In a significant ruling delivered on August 5, 2026, the Supreme Court of India in Commissioner of Central Excise, Hyderabad-IV v. M/s Xerox India Ltd. & Ors. [2026 LiveLaw (SC) 767] has definitively held that the activity of grouping, kitting, and plugging imported photostatic parts and modules at a warehouse – to create customer-specific photocopier sets – does not constitute “manufacture” under Section 2(f) of the Central Excise Act, 1944.
The Bench comprising Justice S.V.N. Bhatti and Justice N.V. Anjaria dismissed Revenue’s Civil Appeals (Nos. 5939-5941 of 2010 and 11870-11872 of 2018), upholding the CESTAT’s findings that no new, commercially distinct article emerged from the Assessee’s warehouse activities.
For manufacturers, importers, and bonded warehouse operators – particularly those operating under the Manufacture and Other Operations in Warehouse Regulations (MOOWR) – this judgment sets a critical judicial standard for distinguishing processing from manufacturing.
The Factual Background
Xerox India Ltd. imported digital multi-function printers, photocopiers, and related modules in Complete Knocked Down (CKD) or Semi-Knocked Down (SKD) condition from its sister concerns abroad. These were classified and assessed as complete machines under Customs Tariff Heading 8471 (Automatic Data Processing Machines), and Customs Duty along with Countervailing Duty (CVD) was duly paid at the time of import.
At its warehouses in Hyderabad (Telangana) and Rampur (Uttar Pradesh), Xerox undertook what it described as “kitting” – grouping imported modules into sets as per individual customer specifications, pinning, plugging, and packing them for dispatch. No physical assembly of any two parts into a single unit was carried out at the warehouse; specific components like the Duplex Automatic Document Feeder (DADF) and the High Capacity Feeder (HCF) were factory-fitted at the overseas manufacturing facility.
The Commissioner of Central Excise issued a Show Cause Notice demanding approximately ₹17.86 Crore in Excise Duty and Education Cess, contending that Xerox’s warehouse activities constituted “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.
The Legal Framework
Section 2(f) of the Central Excise Act, 1944
Section 2(f) defines “manufacture” as including any process incidental or ancillary to the completion of a manufactured product, and any process specified in the Section or Chapter Notes of the First Schedule to the Tariff Act as amounting to manufacture. The settled judicial test requires that a “transformation” must occur where a new and distinct article emerges with a separate commercial identity, name, character, or end-use.
Note 6 to Section XVI of the Central Excise Tariff Act, 1985
Note 6 creates a deeming fiction: the conversion of an article which is incomplete or unfinished – but has the essential character of the complete or finished article – into the complete article, is deemed to amount to manufacture. Two conditions must be met: the article presented must be incomplete or unfinished, and a conversion into the complete article must have been carried out.
Revenue’s Arguments
The Additional Solicitor General of India, Mr. Raghvendra P. Shankar, advanced several grounds on behalf of Revenue:
The imported CKD/SKD modules were individually non-functional. The process of combining them into bespoke printers and copiers was an irreversible assembly carried out by trained engineers, transforming individually ineffectual components into a functional, marketable machine. This, the Revenue contended, fell squarely within Section 2(f) as a process incidental or ancillary to manufacture.
Revenue further argued that the final assembled product often fell under a different Tariff heading (9009.00 for photocopiers) from the imported components (8471.00 for data processing machines), demonstrating that a commercially distinct article had emerged. Additionally, Revenue relied on Note 6, contending that incomplete articles were being converted into complete machines at the warehouse.
Revenue placed strong reliance on the decisions in Narne Tulaman Manufacturers (1989) 1 SCC 172, BPL India Ltd. (2002) 5 SCC 167, and Quippo Energy Ltd. (2025) 152 GST R 264 (SC) – all cases where assembly of procured components was held to constitute manufacture.
Xerox India’s Defense
Mr. V. Lakshmikumaran, appearing for the Assessee, contended that no physical assembly or transformation took place at the warehouse. The modules were imported, classified, and assessed as complete machines under Tariff Heading 8471 at the point of import. They were cleared from the warehouse in their original packing – merely grouped, pinned, plugged, and packed to customer specifications.
Xerox argued that Note 6 was inapplicable because it operates only upon articles that are incomplete or unfinished. Since the goods were already classified and assessed as complete machines at import, no conversion from an incomplete to a complete machine occurred.
He relied upon Delhi Cloth and General Mills (1962) SCC OnLine SC 148 for the “transformation test,” Servo-Med Industries (2015) 14 SCC 47 for the “two-fold test” (essential character test and commercial user test), and Alupro Building Systems (2026) SCC OnLine SC 986 – all cases where mere processing or adaptation without creating a new commercial commodity was held not to constitute manufacture.
The Supreme Court’s Analysis and Conclusion
The Court undertook a comprehensive review of its own precedents on the definition of “manufacture” under Section 2(f), tabulating the key decisions chronologically – from Delhi Cloth and General Mills through Tulaman, BPL India, Satnam Overseas, Servo-Med, Quippo Energy, and Alupro – to extract the “inner and outer limits” of what constitutes manufacture.
Holding 1: Kitting Does Not Constitute Manufacture Under Section 2(f)
The Court held that Xerox’s activity of pinning and plugging different parts together to make a complete set as per customer specifications does not fall within Section 2(f). No new and distinct commercial commodity emerged. The modules were imported as complete machines, grouped into sets, and dispatched in their original packing. The goods remained commercially the same article before and after the warehouse activity.
