My spinning mill sells the cotton waste that comes off the process. The TDS officer says that is scrap and wants one per cent. Is it?
No, not where the waste goes back in as raw material. The Tribunal held that on a plain reading of Explanation (b) to s.206C the assessee ought not to have collected tax on sales of cotton waste, because material that is usable as such — here reused as raw material by open-ended spinning mills — does not answer the definition. It remitted the matter to the Assessing Officer to verify that the supplies went to open-ended spinning mills where the cotton waste is used as raw material, and then to allow the claim.
Decided by the ITAT (Shri Ravish Sood, Judicial Member and Shri S Balakrishnan, Accountant Member (ITAT Visakhapatnam Division Bench)) on 2025-12-03, reported as ITA Nos. 575, 576, 577 and 578/VIZ/2025, assessment years 2017-18, 2018-19, 2019-20 and 2020-21. It bears on section 206C, section 206C(1), section 206C(1A), section 133A of the Income Tax Act 1961, in TDS Defaults, How Tax Law Is Read and Evidence & Burden of Proof matters.
This is the taxpayer side of the scrap line, and it shows where the argument is actually won: on the second limb of Explanation (b), 'definitely not usable as such', and on evidence of what the buyer did with the material. The order collects the High Court learning on that limb — the Madras High Court in Adisankara Spinning Mills on cotton waste reused as raw material for lower-count yarn, the Gujarat High Court in Safari Fine Clothing on rags, wipers and chindi manufactured to order and used as raw material, and the Gujarat High Court in Priya Blue Industries for the proposition that any material usable as such falls outside the expression. It is also useful on Form 27C: the Commissioner (Appeals) here accepted that the cotton waste was not liable to TCS but dismissed the appeal because Form 27C had not been furnished, and the Tribunal treated that as answered by the High Court line condoning the technical breach. Being decided on 3 December 2025 it is the most recent statement of the position located this pass.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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A TDS survey under s.133A(2A) was conducted at the assessee's office premises on 3 February 2020. The assessee generated cotton waste from its manufacturing activities and sold it to various manufacturing units and traders as detailed in the assessment order. The Assessing Officer took the view that cotton waste is scrap and that one per cent should have been collected under s.206C, and raised demands for four assessment years. Before the Commissioner (Appeals) the assessee relied on the decisions holding that waste usable as such is not scrap. The Commissioner (Appeals) prima facie agreed that the cotton waste sold was not liable to TCS, but concluded that the assessee had not furnished Form No. 27C, which he treated as a mandatory requirement, and confirmed the demands. The assessee produced declarations from the traders that the products were used as raw material for open-ended spinning mills.
The appeals were allowed for statistical purposes. On a plain reading of the definition of scrap in Explanation (b) to s.206C the Tribunal found merit in the assessee's argument that it ought not to have collected tax on such sales, and held that the provisions of s.206C are not attracted in the assessee's case. It remitted the matter to the Assessing Officer to examine whether the supplies had been made to 'open ended spinning mills' where the cotton waste is used as raw material, and thereafter to allow the claim in accordance with law. On the Commissioner (Appeals)'s Form 27C ground, the Tribunal noted the holding that filing of the statutory Form No. 27C is a technical breach liable to be condoned.
The Tribunal set out s.206C(1) and Explanation (b) and read the definition plainly, holding that the requirement that the material be 'definitely not usable as such' is not satisfied where the waste is taken by the buyer and used as raw material (paras 12 and 13). It then set out three High Court decisions: the Madras High Court in Adisankara Spinning Mills, where the Tribunal had found as a fact that cotton waste generated in the manufacture of cotton yarn was reused as raw material for lower-count yarn and the Departmental representative had said as much, so that no question of law arose (para 14); the Gujarat High Court in Safari Fine Clothing, where rags, wipers and chindi cut to buyers' specifications were held to be products manufactured by the assessee, used as such by the buyers as raw material, and therefore outside the expression (para 15); and the Gujarat High Court in Priya Blue Industries, for the proposition that any material usable as such does not fall within 'scrap' (para 16). Because the Commissioner (Appeals) had rested his dismissal on the absence of Form 27C, the Tribunal recorded the authority treating that as a condonable technical breach (para 17), and because the buyers' use had not been verified, it remitted for that limited verification (para 18).
From the plain reading of the above definition of scrap, we are of the considered view that there is a merit in the argument of the Ld. AR, the assessee ought not to have collect the tax on such sales made by the assessee.
