Meaning of scrap in context of Tax Collection at Source (TCS)

[CA DEV KUMAR KOTHARI]

Links and references:

Section 206C of the Income-tax Act, 1961. 

The Commissioner of Income Tax Ward -1 (3) Coimbatore Versus M/s Adisankara Spinning Mills (P) Ltd., 2010 (12) TMI 1084 - MADRAS HIGH COURT

CIT Versus SMT PADMA S BORA 2012 (12) TMI 666 - BOMBAY HIGH COURT

The Nawanshahar Co-op. Sugar Mills Ltd. Versus Income Tax Officer 2013 (12) TMI 537 - ITAT AMRITSAR

CIT vs. Deep Chand and others 2002 (5) TMI 37 - DELHI High Court

Gurudevdatta VKSSS Maryadit vs. State of Maharashtra 2001 (3) TMI 976 - SUPREME COURT

Scope of this write-up:

This write-up is limited to the meaning of ‘waste’ for the purpose of applicability of provisions of Tax Collection at Source (TCS) under section 206C of the Income-tax Act, 1961.

Explanation (b) of Section 206C reads as follows:

‘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".

From the above definition we find that a definite meaning is given for ‘scrap’. The meaning is analyzed below in tabular form :

From definition:	Remarks
‘scrap' means	A definite meaning is provided
waste	Waste can be of any type
and scrap from the manufacture or mechanical working of materials	Scrap must be from the manufacture or mechanical working of materials
which is definitely not usable as such	An items will be  waste or scrap only if it is not usable as such in any case and under any circumstances. This is because of words used ‘definitely not usable as such’. Definitely denotes beyond any doubt. If the item alleged to be waste or scrap is such that it can be used as such for any purpose, then it cannot be said that such item is not usable as such. This condition is applicable to waste and scrap both.
because of breakage, cutting up, wear and other reasons".	Non-usability, as such,  must be due to reasons like breakage, cutting up, wear and other reasons.

Some examples:

An item can be a main product, a by-product, a scrap item, or a waste item.

From time to time on changes in circumstances, and development of technology and evolution of new methods for using any material  and also depending on increase in the  market value of  such item an item may change its position from waste or scrap  to by-product or even a main product. For example:

1. molasses which was considered as waste about 60-70 years ago has attained importance and is now considered a valuable by-product of sugar mills.
2. Press mud in a sugar mill can be considered as a waste, however, if such press mud is put to use for making organic fertilizers by cultivation with earthworms, the press mud also become a by-product for sugar mill and raw material for vermin compost plant.
3. In a cotton spinning mill, after spinning of cotton for longer staple fibers , residual cotton is cotton equal to inferior quality of cotton (short fiber). In trade practices and usages , it may be called as scrap or  cotton waste but it is usable as raw material for making low count of yarns. It can also be used as such for cleaning of machines.
4. In a diary farm cow dung is produced, it is used for making cow dung cakes for use in stoves in lieu of fire wood, cow dung is also usable as an organic fertilizer.
5. In a construction project when old structures are demolished, old bricks, old marble and granite pieces   obtained can be used as such, other rubbish consisting of stones, sand etc. is used for infilling of ponds and low lands in new sites.

We find that many of items which may be called a waste or scrap can be a directly usable item which can be used as such in some other activity. Therefore, the nature of seller of such item, nature of buyer of such item and  intended use of  such material or ultimate use of such material are important aspects to find out whether an item is a waste or scrap.

Finance Bill 1988 introduced the  Concept of Collection of Tax:

To counteract large scale evasion of tax by traders in certain goods, a proposal was made  to introduce three new Sections 44AC, 206C and 276BB. Section 44AC proposes to introduce a deeming provision whereby in the case of buyer of (i) alcoholic liquor (ii) forest produce (iii) scrap (iv) waste or (v) such other goods as may be notified by the Central Government (hereinafter called as specified goods).

Thereafter the provisions have been amended many times to cover more items and to clarify many aspects. Initially the terms scrap, waste and forest produce were  not defined. The meaning of ‘scrap’, as given above was provided by the F.A. 2003 w.e.f. 01.06.2003.

As per some illustrations given above one can say that the item to be considered as waste or scrap is to be considered in the context , and according to purposes. An item may be waste or scrap in one situation and it may not be so in another situation.

Contextual meaning is to be considered:

Meaning or definition of any word is to be considered in the context in which it is used. Therefore, an item may be a waste or scrap in one context or for one purpose, still it can be a raw material or a finished good in other context or other purposes.

