Scrap not generated out of manufacturing activities carried out by assessee-Whether tax deductible under section 206C

Navine Fluorine International Ltd. Vs. ACIT (ITAT Ahemdabad)- The assessee was engaged in the manufacture of fluorine and other refrigerant gases. During the survey operation under section 133A it was noticed that the assessee had received payments on account of sale of scrap. The assessee company had not collected tax (TCS) at the time of receipt of the sale proceeds or at the time of debiting the account of the purchasers.

The AO, therefore, issued a show cause notice as to why the tax be not raised under section 206C (6) and interest under section 206C (7). The assessee replied that the scrap sold was plastic, M. S. & G. I. drums, wooden scrap, plastic material, used oil, electrical cables etc. It was stated as per definition of Scrap in Explanation (b) to section 206 C, the scrap should be such waste or scrap which arises from manufacturing or mechanical working of material. It was stated by the assessee that the nature of scrap generated in the assessee’s premises did not arise from manufacturing of product dealt by the company and, therefore, the provisions of section 206C were not attracted. The AO did not accept the above explanation. The details of scrap sold show that it consisted of various things, such as, packing material, oil, electrical items, etc. The AO stated that materials sold were those which had been generated from the manufacturing activity whether directly or indirectly. These materials were not usable which was evident from the narration. The AO further stated that the assessee had not obtained any declaration from the purchaser in Form No. 27C. This also substantiated the fact that the scrap purchased by the purchaser was not meant for any manufacturing but as scrap only. In view of the above, the AO invoked the provisions of section 206C and raised the tax being 1% of the sales and levied interest under section 206C (7). Held: The explanation to section 206 C 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 assessee was admittedly engaged in manufacturing of fluorine and other refrigerated gases and list of scrap items noted above would indicate that same cannot be used for manufacturing or mechanical working of material of fluorine and other refrigeration gases. By the nature of the scrap items noted above, the same cannot be used while manufacturing gases or doing any mechanical working of the material for the gases. The items of the scrap in the case of the assessee would not form part of the definition of the scrap as is provided in Explanation (b) to section 206C. Thus, the explanation was wrongly applied in the case of the assessee.

IN THE INCOME TAX APPELLATE TRIBUNAL

‘B’ BENCH – AHMEDABAD
(BEFORE S/SHRI BHAVNESH SAINI, JM AND D. C. AGRAWAL, AM)

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