2023 (12) TMI 1234 - HC - Income Tax

Bar operator not liable for penalty under Section 271CA as empty bottles don't constitute scrap from mechanical working

The Madras HC held that penalty under Section 271CA for failure to collect tax at source under Section 206C was not applicable to the petitioner operating ... Penalty u/s.271CA - “assessee in default” for failure to collect tax at source u/s 206C - running bars on contract / licnece basis - empty bottles can be considered as scrap or not? - tax has also been imposed u/s 206CC and Section 206CCA and further interest u/s 206C(7) - HELD THAT:- Under Sub-Section (7) to Section 206C where a person responsible for collecting tax fails to collect it in accordance with Section 206C(1) shall be liable to pay tax to the credit of the Central Government in accordance with the provisions of Sub Section (3). As per Sub-Section (3) to Section 206C any person collecting any amount under this Section shall pay within the prescribed time the amount so collected to the credit of the Central Government or as the Board directs. Provided that the person collecting tax on or after the 1st day of April, 2005 in accordance with the foregoing provisions of this Section shall, after paying the tax collected to the credit of the Central Government within the prescribed time, prepare such statements for such period as may be prescribed and deliver or cause to be delivered to the prescribed income-tax authority, or the person authorised by such authority, such statement in such form and verified in such manner and setting forth such particulars and within such time as may be prescribed. As per Sub Section (7) to Section 206C a person responsible for collecting tax failing to pay tax to the credit of the Central Government on or before the date specified, either after collecting the tax or fails to collect tax, shall be liable to pay simple interest at the rate of 1% per month or part thereof on the amount of such tax from the date on which such tax was collectible to the date on which the tax was actually paid or payable and such interest shall be paid before furnishing the quarterly statement for each quarter in accordance with the provisions of sub-section (3). In absence of definition for the expression “mechanical working of materials” in Section 206C the above doctrine of nocitur a sociis can be usefully applied to the facts of the case to resolve the legal conundrum. Court is faced with. The meaning of the expression “mechanical working of materials” in Section 206C can therefore to be gathered by applying the doctrine of noscitur a sociis from the meaning of the expression “manufacture” in Section 2(29BA). The definition of the expression “manufacture” in Section 2(29BA) of the Income Tax Act, 1961 is similar to the definition of “manufacture” in Section 2(f) of the Central Excise Act, 1944. Therefore, for a “waste” or a “scrap” to be liable to excise duty under Section 3 of the Central Excise Act, 1944, such “waste” or “scrap” was also to be specified in the 1st Schedule to Central Excise Tariff Act, 1985. Certain activity may amount to “manufacture” yet not liable to Central Exercise Duty. An activity may resemble to a “manufacturing activity”, yet may not amount to “manufacture”. Only those activity can came within the purview of the expression of “mechanical working of material”. Only those activity which resemble “manufacturing activity”, but are not a “manufacturing activity” can come within the purview of the expression of “mechanical working of material”. Only such “scrap” arising of such “mechanical working of material” are in contemplation of Section 206C. Only such “scarp” generated from such “mechanical working of material” which are not “manufacturing activity” but are akin to “manufacturing activity” can be said to be in contemplation of Section 206C. The expression “mechanical working of material” in Section 206C would apply only to such activity which are akin to “manufacturing activity” but not “manufacturing activity”. Only such “scrap” generated from such activity i.e. either “manufacturing activity” or from “mechanical working of material” can be construed to be in contemplation of Section 206C. Mere opening, breaking or uncorking of a liquor bottle by mere twisting the seal in a liquor bottle will not amount to generation of “scrap” from “mechanical working of material” for the purpose of explanation to Section 206C. Activity of opening or uncorking of the bottle is also not by the petitioner. These are independent and autonomous acts of individual consumers who decides to consume liquor purchased from the Tasmac Shops of the petitioner which have a licensed premises (Bar) adjacent to them under the provisions of the Tamil Nadu Liquor Retail Vending (in Shops and Bars) Rules, 2003. No waste or scrap was generated by the petitioner for it to be sold by the petitioner. Scrap, if any, was generated at the licensed premises which was leased by the licensees from the provide owners of the premises. Left over bottles after consumption are not owned by the petitioner. Neither the petitioner nor the licensee are the owner of the waste bottles. What the respective bar licensees are permitted under the terms of the license under the provisions of the Tamil Nadu Liquor Retail Vending (in Shops and Bars) Rules, 2003 is merely to sell food and water and clear the left over bottles more from the point of view of ensuring cleanliness. The bar owners incidentally monetize the left over bottles. Rule 9(a) of the Tamil Nadu Liquor Retail Vending (In Shops and Bars) Rules, 2003 merely grants privilege to the respective bar owners only to run the bars to sell the eatables and to clear left over empty bottles. Bottles are neither “Scrap” nor a property of either the TASMAC or Bar Licensee. Ownership over the bottles at best would stand vested with the respective bar owners / licensees who have been licensed. Sale of left over bottles are merely regulated. Mere regulation of such sale would not render the petitioner sale of bottles A mere privilege is conferred on the respective bar owners / licensees to collect the left over bottles and sell them to the breweries and distilleries. There is no scope to conclude sale bottles by the petitioners to the respective bar owners / licensees. To be a “seller” of used bottle, the petitioner should be the owner of the bottle. Neither the petitioner nor the Bar owners / licensees are the owners of the bottles left behind in the licensed premises (Bar). The petitioner merely decides the upset price and other terms and conditions in the tender process with the approval of the Commissioner of Prohibition and Excise. Merely because used bottles are to be cleared which implies sale by them would not render the petitioner “seller” for the purpose of Section 206C of the Act. There is neither a “manufacture” nor a generation of “scrap” from ”mechanical working of materials”, the liability under Section 206C of the Income Tax Act, 1961 is not attracted. Suffice to state that the petitioner is neither the owner of the bottle nor generates scrap as is contemplated under the Income Tax Act, 1961. The activity of opening and uncorking is not a “mechanical working of material”. Invocation of Section 206 C, 206CC and 206CCA of Income Tax Act, 1961 was wholly misplaced and unwarranted under the circumstances against the petitioner for the alleged failure to collect tax at 1% on 99% of the license fee payable to the Government and 1% retained as agency commission. Therefore, there is no merits in the impugned order. Consequently, the question of paying simple interest under Section 206C(7) of the Income Tax Act, 1961 cannot be countenanced with. Since Section 206C of the Income Tax Act, 1961 is not applicable, question of imposing liability on the petitioner to furnish the PAN Number of the Bar owners under Section 206CC of the Income Tax Act, 1961 cannot be countenanced with. WP allowed. Issues involved:1. Whether 'empty bottles' can be considered as scrap.2. Whether TASMAC can be termed as a seller of scrap.3. Whether the successful bidders of contracts for running the bars can be termed as 'buyers' of scrap.4. Whether only 1% of the license fee, i.e., the agency commission, accrues as the income of TASMAC.Issue 1: Whether 'empty bottles' can be considered as scrap.The court concluded that empty bottles satisfy the conditions to be termed as 'scrap' as per Section 206(1) of the Act. The bottles are in the nature of waste and scrap, as they are not usable as such and can only be made usable through recycling. The process of opening the bottled liquor involves mechanical working, and the bottles are not usable as such due to breakage, cutting up, wear, and other reasons.Issue 2: Whether TASMAC can be termed as a seller of scrap.The court observed that TASMAC is a corporation established by an Act of the State Government with a significant turnover from the sale of eatables and collection of empty bottles. TASMAC continues to have rights over the empty bottles by giving tenders for collecting and selling them, thus making it a 'seller' as per Section 206C of the Act.Issue 3: Whether the successful bidders of contracts for running the bars can be termed as 'buyers' of scrap.The court noted that TASMAC bar contractors obtain the right to sell eatables and collect and sell empty bottles through tenders. The term 'buyer' includes those who obtain goods or the right to receive goods through auction or tender. The court concluded that bar contractors are buyers as they get the benefit of collecting empty bottles, which they do not use for personal consumption but sell to vendors.Issue 4: Whether only 1% of the license fee, i.e., the agency commission, accrues as the income of TASMAC.The court found that there is no condition requiring TASMAC to collect 99% of the license fee separately for the State Government. TASMAC is responsible for collecting the tender amount from successful tenderers and remitting it to the Government. The liability to collect TCS/TDS arises at the time of making specified receipts/payments, regardless of whether any income is earned.Conclusion:The court held that the invocation of Sections 206C, 206CC, and 206CCA of the Income Tax Act, 1961, against the petitioner was misplaced and unwarranted. The petitioner is neither the owner of the bottles nor generates scrap as contemplated under the Income Tax Act. The activity of opening and uncorking bottles is not a 'mechanical working of material.' Therefore, the impugned orders were quashed, and the writ petitions were allowed.