Processed cotton remains unmanufactured cotton when its essential identity is unchanged, applying the commercial identity test.

Absorbent cotton wool I.P. was considered against Entry 2 of Schedule B to the Bombay Sales Tax Act, 1959, which covered cotton in its unmanufactured state. The governing test was whether processing transformed the material into a new and distinct commodity with a different commercial identity; mere cleaning, ginning, drying, bleaching or sterilising did not amount to manufacture if the essential character of cotton remained unchanged. On that construction, processed absorbent cotton wool retained its identity as cotton and continued to fall within the entry. Rule 3(xviii) of the Bombay Sales Tax Rules, 1959 was read consistently with that approach.

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Issues: Whether absorbent cotton wool I.P. was cotton in its unmanufactured state and fell within entry 2 of Schedule B to the Bombay Sales Tax Act, 1959, or whether the processing applied to raw cotton amounted to manufacture so as to take it outside that entry.

Analysis: Entry 2 of Schedule B covered all kinds of cotton in its unmanufactured state, whether ginned or unginned, baled, pressed or otherwise, excluding only cotton waste. The governing test was whether the process brought about a transformation resulting in a new and distinct commodity having a different commercial identity. Mere cleaning, ginning, drying, bleaching, sterilising, or other processing undertaken to make cotton fit for a particular use did not amount to manufacture if the commodity retained its essential and substantial identity. Applying that principle, absorbent cotton wool remained cotton in common parlance and did not lose its original character merely because it was processed to make it suitable for medicinal or other uses. Rule 3(xviii) of the Bombay Sales Tax Rules, 1959 was consistent with this construction because it excluded from manufacture any process that did not take the goods out of the description in the relevant Schedule B entry.

Conclusion: Absorbent cotton wool I.P. was covered by entry 2 of Schedule B as cotton in its unmanufactured state, and the reference was answered in favour of the assessee and against the Revenue.

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