Sarla Performance Fibers Ltd vs C.C.E.C.,Vapi on 27 April, 2017

caselaws

Supreme Court of India
Sarla Performance Fibers Ltd vs C.C.E.C.,Vapi on 27 April, 2017Bench: A.K. Sikri, Ashok Bhushan

NON-REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS. 5805-5807 OF 2009

|SARLA PERFORMANCE FIBERS LTD. |…..APPELLANT(S) |
|VERSUS | |
|COMMISSIONER OF CENTRAL EXCISE & CUSTOMS, | |
|VAPI |…..RESPONDENT(S) |

W I T H

CIVIL APPEAL NO. 7253 OF 2009

AND

CIVIL APPEAL NO. 11204 OF 2014

J U D G M E N T

A.K. SIKRI, J.
All these appeals involve identical dispute, which pertain to
classification of the goods known as Polyester Covered Yarn and Nylon
Covered Yarn. Whereas the appellants/assessees argue that these products
are covered by Chapter No. 56 and come under CSH No. 5606.06, the Revenue
has taken the position that the aforesaid goods fall in CSH No. 5402.62/61.
The stand of the Revenue has been accepted by the Customs Excise & Service
Tax Appellate Tribunal (for short ‘CESTAT’) which is challenged by the
assessees in these appeals. For the sake of convenience, we shall take
note of the facts from Civil Appeal Nos. 5805-5807 of 2009.

The aforesaid two products, namely, Polyester Covered Yarn and Nylon
Covered Yarn are manufactured by the appellants by applying the process of
conventional covering on machine – MENEGATTO – Model 1500/2000 and also
separately by applying the process of air covering on machine SSM-DP2-C.
The dispute pertains to the goods manufactured with the application of air
covering process. This process of air covering is as under:
The Lycra/Spandex Spool is loaded on the feeder and nylon or polyester is
loaded on the Creel. Then the Lycra or Spandex is drafted to certain
extent i.e. as per the requirement of quality. Then the Nylon/polyester &
Lycra/Spandex is passed through the air jet where the covering takes place.
Finally the covered yarn is wound on paper tube.

It is an admitted case that upto July, 2001, the assessees were themselves
covering these yarns under Chapter No. 54 and paying duty accordingly. As
per them, it was noticed that Custom Department was acquiring such yarns on
importation under Chapter 56. The assessees were advised that the yarns in
question are to be classified under Chapter No. 56 and not Chapter No. 54
and, therefore, after intimating the Department, they started effecting the
clearances under CSH No. 5606.06 w.e.f. July, 2001.

On visit by the officers of the Excise Department, when the aforesaid
manner of effecting the clearances was noticed, the objection was raised by
the Department stating that the goods were classifiable under CSH
5402.62/61 and not 5606.06. After recording the statements of some
employees of the appellants company, show cause notice dated 04.09.2002 was
issued proposing modification in classification of covered yarn
manufactured by air covering method and on that basis differential duty for
the period from March, 2001 to February, 2002 was also demanded. The show
cause notice also proposed imposition of penalty and recovery of interest
as well. This show cause notice led to adjudication by the Adjudicating
Authority. After receiving reply to show cause notice and giving an
opportunity of hearing to the assessees, the Adjudicating Authority
affirmed the proposal contained in the show cause notice and also affirmed
demand of differential duty of Rs.44,89,471/- with interest as applicable.
Penalty of equal amount as that of duty was also imposed. This order was
challenged by the assessees before the Commissioner (Appeals) and
thereafter before the CESTAT, resulting into the dismissal of their appeals
at both levels.

