What Is ‘Manufacture’ Under Central Excise Act? Supreme Court Explains Test For New And Distinct Product

The Supreme Court has held that mere processing or value addition which leaves the original commodity commercially and functionally the same does not satisfy the definition of “manufacture” under Section 2(f) of the Central Excise Act, 1944. It said manufacturing requires a transformation in which a new and distinct article emerges with a different name, character or use.

A Bench of Justices S V Bhatti and N V Anjaria made the observation while dealing with appeals filed by the Commissioner of Central Excise, Hyderabad IV against orders concerning M/s Xerox India Ltd. Court held that the grouping and fitting together of imported modules to make Xerox photocopier machines did not amount to manufacture, as the essential identity of the imported goods remained unchanged.

Why did the Supreme Court hold that the activity was not “manufacture”?

Court found that the Revenue had failed to establish that the imported modules were incomplete or unfinished, or that any manufacturing process was carried out at Xerox India’s warehouse.

The issue before the Court was whether the activity undertaken by the assessee at its warehouse, including grouping and, to whatever extent, fitting together imported modules into Xerox photocopier machines to meet a customer’s requirement, amounted to “manufacture” under 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.

Court pointed out that Note 6 to Section XVI of the Central Excise Tariff Act deems the conversion of an incomplete article into a complete one as manufacture. However, it said this provision requires proof that the imported article was incomplete or unfinished and that a specific manufacturing conversion process was carried out on the goods.

The Bench noted that the Revenue had failed to prove either of these requirements.

Revenue must prove that a manufacturing process took place

The Supreme Court said that in excise disputes, the burden of proof rests on the Revenue to establish that a taxable manufacturing process has occurred.

“Relying on assumptions without verification or inspection of the premises is insufficient to sustain a demand for duty,” Court said.

The Bench noted that the Revenue had drawn its conclusions without inspecting the assessee’s premises. It said the Revenue was required to justify that there was an excisable activity resulting in the excise duty demanded.

“In an era of technological advancement and available wherewithal through information technology, the Revenue could have proved, through best evidence, that the photocopier is a product of change, not a result of ‘kitting’,” the Bench said.

It added that the process could have been captured in photographs as evidence of a manufacturing activity that brought a photocopier into existence.

“This court is not finding fault with the Revenue but is compelled to observe that, in the present era, what can be proved in a straight and simple way need not be induced from the convenient versions of both sides,” the Bench said.

Court further noted that the Revenue failed to establish that the simple processes of unpacking, plugging or pinning changed the classification or identity of the imported modules. The imported modules or parts were also not shown to be unfinished or semi-finished.

What did the Tribunal find?

The Bench found that the findings of the CESTAT were brief but correct. It said the tribunal had considered the record in its entirety, including the depositions of the assessee’s officers, purchase orders, bills of entry and storage tickets, as well as the presentation made on behalf of the assessee.

The tribunal found that the components alleged to have been fitted to the main module were cleared in their original packing.

The Supreme Court said it found no reason to disturb these findings.

The Revenue had filed an appeal against the November 9, 2009 order of the CESTAT, South Zonal Bench at Bangalore. It had also filed an appeal against the July 31, 2017 order arising from the initial order passed by the Commissioner of Central Excise, Meerut-II.

M/s Xerox India Ltd was the first respondent in both sets of appeals.

The Supreme Court ultimately dismissed the appeals.

Case Title: Commissioner of Central Excise, Hyderabad IV Vs M/s Xerox India Ltd & Ors

Bench: Justices S V N Bhatti and N V Anjaria

Date of Judgment: August 5, 2026