Grouping CKD Modules in a Warehouse Is Not ‘Manufacture’ Under Central Excise, Rules Supreme Court
A Division Bench dismisses Revenue’s excise demands against Xerox India, holding that warehouse kitting of imported CKD photocopier modules produces no new commercial commodity.
The Supreme Court has dismissed two sets of civil appeals filed by the Revenue—spanning demands for the period April 2002 to November 2006—against Xerox India Limited, holding that the company’s warehouse activity of unpacking, grouping, pinning and plugging imported photocopier modules to customer specifications did not amount to “manufacture” within the meaning of Section 2(f) of the Central Excise Act, 1944 read with Note 6 to Section XVI of the First Schedule to the Central Excise Tariff Act, 1985. The bench of Justice S.V.N. Bhatti and Justice N.V. Anjaria affirmed the concurrent finding of the Customs, Excise and Service Tax Appellate Tribunal that no physical assembly had taken place at the Hyderabad or Rampur warehouses and that the Revenue had drawn its conclusions without inspecting the premises. The judgment settles how the classic “distinctive name, character or use” test applies to the import and warehousing of CKD goods that are already classified and assessed as complete machines at the customs stage.
How the Dispute Reached the Court
Xerox India Limited is engaged in the business of photocopiers, toners, photoreceptors, and digital multi-functional printers. It operated a warehouse at Hyderabad within the territorial jurisdiction of the Commissioner of Central Excise, Hyderabad-IV, and another hub at Rampur, Uttar Pradesh. The company imported parts, modules and accessories of photocopier machines in complete knocked-down (CKD) or semi-knocked-down (SKD) condition from warehouses of its sister concern abroad, paying Customs Duty and Countervailing Duty (CVD) on these consignments under Tariff Heading 8471, which covers automatic data processing machines.
On 4 May 2007, the Commissioner of Central Excise, Hyderabad-IV issued a Show Cause Notice to Xerox India for the period April 2002 to November 2006. The Revenue alleged that the activity at the Hyderabad warehouse—grouping modules into sets, assigning unique identification numbers via computer, and in some instances fitting components such as the Duplex Automatic Document Feeder (DADF) and High Capacity Feeder (HCF) onto the main work-centre—amounted to manufacture under Section 2(f) of the CE Act. The SCN sought excise duty and Education Cess of Rs. 17,86,47,382 on clearances from the Hyderabad warehouse, along with demands under the proviso to Section 11A and Sections 11AB and 11AC of the CE Act. Penalties were also sought against Respondent Nos. 2 and 3, who held executive positions at Xerox India, under Rule 26 of the Central Excise Rules, 2002.
The Commissioner confirmed all demands on 28 March 2008, finding that what was imported was not a complete machine but components and modules, and that manufacture was complete only upon assembly at the warehouse. The Commissioner also rejected Xerox India’s objection to territorial jurisdiction and held Respondent Nos. 2 and 3 liable for penalty.
Xerox India appealed to CESTAT, South Zonal Bench, Bangalore (for the Hyderabad demands) and to the CESTAT bench dealing with the Meerut-II demands. Both Tribunal benches set aside the Commissioner’s orders, finding that no physical assembly had taken place at the warehouses, that the HCF and DADF were factory-fitted abroad, and that the goods had been cleared in their original packing. Revenue then filed Civil Appeal Nos. 5939-5941 of 2010 (arising from the CESTAT Bangalore order dated 9 November 2009) and Civil Appeal Nos. 11870-11872 of 2018 (arising from the CESTAT order dated 31 July 2017 on the Meerut-II demands) before the Supreme Court.
The Core Question
The point for determination, as framed by the Court, was whether the activity undertaken by Xerox India at its warehouse—the grouping and, to whatever extent, the fitting together of imported modules into Xerox photocopier machines to meet a customer’s need—amounts to “manufacture” within the meaning of Section 2(f) of the CE Act read with Note 6 to Section XVI of the CE Tariff Act.
