Cutting and Grooving Aluminium Composite Panels Is Not Manufacture, Supreme Court Rules
A bench of Justices Pardiwala and Mahadevan held that adapting ACPs by cutting and grooving does not produce a distinct product, reversing the Karnataka High Court.
The Supreme Court has held that a construction contractor who cuts imported aluminium composite panels (ACPs) to size, grooves their edges, and fixes them onto building facades does not carry out “manufacture” within the meaning of Section 2(f) of the Central Excise Act, 1944. The bench of Justice J.B. Pardiwala and Justice R. Mahadevan allowed the appeal of M/S Alupro Building Systems Pvt. Ltd on 27 May 2026, setting aside a 2010 judgment of the High Court of Karnataka that had restored an excise duty demand of Rs. 21,46,437 for the period April 2002 to December 2003. The Court also settled a jurisdictional question that had divided tribunals and High Courts: whether the excisability of goods is a question of “rate of duty” that must go directly to the Supreme Court, bypassing the High Court entirely.
How the Dispute Reached the Court
Alupro is a construction contractor that affixes ACPs on the exterior facades of buildings. ACPs are composite panels made of two aluminium sheets bonded to a polyethylene core. The company imported pre-coated ACPs in standard sizes, classified them under Customs Tariff Heads 7606/7610, and paid customs duty on import.
At its premises, Alupro cut the panels into rectangular or square shapes of the required size and grooved their reverse face to allow mechanical fixing. The cut and grooved panels were then taken to site, fixed onto frames using angles, clamps, and fasteners, and the gaps between adjacent panels were sealed.
Before April 2002, Alupro had been paying excise duty on the cutting and grooving activity. It then stopped, taking the position that the process did not amount to manufacture. On 14 September 2004, the Revenue issued a show cause notice demanding duty of Rs. 21,46,437 for the period April 2002 to December 2003, along with interest and penalties.
The Additional Commissioner confirmed the demand. The Commissioner (Appeals) upheld the finding of manufacture but set aside the penalty and interest. The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), South Zonal Bench at Bangalore, allowed Alupro's appeal in June 2006, holding that the Revenue had not discharged its burden of proving marketability and that no new product had come into existence.
The Revenue appealed to the High Court of Karnataka under Section 35G of the Act. The High Court allowed the appeal in April 2010, holding that cutting, grooving, and routing of the ACPs produced a new commercially identifiable product and therefore amounted to manufacture. Alupro then came to the Supreme Court.
The Jurisdictional Question: High Court or Supreme Court?
Before reaching the merits, the Court addressed whether the High Court had jurisdiction at all. Section 35G permits appeals to the High Court from CESTAT orders on substantial questions of law, but expressly excludes orders “relating, among other things, to the determination of any question having a relation to the rate of duty of excise or to the value of goods for purposes of assessment.” Such orders go directly to the Supreme Court under Section 35L(1)(b).
The Court held that the question of excisability — whether a process amounts to manufacture and therefore attracts excise duty — is not separate from the question of rate of duty. The two are “sequentially and logically interdependent.” Excisability is a precursor to the determination of rate of duty for the purpose of assessment. To treat them as distinct would, in the Court's words, “sever what is inherently a continuous chain of fiscal adjudication into fragments, which the legislature could never have intended.”
The Court also noted that the word “any” in Section 35G gives the exclusion a wide sweep, and the phrase “among other things” signals that the listed exclusions are merely illustrative. Jurisdiction under Section 35G is a creature of statute and its conditions must be strictly construed.
The Revenue had not addressed the maintainability objection raised by Alupro before the High Court, and the High Court left it unaddressed. The Supreme Court found that the only determination made by the CESTAT was on excisability, and the Revenue ought to have appealed directly to the Supreme Court under Section 35L.
Sub-section (2) of Section 35L: Clarificatory and Retrospective
Sub-section (2) of Section 35L was inserted by the Finance (No. 2) Act, 2014. It states that “the determination of any question having a relation to the rate of duty shall include the determination of taxability or excisability of goods for the purpose of assessment.” The question was whether this amendment applied retrospectively to the present dispute, which arose before 2014.
The Court held that the amendment is clarificatory and therefore retrospective. The test for a clarificatory amendment is not the label the legislature attaches to it, but whether the amendment makes explicit what was already implicit in the original provision. The Notes on Clauses to the Finance (No. 2) Bill, 2014 stated expressly that the amendment was being made “so as to clarify” that excisability disputes are covered by the expression “rate of duty.” The Ministry of Finance memorandum said the same.
