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)

ITA No. 1213 and 1214/Ahd/2010

A. Y.: 2009- 10 and 2010- 11

Navine Fluorine International Ltd. Vs The A. C. I. T., TDS Circle

ORDER

Both the appeals by the assessee are directed against the common order of the learned CIT(A)-I, Surat dated 08-02-2010 for assessment years 2009-10 and 2010-11 challenging the order of the learned CIT(A) in confirming the action of the AO holding that the assessee has failed to collect tax at sources under section 206C (6) of the IT Act on sale of scrap and consequently of charging interest under section 206C (7) of the IT Act.

2. The issue in both the appeals are regarding levy of tax under section 206 C (6) and interest under section 206C (7) of the IT Act.

3. In the assessment order the AO has stated that the assessee is engaged in the manufacture of fluorine and other refrigerant gases. During the survey operation under section 133A of the IT Act conducted on 21-07-2009 it was noticed that the assessee has 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 list of scrap is as under:

(a) M.S./G,I. drums – first

(b) M.S./G.I. drums – second

(c) Plastic Drums – first

(d) Plastic bags

(e) Plastic lime bags (torn)

(f) Used oil in drum

(g) Wooden Scrap

(h) Scrap/ damaged old MS/ GI barrels

(i) Scrap torn plastic carbuyos

(j) Scrap – MS light

(k) Scrap – MS heavy

(l) Scrap Electrical cables

(m) Scrap plastic material

(n) Empty bromine crates

(o) Inconel 600 place 1 mtr × 2 mtr × 36 mm

The AO stated that the above list showed that materials sold were those which have been generated from the manufacturing activity whether directly or indirectly. These materials were not usable which is evident from the narration. The AO further stated that the assessee has not obtained any declaration from the purchaser in Form NO. 27C. This also substantiates 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) of the IT Act. The TCS demand raised for 2009-10 was Rs. 44,200/- and interest of Rs. 5,852/-. For assessment year 2010-11 the TCS demand raised is Rs. 33,626/- and interest of Rs. 1,241/-.

4. The orders of the AO were challenged before the learned CIT(A) and the assessee has repeated the submissions made before the AO and stated that word scrap has been defined in explanation (b) to section 206C of the IT Act to mean “waste and scrap from the manufacturing or mechanical working of materials which is definitely not usable as such because of breakages, cutting up, wear and other reasons”. From this definition, it is clear that scrap to be covered under section 206 C of the IT Act should arise from the manufacture or mechanical working of material and since the assessee’s scrap did not arise from manufacture or mechanical work of material, the provisions of section 206C of the IT Act are not attracted. The assessee, therefore, stated that the demand should be deleted.

5. The learned CIT(A) considering the submission of the assessee and the observation of the AO dismissed both the appeals of the assessee. His findings in Paras 2.3 and 3 are reproduced as under:

“2.3 I have considered the submission made by the appellant and the observation of the AO. As per the provisions of Section 206C, scrap is included on which one percent TCS is required to be collected by the assessee. The definition of scrap as stated by the appellant and the AO is also very clear, which includes any scrap which cannot be used directly for manufacturing purpose by the purchaser and which has been generated from the manufacture of mechanical work of materials. The list of items given above clearly shows that the same has been generated by the assessee company. The assessee company is only engaged in the manufacturing of fluorine and other refrigerant gases. Hence, the entire scrap has been generated out of its manufacturing activity. Therefore, the provisions of section 206C are attracted. The fact that this scrap is not directly used for manufacture is further clear as the assessee has not obtained declaration as provided under Rule 37C in the Form No. 27C. Hence, the action of the AO is confirmed and these grounds of appeal are dismissed.

