Supreme Court Classifies Embroidered Ladies Suit Under Residuary Entry: Commissioner, Commercial Tax, U.P. vs. S/s Rujhan Studio (2021)

Date of the Judgment: March 02, 2021

Citation: (2021) INSC 123

Judges: Dr Dhananjaya Y Chandrachud, J and M R Shah, J.

Can a piece of unstitched ladies’ suit material with embroidery be classified as ‘textile’ and thus be exempt from tax, or should it be considered a ‘textile made up’ or an unclassified item? The Supreme Court of India addressed this question in a recent case concerning the classification of goods under the Uttar Pradesh Value Added Tax Act, 2008. The core issue revolved around whether the process of cutting and embroidering fabric transforms it from a simple textile into a different taxable item. The judgment was delivered by a two-judge bench comprising Justice Dr Dhananjaya Y Chandrachud and Justice M R Shah, with the majority opinion authored by Justice Dr Dhananjaya Y Chandrachud.

Case Background

The respondent, S/s Rujhan Studio, was a dealer engaged in the business of purchasing textiles and selling dress material for women. On March 9, 2010, a survey was conducted at their establishment by the Special Investigation Branch. During this survey, a partner of the respondent described their business as manufacturing and selling unstitched suits, salwar kameez, and dupattas. The work included design and embroidery on the kameez and kurta, with some sewing on the neck portion, and “peco” work on the borders of dupattas. No stitching was done on the salwar. The entire process was completed with the help of machines and manual labor.

During the assessment, a representative of the dealer stated that they purchase cloth in bulk, cut it according to the length of the suit, cut the neck of the shirt, and then do the embroidery. The headscarves are picoed. The pieces are cut and matched with the shirt and headscarf to make a set. The dealer claimed they only do cutting and embroidery work in the factory. The business had been operating with the same nature since 2008-09.

The dealer was assessed to a tax of Rs 99,42,870 for the assessment year 2009-2010, by treating the product as an unclassified item under Schedule V of the UP VAT Act 2008, which attracts a tax rate of 12.5%. The respondent filed an appeal before the Additional Commissioner, who partly allowed the appeal and classified the goods as “textile made ups,” subject to a 4% duty under Serial Number 16 of Schedule IIA. Both the appellant and the respondent then appealed to the Commercial Tax Tribunal. The Tribunal allowed the respondent’s appeal, classifying the product as a ‘textile’ under Entry 21 of Schedule I, which is exempt from tax. The appellant’s revision before the High Court was dismissed, leading to the current appeal before the Supreme Court.

Timeline

Course of Proceedings

The Assessing Authority initially classified the product as an unclassified item under Schedule V of the UP VAT Act 2008, imposing a tax rate of 12.5%. The first appellate authority partly allowed the appeal, classifying the goods as “textile made ups” with a 4% duty under Schedule IIA. The Commercial Tax Tribunal allowed the respondent’s appeal, classifying the product as a ‘textile’ under Entry 21 of Schedule I, which is exempt from tax. The High Court dismissed the appellant’s revision, stating that the factual findings of the Tribunal did not warrant interference. This led to the appeal before the Supreme Court.

Legal Framework

The core of the dispute revolves around the interpretation of entries in the Schedules of the Uttar Pradesh Value Added Tax Act, 2008. The relevant entries are:

• Schedule I, Entry 21: This entry lists goods that are exempt from tax. It includes “Silk Fabrics; Handloom cloth of all kinds; handloom shawls & lois whether plain, printed, dyed or embroidered; Dhoties and Saris; textiles of following varieties manufactured on power – loom excluding the items described in schedule -II:- (a) cotton fabrics of all varieties; (b) rayon or artificial silk fabrics, including staple fibre fabrics of all varieties; (c) woolen fabrics of all varieties; (d) fabrics made of a mixture of any two or more of the above fibres, viz. cotton, rayon, artificial silk, staple fibre or wool, or of a mixture of any one or more of the said fibres with pure silk fibre;(e) canvas cloth.”
• Schedule II, Entry 16: This entry lists goods taxed at 4%. It includes “Bed sheets (other than unstitched bed sheets), pillow cover & other textile made ups.”
• Schedule V, Entry 1: This is a residuary entry that includes “All goods except goods mentioned or described in Schedule -I, Schedule -II, Schedule -III and Schedule -IV of this Ordinance,” and is taxed at 12.5%.

