Processing for trading is not qualified for exemption from TCS provision U/s 206C(1)

Processing for trading is not qualified for exemption from TCS provision U/s 206C(1)

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TCS & processing vs manufacturing, Section 206C and processing, beedi and TCS, TCS on processing

The TCS provision U/S 206C (1) is not applicable if the goods are purchased for the purpose of manufacturing. Now, it is important to understand what is manufacturing and what is processing for the purpose of section 206C(1).
Here is an important judgement by Nagpur Bench of Bombay High court on this issue:
Gondia Beedi Leaves Contractors Association
Union of India
422 ITR 404
[Alternative citation: 67 Taxman 528/ / (2020) /187 DTR 111/ 314 CTR 529] 
By Nagpur Bench of Bombay High Court
Short Overview of the case:
  1. The question involved was whether the members of the petitioner-association, who are the contractors of Tendu leaves (a forest produce), are entitled to claim exemption under subsection (1A) of Section 206C of the Income Tax Act, 1961 from the collection of tax at source from them by the seller, namely, the Forest Department of the State of Maharashtra?
  2. The members of the petitioner-association are registered Tendu contractors having separate registrations under the Maharashtra Forest Produce (Regulation of Trade) Act, 1969 as traders and not as manufacturers
  3. Department changed its earlier stance and advised forest department to collect tax under section 206C(1) holding that exemption under section is not available 206C(1) and (1A)
  1. The relevant sections reads as under:
    206C. (1) Every person, being a seller shall, at the time of debiting of the amount payable by the buyer to the account of the buyer or at the time of receipt of such amount from the said buyer in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, collect from the buyer of any goods of the nature specified in column (2) of the Table below, a sum equal to the percentage, specified in the corresponding entry in column (3) of the said Table, of such amount as income-tax.
(1A) Notwithstanding anything contained in sub-section (1), no collection of tax shall be made in the case of a buyer, who is resident in India, if such buyer furnishes to the person responsible for collecting tax, a declaration in writing in duplicate in the prescribed form and verified in the prescribed manner to the effect that the goods referred to in column (2) of the aforesaid Table are to be utilised for the purposes of manufacturing, processing or producing articles or things or for the purposes of generation of power and not for trading purposes.
  1. The members of the association in this case were carrying out the following activities:
    • Pruning
     • Plucking, bundling and tying
     • Drying and sprinkling water
     • Transportation to collection centre where drying and weathering takes place
     • Sprinkling of insecticides
     • Rinsing, shifting and arranging bundles
    • Stacking and packing It is only after completion of this entire process in the prescribed manner the leaves are ready for sale to the manufacturer of bidi.
  2. The members were of the view that the TCS is not applicable in such cases as the beedi leaves is not sold as it is but sold after some processing only.
  3. On the applicability of the TCS in such case HC held as under:
i As non effecting TCS would entail penalty and prosecution and as wrong effecting of TCS would not create harm, it is necessary to hold that TCS is required
ii. Members have wrongly distinguishes Chowgule & Co. Pvt. Ltd. v. Union of India [1981] 1 SCC 653 which was held in the context of section 8 of CST Act but using the same language as section206(1A) where the SC clearly held that transportation is a process
iii.    It wrongly enhances processing as processing resulting in manufacture.
iv. It is wrongly misconstrues the placement of the word ‘processing’ in between ‘manufacturing’ and “or producing articles or things” under sub-section (1A) is also significantly indicate such intention of the Legislature.
v. Members are registered as traders under section 4(1) of the Regulation of Trade Act and not as manufacturers under section 11 of the said Act Manufacture
vi. Hon’ble HC has referred to the judgement of the following during the analysis of the issue:
 • India Cine Agencies Vs CIT 308 ITR 98 SC
• Arihant Tiles and Marbles P. Ltd. [2010] 320 ITR 79 (SC)
• Oracle Software 320 ITR 546 SC
With above observation, court held that the processing for trading is not qualified for exemption in the TCS provision. In short, the court held that the TCS is applicable on sale of beedi leaves processed by contractors on purchase of leaves from forest department.

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