3. In the result, the appeal is dismissed”.

6. We have heard the learned representatives of both the parties and perused the findings of the authorities below.

7. The learned Counsel for the assessee reiterated the submission made before the authorities below and submitted that from the definition of scrap provided in explanation (b) to section 206 C of the IT Act it would be clear and include only such waste and scrap which arises from manufacture of mechanical working of materials. Further, such waste should not be usable as such. He has further submitted that none of the items sold by the assessee arising from manufacture of products dealt by the assessee, therefore, provisions of section 206 C of the IT Act are not attracted to the scrap under reference sold by the assessee. He has submitted that the word “waste and scrap” used in explanation of scrap should be read together and should have direct connection with manufacture or mechanical working of material and as such orders of the authorities below are liable to be set aside.

8. On the other hand, the learned DR relied upon the orders of the authorities below and submitted that the intention of the legislature was clear to charge 1% tax on the scrap and that the meaning of scrap includes both waste and scrap and as such the waste or the scrap which is sold is also subjected to tax and for the waste there is no need to have any connection with manufacture or mechanical working of material. He has submitted that the assessee has admittedly sold the scrap; therefore, provisions of section 206 C of the IT Act are clearly applicable in the case of the assessee. The learned DR submitted that the word waste and scrap are different items. He has, therefore, submitted that the appeals of the assessee have no merit and the same be dismissed.

9. We have considered the rival submissions and perused the findings of the authorities below. The applicability of the provisions of section 206 C of the IT Act for charging of tax on scrap is not in dispute. It is also not in dispute that the assessee has sold scarp of various items as noted above in this order. The issue under consideration depends upon the interpretation of the meaning of scrap as is provided in explanation (b) to section 206 C of the IT Act. It is, therefore, necessary to refer to some of the relevant provisions connected with the issue provided under section 206C of the IT Act. The same reads as under: “206C. (1) Every person, being a seller shall, 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, collect from the buyer of any goods of the nature specified in column (2) of the Table below, a sum equal to the percentage, specified in the corresponding entry in column (3) of the said Table, of such amount as income-tax:

TABLE

[Provided that every person, being a seller shall at the time, during the period beginning on the 1-6-2003 and ending on the day immediately preceding the date on which the Taxation Laws (Amendment) Act, 2003 comes into force, of debiting of the amount payable by the buyer to the account of the buyer or 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, collect from the buyer of any goods of the nature specified in column (2) of the Table as it stood immediately before the 1-6-2003, a sum equal to the percentage, specified in the corresponding entry in column (3) of the said Table, of such amount as income-tax in accordance with the provisions of this section as they stood immediately before the 1-6-2003.]]

[(1A) Notwithstanding anything contained in sub-section (1), no collection of tax shall be made in the case of a buyer, who is resident in India, if such buyer furnishes to the person responsible for collecting tax, a declaration in writing in duplicate in the prescribed form and verified in the prescribed manner to the effect that the goods referred to in column (2) of the aforesaid Table are to be utilised for the purposes of manufacturing, processing or producing articles or things and not for trading purposes.

(1B) The person responsible for collecting tax under this section shall deliver or cause to be delivered to the Chief Commissioner or Commissioner one copy of the declaration referred to in sub-section (1A) on or before the seventh day of the month next following the month in which the declaration is furnished to him.]

[(1C) Every person, who grants a lease or a licence or enters into a contract or otherwise transfers any right or interest either in whole or in part in any parking lot or toll plaza or mine or quarry, to another person, other than a public sector company (hereafter in this section referred to as “licensee or lessee”) for the use of such parking lot or toll plaza or mine or quarry for the purpose of business shall, at the time of debiting of the amount payable by the licensee or lessee to the account of the licensee or lessee or at the time of receipt of such amount from the licensee or lessee in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, collect from the licensee or lessee of any such licence, contract or lease of the nature specified in column (2) of the Table below, a sum equal to the percentage, specified in the corresponding entry in column (3) of the said Table, of such amount as income-tax:

TABLE

[Explanation 1.—For the purposes of this sub-section, “mining and quarrying” shall not include mining and quarrying of mineral oil.

Explanation 2.—For the purposes of Explanation 1, “mineral oil” includes petroleum and natural gas.]