The Additional Solicitor General, Mr. Raghavendra P. Shankar, argued for Revenue that the combining of CKD/SKD parts with domestically procured components to create bespoke copiers constituted manufacture, being an irreversible assembly by trained engineers that transformed individually non-functional components into a marketable machine. He further argued that the process fell within Section 2(f) as incidental or ancillary to manufacture, or alternatively under Note 6. He also contended that the change in Tariff Heading from 8471 to 9009 upon assembly demonstrated that a new product had emerged, and that Xerox India’s mischaracterisation of assembly as “kitting” justified invocation of the extended limitation period under Section 11A.
Mr. V. Lakshmikumaran, for Xerox India, countered that the SCN and the order-in-original had misread a free activity—putting imported modules together for packaging convenience as per customer specifications—as manufacturing. He argued that Section 2(f) requires transformation into a new, distinct substance, that Note 6 to Section XVI applies only when an incomplete or unfinished article is converted into a complete one, and that the CKD photocopiers had already been classified and assessed as complete machines under Heading 8471 at the customs stage. He supported the Tribunal’s findings of fact and submitted that the Tribunal is the final fact-finding authority whose conclusions are normally binding on the Court.
The Court’s Survey of Precedent on ‘Manufacture’
Justice Bhatti, writing for the bench, undertook a structured review of this Court’s decisions on the meaning of “manufacture” under Section 2(f) before applying them to the facts.
In Union of India v. Delhi Cloth and General Mills Co. Ltd., this Court established that manufacture implies a transformation where a new and different article must emerge having a distinctive name, character, or use. Mere processing that causes only minor changes does not amount to manufacture. The commercial identity of the output, not the degree of processing, is the touchstone.
In M/s Narne Tulaman Manufacturers Pvt. Ltd. v. Collector of Central Excise, Hyderabad, the Court held that mere assembly of separately procured components can constitute manufacture, provided the assembled whole answers to a distinctive name, character or use, and that dutiability of parts and dutiability of the end product are independent questions. Duty already paid on a part goes only to abatement, not to the anterior question whether the end product was manufactured.
In BPL India Ltd. v. Commissioner of Central Excise, Cochin, importing VTR kits in SKD condition and assembling them at a factory using fasteners, by technically expert persons, was held to constitute manufacture because the assembled product had a distinct character and use and shifted its classification from the parts heading to the finished product heading.
In Satnam Overseas Limited v. Commissioner of Central Excise, New Delhi, the Court reversed a finding of manufacture in relation to blending raw rice with dehydrated vegetables and spices, holding that the essential character of the product remained rice and no new commercial commodity had come into existence.
In Servo-Med Industries Private Limited v. Commissioner of Central Excise, Mumbai, the Court articulated a twofold test: first, whether a process brings about a physical transformation such that a different commercial commodity comes into existence; and second, whether the commodity already in existence would serve no purpose but for the process. The Court further categorised goods into four groups: (1) exactly the same post-process (no manufacture); (2) essentially the same (no manufacture); (3) transformed but not marketable (no manufacture); and (4) transformed into a new marketable commodity (amounts to manufacture).
In Quippo Energy Ltd. v. Commissioner of Central Excise, Ahmedabad-II, decided in 2025, the Court applied the same twofold test and found that containerising an imported Genset with additional locally procured components such as radiators, fans and pumps—which transformed it into a distinct, marketable “Power Pack”—did amount to manufacture under Section 2(f) read with Note 6.
In Alupro Building Systems, decided earlier in 2026, the Court found that cutting, grooving and bending pre-coated aluminium composite panels for installation as facade cladding did not amount to manufacture because what entered and what emerged were still recognisably the same ACP; the process merely adapted dimensions for a specific use.
Drawing these threads together, the Court stated that at the inner limit, a process that leaves the commodity commercially the same article is not manufacture however much labour, skill or expense may have been applied, and an addition to value will not by itself convert such a process into manufacture. At the outer limit, a process need not be elaborate, nor need it produce any chemical alteration, to be manufacture, if what emerges is an article which the market recognises as different in name, character and use from that which went in.
