Commissioner of Central Excisev.M/s Xerox India Ltd & Ors

Supreme Court Holds "Kitting" of Photocopier Modules Does Not Amount to Manufacture Under Excise Law

Case Snapshot

Case Name: Commissioner of Central Excise v. M/s Xerox India Ltd. & Ors.

Citation: 2026 INSC 805

Bench: Justice S.V.N. Bhatti and Justice N.V. Anjaria

Date of Judgment: August 5, 2026

Area of Law: Central Excise, Manufacture, Customs Duty, Tax Law

The Judgment in One Line

Grouping imported photocopier modules into sets per customer specifications ("kitting") without physical assembly does not constitute "manufacture" under Section 2(f) of the Central Excise Act.

Why This Judgment Matters

This judgment clarifies the fine line between "manufacture" and mere "processing" or "kitting" under excise law. The Court held that no excise duty is attracted when imported modules, already classified and assessed as complete machines, are merely grouped, plugged, and pinned to meet customer specifications without any physical transformation. The judgment reinforces the established test: manufacture requires a new and distinct commercial commodity to emerge. It also emphasizes that the Revenue must prove its case with evidence, not merely by assertion, and that conclusions drawn without inspecting the premises are vulnerable. The decision protects businesses from excise demands on activities that are purely logistical rather than transformative.

Background

Xerox India Ltd. imported photocopier parts and modules in completely knocked down (CKD) or semi-knocked down (SKD) condition from its sister concerns abroad. The goods were classified and assessed as complete machines under Customs Tariff Heading 8471 and paid customs duty and countervailing duty (CVD). At its warehouse in Hyderabad, the assessee grouped the imported modules into sets matching customer orders, assigned unique identification numbers, and cleared them. This process was described as "kitting"—grouping parts for packaging and dispatch.

The Revenue issued a show cause notice claiming that this activity amounted to "manufacture" under Section 2(f) of the Central Excise Act read with Note 6 to Section XVI of the Central Excise Tariff Act. The Commissioner confirmed the demand. The CESTAT allowed the assessee's appeal, holding that no manufacturing activity took place. The Revenue appealed to the Supreme Court.

Issues Before the Court

1. Whether the activity of grouping imported modules into sets ("kitting") at the warehouse amounts to "manufacture" under Section 2(f) of the Central Excise Act.

2. Whether Note 6 to Section XVI of the Central Excise Tariff Act applies to treat kitting as manufacture.

3. Whether the Revenue discharged its burden of proving that the assessee's activity constituted manufacture.

What Did the Supreme Court Hold?

The Supreme Court dismissed the Revenue's appeals and upheld the CESTAT's findings. The Court's reasoning was anchored in settled principles and factual analysis:

"Kitting" is Not Manufacture: The Court applied the classic test from Delhi Cloth Mills: manufacture implies a transformation where a new and different article emerges with a distinctive name, character, or use. Mere processing that causes minor changes does not amount to manufacture. The assessee's activity was limited to grouping imported modules into sets—no physical assembly, no fitting, no transformation. The modules were cleared in their original packing.

Note 6 Not Attracted: Note 6 of Section XVI operates on "an article which is incomplete or unfinished" and deems its conversion into a complete article to be manufacture. The Court held that the goods were already classified and assessed as complete machines under Customs Heading 8471. The Revenue could not, on the same set of facts, treat the goods as complete machines for customs duty (including CVD) and as incomplete articles for excise duty. Rule 2(a) of the General Rules of Interpretation deals with classification, not with whether a process amounts to manufacture.

Revenue Failed to Prove Its Case: The Commissioner had concluded that assembly was undertaken without any verification. No inspection of the premises was conducted. No deposition of any executive stated that modules were assembled in the warehouse. The Revenue failed to point to evidence that HCF and DADF were fitted at the warehouse—the Tribunal found these were factory-fitted abroad.

No Separate Exciseable Product Emerged: The goods imported as automatic data processing machines under Heading 8471 were cleared as the same. No new commercial commodity with a distinct name, character, or use came into existence. The pinning and plugging to meet customer specifications did not transform the product.

Tribunal's Findings Binding: The Tribunal, as the final fact-finding authority, found that no manufacture occurred. These findings were based on evidence and were not perverse. The Supreme Court declined to disturb them.

Key Legal Principles

1. Manufacture requires transformation — a new and different article must emerge having a distinctive name, character, or use; mere processing is insufficient.

2. "Kitting" is not manufacture — grouping components into sets for packaging and dispatch, without physical assembly or transformation, does not create excisable goods.

3. Classification and manufacture are distinct — Rule 2(a) of the General Rules of Interpretation answers where an article is to be classified; it does not answer whether a process amounts to manufacture.

4. Goods cannot be treated inconsistently — goods classified and assessed as complete machines for customs purposes cannot be treated as incomplete articles for excise purposes on the same facts.

5. Burden of proof lies on Revenue — the Revenue must establish, through evidence, that a manufacturing activity has occurred; conclusions without inspection or verification are vulnerable.

6. Four categories of processing — goods may be (1) exactly the same post-process; (2) essentially the same; (3) transformed but not marketable; or (4) transformed into a new marketable commodity. Only the fourth amounts to manufacture.

Important Precedents

Union of India v. Delhi Cloth and General Mills Co. Ltd., 1977 (1) E.L.T. 199 (SC)

• Established the classic test: manufacture implies transformation where a new and different article emerges with a distinctive name, character, or use.

