2011 (2) TMI 1110 - AT - Income Tax

Failure to deduct TDS on sale of scrap u/s 206 C (6) - interest charged u/s 206C (7) - Assessee stated since the assessee s scrap did not arise from manufacture or mechanical work of material, the provisions of section 206C are not attracted - Held 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 thus cannot be read differently as is argued by the DR. The list of scrap sold by the assessee which are not connected with manufacture or mechanical working of material. The findings of the 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 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. In favour of assessee.

Summary

Issues Involved:
1. Levy of tax under section 206C(6) of the IT Act.
2. Charging of interest under section 206C(7) of the IT Act.

Issue-Wise Detailed Analysis:

1. Levy of Tax under Section 206C(6) of the IT Act:

The assessee, engaged in the manufacture of fluorine and other refrigerant gases, was found during a survey operation to have received payments from the sale of scrap without collecting tax at source (TCS) as required under section 206C(6) of the IT Act. The Assessing Officer (AO) issued a show-cause notice, to which the assessee replied that the scrap sold did not arise from the manufacturing process and thus did not attract the provisions of section 206C. The AO rejected this explanation, asserting that the materials sold as scrap were generated from the manufacturing activity, whether directly or indirectly, and thus were subject to TCS. The AO raised a tax demand and levied interest for the assessment years 2009-10 and 2010-11.

The assessee appealed to the CIT (A), reiterating that the scrap did not arise from manufacturing or mechanical working of materials, as defined in Explanation (b) to section 206C. The CIT (A) dismissed the appeal, stating that the scrap generated was from the manufacturing activity and thus attracted the provisions of section 206C. The CIT (A) also noted the absence of a declaration in Form No. 27C, which would indicate that the scrap was not meant for manufacturing purposes by the purchaser.

Upon further appeal, the Tribunal examined the definition of scrap under Explanation (b) to section 206C, which includes "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 Tribunal emphasized that the words "waste and scrap" should be read together and must have a direct connection with the manufacturing or mechanical working of material. The Tribunal found that the items sold as scrap by the assessee did not arise from the manufacturing of fluorine and other refrigerant gases and thus did not fall under the definition of scrap as per section 206C. Therefore, the assessee was not required to collect TCS under section 206C(6).

2. Charging of Interest under Section 206C(7) of the IT Act:

Since the Tribunal concluded that the items sold by the assessee did not qualify as scrap under section 206C, the assessee was not liable to collect TCS. Consequently, the interest charged under section 206C(7) for failure to collect TCS was also not applicable. The Tribunal set aside the orders of the lower authorities, thereby allowing the appeals of the assessee.

Conclusion:

The Tribunal concluded that the authorities had wrongly applied the definition of scrap under section 206C to the items sold by the assessee. Therefore, the assessee was not in default for not collecting TCS, and no interest could be charged under section 206C(7). The appeals were allowed, and the orders of the authorities below were set aside.