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Handle my notice → Ask a CA on WhatsAppNo, not where the waste goes back in as raw material. The Tribunal held that on a plain reading of Explanation (b) to s.206C the assessee ought not to have collected tax on sales of cotton waste, because material that is usable as such — here reused as raw material by open-ended spinning mills — does not answer the definition. It remitted the matter to the Assessing Officer to verify that the supplies went to open-ended spinning mills where the cotton waste is used as raw material, and then to allow the claim. This was decided by the ITAT (Shri Ravish Sood, Judicial Member and Shri S Balakrishnan, Accountant Member (ITAT Visakhapatnam Division Bench)) and bears on section 206C, section 206C(1), section 206C(1A), section 133A of the Income Tax Act 1961. It is reported as ITA Nos. 575, 576, 577 and 578/VIZ/2025, assessment years 2017-18, 2018-19, 2019-20 and 2020-21. This is the taxpayer side of the scrap line, and it shows where the argument is actually won: on the second limb of Explanation (b), 'definitely not usable as such', and on evidence of what the buyer did with the material. The order collects the High Court learning on that limb — the Madras High Court in Adisankara Spinning Mills on cotton waste reused as raw material for lower-count yarn, the Gujarat High Court in Safari Fine Clothing on rags, wipers and chindi manufactured to order and used as raw material, and the Gujarat High Court in Priya Blue Industries for the proposition that any material usable as such falls outside the expression. It is also useful on Form 27C: the Commissioner (Appeals) here accepted that the cotton waste was not liable to TCS but dismissed the appeal because Form 27C had not been furnished, and the Tribunal treated that as answered by the High Court line condoning the technical breach. Being decided on 3 December 2025 it is the most recent statement of the position located this pass. If it applies to you, the first step is this: Frame the ground on the second limb of Explanation (b): the burden is on the Revenue to show the material is definitely not usable as such, not merely that it is called waste.
A TDS survey under s.133A(2A) was conducted at the assessee's office premises on 3 February 2020. The assessee generated cotton waste from its manufacturing activities and sold it to various manufacturing units and traders as detailed in the assessment order. The Assessing Officer took the view that cotton waste is scrap and that one per cent should have been collected under s.206C, and raised demands for four assessment years. Before the Commissioner (Appeals) the assessee relied on the decisions holding that waste usable as such is not scrap. The Commissioner (Appeals) prima facie agreed that the cotton waste sold was not liable to TCS, but concluded that the assessee had not furnished Form No. 27C, which he treated as a mandatory requirement, and confirmed the demands. The assessee produced declarations from the traders that the products were used as raw material for open-ended spinning mills. The matter was decided on 2025-12-03 by the ITAT (Shri Ravish Sood, Judicial Member and Shri S Balakrishnan, Accountant Member (ITAT Visakhapatnam Division Bench)). On those facts the ITAT held as follows. The appeals were allowed for statistical purposes. On a plain reading of the definition of scrap in Explanation (b) to s.206C the Tribunal found merit in the assessee's argument that it ought not to have collected tax on such sales, and held that the provisions of s.206C are not attracted in the assessee's case. It remitted the matter to the Assessing Officer to examine whether the supplies had been made to 'open ended spinning mills' where the cotton waste is used as raw material, and thereafter to allow the claim in accordance with law. On the Commissioner (Appeals)'s Form 27C ground, the Tribunal noted the holding that filing of the statutory Form No. 27C is a technical breach liable to be condoned.
The Tribunal set out s.206C(1) and Explanation (b) and read the definition plainly, holding that the requirement that the material be 'definitely not usable as such' is not satisfied where the waste is taken by the buyer and used as raw material (paras 12 and 13). It then set out three High Court decisions: the Madras High Court in Adisankara Spinning Mills, where the Tribunal had found as a fact that cotton waste generated in the manufacture of cotton yarn was reused as raw material for lower-count yarn and the Departmental representative had said as much, so that no question of law arose (para 14); the Gujarat High Court in Safari Fine Clothing, where rags, wipers and chindi cut to buyers' specifications were held to be products manufactured by the assessee, used as such by the buyers as raw material, and therefore outside the expression (para 15); and the Gujarat High Court in Priya Blue Industries, for the proposition that any material usable as such does not fall within 'scrap' (para 16). Because the Commissioner (Appeals) had rested his dismissal on the absence of Form 27C, the Tribunal recorded the authority treating that as a condonable technical breach (para 17), and because the buyers' use had not been verified, it remitted for that limited verification (para 18). In the words reproduced by the source cited on this page: "From the plain reading of the above definition of scrap, we are of the considered view that there is a merit in the argument of the Ld. AR, the assessee ought not to have collect the tax on such sales made by the assessee." The decision followed or applied CIT v. Adisankara Spinning Mills (P.) Ltd. (Madras High Court) — followed on cotton waste reused as raw material, and on Form 27C as a condonable technical breach; Pr. CIT (TDS) v. Safari Fine Clothing (P.) Ltd. (Gujarat High Court) — followed on material usable as such being outside 'scrap'; CIT (TDS) v. Priya Blue Industries (P.) Ltd. (Gujarat High Court) — followed on the same point; CIT v. A.N. Arunachalam [1994] 208 ITR 481 (Madras) — relied on through Adisankara Spinning Mills for condonation of the technical breach.
