JUDGMENT
1. These tax revision cases have been filed against the orders of the Sales Tax Appellate Tribunal (Additional Bench), Madras in T.A. Nos. 740 of 1988, 741 of 1988 and 742 of 1988 dated March 22, 1989. These tax revision cases relate to tax, surcharge and additional surcharge and additional sales tax for the assessment year 1985-86. The facts leading to the present tax revision cases are as follows :
The respondent claimed exemption on a turnover of Rs. 21,14,641.98 as relating to second sales of cotton sewing thread. The assessing authority on verification found that the dealer purchased only cotton yarn from local registered dealers, converted them into sewing thread and sold them locally as sewing thread. The sale bills showed the commodity sold as cotton sewing thread and not cotton yarn. As the goods purchased locally and sold locally are commercially different goods, the assessing authority proposed to levy 3 per cent single point tax on a turnover of Rs. 21,14,641.98 by disallowing the claim of exemption. In reply to the pre-assessment notice, the dealer contended that locally purchased tax suffered corded yarn from textile mills have been only dipped and dyed before reselling, that no twisting or doubling of the cotton yarn was done, that mere colouring and dyeing will not change the character of the cotton yarn and therefore the proposal to levy tax may be dropped. While overruling the objections of the dealer, the assessing authority observed that the dealer sold sewing thread meant for sewing purposes, that the goods were not sold as cotton yarn meant for weaving purposes, that the sewing thread sold is commercially a different product from cotton yarn as held in [1981] 48 STC 460 (Ker) (K.C. Pappu & Sons v. State of Kerala) that no person intending to purchase cotton yarn would be satisfied with sewing thread instead, that cotton yarn cannot be used in the place of sewing thread or sewing thread in the place of cotton yarn, that the dealer sold the cotton thread under the brand name Balamurugan, i.e., B.K. and therefore the objections are untenable. In the first appeal, the Appellate Assistant Commissioner observed that the respondent purchased cotton yarn from Tuticorin Spinning Mills Ltd., Tuticorin and sold Balamurugan brand (B.K.) sewing thread registered as B.K. brand product under the Trade and Merchandise Marks Act, 1958 in Trade Mark No. 164305 dated May 26, 1954 in respect of threads for sewing. On perusing the samples during hearing the first appellate authority observed that the commodity sold by the dealer is nothing but sewing threads in different shades and in different dimensions and that the commodity is used only for the purpose of sewing and stitching. Further, by Act 7 of 1977 cotton sewing thread was brought to single point levy vide entry 141 of the First Schedule to the Tamil Nadu General Sales Tax Act, 1959 (herein referred to as “the Act”). Referring to the Supreme Court’s decision in State of Tamil Nadu v. Pyare Lal Malhotra reported in [1976] 37 STC 319 he observed that “the object of sales tax law is to tax sales of goods of each variety and not the sale of the substance out of which they are made and the mere fact that the substance or raw material out of which it is made has also been taxed in some other form, when it was sold as a separate commercial commodity would make no difference at all for purposes of law of sales tax”. The first appellate authority further stated that the respondent purchased the substance which is cotton yarn and converted the same into sewing thread in the factory and sold the same under the registered trade mark name. Thus, the product sold is commercially different from cotton yarn and that in commercial parlance cotton yarn is not accepted as sewing thread and that no one intending to purchase cotton yarn would be satisfied with sewing thread. Accordingly, the order of the assessing authority, by following the ratio of the decision in Pyare Lal Malhotra’s case [1976] 37 STC 319 (SC) was upheld. In the second appeal, the Appellate Tribunal found that the respondent bought grey combed signed cotton yarn and dipped and dyed it and then rolled the coloured yarn in small cones or spools and sold the goods as “Balamurugan brand”. From this it was held to be not a manufacture of new product, but sale of dyed yarn rolled in small spools. The Appellate Tribunal referred to several decisions and particularly the decision of the Madras High Court in Madura Mills Company Limited v. Government of Madras [1970] 25 STC 407 and held that the commodity sold by the respondent has not lost its original identity and that it falls under entry 3 of the Second Schedule to the Act as cotton yarn only and therefore the sales of the respondent are eligible for exemption as second sales of cotton yarn. Hence, the present revisions preferred by the Revenue.
