Supreme Court Rules on Classification of Polyester and Nylon Covered Yarn Under Central Excise Tariff

In a significant ruling, the Supreme Court of India addressed the issue of the correct classification of Polyester Covered Yarn and Nylon Covered Yarn under the Central Excise Tariff Act, 1985. The case, Sarla Performance Fibers Ltd. vs. Commissioner of Central Excise & Customs, Vapi, revolved around the classification of these products under Chapter 54 or Chapter 56 of the Central Excise Tariff.

Background of the Case

The dispute arose when the appellants, Sarla Performance Fibers Ltd., argued that their products should be classified under Chapter 56, CSH No. 5606.06, while the Revenue contended that the appropriate classification was under Chapter 54, CSH No. 5402.62/61. The Customs Excise & Service Tax Appellate Tribunal (CESTAT) ruled in favor of the Revenue, prompting the appellants to approach the Supreme Court.

The manufacturing process of these yarns involves air covering, where a Lycra/Spandex Spool is loaded on the feeder, and nylon or polyester is loaded on the creel. The fibers are then passed through an air jet, where the covering takes place before the final yarn is wound onto paper tubes.

Arguments of the Petitioner

The appellants presented the following arguments:

Before July 2001, they classified the goods under Chapter 54 and paid the applicable duty. However, upon noticing that similar imported goods were classified under Chapter 56, they reclassified their products accordingly.
The Explanatory Notes to the Harmonized System of Nomenclature (HSN) support their classification under Heading 56.06.
The product qualifies as gimped yarn, a type of covered yarn, which is specifically included in Chapter 56.
HSN Explanatory Notes for Chapter 56 describe gimped yarn as composed of a core, usually of one or more textile yarns, around which other yarns are wound spirally, forming a distinct structure.

Arguments of the Respondent

The Commissioner of Central Excise & Customs, Vapi, argued:

That the manufacturing process of the covered yarns does not involve gimping, as the polyester or nylon is not wrapped spirally around the Lycra/Spandex core.
That the predominant material in the final product is polyester or nylon (91-93%), and only a small portion (9-10%) consists of Lycra/Spandex, making it unsuitable for classification under Chapter 56.
That the product is more appropriately classified under CSH No. 5402.62/61, as per the definitions and chapter notes of Chapter 54.

Supreme Court’s Observations

The Supreme Court examined the following key factors:

Definition of Gimped Yarn:

“For a product to be classified as gimped yarn, it must have a core yarn around which other yarns are wound spirally. The product in question does not meet this criterion.”

Predominant Material Principle:

“As per the principles of classification under the Central Excise Tariff, the heading that provides the most specific description must be preferred over a general description.”

Air Mingling vs. Gimping:

“The process of air mingling used by the appellants is not the same as gimping. In gimped yarn, the outer covering must completely enclose the core yarn, which is absent in the appellants’ products.”

Final Verdict

The Supreme Court upheld the decision of the CESTAT and ruled that:

“The appellants’ products do not meet the characteristics of gimped yarn as specified in Chapter 56. The appropriate classification remains under Chapter 54, CSH No. 5402.62/61.”

The appeals were dismissed, and the classification under Chapter 54 was confirmed.

Key Takeaways from the Judgment

Classification under Central Excise Tariff must follow the specific description principle. General descriptions cannot override more precise classifications.
HSN Explanatory Notes play a vital role in determining the correct classification.
Air mingled yarn is distinct from gimped yarn. The classification of a product depends on its predominant material and manufacturing process.
Reclassification based on import duty assessments is not sufficient justification. Domestic classifications must align with tariff schedules and established legal precedents.

Implications of the Judgment

This ruling provides clarity on the classification of covered yarns under the Central Excise Tariff.
It prevents manufacturers from altering classifications based on import assessments without proper justification.
It strengthens the application of the predominant material principle in excise classifications.

Conclusion

The Supreme Court’s ruling in Sarla Performance Fibers Ltd. vs. Commissioner of Central Excise & Customs, Vapi reaffirms the principles of specific classification, predominant material rule, and accurate tariff interpretation. By upholding the classification under Chapter 54, the Court has set a precedent that ensures consistency and legal clarity in the classification of textile products under the Central Excise Tariff.

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Download Judgment: Sarla Performance Fi vs Commissioner of Cent Supreme Court of India Judgment Dated 27-04-2017.pdf

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