M/s Narne Tulaman Manufacturers Pvt. Ltd. v. Collector of Central Excise, (1989) 1 SCC 172

• Held that mere assembly of separately procured components can constitute manufacture if the assembled whole answers to a distinctive name, character, or use.

BPL India Ltd. v. Commissioner of Central Excise, (2002) 5 SCC 262

• Held that skilled assembly of imported SKD kits into functional VTRs and monitors constitutes manufacture.

Servo-Med Industries Pvt. Ltd. v. Commissioner of Central Excise, (2019) 17 SCC 174

• Laid down the two-fold test for manufacture: (1) essential character test—whether a different commercial commodity emerges; (2) commercial user test—whether the commodity would serve no purpose but for the process.

Quippo Energy Ltd. v. Commissioner of Central Excise, 2024 SCC OnLine SC 2103

• Held that containerizing a genset with locally procured parts to create a "Power Pack" amounts to manufacture, as a new marketable product emerges.

Satnam Overseas Ltd. v. Commissioner of Central Excise, (2020) 19 SCC 376

• Held that mere addition of dehydrated vegetables and spices to rice does not make it a different product; its essential character remains rice.

Commissioner of Central Excise v. Alupro Building Systems Pvt. Ltd., 2025 SCC OnLine SC 2699

• Held that cutting, grooving, and bending aluminum composite panels does not alter their fundamental identity; no manufacture occurs.

Practical Impact

For advocates: This judgment is crucial when defending against excise duty demands on assembly, kitting, or packaging activities. It reinforces that the Revenue must prove physical transformation and the emergence of a new commercial product. Advocates should cite the Servo-Med two-fold test and the Delhi Cloth Mills transformation test. The judgment also emphasizes that the Revenue cannot rely on classification rules to establish manufacture.

For future litigation: The judgment provides clear guidance on when kitting or grouping activities attract excise duty. It also highlights the importance of the Revenue conducting physical inspections and gathering evidence before issuing demands. The distinction between classification (Rule 2(a)) and manufacture (Section 2(f)) is now firmly established.

May be cited: In any central excise case where the Revenue claims that assembly, kitting, or grouping of imported components constitutes manufacture, particularly where the goods were already classified and assessed as complete articles upon import.

Lawcurb Quick Insight

The Court's observation that "goods cannot be treated inconsistently" is significant. If goods are complete machines for customs duty, they cannot be incomplete articles for excise duty on the same facts. The Revenue cannot have it both ways.

Lawcurb Practice Note

When defending against excise duty demands on kitting or assembly activities, emphasize that no new commercial product emerges. Demonstrate that the goods retain their essential character and are cleared in the same form as imported. Cite the Servo-Med two-fold test to show no transformation occurred.

Remember This Ratio

Grouping imported modules into sets without physical assembly or transformation does not amount to manufacture under excise law.

Exam Lens

Q: What is the test for determining whether an activity amounts to "manufacture" under Section 2(f) of the Central Excise Act? A: The activity must result in a transformation where a new and different article emerges having a distinctive name, character, or use. Mere processing that causes minor changes is insufficient. The Servo-Med two-fold test requires: (1) whether a different commercial commodity emerges (essential character test), and (2) whether the commodity would serve no purpose but for the process (commercial user test).

Q: What is the distinction between Rule 2(a) of the General Rules of Interpretation and Section 2(f) of the Central Excise Act? A: Rule 2(a) is a rule of classification, 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. It answers the question of where an article is to be classified. Section 2(f) defines manufacture and answers the question of whether a process performed upon an article amounts to manufacture. They operate in different spheres.

Q: When does Note 6 to Section XVI of the Central Excise Tariff Act apply? A: Note 6 applies when an article is incomplete or unfinished but has the essential character of the complete article, and is converted into the complete article. Two conditions must be met: (1) what was presented was incomplete or unfinished, and (2) a conversion into the complete article was carried out. If goods were already classified and assessed as complete machines upon import, Note 6 is not attracted.

Final Outcome

• Appeals dismissed — the Supreme Court upheld the CESTAT's findings that no manufacturing activity occurred.

• No excise duty payable — the assessee's "kitting" activity did not amount to manufacture under Section 2(f) of the Central Excise Act.

• Note 6 not attracted — the goods were already classified and assessed as complete machines upon import; no conversion from incomplete to complete occurred.

• Revenue failed to prove its case — no physical inspection was conducted; no evidence of assembly at the warehouse was adduced.

• Tribunal's findings affirmed — the findings of fact recorded by the CESTAT were based on evidence and were not perverse.

• No costs — pending applications disposed of.

Lawcurb Verdict

This judgment is a significant clarification of the distinction between manufacture and mere processing under excise law. By holding that "kitting" of imported modules—grouping them into sets without physical assembly—does not amount to manufacture, the Court has protected businesses from excise demands on logistical activities. The judgment reinforces the settled principle that manufacture requires transformation into a new commercial commodity. It also serves as a reminder to the Revenue to conduct proper inspections and gather evidence before issuing demands, rather than relying on inferences. A balanced and principled decision that upholds the rule of law in taxation.

This report is prepared by Lawcurb for educational and informational purposes only. It is a concise summary of the judgment and should not be construed as legal advice. Readers are encouraged to refer to the original judgment before relying on any legal proposition.