Before proceeding to take note of the submission of the respective counsel
for the parties, it will be apt to take note of the two competing entries.
Chapter 54 deals with Man-Made Filaments and CSH 54.02, with which we are
concerned, pertains to Synthetic filament yarn, other than sewing thread.
Various sub-heads of Heading No.54.02 are as under:|Heading |Sub-headin|Description of goods |Rate of duty |
|No. |g No. | | |
| | | |Basic Additional |
|54.02 | |Synthetic filament yarn| |
| | |(other than sewing | |
| | |thread), including | |
| | |synthetic monofilament | |
| | |of less than 60 Deniers| |
| |5402.10 |- High tenacity yarn of|16% |
| | |nylon or other | |
| | |polyamides | |
| |5402.20 |- High tenacity yarn of|16% |
| | |polyesters | |
| |5402.61 |- Of nylon or other |16% |
| | |polyamides | |
| |5402.62 |- Of polyesters |16% |

There are four chapter notes and for the purposes of these appeals, chapter
note 3 needs to be kept in mind. Accordingly, we reproduce the same as
well:
“3. In relation to products of heading Nos. 54.01, 54.02, 54.03, 54.04 and
54.05, dyeing, printing, bleaching, mercerising, twisting, texturising,
doubling, multiple-folding, cabling, air mingling, air texturing or any
other process or any one or more of these processes, or the conversion of
any form of the said products into another form of such products shall
amount to manufacture.”

Chapter 56 under which the assessees intend to cover their products, bears
the heading “Wadding, Felt and Non-Wovens; Special Yarns; Twine, Cordage,
Ropes and Cables and Articles thereof”. The relevant entry under Heading
No.56.06 reads as under:|Heading |Sub-headin|Description of goods |Rate of duty |
|No. |g No. | | |
| | | |Basic Additional |
|56.06 |5606.00 |Gimped yarn, and strip |16% |
| | |and the like of Heading| |
| | |No. 54.04 or 54.05, | |
| | |gimped (other than | |
| | |those of Heading No. | |
| | |56.05 and gimped | |
| | |horsehair yarn); | |
| | |Chenille yarn | |
| | |(including flock | |
| | |chenille yarn); Loop | |
| | |wale yarn | |

Mr. Lakshmikumaran, learned counsel appearing for the assessees, submitted
that, no doubt, Note 3 of Chapter No. 54 stipulates that the process of air
mingling is also included in Chapter No. 54. His submission, however, was
that this air mingling refers to the situation where same yarn is used. He
argued that when two different kinds of yarns are used in the air mingling,
it is known as gimped and such process of gimped yarn would not be covered
by Chapter No. 54 but was specifically covered by Chapter Heading 56.06.
In support of his submission, Mr. Lakshmikumaran referred to HSN
Explanatory notes pertaining to Heading 56.06 wherein the nature of the
product is described as under:
“These products are composed of a core, usually of one or more textile
yarns, around which other yarn or yarns are wound spirally. Most
frequently the covering threads completely cover the core, but in some
cases the turns of the spiral are spaced; in the latter case, the product
may have somewhat the appearance of certain multiple (folded), cabled or
fancy yarns of Chapters 50 to 55, but may be distinguished from them by the
characteristic of gimped yarn that the core does not itself undergo a
twisting with the cover threads.
(emphasis added)”

He also sought to draw sustenance from the dictionary meaning of ‘gimp
yarn’ which is defined in Fairchild’s Dictionary of Textiles, 7th Edition
authored by Phyllis G. Tortora and Robert S. Merkel in the following
manner:
“gimp yarn A fancy yarn made of one or more strands twisted around a
central core and delivered at a faster rate to form a distinct spiral
effect. The outer yarns often are colored and coarser than the core yarns.
Gimp yarns originally were made of silk twisted around a fine wire or
strong cord. Uses: trimming, lace, embroidery.”

He further submitted that the Tribunal wrongly held that HSN Explanatory
notes would not apply in the instant case.

Counsel appearing in other appeals adopted the same arguments.

Mr. Radhakrishnan, learned senior counsel appearing for the Revenue,
submitted, per contra, that the matter was examined in its all length and
breadth, taking into consideration every relevant fact that the products
were covered by Chapter Heading 5402.62/61. For this purpose, he
extensively read the facts stated in the show cause notice, reasoning given
by the Adjudicating Authority in the Order-in-Original as well as Order-in-
Appeal passed by the Commissioner (Appeals). He further submitted that the
Tribunal has given cogent reasons in rejecting these very submissions made
by the appellants before this Court and commended this Court to accept well
reasoned decision of the Tribunal.

