2020 (4) TMI 438 - AT - Income Tax

TCS u/s 206C(1) - business activity of trading in ferrous and non-ferrous metals carried on by the appellant firm, as an activity of sale of scrap - treating the appellant as an assessee in default for not collecting TCS @ 1 % on the entire sale proceeds made by the appellant firm - HELD THAT - We find that it is an undisputed fact that the assessee is not a manufacturer and is only a dealer in scrap. During the years under consideration, as noted in the assessment orders, the assessee had sold scrap, which included unburned transformer coils from various distribution companies of UPPCL. We find that whether a trader in scrap is liable to be fastened with liability to collect TCS under section 206C came up for consideration in the case of Navine Fluorine International Ltd. vs. ACIT(TDS) 2011 (2) TMI 1110 - ITAT, AHMEDABAD wherein, the ITAT held that to fall under the definition of scrap as given in the Explanation to section 206C of the Act, the term waste and scrap are one and which should arise from manufacture and if the scrap is not coming out of manufacture, then the items do not fall under the definition of scrap and thus not liable to TCS. We further find that the Ahmedabad Bench of ITAT in the case of ITO(TDS) vs. Priya Blue Industries Pvt. Ltd. 2015 (11) TMI 1263 - ITAT AHMEDABAD again relied on the order of the Ahmedbad Bench of the ITAT in the case of Navine Fluorine International Ltd. vs. ACIT(TDS) supra and held that the words waste and scrap should have nexus with manufacturing or mechanical working of materials - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the business activity of trading in ferrous and non-ferrous metals by the appellant firm qualifies as an activity of sale of scrap under section 206C(1) of the Income Tax Act, 1961.
2. Interpretation of the provisions of section 206C regarding the definition of scrap.
3. Applicability of section 206C(1) to the appellant firm given the receipt of Form 27C from some buyers.
4. Legality and correctness of the orders passed by the AO and upheld by the CIT(A).

Issue-wise Detailed Analysis:

1. Business Activity as Sale of Scrap:
The appellant firm contended that its business activity of trading in ferrous and non-ferrous metals does not qualify as the sale of scrap as defined under section 206C(1) of the Income Tax Act, 1961. The CIT(A) upheld the AO's decision, treating the appellant as an assessee in default for not collecting TCS at 1% on the entire sale proceeds. The appellant argued that the scrap sold did not arise from manufacturing or mechanical working of materials, thus not falling under the definition of scrap per Explanation (b) to section 206C.

2. Interpretation of Section 206C:
The appellant relied on several judicial precedents, including the ITAT Ahmedabad 'B' Bench decision in 'Navine Fluorine International Ltd. vs. ACIT(TDS)' and the ITAT Rajkot Bench in 'Nathulal P. Lavti vs. ITO(TDS)', which held that for invoking section 206C, scrap must arise from manufacturing or mechanical working. The appellant argued that since it was not engaged in manufacturing, the scrap sold did not meet the criteria under section 206C. Conversely, the authorities below relied on the Special Bench decision in 'M/s Bharti Auto Products vs. CIT-II, Rajkot', which held that section 206C applies to dealers and traders in scrap.

3. Applicability of Section 206C(1) Given Form 27C:
The appellant firm received Form 27C from some buyers, indicating that the provisions of section 206C(1) were not applicable to those transactions. The appellant argued that this exemption should prevent it from being treated as an assessee in default under sections 206C(6) and 206C(6A). However, the authorities below did not accept this argument.

4. Legality and Correctness of AO and CIT(A) Orders:
The appellant challenged the legality and correctness of the orders passed by the AO and upheld by the CIT(A), arguing that they were contrary to facts and bad in law. The appellant cited the Gujarat High Court decision in 'CIT (TDS) vs. M/s Priya Blue Industries Pvt. Ltd.', which overruled the Special Bench decision in 'M/s Bharti Auto Products', thereby supporting the appellant's position that the definition of scrap requires it to arise from manufacturing or mechanical working.

Tribunal's Findings:
The Tribunal found that the appellant was not a manufacturer but a dealer in scrap, selling items like unburned transformer coils. The Tribunal referred to the ITAT Ahmedabad 'B' Bench decision in 'Navine Fluorine International Ltd. vs. ACIT(TDS)', which emphasized that scrap must arise from manufacturing to fall under section 206C. The Tribunal also noted that the Gujarat High Court in 'CIT (TDS) vs. M/s Priya Blue Industries Pvt. Ltd.' upheld this interpretation, stating that materials usable as such do not qualify as scrap under section 206C.

The Tribunal concluded that the appellant's activity did not meet the definition of scrap under section 206C, thus not liable for TCS. The Tribunal also referenced other decisions, such as 'Dhasawala Traders vs. ITO' and 'Azizbhai A. Lada vs. ITO', which supported the appellant's position.

Conclusion:
The Tribunal allowed the appeals of the assessee, holding that the appellant was not liable to collect TCS under section 206C. The orders of the AO and CIT(A) were set aside, and the stay petitions were dismissed as infructuous. The Tribunal's decision was pronounced in the open Court on 19/02/2020.