(2) The power to recover tax by collection under sub-section (1) [or sub-section (1C)] shall be without prejudice to any other mode of recovery.

(6) Any person responsible for collecting the tax who fails to collect the tax in accordance with the provisions of this section, shall, notwithstanding such failure, be liable to pay the tax to the credit of the Central Government in accordance with the provisions of sub-section (3).

[(6A) If any person responsible for collecting tax in accordance with the provisions of this section does not collect the whole or any part of the tax or after collecting, fails to pay the tax as required by or under this Act, he shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of the tax:

Provided that no penalty shall be charged under section 221 from such person unless the Assessing Officer is satisfied that the person has without good and sufficient reasons failed to collect and pay the tax.]

(7) Without prejudice to the provisions of sub-section (6), if the [person responsible for collecting tax] does not collect the tax or after collecting the tax fails to pay it as required under this section, he shall be liable to pay simple interest at the rate of [one] per cent per month or part thereof on the amount of such tax from the date on which such tax was collectible to the date on which the tax was actually paid [and such interest shall be paid before furnishing the quarterly statement for each quarter in accordance with the provisions of sub-section (3)].”

9.1 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;”

10. The Hon’ble Delhi High Court in the case of CIT v. Deep Chand and others (2002) 257 ITR 756 (Del) relied upon the decision of the Hon’ble Supreme Court in the case of Gurudevdatta VKSSS Maryadit v. State of Maharashtra AIR (2001) SC, 1980 in which it was held as under:

“It is a cardinal principle of interpretation of statute that the words of a statute must be understood in their natural, ordinary or popular sense and construed according to their grammatical meaning, unless such construction leads to some absurdity or unless there is something in the context or in the object of the statute to suggest to the contrary. The golden rule is that the words of a statute must prima facie be given their ordinary meaning. It is yet another rule of construction that when the words of the statute are clear, plain and unambiguous, then the courts are bound to give effect to that meaning, irrespective of the consequences. It is said that the words themselves best declare the intention of the law-giver. The courts have adhered to the principle that efforts should be made to give meaning to each and every word used by the Legislature and it is not a sound principle of construction to brush aside words in a statute as being in-apposite surpluses, if they can have a proper application in circumstances conceivable within the contemplation of the statute.”

10.1 By following the above decision, the Hon’ble High Court held as under:

“It is now a well settled principle of law that a literal meaning should be attributed to a statute. The golden rule of interpretation should ordinarily be adhered to.”

11. The ordinary meaning of scrap and waste as have been provided in Oxford English Dictionary provides –

(a) Scrap- Small piece or amount of something especially one that is leftover after greater part has been used– material discarded for reprocessing.

(b) Waste- eliminated or discarded as no longer useful or required.

11.1 The ordinary meaning of scrap and waste thus has a similarity in words. Ordinarily, the word “AND” is used in a conjunctive sense. This word is used to connect clauses or sentences or to coordinate words in the same clauses.

12. The explanation to section 206 C of the IT Act 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 learned DR. The list of scrap sold by the assessee is reproduced above which are not connected with manufacture or mechanical working of material. The findings of the learned CIT(A) are based on presumption only that since the assessee is engaged in manufacture of fluorine and other refrigerated gases, therefore, entire scrap is generated out of its manufacturing activities. The findings of the learned CIT(A) are not based on any material or evidence. The assessee is 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 of the IT Act. Thus, the explanation is wrongly applied in the case of the assessee.

13. Considering the facts noted above, we are of the view that the authorities below have wrongly applied the meaning of scrap as is provided in Explanation (b) to section 206 C of the IT Act in the case of the assessee. Therefore, the assessee cannot be held to be in default. The assessee is not required to deduct tax under section 206 C (6) of the IT Act on the items of scrap as noted above. Resultantly, no interest could be charged under section 206C (7) of the IT Act. We accordingly, set aside the orders of the authorities below and allow both the appeals of the assessee.

14. In the result, both the appeals of the assessee are allowed. Order pronounced in the open Court on 15-02-2011.