components such as the High Capacity Feeder (HCF) and Duplex Automatic Document Feeder (DADF) were factory-fitted abroad and not installed in the warehouses, thereby negating the Department’s allegation of manufacturing activity. 

The Supreme Court undertook an extensive review of its earlier decisions interpreting “manufacture” under Section 2(f) of the Central Excise Act, including Delhi Cloth & General Mills, Narne Tulaman Manufacturers, BPL India, Satnam Overseas, Servo-Med Industries, Quippo Energy and Alupro Building Systems.

After analysing these precedents, the Court reiterated that every process carried out on goods does not amount to manufacture.

The Court explained that manufacture requires the emergence of a commercially distinct product possessing a different name, character and use. Mere expenditure of labour, skill or value addition is insufficient unless a new commercially identifiable commodity comes into existence. 

The Bench observed that the law distinguishes between simple processing and genuine transformation resulting in a new marketable product.

Applying these settled principles, the Court concluded that Xerox India’s activities amounted only to “kitting”—grouping imported modules according to customer requirements.

It noted that the imported goods had already been classified and assessed to customs duty and countervailing duty as complete machines under Tariff Heading 8471. The Revenue failed to establish that any manufacturing process converted incomplete articles into complete photocopiers at the warehouses.

The Court found that the imported modules were merely unpacked, plugged, pinned together as required for individual customer specifications and dispatched. Such activity did not alter the essential identity of the imported goods or create a new commercially distinct product. 

Rejecting the Revenue’s reliance on Note 6 of Section XVI of the Central Excise Tariff Act, the Supreme Court held that the deeming provision applies only where an incomplete or unfinished article possessing the essential character of a finished product is converted into the complete article.

The Bench held that neither prerequisite was satisfied.

The goods had already been imported, classified and assessed as complete machines. Therefore, the Revenue could not simultaneously treat them as complete machines for customs purposes while contending they were incomplete articles for excise purposes.

The Court further clarified that Rule 2(a) of the General Rules for Interpretation of the Tariff merely governs tariff classification and does not determine whether a process amounts to manufacture. 

The Supreme Court noted that the Revenue had reached conclusions without even inspecting Xerox India’s facilities.

The Bench remarked that, in the present era of technological advancement, the Department could have easily demonstrated the alleged manufacturing process through photographs or other objective evidence instead of relying largely upon statements and assumptions.

The Court observed that where a manufacturing process is alleged, the department should establish the activity through the best available evidence rather than drawing inferences from documents and competing versions presented by the parties. 

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