At the outset, it may be pointed out that there is no dispute that two
yarns are used in the manufacture of the product, namely, Nylon and Lycra.
At the same time, however, it is also an admitted fact that in Polyester
Covered Yarn, the percentage of Lycra is only nine to ten and it is
Polyester/Nylon which is pre-dominantly used ranging from 91% to 93%.
Taking note of these facts and definition of gimped yarn in Explanation (A)
to Chapter Heading 56.00 under Section XI of Explanatory note to HSN, it
was stated in the show cause notice that the product could not be treated
as gimped yarn. This process which is mentioned in the show cause notice
in detail, and the factual position contained therein was not disputed by
the appellants, reads as under:
“5. Whereas it further appear that as per the technical details of the
machineries involved in the manufacture of said polyester/nylon covered
yarn that the Polyester/Nylon yarn is not wound spirally on the
Polyurethane (elastomeric) yarn i.e. Lycra or Spandex that the
Polyester/Nylon Texturised yarn forming the loop in relaxed condition is
not wrapped around the polyurethane (elastomeric) yarn i.e. Lycra or
Spandex or held in place by a binder or tie yarn that both the
Polyester/Nylon texturised and Lycra or spandex are attached to each other
by a new technology of yarn covering by application of pressurized air in
the path of both the polyester-twist-textured yarn and elastomeric yarns,
similar to the technique of intermingling i.e. Air intermingling that the
process of manufacture in SSM DP2C machine is that one textured filament
yarn of Polyester/Nylon is fed. Another yarn of Lycra/Spandex is fed.
Both the yarns are fed together in an air jet. In the air jet, due to
compressed air, the filament of Polyester/Nylon get intermingled with that
of Lycra/Spandex.

6. In Polyester covered yarn the percentage of Lycra/Spandex by weight is
9 to 10%. In other words, the Polyester is predominant ranging from 91 to
93%. In nylon covered yarn, the percentage of Lycra/Spandex by weight is
2.5 to 25%. In other words Nylon is predominant ranging from 75% to 97.5%
and the two yarns are held together by way of intermingling.

7. Further the gimped yarn is defined in explanation (A) to Ch.H.56.00
under section XI of explanatory note to HSN. According to explanatory
notes, gimped yarns are compressed of core, usually of one or more textile
yarn around which other yarn or yarns are wound spirally. Most frequently
the covering threads completely cover the core, but in some case the turns
of the spiral are spaced. In the latter case product may have some what
the appearance certain multiple (folded), cabled or fancy yarn of chapter
50 to 55 but may be distinguished from them by the characteristic of gimped
yarn that the core does not itself undergo a twisting with the cover
threads. In gimped yarn, the yarn forming the loop is wrapped around the
core yarn and is held on place by binder or tie yarn. The manufacture
requires two distinct twisting operation after the yarn is first made, it
is twisted opposite direction to establish the desired effect. It may have
the loops formed by a very soft and slackly twisted yarn. These yarns
falls under Chapter Heading 56.06 of the Tariff as special yarns. In view
of the above, and in view of the fact that the yarn forming the loop is not
wrapped around the core yarn is not held in place by a binder or the tie
yarn like in gimped yarn and loops are not formed by twisted yarn. These
yarns viz. Polyester/Nylon covered yarn can not fall under Chapter heading
56.06 of the Central Excise Tariff Act, 1985.