2. Mr. R. Mahadevan, the learned Government Advocate, contended that State Legislature has specifically brought cotton sewing thread under the First Schedule to the Act with effect from July 25, 1977 and that the Appellate Tribunal has not followed [1981] 48 STC 453 (Orissa) (Srinivasa Distributing Agencies v. State of Orissa) wherein it has been held that the identity of the material, that is, cotton yarn is lost when the cotton yarn is converted into thread. He urged that the decision in Pyare Lal Malhotra’s case [1976] 37 STC 319 (SC) relied on by the Appellate Assistant Commissioner is also relevant. He also referred to the decision of the Bombay High Court in Commissioner of Sales Tax, Maharashtra State, Bombay v. Arvind Trading Company [1995] 98 STC 288 which supports the case of the Revenue.
3. Mr. V.V. Sivakumar, the learned counsel for the respondent, contended that no manufacturing activity took place in the dyeing and colouring of the cotton yarn as held in Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam v. O. Sadasivan [1978] 42 STC 201 (Ker), that the Central Excise clarification in chapter 52.04 also speaks of cotton yarn including sewing thread and that cotton yarn and sewing thread are held to be same commodity in several decisions, namely, State of Tamil Nadu v. R.V. Krishniah Chetty and Sons [1990] 78 STC 422 (Mad.) and [1994] 92 STC 262 (Mad.) and State of Orissa v. Cuttack Monihary Store [1982] 51 STC 411 (Orissa). The ratio of the decision in Madura Mills Company Limited v. Government of Madras [1970] 25 STC 407 (Mad.) relied on by the Appellate Tribunal is very relevant. In Sree Arunachalaeswara Mills v. State of Tamil Nadu [1991] 81 STC 137 (Mad.), a separate entry for blended yarn introduced by the State Legislature was held to be beyond the powers and further held to be subject to the entry in the Second Schedule to the Act pertaining to “cotton yarn”. Thus, in the present case also, notwithstanding a separate item 141 in the First Schedule to the Act, the entry “cotton yarn” would cover “cotton sewing thread” also, inasmuch as both are of the same commodity only. Thus, the order of the Appellate Tribunal is in order.
4. We have considered the rival contentions and perused the records. At the outset we shall consider the various decisions referred to by the learned counsel for the respondent for the proposition that cotton yarn and cotton sewing thread are one and the same commodity. In Madura Mills Company Limited v. Government of Madras reported in [1970] 25 STC 407 (Mad.), the issue considered was whether “cord” dealt in by the assessee is cotton yarn in the accepted commercial sense. It was found that the “cord” though manufactured on looms was admittedly not a textile fabric or cloth. Though twisted, the material did not give the impression that it is some unknown commodity, not being cotton yarn. The thin thread running vertically into the sheet was found to be for the purpose of holding the rest of the thread. In such circumstances, it was held that the identity of the goods yarn was not lost and accordingly held that “cord” is cotton yarn. In [1978] 42 STC 201 (Ker) in the case of Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam v. 0. Sadasivan, exemption in respect of dyed yarn in the context of the entry “cotton yarn other than hand spun yarn, but not including cotton yarn waste” was considered. It was held that despite the process of dyeing and colouring, “cotton yarn” still remained cotton yarn, that is the commodity mentioned in the entry, and does not undergo any process of transformation so as to make sales tax exigible separately on the said commodity after the process of dyeing and colouring. In State of Orissa v. Voona Suru Patra & Sons [1982] 51 STC 410 the Orissa High Court held that “sewing thread is taxable at the same rate as prescribed for the cotton yarn”. The decisions in [19901 78 STC 422 (Mad.) and [1994] 92 STC 262 (Mad.) refer to an identical case, namely “State of Tamil Nadu v. R. V. Krishniah Chetty and Sons“. Apart from Madura Mills Company Limited v. Government of Madras [1970] 25 STC 407 (Mad.), the decision in M. Muthusavari Pillai & Sons v. State of Tamil Nadu [1977] 39 STC 359 (Mad.) wherein it was held that a bunch of spun thread could also come within the definition of “cotton yarn” if it can be used for the manufacture of any textile was also referred to. Similarly the decision in State of Tamil Nadu v. M. Vaithilingam [1980] 46 STC 297 (Mad.) wherein it was held that “cotton thread” would continue to be cotton yarn was also quoted. After reviewing various decisions the Madras High Court held as follows : “Thus, having regard to the ratio of the decisions referred to above of our High Court, which are very much binding on us, we have no difficulty in coming to the conclusion that sewing thread does not lose its character as cotton yarn and continues to retain its identity and character as cotton yarn notwithstanding the fact that they are sold for being used as sewing thread. In our view sewing thread is no different from cotton yarn and they are one and the same commodity and consequently we agree with the conclusions of the Tribunal, reject the contention of the State and order that the tax revision also be dismissed.”
