Direct Tax (Article) - Udyog Software

1 Direct Tax ( article ) TCS on Sale of Scrap The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

2 Introduction Considerable difficulty has been felt in the past in assessing income of persons who take contracts for sale of liquor, forest produce etc. It has been the Department s experience that for taking such contracts, firms or associations of persons are specifically constituted and very often no trace is left of them or their members after the contract has been executed. Persons have also been found to have taken contracts in benami names by floating undertakings or associations for short periods.

3 Since tax is payable in the assessment years on the incomes of the previous years, the time by which the incomes from such sources become assessable, such persons become untraceable. Moreover, at time of assessment in these cases, either the accounts are not available or they are mostly incorrect or incomplete. Thus, even if assessments could be made on ex parte basis, it becomes almost impossible to collect the tax found due, either because it becomes difficult to establish the identity of the persons and trace them or because of the fact the persons in whose names contracts were taken are men of no means.

4 With a view to combating large scale tax evasion by persons deriving incomes from such business, the Finance Act, 1988 has inserted a new section 44AC to provide for determination of income in such cases. Further, with a view to facilitate collection of taxes from such assessees, the Finance Act, 1988 has inserted a new section 206C to provide for collection of such tax at source from the persons carrying on particular trades namely alcoholic liquor, tendu leaves and timber. The Finance Act, 2003 has brought an amendment in section 206C and extended the scope of TCS provisions to the sale of scrap.

5 Section 206C thus seeks to prevent evasion of taxes by ensuring that the seller of these goods collects the tax from the buyers at a particular rate at the time of sale of goods to them or on receipt of payment from them whichever is earlier so that these buyers remain in the net of the tax department. PROVISIONS Section 206C fastens the liability on seller of scrap for collection of tax at source @ 1% from buyer at the time of debiting the amount payable by the buyer to the account of buyer or at the time of receipt of such amount from the said buyer whichever is earlier.

6 Thus, this section is triggered only when there is a seller, there is a buyer and there is a sale of scrap. All these three things are explained in the section itself. Explanation (aa) to sec. 206C explained the term buyer to mean a person who obtains goods or the right to receive goods in any sale by way of auction, tender or any other mode but does not include:- Public Sector Companies Central Government, State Government An embassy, a high commission, legation, commission, consulate and the trade representation of a foreign state A Club A buyer who buys the goods in the retail sale for his personal consumption.

7 Thus, when the sale of scrap is to the above persons, sec. 206C is not attracted. Further, no TCS is to be made in case of a resident buyer who furnishes a declaration in duplicate in Form No. 27C that the goods are to be utilised by him for the purpose of manufacturing, processing or production of article or thing or for the purpose of generation of power and not for trading purposes. Thus, only when the buyer purchases the scrap for trading purpose, tax is required to be collected by the seller on scrap sold to the buyer.

8 Explanation (c) to sec. 206C defined seller as any one of the following:- Central Government State Government Local Authority Statutory Corporation or Authority Company Partnership Firm Co-operative Society Individual/HUF whose total sales or gross receipts exceed the prescribed monetary limits as specified under section 44AB during the previous year Thus, any seller of scrap as stated above is required to collect TCS from buyer who is purchasing the same as a trader or if he is a manufacturer, declaration in Form is not furnished by him.

9 Explanation (b) to sec. 206C defines scrap as waste and scrap from the manufacture or mechanical working of materials which is definitely not usable as such because of breakage, cutting up, wear and other reasons . The definition has three limbs:- (i) scrap means waste; (ii) scrap means scrap generated from the manufacture or mechanical working of materials. (iii) such scrap is not usable as such Whether section 206C is attracted only to the scrap generated from the manufacture or mechanical working of materials?

10 There may be many situations where the scrap is generated from activities other than the manufacture or mechanical working of materials , the dismantling of constructed buildings and superstructure. Further, goods like empty drums, plastic bags, used oil/wooden scrap, scrap electrical cables, empty crates etc., are also sold which may or may not arise in the course of manufacture or mechanical working of material. The Ahmadabad Tribunal in case of Navine Flourine International Ltd Vs. ACIT 56 DTR 273 held that scrap means waste and scrap from manufacture or mechanical working of material which is definitely not usable as such because of breakage, cutting up, wear and other reasons.