Section 206CE: Complete Guide to TCS on Scrap Sales – Rates, Compliance, and Exemptions

Introduction to Section 206CE

Section 206CE of the Income Tax Act, 1961, mandates the collection of Tax Collected at Source (TCS) on the sale of scrap. This provision is part of the broader Section 206C, which deals with TCS on various specified goods. The primary objective is to bring sales of scrap into the tax net, particularly in an often unorganized market segment, to ensure proper tax collection and traceability of transactions.

Before the introduction of this section, the scrap trade was largely conducted in cash, making it difficult for tax authorities to track transactions. Many scrap dealers operated informally without proper documentation. Section 206CE was introduced to formalize this sector by ensuring that every scrap transaction above a certain turnover threshold is recorded and taxed at source. This not only helps in revenue collection but also creates a transparent marketplace where buyers and sellers maintain proper records.

Real-World Scenario: Imagine a manufacturing company that generates 50 tons of iron scrap monthly from its production process. Earlier, they would sell this scrap to local dealers for cash without any formal documentation. Now, under Section 206CE, both the manufacturer and the scrap dealer must maintain proper records, collect TCS, and file returns. This brings accountability and transparency to what was previously an informal transaction.

Key Provisions of Section 206CE

1. Definition of Scrap:

For the purposes of Section 206CE, "scrap" means waste and scrap obtained from the manufacture or mechanical working of materials which is definitely not usable as such because of breakage, cutting up, wear and other similar reasons.

This definition is intentionally broad to cover various types of waste materials across industries. The key element is that the material must be waste resulting from a manufacturing or mechanical process and must be unusable in its current form without reprocessing.

Understanding What Qualifies as Scrap

  • Metal Scrap: Iron, steel, copper, aluminum, brass, bronze scraps from manufacturing units, construction sites, or dismantled machinery. For example, steel turnings from a lathe machine or copper wire offcuts from electrical work.
  • Plastic Waste: Rejected plastic products, off-specification items, production waste from plastic molding units. For instance, excess plastic from injection molding or defective plastic bottles.
  • Industrial Off-cuts: Leftover materials from cutting operations like fabric off-cuts from garment manufacturing, wood pieces from furniture making, or metal sheets trimmed during fabrication.
  • Worn-out Parts: Machinery components that have exceeded their useful life, such as old bearings, gears, motors, or conveyor belts that are being replaced.
  • Construction Debris: Materials like broken bricks, concrete waste, metal reinforcement scraps, old pipes, and fittings from construction or demolition activities (note: land and building demolition debris may have different treatment).

Example 1 - What is Scrap: A car manufacturing company has metal sheets for making car bodies. After stamping and cutting, 15% of each sheet becomes unusable offcuts. These metal pieces are scrap under Section 206CE.

Example 2 - What is NOT Scrap: A furniture showroom selling old display furniture at a discount is not selling scrap. These are complete, usable products being sold as second-hand goods, not waste from manufacturing.

2. Applicability and Seller's Responsibility:

The TCS provisions generally apply to sellers whose total sales, gross receipts, or turnover exceeded Rs. 10 crore in the preceding financial year.

This Rs. 10 crore threshold is calculated based on the total turnover of the seller's business, not just scrap sales. This means if a manufacturing company has a total turnover of Rs. 12 crore (including Rs. 50 lakh from scrap sales), they must collect TCS on all scrap sales.

Understanding the Threshold:

Scenario A: ABC Manufacturing Ltd. has a total turnover of Rs. 15 crore in FY 2023-24. Out of this, Rs. 1 crore comes from scrap sales. Since total turnover exceeds Rs. 10 crore, they MUST collect TCS on all scrap sales in FY 2024-25.

Scenario B: XYZ Traders has a total turnover of Rs. 8 crore, of which Rs. 2 crore is from scrap sales. Since total turnover is below Rs. 10 crore, they are NOT required to collect TCS, even though scrap sales alone are substantial.

  • The seller must collect TCS at the time of debiting 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.

Understanding "Whichever is Earlier":

Case 1 - Payment Received First: On March 10, buyer pays Rs. 1,00,000 for scrap. Seller records the sale in books on March 15. TCS must be collected on March 10 (when payment received).

Case 2 - Book Entry First: On March 10, seller records sale of Rs. 1,00,000 in books (debits buyer's account). Buyer pays on March 20. TCS must be collected on March 10 (when amount debited to buyer's account).

Case 3 - Advance Payment: Buyer pays Rs. 50,000 advance on March 5 for scrap to be delivered on March 25. TCS on Rs. 50,000 must be collected on March 5 itself, and balance TCS when balance payment or delivery occurs.

  • The collected TCS must be deposited with the government using Challan Number 281 by the 7th day of the month following the month in which the tax was collected. For TCS collected in March, the due date is April 30.