In the case CIT Versus SMT PADMA S BORA 2012 (12) TMI 666 - BOMBAY HIGH COURT (supra.)  considered the meaning of ‘waste’ in the context of deduction allowable  S. 80JJA. In that case assessee was  manufacturing fuel briquettes from bagasse .  The revenue did not accept bagasse as ‘waste’. The High Court  held that in context of S. 80JJA and  bagasse is a waste of the sugar factory. This waste is a bio-degradeable waste and the same is collected on consideration by the assessee from the sugar factory. There could be no universal definition of the word “waste”  and has to be understood contextually i.e. place where it arises and the manner in which it arises during the processing of some article. The fact that sugar industry also regards Bagasse as waste is evident from Circular dated 4/2/2006 issued by the Sugar Commissioner, Maharashtra State, Pune. Besides the ITC classification of the Exim policy & CETA 1985 classifies bagasse as a waste of sugar industry under Chapter 23 Heading 23.20 thereof & Chapter 23 heading 23.01 respectively. Therefore, the High Court held that for the purposes of S. 80JJA , the bagasse purchased by assessee was waste item collected from sugar mill on payment of  purchase price.

Case of The Commissioner of Income Tax Ward -1 (3) Coimbatore Versus M/s Adisankara Spinning Mills (P) Ltd., 2010 (12) TMI 1084 - MADRAS HIGH COURT (Supra.):

In this case  the following question arose:

Whether on the facts and circumstances of the case, the Tribunal was right in deciding that-cotton waste cannot be considered as 'scrap' within the meaning of explanation to Section 206  (sic .206C)of the IT Act?

The question related to sale of cotton waste. Accordingly to the Revenue, the said sale should be construed as sale of scrap within the meaning of Explanation (b) to Section 206C of the Income Tax Act.

On examination of the meaning of ‘scrap’ the court observed  and held on the following lines: 

1. When we examined the said issue, we have noted the findings of the Tribunal in Paragraph 5 of the order impugned in this appeal.
2. The Tribunal has specifically found that in the process of manufacture of Cotton yarn, cotton waste came to be generated and the use of the said waste by another manufacturer shows that it was used as a raw material by the purchaser.
3. Even the learned Departmental representative stated before the Tribunal that the cotton waste disposed of by the respondent-assessee, was re-used as raw material for manufacture of lower count of cotton yarn and it does not come under the definition of scrap as defined in Explanation (b) of Section 206C of the Act.
4. The said conclusion of the Tribunal have been reached as a finding of fact.
5.  Therefore, Court held that “we do not find any question of law much less substantial question of law to be considered in this appeal. The Tax Case. Appeal is therefore dismissed.”

Observations of author:

In the above case the Tribunal had recorded a finding of fact.

The finding of fact was not challenged by revenue as perverse or incorrect.

The Departmental representative who represented the case of revenue before the Tribunal , himself has admitted that the  item sold by assessee called as ‘cotton waste’ was used as such by purchaser who used it as  raw material for manufacture of lower count of cotton yarn.

Therefore, revenue should not have disputed this issue before the High Court.

Matter before the Supreme Court:

It appears that the following matter as found on the website of the Supreme Court is pending before the Supreme Court:

SUPREME COURT OF INDIA

Case Status PENDING

Status of : Special Leave to Petition (Civil)...    14678    Of   2011

COM.OF INCOME TAX-III COIMBATORE   .Vs.   ADISANKARA SPINNING MILLS PVT.LTD.

Pet. Adv. : MR. B.V. BALARAM DAS

Subject Category : DIRECT TAXES MATTERS - DEDUCTIONS / EXEMPTIONS

Last Listed on : 12/09/2011

Any order is not yet available on the website of the Supreme court. However, on going through details of judgments of Tribunal, it seems very likely that this SLP of the revenue is against the judgment of Madras High Court dated 21.12.2010 on the issue of ‘cotton waste’ in context of S. 206C.

When the position that  item sold though described as ‘cotton waste’ is not a scrap within meaning of S.206C, and is a raw material of the buyer,  was admitted by the Departmental Representative, there is no justification of the revenue to further appeal before the Supreme Court. This is a case of un-necessary litigation by revenue. Author hopes that the SLP will be dismissed by the Supreme Court.

Case of The Nawanshahar Co-op. Sugar Mills Ltd. Versus Income Tax Officer 2013 (12) TMI 537 - ITAT AMRITSAR (supra.)

In this case assessee sold Molasses and bagasses. The revenue contended that S. 206C is applicable.  Tribunal held that Molasses is not a waste or scrap and cannot (sic.can) be used as such therefore, it does not fall within the meaning of scrap as defined in Explanation (b) to section 206C.

 The assessee cannot be held to be in default and is not required to deduct tax under section 206C(6) on the Molasses and no interest could be charged under section 206(7) – Decided in favour of assessee.