5. In [1991] 81 STC 137, in the case of Sree Arunachalaeswara Mills v. State of Tamil Nadu the Madras High Court considered the case of assessees who blended staple fibre varying from 10 to 16 per cent with cotton yarn and claimed that the sale of goods is “cotton yarn” only notwithstanding the entry 18-A of the First Schedule to the Act which reads “blended cotton yarn with non-cellulosic, fibre content not exceeding 16 2/3 per cent by weight to that of cotton yarn (i.e., cotton viscose or cotton/polynosic) and thereby declared it as non-declared goods. In this case, the Madras High Court followed the ratio of the judgment in T.C. No. 47 of 1974 [Deputy Commissioner (CT) v. Kandasami Spinning Mills] wherein it was held that “cotton yarn” manufactured by blending staple fibre up to 40 per cent will still be “cotton yarn” for the purpose of Section 14(ii-b) of the Central Sales Tax Act, 1956 and accordingly held that the “cotton yarn” manufactured by the assessees notwithstanding the blending of staple fibre up to 16 2/3 per cent (with which quantity alone we are concerned in this case) will still be “cotton yarn” within the meaning of Section 14(ii-b) of the Central Sales Tax Act, 1956 and, therefore, will be one of the items of goods declared by the Parliament as goods of special importance for the purpose of Article 286(3) of the Constitution of India, and therefore, all restrictions and conditions in regard to levy of tax on sale or purchase of such declared goods, namely, cotton yarn, will be governed by Section 15 of the Central Sales Tax Act, 1956.
6. In this connection, it is pertinent to note that in none of the decisions considered above, entry 141 of the First Schedule to the Act namely, “cotton sewing thread” introduced from July 25,1977 vis-a-vis the entry 3 “cotton yarn” in the Second Schedule to the Act was discussed. In Sree Arunachalaeswara Mills v. State of Tamil Nadu [1991] 81 STC 137 (Mad.) it is stated that “cotton yarn” is not defined either in the Central Act or in the State Act and “yarn” is defined under the Cotton Textiles (Control) Order, 1948 to mean any type of yarn manufactured either wholly from cotton or partly from any other material. Further the manufacturer was under obligation to blend staple fibre while manufacturing cotton yarn and in no case such staple fibre shall be less than 10 per cent of the total fibre consumption in a quarter. In that context the High Court in T.C. No. 47 of 1974 [Deputy Commissioner (CT) v. Kandasami Spinning Mills] affirmed the following views of the Tribunal :
“……..It must also be remembered that ‘blended yarn’ manufactured and sold by the appellants is known in the commercial circles as cotton yarn and that the prices charged are the same for yarn manufactured wholly out of the cotton and yarn manufactured out of an admixture of cotton and staple fibre. This circumstance would also point out that the goods in question have to be treated as ‘cotton yarn’. There is also a certificate issued by the Superintendent of Central Excise dated November 30, 1971 to the effect that in the assessment year in question the appellants had been licensed only to manufacture ‘cotton yarn’ and the ‘cotton yarn’ manufactured by the ‘blended yarn’ (cotton mixed with staple fibre up to 40 per cent) as well as other varieties of ‘cotton yarn’ manufactured by them have been cleared as ‘cotton only’ as per the Central Excise Rules. Under these circumstances, we hold that the ‘cotton yarn’ sold by the appellants must be held to be declared goods coming under item (ii-b) of Section 14 and liable to be assessed at 2 per cent under the Tamil Nadu General Sales Tax Act read with Sections 14 and 15 of the Central Sales Tax Act.”
