Mere uncorking of liquor bottle not amount to generation of “scrap” for purpose of TCS [Read Judgement]

The High Court of Madars in the matter of M/s. Tamil Nadu State Marketing Corporation Ltd. Vs. The Deputy Commissioner of Income Tax has held that the Mere uncorking of liquor bottles not amount to the generation of “scrap” for the purpose of TCS.

In these Writ Petitions, the Petitioner has prayed that this Court may be pleased to issue a WRIT OF CERTIORARI to call for the records on the file of the Respondent in the Impugned Orders dated 30.05.2023 in TAN : CHET07317C bearing DIN No: CHE/CT/153/1/30052023/00111 passed under Section 206C/206C (6A)/206C (7) of the Act for the Assessment years between 2016-2017 and 2023-2024 and quash the same.

The petitioner has also prayed for an interim stay of all further proceedings including recovery and penalty u/s.271CA of the Act pursuant to the Impugned Orders in DIN No: CHE/CT/153/1/30052023/00111 passed under Section 206C/206C (6A)/206C (7) of the Act dated 30.05.2023 for these Assessment years.

The impugned orders have held that the petitioner, TASMAC, ought to have collected “Tax Collected at Source” (TCS) u/s 206C(1) of the Income Tax Act, 1961 on the amounts tendered by the successful bar licensee, inter alia, towards tax from sale of empty bottles by treating the sale of bottles as scrap.

The impugned orders precede notices issued to the petitioner for the respective assessment years which called upon the petitioner to furnish the details of the bar licensees, including their PAN number, which were apparently not fully furnished by the petitioner. For the respective period, the petitioner was also issued with Show Cause Notices dated 07.03.2023.

The common issues that arise for consideration in these Writ Petitions is as to whether the petitioner was required to collect “Tax at Source” from the bar licensees, who have been licensed to run bars under the license issued to them under Tamil Nadu Liquor Retail Vending (in Shops and Bars) Rules, 2003, under Section 206C of the Income Tax Act, 1961.

The supplementary issue that arises for consideration is whether for the Assessment Years 2018-2019 to 2023-24, the petitioner was also liable to pay tax at 5% under 206CC of the Income Tax Act, 1961 and whether for the Assessment Years 2022-23 and 2023-24, the petitioner is also liable to pay tax under Section 206CCA of the Income Tax Act, 1961?

The petitioner is a company incorporated under the provisions of the Companies Act, 1956 in the year 1981. It is wholly owned by the Government of Tamil Nadu. It is a statutory body which under Section 17-C (1-B) of the Tamil Nadu Prohibition Act, 1937 has been given an exclusive monopoly not only to control and effect wholesale but also the retail sale of Indian Made Foreign Spirits (IMFS) in the entire state of Tamil Nadu.

The definition of “manufacture” in Section 2(f) of the Central Excise Act,1944 was expanded in 2003 with effect from 01.03.2003 vide Section 135 of the Finance Act, 2003(32 of 2003), read with clause 127 of the Finance Bill, 2003 (8 of 2003). We are not concerned with it in these writ petitions.

The expression “mechanical working” is not new to taxing enactments. It has been used in the Central Excise Tariff Act, 1985 and under the Customs Tariff Act, 1975. Section Note 8(a) to Section XV of the Central Excise Tariff Act, 1985 uses the expression ‘waste generated during mechanical working of metal in the workshop’.

The test of manufacture under Section 2(f) of Central Excise Act, 1944 is well known. An activity which has to lead to emergence of a new product in the market is a manufacturing activity.

It was in this context, the Courts have held levy of Central Excise duty on various “scrap” generated from either manufacture or “mechanical working of materials” are liable to tax provided such waste is also specified in the 1st schedule to the Central Excise Tariff Act, 1955.

“Scrap” was treated as “excisable goods” for the purpose of Section 2(f) of the Central Excise Act, 1944, for levy under Central Excise Act, 1944, provided it satisfied the above requirements.

Though the expression “manufacture” has been defined in Income Tax Act, 1961, the expression “mechanical working of material” has not been defined in Income Tax Act,1961. In the 9th Ed. of Oxford’s Dictionary, the expression has been defined “mechanical” as follows:-

“a) operated by power from an engine;

b) connected with machines and engines; …

c) connected with the physical laws of movement and cause and effect”

However, dictionary meaning of the word “mechanical” by itself does not help in resolving the legal issue in this case. Therefore, other rules of interpretation have to be looked for and applied.

In absence of definition for the expression “mechanical working of materials” in Section 206C of the Income Tax Act, 1961, 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 of the Income Tax Act, 1961 can therefore to be gathered by applying the doctrine of noscitur a sociis from the meaning of the expression “manufacture” in Section 2(29BA) of the Income Tax Act, 1961.

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”.

In other words, 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 206 C of the Income Tax Act, 1961.

Only such “scrap” 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 of the Income Tax Act, 1961.

The expression “mechanical working of material” in Section 206C of the Income Tax Act, 1961 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 of the Income Tax
Act, 1961.

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 of the Act.

That apart, the 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.

Further, 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.

That apart, 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 boittles.

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.

If at all, the 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 petition “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”.

Therefore, 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.

As a consequence, the question of invoking Section 206CCA of the Income Tax Act, 1961 cannot be countenanced with.

In the result, all these Writ Petitions are allowed. Consequently, the connected Miscellaneous Petitions are closed. No costs.

For Official Judgment Download PDF Given Below: