SC: Conversion of Gensets into “Power Packs” Amounts to Manufacture under Excise Law

The appellant was engaged in leasing containerised gas-generating sets, marketed as “Power Packs.” For this business, it imported gas-generating sets (gensets) and placed them in steel containers, adding indigenously sourced components such as radiators, ventilation fans, air filter units, oil tanks, silencers, and related piping. These modifications enabled easy transport and relocation of the gensets for leasing purposes. While the imported gensets were classified under the Customs Tariff Act, the excise department issued show cause notices contending that the containerization and fitting of accessories transformed the gensets into a new product, constituting “manufacture” under Section 2(f) of the Central Excise Act, 1944.

On appeal, CESTAT partly accepted Quippo’s challenge by setting aside the extended period demand and penalties, but upheld the levy of excise duty for the normal period. It found that the activity resulted in a distinct commodity, “containerised gensets” or “Power Packs” falling under sub-heading 8502.2090 of the Central Excise Tariff Act, 1985. Aggrieved, Quippo appealed to the Supreme Court, challenging the finding on “manufacture.”

Main Issue: Whether placing imported gensets into containers with additional accessories such as radiators, ventilation fans, oil tanks, pipes, and silencers amounted to “manufacture” under Section 2(f) of the Central Excise Act, 1944.

SC’s Ruling: The Supreme Court dismissed the appeals and affirmed the CESTAT’s finding that the process carried out by the appellant amounted to “manufacture” under Section 2(f)(i) of the Central Excise Act, 1944.

Applying the settled two-fold test of manufacture, the Transformation Test and the Marketability Test, the Court held that both were satisfied. On transformation, it noted that the imported genset and the final product, described as a “Power Pack” or “Containerised Genset,” were two distinct commodities. The latter had a different structure, functional utility, and constituent elements. What was initially an incomplete machine had, after the process, become a new and independent product with a separate commercial identity, specifically suited for industrial leasing. On marketability, the Court found that the finished “Power Packs” were in fact delivered to customers under lease agreements, which established their ready marketability and separate recognition in trade.

Thus, the Court upheld the liability to central excise duty for the normal period. At the same time, it left undisturbed the relief granted by CESTAT in respect of the extended limitation period, confiscation, and penalties.

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