Kitting Is Not Manufacture: Supreme Court Rejects Rs 17.86 Crore Excise Demand on Xerox Warehouse Activity

Case at a glance: The Supreme Court has dismissed the Revenue's appeals and upheld CESTAT orders holding that Xerox India's activity of grouping imported modules and accessories into sets for customers at its warehouse was not “manufacture” under Section 2(f) of the Central Excise Act, and that Note 6 to Section XVI of the Tariff was not attracted.

Xerox India imported parts, modules and accessories of photocopiers and printers, paying customs duty and CVD, and stored them at warehouses in Hyderabad and Rampur. A show cause notice dated 4 May 2007 alleged that the warehouse activity amounted to manufacture and demanded excise duty and cess of Rs 17,86,47,382 for April 2002 to November 2006, with penalties on two executives. The Commissioner confirmed the demand on 28 March 2008.

On 9 November 2009 the CESTAT, Bangalore set aside that order, finding that the HCF and DADF units were factory-fitted, no assembly took place in the warehouse and any installation happened at the buyers' premises. A similar Meerut demand was set aside by the CESTAT on 31 July 2017, and the Revenue's appeals from both were heard together.

The Key Question Before the Court

Does grouping and fitting together imported modules into sets for customers amount to manufacture, or fall within Note 6 to Section XVI?

Section 2(f), Note 6 and the Revenue's Burden

Reviewing precedents from Delhi Cloth Mills, (1962) 10 SC CK 0020 to Servo-Med, Quippo, (2025) 09 SC CK 0319 and Alupro, (2026) 05 SC CK 0515, the Court reiterated that “a process that leaves the commodity commercially the same article is not manufacture.” The label “kitting” was not decisive, but the Revenue had to bring the activity strictly within Section 2(f), and pinning and plugging parts into a set to a customer's specification did not qualify. BPL India, (2002) 05 SC CK 0018, Narne Tulaman, (1988) 09 SC CK 0002 and Quippo were distinguished on their facts.

On Note 6, the Court said “two prongs must be established before the deeming provision can be invoked”: an incomplete or unfinished article, and its conversion into a complete article by the person charged. Neither was shown, and the Revenue could not treat the goods as complete machines and incomplete articles at once. The Revenue had not inspected the premises or produced best evidence, and the Tribunal's findings were not perverse.

What the Court Actually Held

• The activity does not fall within Section 2(f) of the Central Excise Act.
• The requirements of Note 6 to Section XVI are not established.
• The Tribunal's findings of fact were upheld as resting on evidence.
• Both sets of appeals (2010 and 2018) were dismissed.

Why This Judgment Matters

• It restates the limits of the deemed manufacture concept for importers who assemble sets for customers.
• It places a clear evidential burden on the Revenue to prove manufacture.
• It confirms that Rule 2(a) of the Interpretative Rules is about classification, not manufacture.

What Should Advocates Take Away From the Judgment?

For Assessees

• Document that imported goods are commercially complete and only grouped or packed.
• Keep purchase orders, bills of entry and storage records to show no process at the warehouse.

For the Revenue

• Inspect premises and gather direct evidence before alleging manufacture.
• Do not take inconsistent positions on whether goods are complete or incomplete.

Key Takeaways

Frequently Asked Questions

Grouping imported modules and accessories into sets as per customer specification at warehouses.

The Revenue did not show an incomplete article converted into a complete one by the assessee.

No. It dismissed the appeals and upheld the Tribunal's orders.

Conclusion

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