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. 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.

2 Persons have also been found to have taken contracts in benami names by floating undertakings or associations for short periods. 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.

3 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. 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.

4 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. 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.

5 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. 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.

6 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? 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.

7 , 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 . Waste and Scrap, therefore should have nexus with the manufacturing or mechanical working of material. Items sold which cannot be used for manufacturing or mechanical working of material would not form part of the definition of the scrap. The Rajkot Special Bench (Tribunal) in case of Bharti Auto Products Vs. CIT 92 DTR 345 has however held that the definition of scrap is not limited to scrap from the manufacture or mechanical working of materials alone but extends to cover waste also.

8 While waste covers everything that is unusable or has been discarded as no longer useful as such, scrap covers everything that arises from the manufacture or mechanical working of materials. By its very nature, waste is a term of wider import while scrap is narrower in its scope. Therefore, any waste and scrap from the manufacture or mechanical working of materials which is not useable as such is covered by the scope of TCS. Therefore, according to this judgement waste arising from the dismantling of constructed buildings and superstructure, used oil/wooden scrap, scrap electrical cables, empty crates etc. are covered by definition of scrap being waste , which is not useable as such. However, empty drums/plastic bags which are useable as such are not covered by the definition of scrap even if it is sold as waste since they are useable as such.

9 Whether a Trader of Scrap is subject to section 206C? The issue here is that whether TCS is to be collected by manufacturer of scrap only or TCS is applicable on traders of scrap also. The Rajkot Bench of ITAT in case of Nathalal P. Lavti Vs. ITO 65 DTR 133 held that trader is not liable to TCS provisions on sale of scrap. However, the Rajkot Special Bench (Tribunal) in case of Bharti Auto Products Vs. CIT 92 DTR 345 has held that the use of words Profits & gains from business of trading etc. in the head note of sec. 206C makes it clear that the applicability of sec. 206C is not restricted to the sale of scrap generated from the business of manufacturing undertaken by the assessee himself but also covers the sale of scrap in the business of trading in scrap. The CBDT in its letter no 275/86/2011-IT(B) dated has also clarified that the term buyer is not restricted to a person who buys the specified goods in an auction or tender and thus includes a buyer in the retail sale of specified goods.

10 Therefore, all sellers of scrap including those trading in scrap are liable to collect tax at source from the buyers of such scrap. Therefore, the TCS provision on sale of scrap is applicable to the trader of scrap also. If the seller has not collected the TCS but buyer has paid the tax due on his income, is the seller still be considered as assessee in default? The first proviso to sub section (6A) of section 206C inserted by , 2012 provides that where any person [other than a person referred in sub section (1D)] responsible for collecting tax at source fails to collect the same, he shall not be deemed to be an assessee in default in respect of such tax if the buyer:- - has furnished his ROI u/s 139 - has taken into such amount for computing income in such ROI and - has paid the tax due on the income declared by him in such ROI - furnishes a certificate from CA in Form No.