Cutting and Grooving ACP Panels: Why the Supreme Court Said It Is Not ‘Manufacture’ Under Central Excise

1. Background and Context

The decision in Alupro Building Systems Pvt. Ltd Vs Commissioner of Central Excise Bangalore-II is a significant ruling on two critical questions under the Central Excise Act, 1944:

  1. Which court has appellate jurisdiction when the issue concerns “excisability” of goods – the High Court under Section 35G or the Supreme Court under Section 35L?
  2. Whether activities such as cutting, routing/grooving, bending and fixing Aluminum Composite Panels (ACPs) on building facades constitute “manufacture” within the meaning of Section 2(f) of the Central Excise Act, 1944.

The assessee in this case was a construction contractor engaged in façade works. It imported pre-coated ACP sheets in standard sizes, classified under Customs Tariff Headings 7606/7610, and paid applicable customs duties at the time of import.

These ACPs are composite sheets consisting of:

  • A rigid polyethylene core;
  • Aluminum sheets bonded on both sides;
  • Often pre-coated with weather-resistant fluorocarbon finishes (e.g. PVDF) to withstand sunlight and industrial pollution.

They are predominantly used as cladding material for the exterior of buildings.

At the assessee’s premises, the imported sheets were:

  • Cut into panels of required sizes;
  • Grooved/routed on the reverse side to permit bending and fixing;
  • Later transported to site and installed on pre-erected frames with angles, clamps, fasteners and sealants, leaving controlled gaps between panels to create weather-sealed joints.

Initially, up to March 2002, the assessee discharged central excise duty on this activity. From April 2002 onwards, it stopped paying excise duty on the bona fide understanding that these operations did not amount to “manufacture” under Section 2(f) of the Central Excise Act, 1944.

A Show Cause Notice dated 14.09.2004 was issued alleging that cutting, grooving and assembling ACPs into panels for use in buildings amounted to manufacture, and demanded:

  • Central excise duty of Rs. 21,46,437/- for the period April 2002 to December 2003;
  • Interest on this duty;
  • Penalties under the Act.

The assessee contested the demand, asserting that:

  • No new product with a distinct name, character or use emerged after the process;
  • The operations only facilitated installation and enhanced functional utility;
  • Hence, the process did not qualify as “manufacture” and excise duty was not leviable.

Despite these contentions, the Additional Commissioner of Central Excise confirmed the demand, interest and penalty by Order-in-Original dated 21.06.2005. The amounts already paid by the assessee were appropriated against the liability.

On appeal, the Commissioner (Appeals), by Order-in-Appeal dated 28.10.2005:

  • Deleted penalty and interest;
  • But upheld the finding that the activity amounted to manufacture.

The assessee then approached the CESTAT, which, by Final Order dated 27.06.2006:

  • Accepted the assessee’s appeal;
  • Held that no new product came into existence;
  • Observed that Revenue had not established marketability of any distinct goods emerging from the process;
  • Concluded that “manufacture” under Section 2(f) was not attracted.

Revenue filed a further appeal before the Karnataka High Court under Section 35G, which reversed the Tribunal’s order and restored the order of the Commissioner (Appeals).

The matter then reached the Supreme Court, both on the question of jurisdiction and on the substantive question of manufacture.

2. Jurisdiction: High Court vs Supreme Court in Excise Appeals

2.1 Statutory Framework: Section 35G and Section 35L

The Supreme Court first addressed whether the Karnataka High Court could entertain Revenue’s appeal under Section 35G.

The relevant provisions of the Central Excise Act, 1944 are:

  • Section 35G(1) – appeal to the High Court from every order of the Appellate Tribunal passed on or after 1 July 2003, except orders “relating, among other things, to the determination of any question having a relation to the rate of duty of excise or to the value of goods for purposes of assessment”.

  • Section 35L(1)(b) – appeal to the Supreme Court from any order of the Appellate Tribunal “relating, among other things, to the determination of any question having a relation to the rate of duty of excise or to the value of goods for purposes of assessment”.