Dyed yarn and customer yarn dyeing were treated as non-taxable transactions where dyeing did not create a taxable sale.

Dyed yarn remained within the exempt description of yarn, because dyeing did not alter its essential character or take it outside the Schedule II tax-free entry, so the sale was not taxable. A separate dyeing arrangement for yarn supplied by customers was treated as a contract of work and labour: the substance was dyeing the customers' yarn, with materials used only incidentally and no sale or transfer of property in those materials. That transaction was therefore not a sale of goods and did not attract sales tax. The assessment was quashed for both categories of transactions.

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Issues: (i) Whether sales tax was payable on the sale of yarn purchased, dyed and then sold as dyed yarn; (ii) Whether sales tax was payable on the dyeing charges for yarn supplied by customers and returned after dyeing.

Issue (i): Whether sales tax was payable on the sale of yarn purchased, dyed and then sold as dyed yarn

Analysis: Yarn included dyed yarn, and no exception excluded dyed yarn from the tax-free entry in Schedule II. Dyeing did not change the essential character of the commodity so as to take it outside the exempt description.

Conclusion: The sale of dyed yarn was not taxable, and this issue was decided in favour of the assessee.

Issue (ii): Whether sales tax was payable on the dyeing charges for yarn supplied by customers and returned after dyeing

Analysis: The transaction was one for work and labour in which the substance of the contract was dyeing the customers' yarn, not selling dye-stuffs or chemicals. The materials used were only ancillary to the service rendered, and on the admitted facts there was no sale or supply of those materials to the customers. The transaction therefore did not amount to a sale of goods or involve a taxable transfer of property in goods.

Conclusion: The dyeing transactions did not amount to sales and were not taxable, and this issue was decided in favour of the assessee.

Final Conclusion: The liability to sales tax on both categories of transactions was set aside, and the petitioners succeeded to the extent of quashing the assessment order in respect of those transactions.

Ratio Decidendi: A contract is not a sale of goods for sales tax purposes where the substance of the transaction is work and labour and any materials used are merely ancillary, so that there is no taxable transfer of property in goods.

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