Supreme Court Classifies Polyester and Nylon Covered Yarn under Chapter 54: Sarla Performance Fibers Ltd. vs. Commissioner of Central Excise & Customs (27 April 2017)

Case Background

Sarla Performance Fibers Ltd. manufactured Polyester Covered Yarn and Nylon Covered Yarn. They used two processes: conventional covering and air covering. The dispute specifically concerns the goods manufactured using the air covering process. In this process, Lycra/Spandex is loaded on a feeder, and nylon or polyester is loaded on a creel. The Lycra/Spandex is drafted, and then both materials are passed through an air jet where covering takes place. Finally, the covered yarn is wound on a paper tube.

Initially, the company classified these yarns under Chapter 54. However, after noting that the Customs Department was classifying similar imported yarns under Chapter 56, the company began classifying their products under Chapter 56 from July 2001. The Excise Department objected to this change, arguing that the goods should be classified under Chapter 54.

The department issued a show cause notice on 04.09.2002, proposing a modification in the classification and demanding differential duty for the period from March 2001 to February 2002. The notice also proposed penalties and interest. The Adjudicating Authority upheld the department’s proposal. The Commissioner (Appeals) and the Customs Excise & Service Tax Appellate Tribunal (CESTAT) also dismissed the company’s appeals.

Timeline

Legal Framework

The core of the dispute lies in the interpretation of Chapter 54 and Chapter 56 of the Central Excise Tariff Act, 1985. Chapter 54 covers “Man-Made Filaments,” specifically, Heading 54.02 pertains to “Synthetic filament yarn, other than sewing thread.” Sub-headings 5402.61 and 5402.62 classify yarns made of nylon or other polyamides and polyesters, respectively.

Chapter Note 3 of Chapter 54 specifies that processes like “air mingling” amount to manufacture for products under headings 54.01 to 54.05.
Chapter 56 covers “Wadding, Felt and Non-Wovens; Special Yarns; Twine, Cordage, Ropes and Cables and Articles thereof.” Heading 56.06 includes “Gimped yarn, and strip and the like of Heading No. 54.04 or 54.05, gimped; Chenille yarn; Loop wale yarn.”

The relevant entries are:

• Chapter 54: Man-Made Filaments
• 54.02: Synthetic filament yarn, other than sewing thread
• 5402.61: Of nylon or other polyamides
• 5402.62: Of polyesters
• Chapter 56: Wadding, Felt and Non-Wovens; Special Yarns; Twine, Cordage, Ropes and Cables and Articles thereof
• 56.06: Gimped yarn, and strip 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

Arguments

The appellants argued that while Chapter 54 includes “air mingling,” this applies only when the same yarn is used. They contended that using two different yarns in air mingling creates “gimped yarn,” which falls under Chapter 56. They referred to the Harmonized System of Nomenclature (HSN) explanatory notes for Heading 56.06, which describe gimped yarn as having a core around which other yarns are spirally wound. They also cited the definition of “gimp yarn” from Fairchild’s Dictionary of Textiles, which describes it as a fancy yarn with strands twisted around a central core.

The Revenue argued that the products were correctly classified under Chapter 54. They emphasized that the process used by the appellants involves air mingling, which is explicitly mentioned in Chapter Note 3 of Chapter 54. They also highlighted that in Polyester Covered Yarn, polyester is the predominant material (91-93%), and in Nylon Covered Yarn, nylon is the predominant material (75-97.5%). The Revenue relied on the principle of predominance of textile material used for classification. They also referred to test reports from the Man Made Textile Research Association (MANTRA) to support their claim.

Issues Framed by the Supreme Court

The Supreme Court had to determine the following issue:

1. Whether the Polyester Covered Yarn and Nylon Covered Yarn, manufactured by the air covering process, should be classified under Chapter 54 or Chapter 56 of the Central Excise Tariff Act, 1985?

Treatment of the Issue by the Court

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

Authorities

The court considered the following authorities:

Judgment

The Supreme Court upheld the decision of the CESTAT. The court agreed with the Revenue that the products manufactured by the assessees were air mingled yarns and not gimped yarns. The court noted that the process used by the assessees involves air mingling, which is explicitly mentioned in Chapter Note 3 of Chapter 54.

The court also emphasized that the core of gimped yarn does not undergo twisting with the cover threads, which was not the case in the product manufactured by the assessees. The court also relied on the principle of predominance of textile material used for classification.

The court viewed the authorities as follows:

• Chapter 54, Central Excise Tariff Act, 1985*: The court used this to classify the product.
• Chapter 56, Central Excise Tariff Act, 1985*: The court held that the product does not fall under this chapter.
• Harmonized System of Nomenclature (HSN) Explanatory Notes for Heading 56.06*: The court used this to define gimped yarn and found that the product did not meet the definition.
• Fairchild’s Dictionary of Textiles, 7th Edition*: The court used this to define “gimp yarn” and found that the product did not meet the definition.
• Man Made Textile Research Association (MANTRA) Test Reports*: The court used this to support the finding that the product was not gimped yarn.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors: the manufacturing process, the definition of gimped yarn, and the principle of predominance. The court emphasized that the process used by the assessees was air mingling, which is specifically covered under Chapter 54 of the Central Excise Tariff Act, 1985. The court also noted that the product did not have a core around which other yarns were wound spirally, which is the characteristic of gimped yarn as per HSN and dictionary definitions. Furthermore, the court relied on the principle of predominance, noting that polyester or nylon was the predominant material in the yarn.

The court’s reasoning can be summarized as follows:

The court considered the argument that air mingling should be interpreted differently when different yarns are used. However, it rejected this interpretation, emphasizing the explicit inclusion of air mingling in Chapter Note 3 of Chapter 54. The court also considered the HSN explanatory notes and dictionary definitions of gimped yarn, finding that the product in question did not meet these criteria.

The court quoted the following from the show cause notice:

• “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.”
• “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.”

Key Takeaways

• The Supreme Court clarified that air-mingled yarns, where the predominant material is polyester or nylon, are classified under Chapter 54 of the Central Excise Tariff Act, 1985.
• The court emphasized that the definition of gimped yarn requires a core around which other yarns are spirally wound, a characteristic not found in the products manufactured by the assessees.
• The principle of predominance of textile material used is a key factor in classifying such yarns.
• This judgment provides clarity on the classification of covered yarns manufactured using the air covering process.
• The court upheld the findings of the lower authorities.

Directions

No specific directions were given by the Supreme Court in this case.

Development of Law

The ratio decidendi of this case is that air-mingled yarns, where the predominant material is polyester or nylon, are classified under Chapter 54 of the Central Excise Tariff Act, 1985. This case clarifies the scope of air mingling as a manufacturing process under Chapter 54 and reinforces the principle of predominance in classifying textile materials. There is no change in the previous position of law, but the judgment clarifies the interpretation of existing provisions.

Conclusion

The Supreme Court dismissed the appeals, affirming that Polyester Covered Yarn and Nylon Covered Yarn, manufactured through air covering, are correctly classified under Chapter 54 of the Central Excise Tariff Act, 1985. The court emphasized the importance of the manufacturing process, the definition of gimped yarn, and the principle of predominance in classifying textile materials. This judgment provides clarity on the classification of such yarns, reinforcing the interpretation of existing legal provisions.