Case: Sarla Performance Fibers Ltd Vs. C.C.E.C.,Vapi

For the sake of convenience, we shall take note of the facts from Civil Appeal Nos.of 2009.2. 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 machineModel 1500/2000 and also separately by applying the process of air covering on machineThe dispute pertains to the goods manufactured with the application of air covering process. This process of air covering is asLycra/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.3. 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, 2001.4. 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.

Court's reasoning:
13. 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 isused 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.In nutshell, having regard to the use of Nylon and Lycra in the ratio of 90:10, the classification was proposed on the principle ofof textile material used. Thewas 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.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