Portability-Induced Re-engineering Is “Manufacture” under Section 2(f): Containerised Gensets Held to Be New, Distinct Goods

Case: M/s. Quippo Energy Ltd. v. Commissioner of Central Excise, Ahmedabad-II

Citation: 2025 INSC 1130

Court: Supreme Court of India (Civil Appellate Jurisdiction)

Bench: J.B. Pardiwala, J.; K.V. Viswanathan, J.

Date: 19 September 2025

Introduction

The Supreme Court’s decision in M/s Quippo Energy Ltd. is a significant addition to the jurisprudence on what constitutes “manufacture” under Section 2(f) of the Central Excise Act, 1944. The Court held that when imported gas generator sets (gensets) are placed in steel containers and integrated with additional components (radiator, ventilation fan, air filter unit, oil tank, piping, pumps, valves, silencers, control panels, etc.) so that they can operate within the container and be transported/relocated easily, the result is a new product—“Power Packs” or “Containerised Gensets”—with a distinct character and identity. This process, the Court held, amounts to “manufacture” under Section 2(f)(i).

The ruling refines the two-pronged test for “manufacture” (transformation + marketability), clarifies the non-mechanical application of the “but for the process” limb of J.G. Glass, and articulates a clear rule to differentiate “parts” from “accessories.” Crucially, the Court recognises that transformation can be grounded in altered functional utility and constituent composition—even where the core end-use (electricity generation) remains the same.

Background and Factual Matrix

The appellant imported complete gensets (engine coupled with alternator on a base frame), assessed under sub-heading 8502.2090 of the Customs Tariff as generating sets with spark-ignition engines.
Given its leasing model, permanent installation at customer sites was commercially impractical. To enable easy deployment and relocation, the appellant housed the gensets inside steel containers and integrated various components—radiators, ventilation fans, air filters, oil tanks, pumps, valves, silencers, cable trays, control panels, piping—followed by testing (hydraulic and electrical).
The department viewed the resultant “Power Packs” as distinct from imported gensets and demanded excise duty, classifying them under sub-heading 8502.2090 of the Central Excise Tariff Act, 1985.
CESTAT held that the process amounted to “manufacture,” upheld duty for the normal period (not the extended period), and set aside penalties/confiscation. The assessee appealed to the Supreme Court on the “manufacture” finding.

Issue

Whether the process of placing imported gensets inside steel containers and integrating them with components like radiators, fans, air filters, tanks, pumps, valves, silencers, control panels, and associated piping/cabling amounts to “manufacture” under Section 2(f) of the Central Excise Act, 1944?

Summary of the Judgment

The Supreme Court answered in the affirmative: the process amounts to “manufacture” under Section 2(f)(i), as it yields a new and distinct marketable product—“Power Packs” or “Containerised Gensets.”
Both prongs of the “manufacture” test are satisfied:
- Transformation: The imported genset is re-engineered into a containerised, portable, self-contained power-generating unit with distinct constituent elements, structure, and functional utility (portability and operation within the container).
- Marketability: The Power Packs are actually leased/supplied as the finished product; thus, marketability is admitted.
Key doctrinal refinements:
- The “but for the process” limb from J.G. Glass cannot be applied as a rigid universal rule; it must be applied contextually along with the transformation test.
- A critical distinction is drawn between “parts” (integral to function) and “accessories” (supplementary/comfort/convenience). The integrated components needed for operation within the container are “parts,” not mere “accessories.”
- Transformation can be based on altered functional utility (e.g., portability) and changed constituent composition/structure, even if the core end-use (generating electricity) is unchanged.
Result: The appeals by the assessee were dismissed; CESTAT’s determination that the process amounts to “manufacture” and classification under 8502.2090 stands (with duty for the normal period). The CESTAT’s reliefs on extended limitation and penalties—unchallenged by Revenue—remain undisturbed.

Detailed Analysis

A. The Doctrinal Framework under Section 2(f)

Section 2(f) includes: (i) processes incidental or ancillary to completion of a manufactured product; (ii) processes specified in Section/Chapter Notes of the Tariff as amounting to manufacture; and (iii) certain treatments of Third Schedule goods. Consistently, the Supreme Court has held that “manufacture” is not mere “processing”: it entails bringing into existence a new and distinct product known to the market (Union of India v. Delhi Cloth & General Mills, 1962).

Over time, the Court crystallised a two-pronged test (J.G. Glass Industries Ltd., 1998; Servo-Med Industries, 2015):

Transformation Test: Does the process produce a new and different article having a distinct name, character, identity, or use?
Marketability Test: Is the transformed product marketable as such?

