Case Note & Summary
The dispute arose from a show cause notice dated 4 May 2007 issued by the Commissioner of Central Excise, Hyderabad-IV, alleging that M/s Xerox India Ltd. undertook manufacturing activity at its warehouse by assembling imported modules of photocopiers into complete machines without payment of excise duty. The Revenue contended that the activity of grouping and fitting together imported parts and modules in CKD/SKD condition to meet customer specifications amounted to 'manufacture' under Section 2(f) of the Central Excise Act, 1944, read with Note 6 to Section XVI of the Central Excise Tariff Act, 1985, and demanded duty of over Rs. 17.86 crores along with interest and penalties. The assessee countered that the imported goods were complete machines classified under Tariff Heading 8471, assessed to customs duty and CVD as such, and that only kitting was done at the warehouse for transportation convenience, which involved no physical assembly or transformation. The Commissioner confirmed the demand by order dated 28 March 2008, holding that the assembly resulted in a new marketable commodity and that the process fell within the deeming fiction of Note 6. On appeal, the CESTAT, South Zonal Bench, Bangalore, vide order dated 9 November 2009, set aside the demand, finding that no assembly or fitting took place at the warehouse; the imported modules were cleared in their original condition as complete machines, and the mere grouping of components and generation of unique IDs by computer did not amount to manufacture. The Tribunal held that Note 6 was not attracted as the imported goods already possessed the essential character of a complete machine, and that every process is not manufacture, relying on Union of India v. Delhi Cloth Mills. Aggrieved, the Revenue approached the Supreme Court in Civil Appeal Nos. 5939-5941 of 2010 and the connected matters. The Court, after hearing arguments, reserved judgment. The key legal issue is whether the assessee's warehouse process constitutes manufacture within the meaning of the Central Excise Act, 1944, given the evidence of classification, the nature of the activity, and the deeming provision under Note 6. The final determination and ratio are not yet pronounced in the available text.
Headnote
A) Central Excise - Manufacture - Section 2(f) of Central Excise Act, 1944, read with Note 6 to Section XVI of Central Excise Tariff Act, 1985 - The activity of grouping imported modules without physical assembly or fitting does not amount to manufacture - Held that where imported goods are complete machines in CKD condition and no process physically alters them, mere kitting or assigning ID numbers is not manufacture; no new article emerges (Paras 5-8 of the Impugned CESTAT Order). B) Classification under Central Excise Tariff - Tariff Headings 8471 and 9009 - Customs classification of imported goods as complete machines under Heading 8471 is a strong indicator that they are not parts - Held that goods imported as complete machines and assessed to CVD under Heading 8471 cannot later be treated as components for excise duty purposes (Paras 5-6 of the Impugned CESTAT Order). C) Central Excise - Manufacture - Kitting - The process of kitting, which involves grouping sets of components and assigning unique IDs via computer, is not a manufacturing process as it does not involve any physical transformation - Held that a computer cannot produce tangible goods; therefore, such grouping does not fall within the definition of manufacture (Paras 7-8 of the Impugned CESTAT Order). D) Central Excise - Penalty - Rule 26 of Central Excise Rules, 2002 - Liability of executives - The Commissioner imposed penalty, but CESTAT set aside the demand, consequently penalty also not sustainable - Held that since no duty is payable, penalty on executives is not justified (Para 8 of the Impugned CESTAT Order).
Issue of Consideration
Whether the activity undertaken by the Assessee 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 Central Excise Act, 1944, read with Note 6 to Section XVI of the First Schedule to the Central Excise Tariff Act, 1985.
Law Points
- concept of manufacture under Section 2(f) of the Central Excise Act
- 1944
- interpretation of Note 6 to Section XVI of the Central Excise Tariff Act
- 1985
- distinction between kitting and manufacturing
- classification of goods under Tariff headings
- applicability of extended period of limitation
- imposition of penalty under Rule 26 of the Central Excise Rules
- 2002
