FROM GENSETS TO POWER PACKS: REDEFINING MANUFACTURE UNDER EXCISE LAW

• Introduction to the Topic:

The Supreme Court of India, in the case of M/S Quippo Energy Ltd. vs Commissioner of Central Excise Ahmedabad – II, Civil Appeal Nos. 9418-9420 of 2016, Coram – Justice J. B. Pardiwala and Justice K.V. Viswanathan has held a landmark judgment. In Indian excise law, a critical question arises as to what qualifies as “manufacture” under the Central Excise Act, 1944. Excise duty applies only on goods that are “produced or manufactured” within India. Sometimes, goods are imported and further modified, assembled or combined to form a new product. The legal issue that comes into question is whether that process amount to a “manufacture” thereby making the end product liable for excise duty.

Over the years, the courts have developed two tests to ascertain the applicability of indirect tax – the ‘Transformation Test’ (does a new and distinct article emerge, with a new identity, character, name or use?) and the ‘Marketability test’ (is it marketable as such?).

In this case, the core principle examined was whether a process of converting imported, fully operational goods into a new, distinct, and marketable unit qualifies as “manufacture” under the Act. The judgment highlights the fine difference between mere assembly or accessory fitting and a transformation that leads to a new commodity.

• Brief facts of the Case:

M/s Quippo Energy Ltd. was in the business of leasing containerized power packs, commonly known as containerized gensets. For this purpose, the company imported gas-generating sets (gensets) that were complete and functional on import. Once imported, the company undertook several processes to transform these gensets into “power packs.” This required housing the genset in a steel container and fitting it with additional elements such as a remote radiator, lube oil tank, fans for ventilation, a control panel, silencers, and connecting pipelines.

• Revenue’s stance: The Customs & Central Excise authority held that this process of containerization plus addition of parts amounts to “manufacture” under Section 2(f) of the Central Excise Act, and therefore excise duty is payable on the final “Power Pack” product.
• Appellant’s argument: Quippo contended that the genset was already a finished, functional product. According to them, the added items were simply accessories or conveniences for transportation and did not transform the genset into a new, distinct product for excise purposes.
• Lower authorities’ decision: Both the Commissioner (Appeals) and the CESTAT partly supported the revenue’s view. Ultimately, the matter was carried before the Supreme Court.

 

• Issues of law involved:

1. The central legal question was whether placing imported gensets in containers and attaching supplementary parts by Quippo Energy could be regarded as “manufacture” within the meaning of Section 2(f) of the Central Excise Act, 1944.
2. Whether the additional items were merely accessories or whether they constituted essential components that gave rise to a new product.
3. Whether the final containerised unit, marketed as a “Power Pack,” had a separate commercial identity so as to satisfy the requirement of marketability.
4. A further concern was how the transformation and marketability tests should be applied in cases of this nature.

• Reasoning Behind the Judgment:

1. The test of ‘manufacture’:

The Court relied on earlier rulings, particularly Servo-Med Industries Pvt. Ltd. v. Commissioner of Central Excise, Mumbai (2015) which laid down the twofold test for determining manufacture: (i) the transformation test, and (ii) the marketability test. It reiterated that for an activity to be considered “manufacture,” it must result in a new product with a distinct name, character, identity, or use. Simple processing or minor additions are not enough.

2. Application of the ‘transformation test’

The Court observed that placing a genset into a steel container and fitting it with equipment such as radiators, fans, silencers, and pipelines changed the form and structure of the original imported genset. The outcome, the “Power Pack,” was substantially different from the genset in its original form. The added components were not mere accessories. Instead, they were vital for the effective functioning of the genset once containerized. Without them, the unit would not operate safely or efficiently, making these components integral rather than supplementary.

3. Application of the ‘marketability test’

The Court noted that the final “Power Packs” were in fact marketed and leased in their containerized form. They were commercially viable in that structure, satisfying the condition of marketability.

4. Rejecting the appellant’s arguments

The Court dismissed the argument that since the genset was a complete product on import, the subsequent additions were merely for convenience. It held that the addition of a container along with crucial components went beyond cosmetic or accessory-level changes.

Furthermore, while the essential function of generating electricity remained, the Court explained that functionality alone cannot be the sole determinant. The altered attributes — including portability, design, and distinct commercial identity — were decisive in establishing manufacture.

5. Conclusion & Order

The Court, while referring to Servo-Med Industries Pvt. Ltd. v. Commissioner of Central Excise, Mumbai, firmly held that both elements of the test must be met together for a process to amount to manufacture. Meeting only one condition would not suffice. Since both requirements were fulfilled, the “Power Packs” were considered a distinct, marketable product manufactured in India by Quippo, thereby attracting excise duty. Consequently, the Supreme Court rejected the appeals.

• Analysis of the Judgment:

This ruling is a landmark in clarifying the meaning of “manufacture” under excise law. The court’s ruling reinforces the test of “new and distinct product” by looking at the outcome of the process, rather than the nature of the individual components. By emphasizing that the added parts were necessary for the genset’s functionality in a containerized form, the Court drew a clear line between ‘accessories’ and ‘part’.

The decision in Quippo Energy demonstrates that even when a major portion of the final product is imported in a complete and functional form, the subsequent integration of other parts that result in a distinct name, character, and marketability will attract excise duty. This prevents businesses from bypassing excise duty by importing a core product and performing only minor modifications to claim it remains unchanged. The Court confirmed that when a set of processes creates a new, commercially viable commodity, the law treats it as a manufacturing activity.

At the same time, the ruling indirectly raises a policy concern: such cases could lead to a situation of dual taxation—customs duty at the stage of import, followed by excise duty after modification. However, the Court did not deal with this issue in detail.

• Conclusion:

The Supreme Court’s judgment in M/s Quippo Energy Ltd. v. Commissioner of Central Excise Ahmedabad – II definitively ruled that transforming imported gensets into containerized power packs constitutes “manufacture.” The Court’s reasoning was based on the finding that the process produced a new, distinct, and marketable commodity with its own name, features, and commercial identity. The ruling reaffirms that a mere change in the imported product’s form or the addition of components, when it results in a new commercial commodity, is sufficient to trigger excise duty liability. Thus, the ruling strengthens the principle that any activity which gives rise to a commercially distinct product qualifies as manufacture under the Central Excise Act, 1944.

 

Contributed by-

SUMIT SAXENA

ADVOCATE, ALLAHABAD HIGH COURT

 

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