The Court relied on its earlier decisions in CIT v. Podar Cement (P) Ltd., University of Kerala v. Merlin J.N., and M. Rajendran v. KPK Oils & Proteins India (P) Ltd. to affirm that amendments which are declaratory, curative, or clarificatory in nature operate retrospectively. The amendment did not create any new right of appeal, vest new jurisdiction, or impose new obligations. It merely articulated what was always inherent in the structure of Sections 35G and 35L read together.
The Full Bench of the Bombay High Court in CCE v. Reliance Media Works Ltd. and the Punjab & Haryana High Court in Commr., S.T. v. DLF Golf Resorts Ltd. had reached the same conclusion, and the Court endorsed both decisions.
Whether Cutting and Grooving Amounts to Manufacture
The Court then turned to the substantive question. Section 2(f) of the Act defines “manufacture” to include any process incidental or ancillary to the completion of a manufactured product, or specified processes in the Schedule. The taxable event for excise duty is manufacture.
The Court applied the two-fold test drawn from its earlier decisions in Union of India v. J.G. Glass Industries Ltd. and Servo-Med Industries (P) Ltd. v. CCE: first, whether the process results in goods with a distinct name, character, or use; and second, whether the transformed goods are marketable as distinct goods. Both limbs must be independently satisfied.
On the first limb, the Court's answer was unequivocal. What enters the process is an ACP consisting of two aluminium sheets bonded to a polyethylene core. What emerges is still an ACP, cut to a particular size, grooved at the edges, and bent into a frame. The essential character of the goods remains entirely unchanged. Cutting adapts the dimensions of the panels to the requirements of a specific building. Routing prepares the reverse face for mechanical fixing. Grooving facilitates bending and joining at the edges. These are preparation, sizing, and installation activities. None of them, individually or collectively, result in the creation of new distinct goods.
The Court drew on a line of its own precedents. In Bharat Forge and Press Industries (P) Ltd. v. CCE, steel pipes cut and shaped into pipe fittings were held not to be a new product because their essential character and use remained the same. In CCE v. S.R. Tissues (P) Ltd., cutting jumbo rolls of tissue paper into table napkins and toilet rolls was held not to amount to manufacture because the characteristics of the tissue paper were unchanged. In Aman Marble Industries (P) Ltd. v. CCE, cutting marble blocks into slabs was held not to produce a new substance.
The Court also referred to the Constitution Bench decision in Union of India v. Delhi Cloth & General Mills Co. Ltd., which held that manufacture means bringing into existence a new substance, not merely producing some change in a substance. The distinction between “processing” and “manufacturing” turns on whether a transformation into a new and different article with a distinctive name, character, or use has occurred.
The Court noted that the location at which the cutting and grooving is carried out — at Alupro's premises rather than at the building site — is not material to the question of manufacture. Nor does the fact that the assessee gave specifications for the cutting make it a manufacturer.
Marketability: Revenue's Burden Not Discharged
Although the Court found that the first limb of the test was not satisfied, it addressed the marketability question as well. The second limb requires the Revenue to demonstrate that the goods emerging from the process are marketable as distinct goods — capable of being bought or sold, or known as a commercial product in the market.
The CESTAT had found that the Revenue produced no evidence of trade parlance or market understanding that cutting and routing ACPs brings into existence a new product known in the market. The Court agreed. It referred to decisions in CCE v. Ambalal Sarabhai Enterprises (P) Ltd., CCE v. United Phosphorus Ltd., Hindustan Zinc Ltd. v. CCE, and Cipla Ltd. v. CCE, all of which held that marketability cannot be established by assertion, assumption, or the mere fact that a process has been undertaken. The Revenue must adduce evidence.
The Court held that the standard of proof is preponderance of probabilities, calibrated to the nature and character of the goods in question. The degree of probability required is flexible: for rare commodities, even a single instance of marketability may suffice; for common goods, the standard is correspondingly higher. In the present case, since the ACPs had not undergone any transformation producing distinct characteristics, the question of marketability did not arise independently.
Outcome
The Supreme Court allowed the appeal and set aside the judgment of the High Court of Karnataka dated 1 April 2010. The CESTAT order dated 27 June 2006, which had found in favour of Alupro, stands restored. Pending applications, if any, were disposed of.
The Court summarised its conclusions: an appeal on excisability lies before the Supreme Court, not the High Court; sub-section (2) of Section 35L is clarificatory and retrospective; superficial changes that facilitate the use of goods without altering their fundamental properties do not satisfy the transformation test; and the burden of proving marketability lies on the Revenue and must be discharged by evidence, not assertion.