Introduction:
The Supreme Court of India, in M/s Alupro Building Systems Pvt. Ltd. v. Commissioner of Central Excise, Bangalore-II, Civil Appeal No. 8030 of 2010, delivered a significant judgment concerning the scope of appellate jurisdiction under the Central Excise Act, 1944, and the legal requirements for levy of excise duty. The decision, reported as 2026 LiveLaw (SC) 599, was rendered by a Bench comprising Justice J.B. Pardiwala and Justice R. Mahadevan.
The case arose from a dispute relating to Aluminium Composite Panels (ACPs), which were imported by the appellant-company and used in construction projects for exterior cladding of buildings. ACPs are widely used in modern architecture because of their durability, flexibility, and aesthetic appeal. After importing the ACPs, the company undertook certain activities such as cutting the panels into required dimensions, grooving their reverse sides, bending them where necessary, and thereafter installing them onto frames erected at construction sites.
The Revenue authorities viewed these activities as amounting to “manufacture” within the meaning of Section 2(f) of the Central Excise Act, 1944. According to the Department, the processing undertaken by the company transformed the imported ACPs into a distinct product capable of attracting excise duty. Consequently, a show cause notice dated September 2004 was issued demanding excise duty amounting to Rs. 21,46,437 for the period from April 2002 to December 2003, along with interest and penalties.
The dispute initially reached the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), which ruled in favour of the assessee and held that no manufacturing activity had taken place. The Tribunal found that the ACPs retained their original identity and that the Revenue had failed to establish marketability of any allegedly manufactured goods. However, the Karnataka High Court, exercising jurisdiction under Section 35G of the Central Excise Act, reversed the Tribunal’s findings and restored the Revenue’s case.
Aggrieved by the High Court’s decision, the assessee approached the Supreme Court. The matter raised two important legal issues. First, whether the Karnataka High Court possessed jurisdiction under Section 35G to entertain an appeal involving the question of excisability of goods. Secondly, whether the cutting, grooving, routing and installation of ACPs amounted to manufacture under Section 2(f) of the Central Excise Act, thereby attracting excise duty.
The judgment assumes significance not only because it clarifies the distinction between Sections 35G and 35L of the Central Excise Act but also because it reiterates the foundational principles governing the concept of manufacture and excisability under indirect tax law.
Arguments of the Parties:
The appellant-assessee contended that the Karnataka High Court lacked jurisdiction to entertain the Revenue’s appeal under Section 35G of the Central Excise Act. It was argued that the dispute essentially concerned the excisability of goods, which directly relates to assessment and determination of duty liability. Under the statutory framework, appeals involving determination of questions relating to the rate of duty or valuation of goods are excluded from the jurisdiction of High Courts and lie directly before the Supreme Court under Section 35L. Therefore, according to the appellant, the High Court ought not to have entertained the Revenue’s appeal in the first place.
On the substantive issue, the appellant argued that the processes undertaken on ACPs did not result in the emergence of a new and distinct commodity. The ACPs remained ACPs even after cutting, grooving, routing and bending. These activities merely customized the panels according to architectural requirements and facilitated their installation at construction sites. The appellant emphasized that the essential characteristics, identity, composition and commercial understanding of the product remained unchanged.
The appellant further submitted that for excise duty to be levied, there must be manufacture resulting in a commercially distinct product capable of being bought and sold in the market. No such product emerged in the present case. The processed ACPs were not marketed separately as independent commercial goods. Consequently, the twin requirements of manufacture and marketability were not satisfied.
The Revenue, on the other hand, defended the Karnataka High Court’s jurisdiction. It argued that the dispute primarily involved interpretation of the concept of manufacture rather than determination of the rate of duty or valuation of goods. According to the Revenue, such questions could legitimately be examined by the High Court under Section 35G.
On merits, the Revenue contended that the activities carried out by the appellant substantially transformed the imported ACPs. The Department argued that once the panels were cut, grooved, bent and assembled according to project specifications, they acquired a different form and utility. The resulting panels were allegedly distinct from the original imported ACP sheets and therefore constituted manufactured goods.
The Revenue also maintained that the transformation process enhanced the utility of the product and prepared it for a specific commercial purpose. According to the Department, the operations undertaken by the appellant were not mere installation activities but constituted a systematic process leading to the emergence of excisable goods. Therefore, the demand of excise duty along with consequential liabilities was justified.
The Revenue further relied upon the broad language of Section 2(f) and argued that modern concepts of manufacture should not be restricted to situations where an entirely different product emerges. It submitted that substantial transformation and adaptation of goods for commercial use should also be recognized as manufacturing activity.
Thus, while the assessee focused on the absence of a distinct product and lack of marketability, the Revenue emphasized the extent of processing undertaken and the functional transformation of the ACPs.