The special leave petition filed before the Supreme Court by the Revenue was not dismissed and that the matter was not pursued and therefore the order of the court had become final. Thus, based on circumstances as narrated above, the view of the Tribunal that blended yarn sold by the assessee would be covered by Section 14(ii-b) of the Central Sales Tax Act, 1956 was approved by the High Court in T.C. No. 47 of 1974 [Deputy Commissioner (CT) v. Kandasami Spinning Mills] and in the decision reported in Sree Arunachalaeswara Mills v. State of Tamil Nadu [1991] 81 STC 137 (Mad.). In this connection, it is pertinent to note that “cotton sewing thread” has not been classified as declared goods by the Central Act and in such circumstances “cotton sewing thread” vide entry 141 of the First Schedule to the Act classified as non-declared goods by the State Legislature is very much relevant. It is an admitted fact that “cotton yarn” purchased in the present case has been dyed and sold as “cotton sewing thread” under a registered brand name. It is contended that “dyeing” the yarn does hot change the character or identity of the commodity. But the fact remains that the dyed yarn is rolled and sold in spools. Under a registered brand name as “cotton sewing thread” and it is bought and used in commercial circles as “sewing thread” only. In [1995] 99 STC 87, the Supreme Court in Vasantham Foundry v. Union of India considered the issue pertaining to cast iron casting. It was held that cast iron casting in its basic or rough form is “cast iron” as contemplated in item (iv)(i) of Section 14 of the Central Sales Tax Act, 1956 and the corresponding item (i) of entry 4 of the Second Schedule to the Tamil Nadu General Sales Tax Act, 1959. But, if thereafter any machining or polishing or any other process is done to the rough castings to produce things like pipes, man-hole covers or bends, they cannot be registered as “cast iron castings” in its primary or rough form ; they are products made out of cast iron casting. Such product cannot be treated as declared goods Under Section 14(iv) of the Central Sales Tax Act, 1956. The following observations of the West Bengal Taxation Tribunal in regard to dyeing works contract in [1994] 92 STC 503 in the case of Bijoy Processing Industries v. Commercial Tax Officer, Central Section are relevant :
“……It does not necessarily follow that accretion has to be in the form of material ; it may be in the form of colour, reaction or strength…..In the case of dyeing, the chemicals applied to the fabric for dyeing are not exhausted but are retained by the fabric in the form of a shade of colour. There is accretion of coloured ions into the fabric.”
Thus, dyeing of cotton yarn in the present case also involves a process resulting in accretion and added value, apart from changing the character as sewing thread for sewing or stitching purposes.
7. In the light of the above position, it is relevant to consider the decision of the Bombay High Court in the case of Commissioner of Sales Tax, Maharashtra State, Bombay v. Arvind Trading Company reported in [1995] 98 STC 288. In that case, the High Court considered the case of purchase of “mercerized yarn” sold after process of dyeing under a brand name as “cotton sewing thread” in the context of “cotton sewing thread” specified as a separate item in entry 23 of Schedule C of the Bombay Sales Tax Act, 1959. The following passage in the decision is relevant :
“The question that arises for consideration, therefore is whether the process adopted by the assessee to the cotton yarn purchased by it to convert into ‘cotton sewing thread’ is a process which takes it out of the description of ‘cotton yarn’ in entry 3. In other words, whether ‘sewing cotton thread’ does not meet the description of ‘cotton yarn’ and is regarded as a commercial commodity different and distinct from ‘cotton yarn’. The answer to this question has been provided by the Legislature itself which has classified ‘cotton thread’ as an item, different and distinct, from cotton yarn by specifying the same in entry 23 of Part I of Schedule C. In Schedule C, goods (other than declared goods) have been specified. Thus, the Legislature while classifying ‘cotton yarn’ as declared goods has made it clear that it does not include ‘cotton thread’ by classifying ‘cotton thread’ as goods other than declared goods and specifying the same as a separate item in entry 23 of Schedule C. In view of the above, it is difficult to accept the contention of the assessee that ‘cotton sewing thread’ is ‘cotton yarn’, for the purpose of Section 7 of the Act.”
