1. The petitioner in this group of special civil application are all composite mills who manufacture yarn and thereafter from the yarn manufactured by them, they weave cloth, thus utilising the yarn for the purpose of weaving in the weaving department or the weaving section. Excise duty on yarn is by weight and the question whether excise duty should be taken on yarn as it emerges from the spinning department of these composite mills. Sizing is a process as found from the materials which sill hereafter be referred, which is applied to yarn when it is taken to the weaving department. Sizing is applied to yarn in order to strengthen the yarn so as to have proper strength at the time of weaving and it must be borne in mind that it is used only for the warp yarn for the weaving of fabric, weft being unsized. If a manufacturer manufactures only yarn and then sells the yarn manufactured by it, the manufacturer is not required to size the yarn and yarn, a commercial commodity known to the trade, comes into existence without any sizing being required. It is therefore obvious that since it is the manufacture of yarn which is the taxable event for the purpose of excise duty, yarn should be weighed as un-sized for excise duty because the very process of sizing would add to the weight of the yarn and if excise duty on yarn is to be levied, the sizing of the yarn having added weight to the yarn, the sizing which is not part of the manufacture of yarn is allowed to influence the levy of excise duty. On veneral principles therefore it is obvious that if excise duty is to be levied on yarn, it must be on the weight of un-sized yarn and not on the weight of the sized yarn. This is the conclusion which has been reached by the Government of India, Ministry of Finance, Department of Revenue, in its order dated July 26, 1980, being the order No. 720 : 722 of 1980 on the Central Excise Revision Application preferred by Messrs. Binny Limited and in that revision application the Government of India set aside the orders of the excise authorities. It was held that the Central excise duty under Item 18E of the First Schedule in the Central Excise and Salt Act, 1944 should be charged on the yarn in the form in which it is cleared from the spinning department of the composite mill for further use in the weaving of fabrics, namely, un-sized yarn, that is, on the weight of the un-sized yarn. The same conclusion was also reached by the office of the Collector of Central Excise (Appeals), Bombay in a group of appeals bearing Nos. 867/80 to 874/80 in the case of Messrs Maharana Mills Ltd., Porbandar and other appeal which were heard along with it and there also it was held that sizing process is carried out to add some strength to the yarn, to undergo stress and strain of weaving. This size so added is removed completely after weaving and bleaching processes, to make the fabric suitable for dyeing, printing etc. The manufacture of yarn is completed the moment it reaches the marketable stage, which stage is the spindle stage or cone stage. The Collector considered the question from the angle as to whether yarn known as such in commerce and trade, has come into existence prior to the beaming and sizing and thereafter he observed :-
'It is common day knowledge that yarn in the form of cones, pirns, bobbins, etc. is marketed frequently. It is in the case of composite mills that is to say mills which besides manufacturing yarn also undertake the manufacture of fabrics, that the yarn manufactured by them is subjected to the process of beaming and sizing, for using it as warp yarn. Even the extent and variety and type of sizing material is applied according to the type of fabrics to be obtained. In fact, sizing is the process of preparing yarn for manufacture of fabrics and not for the process of manufacturing of yarn itself.'
He held that no duty can be levied on the weight of sizing material contained in yarn falling under Tariff Item No. 18-III or 18E. He directed that duty if levied should be refunded because the duty has been levied not on the basis of the yarn at the spindle stage but on the weight of the sized yarn.
2. We are informed that a similar conclusion has been reached by the Delhi High Court in Civil Writ Petition No. 664 of 1979 decided by the Delhi High Court on October 16, 1980. Under these circumstances, it is obvious that the petitioners before us in this group of matters who are all composite mills, that is, mills having spinning a well as weaving departments, cannot be called upon to pay excise duty on yarn on the weight of the sized yarn since sizing is necessary for weaving purposes after the yarn is completely manufactured. The taxable event is the manufacture of yarn and not the use of yarn at any subsequent stage and therefore excise duty is only levied on the weight of the yarn manufactured by the particular manufacturer and the weight of the sized yarn cannot be taken into consideration for the purpose of levying excise duty on yarn. It is only the weight of the unsized yarn as it emerges at the spindle stage that has to be taken into consideration for the purpose of levying excise duty on yarn.
3. We, therefore allow the special civil application in each of the cases of this group and direct the respondents to refund the difference in excise duty between the weight of sized yarn and the weight of unsized yarn as explained above, if duty had already been collected. All demand notices issued without recognizing the difference between unsized yarn and sized yarn, so far as levy of excise is concerned, are also quashed and set aside. If money has already been collected on the bases of the weight of sized yarn instead of on the basis of the weight of unsized yarn, the same should be refund with interest at twelve per cent per annum from the date of collection till date of refund such refund to be made within three months from today. The respondents to report to this Court on or before 31st October, 1981 the fact that they have so refunded the money. The respondents are also restrained by orders and injunctions of this High Court from collecting excise duty on yarn on the basis of the weight of the sized yarn instead of on the weight of unsized yarn at the spindle stage. If any show cause notices have been issued against any of the petitioners in this group of matters for the purpose of collecting the difference between excise duty on the basis of the weight of sized yarn the same are also quashed and set aside. The respondents must pay the costs of the petitioners in each of this group of matters.