Court’s Judgment:
The Supreme Court allowed the appeal and set aside the judgment of the Karnataka High Court. In doing so, the Court addressed both the jurisdictional issue and the substantive question relating to manufacture and excisability.
At the outset, the Court examined the statutory scheme governing appeals under Sections 35G and 35L of the Central Excise Act. Section 35G permits appeals to High Courts on substantial questions of law arising from orders of the Tribunal. However, the provision specifically excludes matters relating to determination of questions having a relation to the rate of duty of excise or to the value of goods for purposes of assessment. Such matters are appealable directly to the Supreme Court under Section 35L.
The Court observed that the expression “determination of any question having a relation to the rate of duty of excise or to the value of goods for purposes of assessment” is of wide amplitude and cannot be interpreted narrowly. What is relevant is whether the question involved bears a direct and proximate nexus with assessment.
Applying this principle, the Court held that the issue of excisability is intrinsically connected with assessment. Before determining the rate at which duty is payable, it is first necessary to determine whether the goods are excisable at all. Therefore, a decision on excisability serves as a precursor to determination of the rate of duty and possesses a direct relationship with assessment.
The Court noted that Section 35L(2), inserted by the Finance Act, 2014, expressly clarifies that questions relating to taxability or excisability are included within the expression “determination of any question having a relation to the rate of duty.” The Bench held that this amendment was clarificatory in nature and merely made explicit what was always implicit in the statutory framework. As a result, the amendment was held to have retrospective operation.
Consequently, the Court concluded that disputes involving excisability fall within the exclusive appellate jurisdiction of the Supreme Court and cannot be entertained by High Courts under Section 35G. The Karnataka High Court therefore lacked jurisdiction to decide the Revenue’s appeal.
Having resolved the jurisdictional issue, the Court proceeded to examine whether the appellant’s activities amounted to manufacture.
The Court reiterated the well-settled principles governing excisability under the Central Excise Act. It emphasized that excise duty is a duty on manufacture and can be imposed only when two essential conditions are satisfied. First, the process undertaken must result in the emergence of a new and distinct product having a different name, character, identity or use. Secondly, the resulting product must be marketable or capable of being marketed as a distinct commercial commodity.
The Court carefully analyzed the nature of the processes undertaken by the appellant. It found that the ACPs remained ACPs even after cutting, grooving, routing and bending. The operations merely altered the dimensions and shape of the panels so that they could be installed according to customer requirements. No new commercial product emerged from the process.
The Bench observed that superficial modifications made to facilitate the use of a product do not necessarily amount to manufacture. What is required is a transformation resulting in the emergence of a commercially distinct commodity. In the present case, the essential character and identity of the ACPs remained unchanged throughout the process.
The Court also noted that the erection of support frames, fixing of panels onto structures and sealing of gaps were essentially installation activities carried out at project sites. Such activities were part of the execution of construction contracts and could not be equated with manufacturing operations.
Significantly, the Court reaffirmed the principle that marketability is an independent requirement for levy of excise duty. Even where some transformation is alleged, the Revenue must establish through evidence that the resulting goods are capable of being bought and sold as distinct commercial products in the market.
The Court held that the burden of proving marketability rests upon the Revenue. Mere assumptions or assertions are insufficient. In the present case, the Department failed to produce any evidence demonstrating that the processed ACPs were known in the market as a separate commodity or were capable of independent commercial transactions.
The Bench further observed that since no distinct product had emerged, the question of marketability became largely academic. Nevertheless, even on that aspect, the Revenue had failed to discharge its evidentiary burden.
In reaching its conclusion, the Court reaffirmed the established jurisprudence that manufacture requires transformation of goods into a new and distinct article having a separate commercial identity. Mere processing, customization or adaptation of goods for a particular use does not automatically amount to manufacture unless the transformation test is satisfied.
Accordingly, the Supreme Court restored the findings of the CESTAT and held that the activities undertaken by the appellant did not constitute manufacture under Section 2(f) of the Central Excise Act. The demand for excise duty, interest and penalties therefore could not be sustained.
The judgment serves as an important reaffirmation of two foundational principles of indirect tax law. First, disputes relating to excisability are directly connected with assessment and therefore fall within the exclusive appellate jurisdiction of the Supreme Court under Section 35L. Secondly, excise duty can be levied only when a process results in the emergence of a distinct and marketable product. Mere customization, alteration of dimensions, or installation-related activities are insufficient to satisfy the statutory requirement of manufacture. By restoring the Tribunal’s decision, the Supreme Court has provided clarity on jurisdictional boundaries under the Central Excise Act and reinforced the traditional tests of manufacture and marketability that continue to govern excise jurisprudence.