27 May 2011
We are in the business of construction of Road/Highways. During the construction of Road, we have some wastage i.e TMT Bars Pieces, Empty Bags , Burn Oil from Machine etc. If we are selling the same as wastage will cover under TCS or Not.
please confirm if possible any docuements support.
27 May 2011
The meaning of scrap as provided in Explanation (b) to section 206 C of the IT Act reads as under: “Explanation.—For the purposes of this section,— [(b) “scrap” means 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;” IN UR CASE THE SCRAP IS GENERATED OUT OF MECHANICAL WORKING OF MATERIALS TCS IS APPLICABLE
Applicability of TCS under Section 206C of the Income Tax Act, 1961 on Sale of Scrap Materials
Case Study:
The Company is in the business of real estate development. The Company purchases the materials on its own required in the constructions of its various projects. During the normal course of construction, some scrap materials is generated, which is the pieces of steels, wooden etc. The scrap generated is sold in the market on its realizable value by the Company.
Section 206C of the Act, includes “scrap” as an article for Tax Collection at Source (TCS).
(i) Whether Sale of scrap generated as above during the construction process, is liable for TCS under section 206C of the Act?
Section 206C of the Act, provide as under:
The seller of any goods of the specified nature (like “scrap’) shall collect;
at the time of debiting of the amount payable by the buyer to the account of the buyer or at the time of receipt of such amount from the said buyer in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier;
from the buyer of any goods of the specified nature;
a sum equal to the percentage specified (1%) in Section 206C of the Act
As per Section 206 of the Act, the Scrap is defined as under:
"scrap" means 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;
As per Sub-section (11) of section 206C of the Act, the following persons are not included in the ‘buyers’. i.e. if the following are the buyer, then TCS is not to be collected by the seller:
(A) a public sector Company, the Central Government, a State Government, and an embassy, a High Commission, legation, commission, consulate and the trade representation, of a foreign State and a club; or
(B) a buyer in the retail sale of such goods purchased by him for personal consumption;
As per the above provisions, scrap is liable for TCS, only if it is generated from the manufacture or mechanical working of materials. In Real Estate business, no such manufacturing activities is carried on, which would produce materials or accordingly waste would be generated from manufacture or mechanical working of materials. In this business, the finished goods are nothing but the commercial or residential building comprising many flats. Apart from Flats, there is no material is manufactured. The materials used for the construction process of building, is the sub-process of construction, which itself cannot be treated as an independent manufacturing activity. The cutting, moldings of the steel and wooden material is not a manufacturing process, because after such process, no material of steel or wooden, as such would be generated. The outcome of this process would be a building, which is separate from the scraps generated from steels and materials.
Thus, logically, the scrap of steel and wooden is not generated through the manufacturing or mechanical process of the same, but from the construction of buildings.
Thus, the scrap generated as mentioned above will not be covered under the definition of scrap as given under the Act as mentioned above.
Navine Fluorine International Ltd. vs. Assistant Commissioner of Income Tax ((2011) 139 TTJ (Ahd) 248: In this case, Hon’ble Ahmedabad Tribunal held as under: “The Expln. (b) to s. 206C provides the meaning of 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". In the above definition the important words used in the definition of scrap are "waste and scrap", "from manufacture" and "which is". The word "waste and scrap" are one item. Thereafter, the word used is "from" the manufacture or mechanical working of material. It would mean that the waste and scrap being one item should arise from the manufacture or mechanical working of material. It is, therefore, necessary to read the words waste and scrap together which are generated out of manufacturing process of the assessee. The words waste and scrap should have nexus with the manufacturing or mechanical working of material. Thereafter, the word used is "which is" definitely not usable. The word "is" as used in this definition of the scrap meant for singular item i.e., "waste and scrap". The word waste "which is" denotes to singular item and thus the singular item would be waste and scrap. The words waste and scrap thus cannot be read differently as is argued by the Departmental Representative. The scrap sold by the assessee is not connected with manufacture or mechanical working of material. Since assessee is engaged in manufacturing of fluorine and other refrigerant gases the scrap items sold viz. drums, plastic drums, plastic bags, used oil wooden scrap, scrap electrical cables, empty bromine crates etc. cannot be used for manufacturing or mechanical working of material of fluorine and other refrigerant gases and hence such items would not form part of the definition of the scrap and consequently, assessee was not required to deduct tax under s. 206C(6).”
In view of the above facts and judicial analysis, the following observation can be made:
1. The facts and merits of the Company are similar to the above case. In this regard, it can be appropriately observed that where the scrap items sold viz. drums, plastic drums, plastic bags, used oil wooden scrap, scrap electrical cables, empty bromine crates etc. cannot be used for manufacturing or mechanical working of material of fluorine and other refrigerant gases, the pieces of steels and wooden generated during the construction process of the building by the Company, can not be as such used for the construction of building.
2. Further, in the real estate development business, no manufacturing or mechanical process is involved, thus, the scraps from its construction process, will not be covered by the definition of scrap, as provide under section 206C of the Act.
Thus, section 206C is not applicable for the sale of scrap generated by the Company during its constructions process and accordingly, no TCS liability is applicable to the Company.
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