It was decided by the ITAT on 2025-12-03 and is reported as ITA Nos. 575, 576, 577 and 578/VIZ/2025, assessment years 2017-18, 2018-19, 2019-20 and 2020-21. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 206C, section 206C(1), section 206C(1A), section 133A, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeals were allowed for statistical purposes. On a plain reading of the definition of scrap in Explanation (b) to s.206C the Tribunal found merit in the assessee's argument that it ought not to have collected tax on such sales, and held that the provisions of s.206C are not attracted in the assessee's case. It remitted the matter to the Assessing Officer to examine whether the supplies had been made to 'open ended spinning mills' where the cotton waste is used as raw material, and thereafter to allow the claim in accordance with law. On the Commissioner (Appeals)'s Form 27C ground, the Tribunal noted the holding that filing of the statutory Form No. 27C is a technical breach liable to be condoned. It arises in TDS Defaults, How Tax Law Is Read and Evidence & Burden of Proof matters, on section 206C, section 206C(1), section 206C(1A), section 133A of the Income Tax Act 1961, and was decided by Shri Ravish Sood, Judicial Member and Shri S Balakrishnan, Accountant Member (ITAT Visakhapatnam Division Bench). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Prove the buyer's use, not your own process: obtain confirmations from the purchasing mills or units that the material went in as raw material, and identify the class of buyer (here, open-ended spinning mills). Take the excise or GST classification of the product if it has one — the Gujarat High Court in Safari Fine Clothing relied on the goods being classified under headings 63.09 and 63.10. Where the Commissioner (Appeals) accepts the goods are not scrap but dismisses on Form 27C, argue both points: if the goods are outside s.206C(1) there is nothing for s.206C(1A) to displace, and in any event the failure has been treated as a technical breach. Expect a remand rather than outright relief where the evidence of the buyer's use has not been examined below — put that evidence on record at the first opportunity.
Validity check could not be completed. Decided 3 December 2025; later treatment was NOT checked this pass and, given the date, there may be none. The holding is on the 'definitely not usable as such' limb of Explanation (b) and does not touch the separate line, applied by the Jaipur Tribunal in Ramdas Trading Company following the Special Bench in Bharti Auto Products, that a seller need not be a manufacturer and need not have generated the scrap himself. The three High Court decisions relied on were read only inside this order. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Two defects in the report should be flagged. First, the version of the s.206C(1) Table reproduced by the Tribunal at paragraph 12 is out of date: it shows timber under and otherwise than under a forest lease at two and one-half per cent, omits serial (v) without marking it as omitted, and does not reflect the position from 1 April 2025 under which forest produce sits in serial (iii) at two per cent. Second, paragraph 17 attributes CIT v. Adisankara Spinning Mills (P.) Ltd. to 'the Hon'ble Gujarat High Court', whereas the same order at paragraph 14 correctly attributes it to the Madras High Court; the Madras attribution is the right one on the internal evidence of the order. The three High Court decisions — Adisankara Spinning Mills (Madras), Pr. CIT (TDS) v. Safari Fine Clothing (P.) Ltd. (Gujarat) and CIT (TDS) v. Priya Blue Industries (P.) Ltd. (Gujarat) — were read only as reproduced inside this order and were NOT separately retrieved this pass; their paragraph numbers as given here ('Para No. 9', 'Para No. 7') are the Tribunal's citations, not locators verified against those judgments. The order's own paragraphs run 1 to 22 and were inventoried before any locator was used. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were allowed for statistical purposes. On a plain reading of the definition of scrap in Explanation (b) to s.206C the Tribunal found merit in the assessee's argument that it ought not to have collected tax on such sales, and held that the provisions of s.206C are not attracted in the assessee's case. It remitted the matter to the Assessing Officer to examine whether the supplies had been made to 'open ended spinning mills' where the cotton waste is used as raw material, and thereafter to allow the claim in accordance with law. On the Commissioner (Appeals)'s Form 27C ground, the Tribunal noted the holding that filing of the statutory Form No. 27C is a technical breach liable to be condoned.
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