CESTAT Sets Aside ₹2.37-Cr Duty Demand On CNG/LPG Kits, Finding Mere Boxing Of Bought-Out Parts Without Processing Was Not Manufacture

Rohan Automotive Equipment procured LPG/CNG conversion-kit components from domestic and imported sources, placed the components in a box, and sold them as kits. The tank and tank stand were supplied separately.

The Department alleged that the activity amounted to manufacture under Section 2(f) of the Central Excise Act, 1944, and demanded duty of ₹2,37,06,413 for 2007–08 to 2009–10, with interest and penalties.

The Commissioner confirmed the demand and imposed penalties on the company and its authorised signatory, Upendrabhai C. Shah.

The Tribunal’s earlier remand order, which directed re-quantification of duty, was set aside by the Gujarat High Court; the matter was remanded to the Tribunal for a fresh decision on merits, leaving all contentions open.

The company maintained that the components were merely collected and packed, without any manufacturing process.

Under Section 2(f) of the Central Excise Act, 1944, an activity amounts to manufacture where it results in a new and distinct product; excisability also requires that the resulting goods be marketable.

The Tribunal, applying the Supreme Court’s discussion in Alupro Building Systems Pvt. Ltd. [2026 (397) E.L.T. 3 (S.C.)], treated transformation and marketability as cumulative requirements: a change to goods is insufficient unless it produces goods with a distinct name, character, or use, and the Revenue bears the burden of establishing marketability.

It also relied on CEV Engineering Pvt. Ltd. v. Commissioner of Central Excise, Delhi-II [2015 (38) S.T.R. 93 (Tri.-Del.)], upheld by the Supreme Court, which held that collecting and packing components as a CNG kit did not, on the facts of that case, amount to manufacture.

Under Rule 26 of the Central Excise Rules, 2002, an individual penalty could not stand where the underlying duty liability was not sustainable.

The Tribunal found that the components retained their individual character and underwent no processing or transformation before being placed in the box and sold as a kit.

Although the kit was marketed as a distinct commodity and its components could function together as an alternative-fuel system, the Tribunal held that this commercial description did not satisfy the transformation requirement for manufacture.

It considered CEV Engineering directly applicable and distinguished the Department’s assembly authorities on the basis that those cases involved transformation of the bought-out items.

Because the company’s activity did not amount to manufacture, the excise-duty demand could not be sustained; the Tribunal consequently did not need to decide the alternative claims concerning limitation, cum-duty valuation, or CENVAT credit.

Since duty was not leviable on the company, it also set aside the ₹2,00,000 penalty imposed on Shah under Rule 26.

Both appeals were allowed.