In this case the Ld. CIT(A)  himself has held that Bagasses sold  by the assessee is not sale of scrap and  the assessee is not to liable to collect tax at source u/s 206C(1) of the Act.

The decision of the CIT(A)  has been upheld by the Bench in the appeal filed by the Revenue vide order dated 19.11.2012 in assessee's own case in ITA Nos. 311 to 314(Asr)/2012 [ITO, (TDS)-1, Jalandhar vs. M/s. Nawanshar Co-op. Sugar Mills Ltd.; Nawanshhar. 2014 (3) TMI 341 - ITAT AMRITSAR

Cases referred by the Tribunal on rule of interpretation:

The Tribunal referred to  CIT vs. Deep Chand and others 2002 (5) TMI 37 - DELHI High Court Delhi in which High Court had relied on  Gurudevdatta VKSSS Maryadit vs. State of Maharashtra 2001 (3) TMI 976 - SUPREME COURT 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 word 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 inapposite surpluses, if they can have a proper application in circumstances conceivable within the contemplation of the statute."

 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."

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 part has been used - material discarded for reprocessing.

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

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.

The explanation to section 206C of the IT Act provides the meaning of scrap means "waste and scrap" from the 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 in "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.

Tribunal held that we are of the view that the findings of the ld. first appellate authority are not based on any material or evidence and the Molasses would not form part of the definition as provided in Explanation (b) to section 206C of the Act.

The Explanation has wrongly been applied in the case of the assessee because the assessee is engaged in the extraction of sugar from sugar-cane and the sugar Molasses is produced as by-product. It is obtained when sugarcane juice is boiled to obtain sugar. Molasses is by-product arise during the processing of sugarcane. It is not wastage and scrap as discussed in the foregoing paragraphs.

As regards the mechanical working of materials the Tribunal considered  that the Molasses is obtained when the sugar is crystalised from sugarcane juice after boiling and clarifying. The process of crystalisation takes place when the sugarcane juice is saturated to such an extent that the sugarcane juice separates into sugar crystals and molasses and that is the stage where molasses and sugar crystals are separated, no mechanical working of materials is involved.

 Keeping in view the aforesaid discussions alongwith various decisions rendered by the Hon'ble Supreme Court as well as the Hon'ble High Courts, we are of the view that Molasses is not a scrap as held by the Revenue Authorities in the impugned orders. It is not waste or scrap and cannot be used as such.

 Thus it does not fall within the meaning of scrap as defined in Explanation (b) to section 206C of the Act. Therefore, the assessee cannot be held to be in default and is not required to deduct tax under section 206C(6) of the Act on the Molasses and no interest could be charged under section 206(7) of the Act, as charged by the Revenue Authority in the impugned order. As pointed out in the fore-going paragraphs that the ld. first appellate authority has deleted the addition on account Bagassese itself in the impugned years, which has been upheld by this Bench in the appeal filed by the Revenue vide order dated 19.11.2012 in assessee's own case in ITA Nos. 311 to 314(Asr)/2012 [ITO, (TDS)-1, Jalandhar vs. M/s. Nawanshar Co-op. Sugar Mills Ltd.; Nawanshhar. 2014 (3) TMI 341 - ITAT AMRITSAR.

The AO has made the addition on account of Molasses on the similar analogy as applicable on the sale of Bagasses but the ld., CIT(A) has wrongly made the addition in dispute by upholding the action of the AO in holding the assesse to be in default under section 206C(6) of the Act in respect of sale of Molasses.

 As per detailed discussions above, the definition of scrap clearly establishes that the Molasses is not a scrap.

Tribunal  accordingly, cancel the impugned order on the issue in dispute by accepting the appeal filed by the assessee. Thus, the appeal of the assessee was allowed concluding that molasses is not a scrap or waste.

View of author:

S.206C was inserted  in 1988 with a view to bring into tax net various traders in un-organized sector. Thereafter, base of  tax assesses has improved a lot and people who are engaged in such businesses are also required to obtain Permanent Account Number and file returns. The meaning of ‘scrap’ clearly provides that an item which cannot at all be used as such will only be covered by the expression ‘scrap’ to which provisions can be applied. Whether an item can be used as such or not is an important yet very simple aspect. If an item find use as such, then the provision will not apply in this category for TCS. Thus old news papers and magazines are generally regarded as scrap, but they are not scrap for the purpose of S.206C because old news papers and magazines are used as raw material for manufacture of paper or to make packing material. Therefore, assessing authorities must take a practical view on the issue and decide the matter, instead of taking a prejudiced view that an item is scrap or waste.