No TCS on Sale of Empty Liquor Bottles as Uncorking Liquor Bottles Didn’t Amount to Generation of ‘Scrap’ | HC

Case Details: Tamil Nadu State Marketing Corporation Ltd. v. DCIT - [2023] 157 taxmann.com 704 (Madras)

Judiciary and Counsel Details

• • C. Saravanan, J.
  • R. Vijayaraghavan, Ms Subbaraya Aiyar Padmanaban & Ramamani for the Petitioner.
  • Dr B. Ramaswamy, Senior Standing Counsel for the Respondent.

Facts of the Case

Assessee-Company, owned by Tamil Nadu Government, had an exclusive monopoly for retail and wholesale of Indian Made Foreign Spirits (IMFS) in the entire state of Tamil Nadu.

Assessee floated tenders to select third-party bar contractors (licensees) to sell eatables and collect empty bottles left by consumers at bars adjacent to/within the assessee’s liquor retail shop. Assessee acting as an agent merely collected tender/licence amount from successful tenderer and remitted 99 per cent of same to Government retaining 1 per cent commission.

Assessing Officer (AO) treated assessee as the assessee-in-default for failure to collect tax at source under section 206C(1) on the amount tendered by the successful bar licensee from the sale of empty bottles by treating sale of bottles as scrap.

The matter reached before the Madras High Court.

High Court Held

The Madras High Court held that to attract the liability under Section 206C, it is incumbent on the part of AO to establish that the bottles left by buyers of liquor who consume liquor in the bars attached to the assessee’s retail shops qualify as ‘Scrap’ as defined in Section 206C.

‘Scrap’ is defined as waste and discarded material resulting from the ‘manufacturing’ or ‘mechanical working of materials’ rendered unusable due to breakage, cutting up, wear, or other reasons.

The expression “mechanical working of material” has not been defined in the Income-tax Act 1961. Thus, the interpretation of “mechanical working of materials” is derived by applying the principle of noscitur a sociis, referencing the definition of “manufacture” in Section 2(29BA).

The definition of “manufacture” in Section 2(29BA) of the Income Tax Act, 1961, aligns with the definition in Section 2(f) of the Central Excise Act, 1944. Consequently, for waste or scrap to incur excise duty under Section 3 of the Central Excise Act, 1944, it must also be specified in the 1st Schedule to the Central Excise Tariff Act, 1985.

Certain activities may amount to “manufacture” yet not liable to Central Exercise Duty. An activity may resemble a “manufacturing activity”, yet may not amount to “manufacture”. Thus, only those activities which resemble “manufacturing activity”, but are not a “manufacturing activity” can come within the purview of the expression of “mechanical working of material”.

Thus, the expression “mechanical working of material” would apply only to such activities which are akin to “manufacturing activity” but not “manufacturing activity”. Only such “scrap” generated from such activity can be construed to be in contemplation of Section 206C.

Mere opening, breaking or uncorking of a liquor bottle by twisting the seal in a liquor bottle will not amount to the generation of “scrap” from “mechanical working of material” for explanation to Section 206C.