By TIOL News Service

AHMEDABAD, DEC 15, 2015: THE issue is - Whether when certain products commercially known as 'scrap' are 'usable as such' during the process of ship breaking activity, they would still be considered as "waste and scrap", as envisaged in the Explanation to section 206C(1). NO is the answer.

Facts of the case

The assessee is a manufacturing concern. AO noticed that during the FY 2005-06, assessee had made sales of scrap worth Rs.35,79,69,613/-; however, no documents/papers leading to collection of tax at source on sale of scrap and payment thereof to the credit of the Central Government Account were produced nor was certification in Form No.27C produced. According to AO, the assessee was under an obligation to collect from the buyer of the scrap, a sum of 1% as income tax + SC + EC. The AO held that on account of non-compliance of the provisions of section 206C read with rule 37C, the assessee was liable to pay tax and interest u/s 206C (7) and, accordingly, raised a demand of Rs.40,16,418/- u/s 201(1) and levied interest of Rs.23,29,522/- u/s 201(1A). On appeal, CIT(A) observed that the assessee was engaged in ship breaking activity and the items/products in question were, finished products obtained from the activity and constituted sizeable chunk of production done by the ship breakers. The CIT(A) was in agreement with the contention of assessee that though such products may be commercially known as "scrap" they were definitely not "waste and scrap". CIT(A) further agreed with the contention of the assessee that the items in question were usable as such and, therefore, do not fall within the definition of "scrap" as given in Explanation (b) to section 206C(1). Placing reliance upon the decision of the Tribunal in the case of Navine Fluorine International Ltd. v. ACIT, TDS Circle Surat, CIT(A) ordered deletion of the demand of TCS on the said items. The Tribunal found that ITAT 'B' Bench, Ahmedabad in ITA Nos.1213 and 1214/Ahd/2010 dated 15.02.2011 in case of Navine Fluorine International Ltd. v. ACIT, TDS Circle Surat, for A.Y. 2009-10 & 2010-11, inter alia held that term "waste and scrap" are one item. The "waste and scrap" must be from manufacture or mechanical working of material which is definitely not usable as such because of breakage, cutting up, ware and to other reasons. It would mean that these waste and scrap being one item should arise from manufacture or mechanical working of material. The words waste and scrap should have nexus with manufacturing or mechanical working of materials. Therefore, 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". As stated above, assessee is engaged in ship breaking activity and as given to understand these items/products in question are finished products obtained from the activity. They constitute sizeable chunk of production done by ship breakers. Though such products may be commercially known as "scrap" they were definitely not "waste and scrap". The items in question were "useable as such" and therefore does not fall within the definition of scrap as given in of section 206C(1). Thus , the Tribunal restore the issue to AO with direction to grant relief to assessee under the provision of 206C(1), with regards to only sale of scrap arising out of manufacturing activity in course of ship breaking after providing due opportunity of hearing to assessee.

Held that,

++ from the facts as narrated hereinabove, it is apparent that the assessee had collected and paid tax at source (TCS) on the seven items as enumerated in the orders passed by the CIT(A) as well as the Tribunal and had not collected tax at source on certain items. The Tribunal, after considering the definition of scrap under clause (b) to section 206C, has noted that the assessee is engaged in ship breaking activity and the items in question are finished products obtained from the activity and constitute sizeable chunk of production done by ship breakers. Though such products may be commercially known as "scrap" they are not "waste and scrap", as such items are usable as such, and, therefore, do not fall within the definition of scrap as envisaged in the Explanation to section 206C(1). The Tribunal, in the impugned order, has recorded that the items/products in question obtained from the activity of ship breaking are usable as such and, therefore, do not fall within the definition of scrap. However, since the assessee had not collected tax at source on items other than items obtained out of the manufacturing activity in the course of ship breaking, the Tribunal has remitted the matter to AO for the purpose granting relief to the assessee under the provisions of section 206C (1) with regard to only sale of scrap arising out of manufacturing activity in the course of ship breaking after providing due opportunity of hearing to the assessee. Thus, the Tribunal after recording a finding of fact to the effect that the products obtained by the assessee in the course of ship breaking activity are usable as such, and, therefore, do not fall within the definition of scrap has remitted the matter to the AO to grant relief accordingly. Essentially, therefore, the impugned order of the Tribunal is based upon a finding of fact which does not give rise to any question of law. Insofar as the course of action adopted by the Tribunal in remitting the matter to the AO to decide in relation to which of the items the assessee is entitled to relief under the provisions of section 206C(1) is concerned, no fault can be found in the approach adopted by the Tribunal, inasmuch as, out of the four items of which tax was not collected at source, the matter has merely been referred to AO for the purpose of examining as to what extent relief is required to be granted to the assessee under the provisions of section 206C(1) having regard to the findings of fact rendered by it. In the opinion of this court, the impugned order passed by the Tribunal does not suffer from any legal infirmity so as to give rise to any question of law, much less, a substantial question of law warranting interference. The appeal, therefore, fails and is, accordingly, dismissed..

(See 2015-TIOL-2786-HC-AHM-IT)