Applying the Tests to Xerox India’s Warehouse Activity
The Court held that the Revenue’s reliance on BPL India, Tulaman and Quippo was misplaced on the facts. The stark distinction between BPL India and the present case is the tariff classification under which Xerox India imported its goods. The kits in BPL India were imported as parts; the goods in the present appeals were imported, classified and assessed to customs duty and CVD as complete machines under Heading 8471. Tulaman dealt with assembly of distinct parts, as did Quippo. None of those fact-patterns matched what the Tribunal found at the Hyderabad and Rampur warehouses.
On the Tribunal’s findings, which the Court described as “both brief and correct”, no physical assembly had taken place at the warehouse. The components alleged to have been fitted to the main module were cleared in their original packing. The HCF and DADF—specifically identified by the Revenue as evidence of assembly—had been factory-fitted at the premises of Xerox India’s sister concern abroad, not at Hyderabad or Rampur. No deposition of any executive of Xerox India stated that modules were assembled in the warehouse. The Commissioner had concluded that assembly was undertaken without making any verification whatsoever. The Court found these findings were not perverse, rested on evidence, and had been arrived at by careful consideration of the material on record, including depositions, purchase orders, bills of entry and storage tickets.
The activity that did occur at the warehouse—unpacking, grouping, pinning and plugging modules into sets according to customer specifications, assigning a unique identification number by computer, and dispatching under a single invoice—was held to be kitting, not manufacturing. The Revenue had failed to demonstrate that this process changed the tariff heading under which the modules arrived, or that the modules were unfinished or semi-finished goods.
On Note 6 to Section XVI of the CE Tariff Act
Note 6 to Section XVI deems the conversion of an article which is incomplete or unfinished but has the essential character of the complete article into the complete article to be manufacture. The Court held that two prongs must be established before the deeming provision can be invoked: first, that what was presented was incomplete or unfinished; second, that a conversion of it into the complete article was carried out by the person sought to be charged.
On the Tribunal’s findings, neither prong was made out. The goods were imported, classified and assessed as complete machines under Heading 8471, and were cleared from the warehouse in the sets and original packing in which they had been received, with no process having been performed on them there. The Court observed: “The Revenue cannot, upon one and the same set of facts, treat the goods as complete machines for the purpose of levying customs duty including CVD, and as incomplete articles for the purpose of attracting Note 6.”
The Court also addressed Rule 2(a) of the General Rules for Interpretation of the Schedule, which requires an incomplete or unassembled article having the essential character of the finished article to be classified under the heading of the finished article. The Court held that this rule answers only the question of classification, not the question whether a process performed upon an article amounts to manufacture. Revenue’s attempt to use the rule to support the manufacture argument was therefore rejected.
On the Quality of the Revenue’s Evidence
The Court made pointed observations about how the Revenue had built its case. Conclusions had been drawn without inspecting the Assessee’s premises. The Court said that Revenue was not required to “traverse on a winding journey” but simply to justify that there was excisable activity—and in an era of technological advancement, the process ought to have been captured in photographs as a manufacturing activity. The Court was careful to note it was not finding fault with the Revenue, but observed that what can be proved in a straight and simple way need not be induced from the convenient versions of both sides.
The nomenclature used by the Assessee on the factory or warehouse floor—calling the activity “kitting”—was held not to be conclusive or determinative in itself. The operative enquiry remains whether the activity amounts to manufacture, not what the parties chose to call it.
Outcome
Civil Appeal Nos. 5939-5941 of 2010 and Civil Appeal Nos. 11870-11872 of 2018 were dismissed. The orders of the CESTAT setting aside the excise demands and the penalties on Respondent Nos. 2 and 3 were affirmed. All pending applications were disposed of. The judgment was delivered on 5 August 2026.