The definition of “manufacture” under Section 2(t) of the UP VAT Act 2008 is also relevant, which states, ““manufacture” means producing, making, mining, collecting, extracting, mixing, blending, altering, ornamenting, finishing, or otherwise processing, treating or adapting any goods; but does not include such manufacture or manufacturing processes as may be prescribed;”

Arguments

Appellant’s Arguments:

• The appellant argued that the product, an “embroidered ladies suit,” does not fall under the description of ‘textile’ in Entry 21 of Schedule I. The work done by the respondent, including cutting, embroidery, and sewing on the neck portion, changes the nature of the textile.
• The appellant contended that the product should be classified under the residuary entry in Schedule V, which attracts a 12.5% tax rate.
• The appellant further submitted that the expression “other textile made ups” in Entry 16 of Schedule II should be read in conjunction with the other goods specified in the entry, i.e., bedsheets and pillow covers, and hence, the product cannot be classified as “textile made up”.

Respondent’s Arguments:

• The respondent argued that the product should be classified as a ‘textile’ under Entry 21 of Schedule I, which is exempt from tax. They contended that their work only involves cutting and embroidery, and the material remains essentially a textile.
• The respondent argued that the product is not a “textile made up” because it is unstitched.

Analysis of Arguments:

The appellant argued that the process of cutting and embroidering the fabric transforms it from a simple textile into a different article, which should not be exempt from tax. The respondent, on the other hand, argued that the essential nature of the product remains textile, despite the embroidery and cutting. The appellant also argued that the term “other textile made ups” should be read in conjunction with “bedsheets and pillow covers” and not as a standalone entry.

Innovativeness of the Argument: The appellant’s argument that the term “other textile made ups” should be read in conjunction with bedsheets and pillow covers, rather than as a standalone entry, is a key innovative point. This interpretation significantly impacted the court’s decision.

Issues Framed by the Supreme Court

The main issue before the Supreme Court was:

1. Whether the commodity described as an “embroidered ladies suit”, which the respondent claims to be unstitched, would fall within the description of a ‘textile’ under Entry 21 of Schedule I of the UP VAT Act 2008.

The sub-issues that the court dealt with were:

• Whether the product should be classified as “other textile made ups” under Entry 16 of Schedule II of the UP VAT Act 2008.
• Whether the product should be classified under the residuary entry in Schedule V of the UP VAT Act 2008.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Court did not rely on any previous cases or books in its judgment. The Court primarily relied on the interpretation of the entries in the Schedules of the UP VAT Act 2008 and the definition of “manufacture” under Section 2(t) of the same Act.

The court considered the following legal provisions:

• Section 2(t) of the UP VAT Act 2008: Definition of “manufacture”.
• Entry 21 of Schedule I of the UP VAT Act 2008: List of exempt goods, including certain textiles.
• Entry 16 of Schedule II of the UP VAT Act 2008: List of goods taxed at 4%, including “other textile made ups”.
• Residuary Entry of Schedule V of the UP VAT Act 2008: List of goods taxed at 12.5%.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Section 2(t) of the UP VAT Act 2008: The court used the definition of “manufacture” to determine that the respondent’s activities altered the nature of the textile.
• Entry 21 of Schedule I of the UP VAT Act 2008: The court examined the scope of the entry and determined that the product did not fall under the description of ‘textile’ under this entry.
• Entry 16 of Schedule II of the UP VAT Act 2008: The court interpreted the entry and held that the expression “other textile made ups” must be read ejusdem generis with the articles that precede it in the entry.
• Residuary Entry of Schedule V of the UP VAT Act 2008: The court determined that since the product does not fall under any other specific entry, it should be classified under the residuary entry.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the interpretation of the relevant entries in the UP VAT Act 2008 and the definition of “manufacture.” The court emphasized that the activities carried out by the respondent, such as cutting and embroidering the fabric, altered its nature, thus disqualifying it from being classified as a simple textile. The court also relied on the principle of *ejusdem generis* to interpret the term “other textile made ups” in Entry 16 of Schedule II, which means that the term should be interpreted in light of the other terms in the same entry, i.e., bedsheets and pillow covers. The court also considered the common parlance meaning of the term ‘textile’ and whether the product sold by the respondent could be considered a ‘textile’ in common parlance.