In Servo-Med, the Court categorised case law into four groups, with “manufacture” occurring only where goods are transformed into different/new goods that are marketable. Crucially, Servo-Med clarified that the “but for the process” inquiry is not a standalone trigger: it must be coupled with genuine transformation.

B. Precedents Cited and Their Influence

1) Union of India v. Delhi Cloth & General Mills (1962)

The seminal distinction between “processing” and “manufacture” was restated: manufacture implies a transformation into a new substance known to the market, not merely any change effected by processing. This judgment anchors the Court’s insistence on transformation—not superficial operations—as the hallmark of manufacture.

2) Union of India v. J.G. Glass Industries Ltd. (1998)

This case established the two-fold test (transformation and marketability). Printing logos/names on plain glass bottles was held not to amount to manufacture because the bottles retained their character and use; they remained “bottles.” The present decision embraces the test but cautions against a mechanical application of the “but for the process” limb in isolation.

3) Servo-Med Industries Pvt. Ltd. v. CCE (2015)

Sterilisation of syringes/needles was held not to be manufacture: the products were complete as such; sterilisation merely removed bacteria without transforming character or end-use. In Quippo, the Court distinguishes Servo-Med: unlike mere sanitisation or preservation, containerization here introduces substantial re-engineering, new constituent parts, and a functional shift (portability and operation within the container).

4) CCE v. S.R. Tissues Pvt. Ltd. (2005)

Cutting/slitting tissue jumbo rolls into napkins/facial tissues/toilet rolls does not amount to manufacture because the characteristics, character, and end-use remained the same; the operations only aided convenience of use. Quippo departs on facts: the Court identifies a structural and functional transformation, not a mere change in size or shape.

5) Satnam Overseas Ltd. v. CCE (2015)

Adding dehydrated vegetables/spices to raw rice does not produce a new product; the essential character remained “rice.” In Quippo, by contrast, the transformation is evidenced in the new constituent elements and the imparted core functional utility (portability and containerised operation), yielding a product with a different identity in the market.

6) Maruti Suzuki India Ltd. v. CCE (2015)

Electro-deposition coating (anti-rust) of inputs did not amount to manufacture; the inputs remained the same. Quippo is distinguished: the integration of new functional components and the re-engineering for containerised operation produce a distinct unit with different essential attributes.

7) Parts vs Accessories Trilogy

Saraswati Sugar Mills v. CCE (2014) and Steel Authority of India Ltd. v. CCE (2022) define “parts” as integral components without which the article cannot perform its primary function.
CCE v. Insulation Electrical Pvt. Ltd. (2008) defines “accessories” as supplementary add-ons enhancing comfort or convenience, not essential to core function.

Applying these, the Court in Quippo concludes that the radiator, ventilation fan, air filter unit, pumps, valves, silencers, tank, control panels, cabling, etc., when the genset is placed in a container, are not mere accessories: they are parts necessary to make the containerised unit function as intended. This classification supports the finding of transformation.

C. The Court’s Legal Reasoning

Non-Mechanical Application of J.G. Glass’s “But For the Process” Limb:
The Court warns that if “no commercial use but for the process” were treated as a universal mandate, absurd outcomes would follow (e.g., wheat milling). The second limb must be applied contextually with the primary transformation test.
Transformation Grounded in Functional Utility and Composition:
The Court emphasises that transformation can be established by:
- Changed constituent elements and structure: the Power Pack’s components are materially different from the imported genset’s composition.
- Altered functional utility: imparting portability and enabling operation within the container—capabilities absent in the imported form—are not minor enhancements but defining attributes of the finished product’s identity.
Even if the ultimate end-use (electricity generation) is unchanged, the shift in essential functionality and composition suffices for transformation.
Parts vs Accessories Test Applied:
Once the genset is placed inside a container, the added components (radiator, ventilation fan, filter, pumps, valves, silencers, control panel, cabling) are integral to the unit’s functioning as a containerised power system. They are “parts,” not “accessories.” This supports the conclusion that the assembly yields a distinct product.
Marketability Established:
The Power Packs are the very goods leased to customers. Marketability was thus not in doubt; the product is known and traded as containerised gensets/power packs.
Statutory Hook Chosen—Section 2(f)(i):
While Note 6 of Section XVI (Customs Tariff) was invoked in earlier stages to argue completion of unfinished articles, the Supreme Court expressly rests the decision on Section 2(f)(i)—process incidental or ancillary to completion of a manufactured product—without needing to hold that the imported genset was “incomplete.”

D. Impact and Significance

1) Refined Contours of “Manufacture”

Transformation can be functional: A product may be “manufactured” even when its ultimate end-use remains the same, if the process alters its essential functional utility and constituent architecture (e.g., making a stationary genset into a portable, containerised unit).
Second limb not universal: Courts and tax authorities must avoid treating the “but for the process” limb as a dispositive rule detached from transformation.