TCS Deposit Timeline Examples:

Example 1: TCS collected during April 2024 (say Rs. 50,000 total from various sales) must be deposited by May 7, 2024.

Example 2: TCS collected during March 2024 gets extended due date - must be deposited by April 30, 2024 (not April 7).

Example 3: If May 7 falls on Sunday, the actual due date becomes May 8 (next working day).

Late Deposit Consequence: If you collected Rs. 50,000 TCS in April but deposit on May 15 (8 days late), you'll pay interest at 1% per month. So, Rs. 50,000 × 1% × 1 month = Rs. 500 interest penalty.

3. Who is the Seller (Collector)?

Any person who is a seller of scrap is liable to collect TCS, provided their turnover criteria are met.

The term "seller" includes any individual, company, partnership firm, LLP, HUF, or any other entity engaged in the business of selling scrap. It doesn't matter whether scrap trading is your primary business or a secondary activity. If you sell scrap and meet the turnover threshold, you're a collector.

Different Types of Sellers:

Type 1 - Primary Scrap Trader: Ram Scrap Dealers - their entire business is buying and selling scrap. Total turnover Rs. 12 crore. They MUST collect TCS on every sale.

Type 2 - Manufacturer with Scrap By-product: Steel Pipes Ltd. manufactures pipes (Rs. 50 crore turnover). They generate Rs. 3 crore from selling production scrap. They MUST collect TCS on scrap sales.

Type 3 - Service Provider: A car repair workshop with Rs. 15 crore turnover sells old replaced parts as scrap (Rs. 20 lakh). They MUST collect TCS on these scrap sales.

4. Who is the Buyer (Collectee)?

Any person who is a buyer of scrap is liable to pay TCS to the seller.

The buyer can be anyone - an individual, a recycling company, another manufacturer, or a trader. The buyer's turnover or tax profile doesn't affect their TCS liability. As long as they're buying scrap from a seller who exceeds the Rs. 10 crore threshold, TCS must be paid.

Buyer Scenarios:

Scenario 1 - Recycling Company: Green Recyclers Ltd. buys 100 tons of plastic scrap for Rs. 10 lakhs from a manufacturer with Rs. 20 crore turnover. They pay Rs. 10,10,000 (Rs. 10 lakh + Rs. 10,000 TCS at 1%).

Scenario 2 - Individual Trader: Mohan, an individual scrap trader, buys copper scrap worth Rs. 2 lakhs from a factory with Rs. 15 crore turnover. He pays Rs. 2,02,000 (including Rs. 2,000 TCS). Later, when Mohan files his ITR, this Rs. 2,000 will be adjusted against his total tax liability.

Scenario 3 - Export Company: An exporter buys scrap for export. Even though the final sale is export (which is typically zero-rated for taxes), TCS still applies on the domestic purchase of scrap.

5. Threshold Limit:

Section 206CE does not specify a separate threshold limit for the collection of TCS on scrap. The obligation to collect TCS arises on every sale of scrap.

This is a critical point often misunderstood. Unlike some other TCS provisions that have transaction-wise limits (like Rs. 50 lakh for sale of motor vehicles), Section 206CE has NO per-transaction exemption. Whether you sell scrap worth Rs. 500 or Rs. 50 lakhs, if your annual turnover exceeds Rs. 10 crore, TCS must be collected.

No Transaction Threshold - Practical Impact:

Situation: A factory with Rs. 25 crore turnover sells scrap in small quantities:

  • Sale 1: Rs. 5,000 worth scrap - TCS Rs. 50
  • Sale 2: Rs. 15,000 worth scrap - TCS Rs. 150
  • Sale 3: Rs. 2,50,000 worth scrap - TCS Rs. 2,500

All three sales, regardless of amount, attract TCS. The factory must collect and deposit TCS for each transaction. This can be administratively burdensome but ensures comprehensive tax collection.

6. TCS Rate:

The rate of TCS to be collected under Section 206CE on the sale of scrap is 1% of the sale consideration.

  • This rate is applied to the amount received by the seller from the buyer.

TCS Rate Calculation - Detailed Examples:

Example 1 - Simple Transaction:

Scrap Sale Value: Rs. 1,00,000
TCS Rate: 1%
TCS Amount: Rs. 1,00,000 × 1% = Rs. 1,000
Total Amount Collected from Buyer: Rs. 1,01,000

Example 2 - Including GST:

Scrap Sale Value: Rs. 1,00,000
GST @18%: Rs. 18,000
Total Invoice Value: Rs. 1,18,000
TCS Calculated on Base Value: Rs. 1,00,000 × 1% = Rs. 1,000
Total Amount from Buyer: Rs. 1,19,000 (Rs. 1,18,000 + Rs. 1,000 TCS)

Important Note: TCS is calculated on the sale value before GST, not on the GST-inclusive amount.