Logical Reasoning:

The court considered alternative interpretations but rejected them based on the plain meaning of the entries and the definition of “manufacture”. The court emphasized that the work done by the respondent transformed the nature of the textile, making it a distinct article. The final decision was reached by applying the principle of *ejusdem generis* and the residuary entry.

The court’s reasoning was that the process of cutting and embroidering the fabric transforms it from a simple textile into a distinct article. The court stated, “It is evident from the work which is carried on by the respondent in its factory that the textile material which is purchased in bulk is cut to the size of a salwar kameez.” The court further noted, “The textile material which is cut may not assume the character of a final article of apparel which can be worn by the consumer because the final work of stitching is not carried out by the respondent.” The court also observed, “The important point to note is that as a result of the work which is carried out by the respondent in the factory, the material ceases to be textile within the meaning of Entry 21 and assumes the character of an article which has a distinct meaning and description.”

The court did not have a minority opinion, with both judges concurring on the final decision.

The implications for future cases are that the court has clarified that the process of cutting and embroidering fabric transforms it from a simple textile into a distinct article, which is not exempt from tax under the UP VAT Act 2008. The principle of *ejusdem generis* was applied in the context of tax classification, which means that similar terms in the same entry must be interpreted in light of each other.

No new doctrines or legal principles were introduced in this case. The court applied existing principles of statutory interpretation.

Key Takeaways

• The process of cutting and embroidering fabric transforms it from a simple textile into a distinct article for tax purposes.
• The term “other textile made ups” in Entry 16 of Schedule II of the UP VAT Act 2008, must be interpreted in conjunction with the other terms in the same entry, i.e., bedsheets and pillow covers.
• Unstitched embroidered ladies’ suit material will be classified under the residuary entry in Schedule V of the UP VAT Act 2008 and taxed at 12.5%.
• The principle of *ejusdem generis* is applicable in the context of tax classification.

The judgment clarifies the tax implications for businesses engaged in similar activities and provides guidance on how tax authorities should classify such goods. This decision may prompt businesses to re-evaluate their tax liabilities and compliance strategies.

Directions

The Supreme Court set aside the impugned judgment of the Allahabad High Court and the orders of the Commercial Tax Tribunal and the first appellate authority. The order of the Assessing Authority, which classified the product under the residuary entry in Schedule V, was restored.

Development of Law

The ratio decidendi of the case is that the process of cutting and embroidering fabric transforms it from a simple textile into a distinct article, which is not exempt from tax under the UP VAT Act 2008. The court also clarified that the term “other textile made ups” in Entry 16 of Schedule II of the UP VAT Act 2008, must be interpreted in conjunction with the other terms in the same entry, i.e., bedsheets and pillow covers. This case clarifies the position of law regarding the taxability of embroidered ladies’ suit material under the UP VAT Act 2008.

Conclusion

In conclusion, the Supreme Court held that an unstitched ladies’ suit material with embroidery does not qualify as a textile under Entry 21 of Schedule I of the UP VAT Act 2008. The court further held that it also does not qualify as a “textile made up” under Entry 16 of Schedule II of the UP VAT Act 2008. Instead, it should be classified under the residuary entry in Schedule V of the UP VAT Act 2008, which attracts a tax rate of 12.5%. The decision was based on the interpretation of the relevant entries in the UP VAT Act 2008, the definition of “manufacture,” and the principle of *ejusdem generis*.