8. It therefore appears that Air mingled yarns manufactured by M/s. Sarla
Polyester Ltd. comprise a Polyester Yarn (Polyester) or Nylon Yarn
(Polyamide) air mingled with Lycra/Spandex (polyurethane). The assessee
using lycra or spandex as core yarn and covering the same with polyester or
nylon yarn, a non elastic multi filament yarn of Polyester/Nylon is fed
through an air jet with stretched lycra/spandex. In the air jet, due to
compressed air, the filaments of polyester/nylon get intermingled with that
of Lycra/Spandex. The resulting yarn would therefore merit classification
based on the principle of pre-dominance of textile material used. Since
the air mingled yarn contain more polyester or nylon by weight vis-a-vis
Lycra/Spandex such yarns merit classification under Chapter Sub Heading No.
5402.61 or 5402.62 as Synthetic Filament Yarn of Nylon or Polyester
respectively. This classification is decided by virtue of Section Note
2(A) to section XI covering chapter 50 to 63 of the first schedule to
Central Excise Tariff Act, 1985. Since M/s. Sarla Polyester Ltd., Silvassa
are having intermingling machinery at their manufacturing unit, they are
adopting the intermingling/interlacing process for covering lycra/spandex.
Further the unit does not have facility to manufacture spun yarn and cannot
manufacture crimped yarn. The unit has the air mingling machinery capable
of producing air mingled yarn only. Therefore yarn manufactured by them
cannot be classified Crimped Yarn under CH. Heading no.56.06 of CET. The
interlaced/intermingled yarn manufactured by undertaking air mingling
operation is to be classified by resorting to section note 2(a) to section
XI i.e. by principle of pre-dominance of textile material used. The goods
manufactured by M/s. Sarla Polyester Ltd. would therefore fall under
chapter Heading no.5402.61 and 5402.62 as Nylon and Polyester respectively
predominate in weight over lycra/spandex.”

In nutshell, having regard to the use of Nylon and Lycra in the ratio of
90:10, the classification was proposed on the principle of pre-dominance of
textile material used. The Order-in-Original was passed by the Assessing
Authority, taking note of the dominance of Polyester or Nylon yarn in the
manufacturing of the said product. The Assessing Authority also referred
to tests reports from Man Made Textile Research Association (MANTRA) which
also supported the version of the Revenue. Contention of the assessees
that the product should be covered under Chapter Heading 56.06 was turned
down by the Assessing Officer in the following manner:
“28. The assessee has claimed the classification of their covering yarn
manufactured by way of attachment by applying pressurized air in Air Jet
machine under Chapter Sub-heading 56.06 of Central Excise Tariff.
Accordingly, on perusal of said entry in Central Excise tariff, it is seen
that Chapter Sub-heading No. 56.06 covered gimped yarn, and strop and the
like of heading No. 54.04 or 54.05, gimped (other than those of Heading
No.56.05 and gimped horse hair); chenille yarn (including flock chenille
yarn); lop wale yarn.

Since the assessee has claimed polyester and Nylon covering yarn as
gimped yarn under Chapter Sub-heading 56.06 of Central Excise Tariff, it
may be mentioned here that as per the Explanatory Notes to HSN, Gimped yarn
are composed of core, usually of one or more textile yarns, around which
other yarns are wound spirally. In gimped yarn, the yarn forming the loop
is wrapped around the core yarn and is held in place by binder or tie yarn.
However as per the test report of MANTRA, Surat, which has not been
challenged or disputed by the assessee, the polyester or Nylon yarn did not
wound spirally and even did not wrapped around the Lycra/Spandex
(elastoemeric) yarn or it was not held in place by a binder or tie yarn.
It was merely attached with each other due to pressurized air by way of
technique of intermingling. Therefore the yarns in question cannot be said
to be composed of core of yarns. And as such it is not gimped yarn.”

The Appellate Authority while affirming the order of the Assessing Officer
also referred to Rule 3(a) of the Rules of Interpretation as per which the
heading which provides the most specific description is to be preferred to
the heading providing a more general description. The Tribunal has
revisited the entire issue taking into consideration all the aspects of the
matter and in the light of tests reports of MANTRA, affirmed the findings
of the Authorities below that the products manufactured by assessees are
nothing but air mingled yarn and, therefore, cannot be classified under
Chapter No. 56 in view of the fact that it does not contain a core around
which another yarn has been woven. Thus, a categorical finding is arrived
at that the core does not itself undergo twisting with covered threads. On
the basis of the aforesaid concurrent finding of the Authorities below
rejecting the contentions of the assessees that the product in question was
a gimped yarn, supported with cogent and valid reasons, we do not find any
merit in any of the contentions raised by the appellants before us. The
appeals accordingly fail and are dismissed with cost.

………………………………………J.
(A.K. SIKRI)

………………………………………J.
(ASHOK BHUSHAN)

NEW DELHI;
APRIL 27, 2017.