2) Parts vs Accessories—A Practical, Operative Test

Components required for the article to perform its core function in the configuration in which it is supplied are “parts.”
Items enhancing comfort or convenience without being essential to core function are “accessories.”
This test will influence classification disputes and excise/customs/GST-era analogues where “parts” and “accessories” are differently treated.

3) Sectors Likely Affected

Packaged/Skid/Containerised Equipment: Gensets, compressors, chillers, turbines, water treatment “skids,” industrial process modules, and mobile/temporary power solutions assembled into transportable enclosures.
Leasing/Infrastructure Deployment Models: Businesses that assemble imported cores into turnkey, movable units may be treated as “manufacturers” of the finished units for the relevant pre-GST periods.
EOU/SEZ/Customs: Although this ruling is under Central Excise, the reasoning on transformation and parts vs accessories can inform cognate definitions of “manufacture” or “substantial transformation” in allied statutes/regimes.

4) Litigation and Compliance Posture

For pre-GST periods still in dispute, containerisation/integration that imparts new functionality and forms a cohesive unit may attract excise duty as manufacture, with corresponding benefits of CENVAT credit (as CESTAT had directed, subject to verification).
Taxpayers’ proactive disclosures (like Quippo’s 22.11.2007 letter) may help resist extended limitation and penalties—CESTAT’s relief on these aspects remains intact as the Revenue did not appeal.

E. Complex Concepts Simplified

Manufacture vs Processing: “Processing” may change form or condition; “manufacture” requires transformation into a distinct product known to the market.
Transformation Test: Ask whether the post-process item has a distinct name, character, identity, or use compared to the pre-process item.
Marketability Test: The transformed item must be capable of being bought/sold in the market as such.
“But for the process” Test (J.G. Glass): A helpful aid, not an absolute rule; it must be read along with transformation and applied contextually.
Parts vs Accessories: Parts are integral and necessary for the item to perform its primary function in its supplied configuration; accessories add convenience or comfort but are not essential.
Portability as Functional Utility: Even if the end-use (e.g., power generation) is unchanged, imparting portability and the capability to operate within a container can be a decisive transformation of the product’s functional identity.

What the Judgment Does Not Decide

Extended limitation/penalty: Not before the Supreme Court; CESTAT’s findings (no extended period, penalties set aside) stand unaltered.
Reliance on Note 6, Section XVI: The Supreme Court did not anchor its holding on Note 6; instead, it grounded the decision in Section 2(f)(i), even assuming arguendo the imported genset was complete.
GST-era implications: The ruling addresses pre-GST excise; while the reasoning may be persuasive in analogous contexts, GST has different charging principles.

Practical Takeaways for Industry

Evaluate whether integration/packaging operations impart new functional utility (e.g., portability, containerised operation) and materially alter constituent composition and structure; if so, treat the operation as “manufacture” for relevant periods.
Classify integrated components carefully:
- Components essential for functioning in the supplied configuration are “parts,” not “accessories.”
- Document engineering drawings, bills of materials, and test reports to evidence integral functionality.
For pending pre-GST disputes:
- Prepare for duty demands on the finished units; simultaneously assert entitlement to input CENVAT credits.
- Leverage any contemporaneous voluntary disclosures to contest the extended period and penalties.
For customs/SEZ/EOU contexts, use this decision’s reasoning on transformation and parts vs accessories to support or defend “manufacture/substantial transformation” positions.

Conclusion

Quippo Energy departs from a narrow view that equates unchanged end-use with absence of manufacture. The Supreme Court affirms that “manufacture” under Section 2(f)(i) encompasses processes that re-engineer a product’s constituent composition and functional utility, thereby creating a distinct marketable good—even if the ultimate end-use remains the same. By clarifying the non-mechanical application of J.G. Glass’s second limb and sharpening the “parts vs accessories” test, the judgment provides a pragmatic, engineering-sensitive framework for contemporary assembly and packaging industries. Containerised gensets are, therefore, not merely enhanced gensets; they are distinct power packs—a new commodity for excise law purposes.

Key Points at a Glance

Two-pronged test reaffirmed: transformation + marketability.
“But for the process” is not a universal standalone rule; apply contextually with transformation.
Transformation can lie in new constituent composition, altered structure, and functional utility (portability, containerised operation), even with unchanged end-use.
Integrated components necessary for functioning in the supplied configuration are “parts,” not “accessories.”
Containerised gensets/power packs are new, distinct excisable goods under Section 2(f)(i), classifiable under 8502.2090.