Referring to “thread” as one of the products of “yarn” and not yarn itself, the Bombay High Court further observed as follows :
“The use to which yarn and thread can be put are totally different. Yarn cannot be used for the purpose of sewing nor can sewing thread be used as yarn for the purpose of weaving or knitting. Sewing thread is used particularly for the purposes of sewing or stitching or securing together two objects. It is thus clear that ‘sewing thread’ and ‘yarn’ are distinct and different items having separate uses. Anybody who wants sewing thread would never purchase yarn. In fact, cotton yarn and sewing thread are regarded as two different and distinct commercial commodities both by the person who deal therein and those who use the same. It is, therefore, difficult to hold ‘cotton sewing thread’ to be ‘cotton yarn’. In fact, as stated above, sewing thread is one of the products of yarn and not ‘yarn’.
To consider the question whether cotton sewing thread retained its characteristic of its being cotton yarn it is relevant to refer to the following observations of the Allahabad High Court in Mohta Trading Co. v. Commissioner of Sales Tax, U.P., Lucknow [1976] 38 STC 11 approved and quoted in Commissioner of Sales Tax, Maharashtra State, Bombay v. Arvind Trading Company [1995] 98 STC 288 (Bom) :
“The cotton sewing thread, although it comes out of the basic raw material, viz., cotton yarn, but is a distinct product and of a particular thickness and strength. Although the cotton sewing thread is made out of cotton yarn, it cannot be re-converted into cotton yarn if not used as a cotton sewing thread. Further although cotton yarn is twisted to produce cotton sewing thread but there is a distinct process to do so and the end-result is entirely a distinct and separate product. It has no bearing or relationship to cotton yarn as is known in common parlance.”
The Gujarat High Court in Shreeji Traders v. State of Gujarat [1992] 86 STC 27 in the absence of a specific entry dealing with blended yarn, adopted the predominant component test and held that blended yarn having 80-85 per cent of cotton yarn is cotton yarn.
8. However, in the present case before us, the Legislature has specifically classified “cotton sewing thread” as a separate item in entry 141 of the First Schedule to the Act with effect from July 25, 1977. Following the ratio of the decision in Vasantham Foundry v. Union of India [1995] 99 STC 87 (SC) we have no hesitation in holding that the processed dyed cotton yarn, rolled in spools and marketed under a registered brand name as “cotton sewing thread” is a non-declared goods different from “cotton yarn”, a declared goods, under entry 8 of the Second Schedule to the Act. In such circumstances the levy of single point tax under item 141 of the First Schedule to the Act by negativing the claim of second sales of cotton yarn under item 3 of the Second Schedule to the Act by the assessing authority is in order. Thus, we find that the conclusions reached by us having regard to legislative entry and the Supreme Court decision as indicated supra are in consonance with the ratio of the judgment of the Bombay High Court reported in Commissioner of Sales Tax, Maharashtra State, Bombay v. Arvind Trading Company [1995] 98 STC 288, though not with that of the Madras High Court reported in State of Tamil Nadu v. R.V. Krishniah Chetty and Sons [1994] 92 STC 262. Accordingly we hold that the orders of the Appellate Tribunal are erroneous in law and therefore we set aside the same and restore the orders of the Appellate Assistant Commissioner.
In fine, the tax revision cases are allowed.
And this Tribunal doth further order that this order on being produced be punctually observed and carried into execution by all concerned.
Issued under my hand and the seal of this Tribunal on the 20th day of December, 1999.