When you buy the powder, the gem is consumed and you are granted access to the Upgrader (NPC with a purple hammer).
It works like the dvergr in the act 5 quest. You just have to talk to the Upgrader, put an item in the window and click Upgrade.
However, like written on the Powder description, you must speak to the Upgrader in the same session as the one in which the gem was consumed.
Otherwise the access is lost and a new gem has to be crafted/consumed to get access again to the upgrader.
You can check this video here showing the consumption of the gem and the actual upgrade
https://youtu.be/xTW8Q-NEbqU?t=101Possibly you need to click twice on the Upgrader, the first time a dialog box appears, the second time the Upgrade window shows.