The Court reiterated the four-fold classification from Servo-Med Industries:
(1) exactly the same post-process – no manufacture;
(2) essentially the same – no manufacture;
(3) transformed but not marketable – no manufacture;
(4) transformed into a new, marketable commodity – amounts to manufacture. Xerox’s kitting fell within category (2).
Holding 2: Revenue Cannot Take Contradictory Positions on Classification
In a decisive observation, the Court held that Revenue cannot, upon one and the same set of facts, treat the goods as complete machines for the purpose of levying customs duty (including CVD) under Heading 8471, and simultaneously as incomplete articles for the purpose of invoking Note 6 to levy excise duty. The Court emphasized that Note 6 requires two prongs to be established: first, that the article was incomplete or unfinished; and second, that a conversion into a complete article was carried out. On the Tribunal’s findings, neither was made out.
Holding 3: Revenue Failed to Discharge Its Burden of Proof
The Court observed that Revenue had drawn conclusions without physically inspecting the Assessee’s premises. In an era of technological advancement, the Revenue could have proved through best evidence – photographs, physical inspection reports – that a manufacturing activity was taking place. Instead, it relied on generic inferences and employee depositions that, upon scrutiny, did not support the manufacturing claim. The Tribunal had found that no deposition of any executive stated that modules were assembled in the warehouse, and the Commissioner had concluded assembly occurred without any verification whatsoever.
Key Precedents Distinguished
The Supreme Court specifically distinguished the three decisions relied upon by Revenue, while drawing support from precedents cited by the Assessee:
BPL India (2002) was distinguished because in that case, SKD kits were put together using fasteners to create VTRs and colour monitors – an expert assembly creating a distinct commercial product. The critical distinction was the classification under which the kits were imported; in Xerox’s case, the goods were imported as complete machines.
Tulaman (1989) and Quippo Energy (2025) were distinguished because both involved actual physical assembly of distinct parts creating a new product known to the market. In Xerox’s case, no physical assembly took place at the warehouse.
Conversely, the Court’s analysis drew on the ratio in Alupro Building Systems (2026) SCC OnLine SC 986, where cutting, grooving, and bending imported Aluminium Composite Panels for use in building facades was held not to constitute manufacture – the ACP that entered the process remained an ACP. This reinforced the principle that adapting an existing article to a specific use, without altering its fundamental commercial identity, does not cross the threshold into manufacture.
Impact on MOOWR and Warehouse Operations
This judgment carries significant implications for manufacturers and importers operating under the Manufacture and Other Operations in Warehouse Regulations (MOOWR) framework under Section 65 of the Customs Act, 1962.
MOOWR licensees who perform assembly, kitting, value-added packaging, or similar operations inside bonded warehouses must now re-examine whether their activities cross the judicial threshold from mere processing to manufacturing. The Supreme Court’s adoption of the Servo-Med two-fold test – requiring both a transformation into a new, distinct commercial commodity and marketability – sets a clear standard that Revenue authorities must satisfy before asserting that warehouse activities constitute manufacture.
Additionally, the Court’s insistence on best evidence (physical inspection, photographic documentation) rather than generic assumptions strengthens the procedural safeguards for warehouse operators facing manufacturing-related Show Cause Notices.
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Frequently Asked Questions (FAQs)
The Supreme Court held that the activity of grouping, kitting, and plugging imported CKD/SKD photocopier modules at a warehouse – to create customer-specific sets – does not constitute “manufacture” under Section 2(f) of the Central Excise Act, 1944. No new, commercially distinct article emerged from the kitting process.
The settled judicial test requires a “transformation” where a new and distinct article emerges with a separate commercial identity, name, character, or end-use. Mere processing, kitting, or simple assembly that leaves the commodity commercially the same article does not amount to manufacture, regardless of the labour, skill, or value added.
Note 6 applies only when two conditions are met: the article presented must be incomplete or unfinished (but having the essential character of the complete article), and a conversion of that incomplete article into the complete article must have been carried out. If goods are imported and classified as complete machines, Note 6 is not attracted.
No. The Supreme Court in this judgment explicitly held that Revenue cannot, upon the same set of facts, treat goods as complete machines for customs duty purposes while simultaneously treating them as incomplete articles for excise duty under Note 6. This contradictory position is legally unsustainable.
Manufacturers and importers operating under MOOWR (Section 65 of the Customs Act) must re-examine whether their assembly, kitting, or value-added operations inside bonded warehouses cross the threshold from processing to manufacturing. The judgment sets a clear judicial standard: Revenue must prove, through best evidence, that a new, distinct, marketable commodity emerged – not rely on generic assumptions.
From Servo-Med Industries v. Commissioner of Central Excise, Mumbai (2015) 14 SCC 47, the Supreme Court established a two-fold test: (1) the Essential Character Test – whether the process transforms the article so that a different commercial commodity emerges; and (2) the Commercial User Test – whether the article would serve no commercial purpose without the process. Both must be satisfied for an activity to amount to manufacture.
The Supreme Court emphasized that Revenue must produce best evidence – physical inspection reports, photographic documentation, or other direct proof – showing actual manufacturing operations. Generic inferences, assumptions, or unsubstantiated conclusions without physical verification are insufficient to sustain an excise duty demand.
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