Example 3 - Partial Payment:

Total Scrap Value: Rs. 5,00,000
Advance Received: Rs. 2,00,000 on March 10
TCS on Advance: Rs. 2,00,000 × 1% = Rs. 2,000 (collected on March 10)
Balance Payment: Rs. 3,00,000 on March 25
TCS on Balance: Rs. 3,00,000 × 1% = Rs. 3,000 (collected on March 25)
Total TCS: Rs. 5,000

7. PAN Requirement and Higher TCS Rate:

It is mandatory for the buyer to furnish their Permanent Account Number (PAN) to the seller. If the buyer fails to provide their PAN, TCS shall be collected at a higher rate as prescribed. However, sections 206AB and 206CCA, which mandated higher TDS/TCS for non-filers, have been removed from April 1, 2025, simplifying compliance.

Providing PAN is crucial for the buyer because without it, not only do they pay higher TCS, but they also cannot claim credit of that TCS in their income tax return. The TCS certificate issued by the seller shows the buyer's PAN, which is how the Income Tax Department matches the TCS credit to the buyer's account.

Impact of PAN Requirement:

Case 1 - PAN Provided:

Buyer provides PAN: ABCPK1234L
Scrap Value: Rs. 1,00,000
TCS at 1%: Rs. 1,000
Total Payment: Rs. 1,01,000
Buyer can claim Rs. 1,000 credit in ITR

Case 2 - PAN Not Provided (Before April 1, 2025):

Buyer doesn't provide PAN
Scrap Value: Rs. 1,00,000
TCS at Higher Rate (typically 5%): Rs. 5,000
Total Payment: Rs. 1,05,000
Buyer faces difficulty claiming credit without proper documentation

Case 3 - Post April 1, 2025 Scenario:

With 206AB/206CCA removed, the higher rate structure is simplified. However, providing PAN remains mandatory for proper credit allocation. Buyers should always provide PAN to avoid compliance issues.

8. Exemptions from TCS Collection:

TCS under Section 206CE is not required in the following cases:

  • If the buyer purchases the scrap for personal consumption.

Personal Consumption - When Does It Apply?

Example 1 - Genuine Personal Use: Mr. Sharma, an individual, buys 500 kg of steel scrap from a factory to build a boundary wall for his house. This is personal consumption - NO TCS applicable. However, Mr. Sharma must provide a written declaration stating the personal use purpose.

Example 2 - Not Personal Use: Mr. Verma, who runs a small fabrication shop, buys steel scrap claiming personal use but actually uses it in his business. This is NOT personal consumption - TCS is applicable. If caught, this can lead to penalties.

Example 3 - Hybrid Case: A person buys a mix of items - some old machinery (scrap) for personal home workshop and some for his small business. TCS exemption applies only to the portion genuinely used personally, not the business portion.

  • If the buyer purchases the scrap for the purpose of manufacturing, processing, or producing any article or thing, or for the purpose of generating power, and not for trading purposes. In such cases, the buyer needs to furnish a declaration in Form 27C to the seller, stating the purpose of purchase. The seller then submits one copy of this declaration to the jurisdictional Chief Commissioner or Commissioner of Income Tax within seven days of receipt.

Form 27C Exemption - Detailed Understanding:

Scenario 1 - Manufacturing Use:

ABC Steel Rolling Mills purchases iron scrap worth Rs. 50 lakhs from a scrap dealer to melt and manufacture TMT bars.

Process:

  • ABC furnishes Form 27C to the scrap dealer before purchase
  • Form 27C states: "Scrap being purchased for manufacturing TMT bars, not for resale"
  • Scrap dealer doesn't collect TCS of Rs. 50,000
  • Scrap dealer submits one copy of Form 27C to Income Tax Commissioner within 7 days
  • ABC pays only Rs. 50 lakhs (no TCS)

Scenario 2 - Power Generation:

Green Power Ltd. purchases coal waste/slack (a form of scrap) worth Rs. 20 lakhs to generate power in their plant.

Process:

  • Green Power furnishes Form 27C stating purpose as "power generation"
  • No TCS collected (exemption applies)
  • Seller files copy with tax authorities

Scenario 3 - NOT Eligible for Form 27C:

XYZ Traders purchases plastic scrap worth Rs. 30 lakhs to resell to recycling units at a profit.

Result:

  • Form 27C CANNOT be used (purchase is for trading/resale)
  • TCS of Rs. 30,000 MUST be collected
  • Total payment: Rs. 30,30,000
  • XYZ can claim this Rs. 30,000 as credit in their ITR

Important Note: Form 27C is a declaration under penalty of perjury. If authorities find that scrap was actually resold (not used for manufacturing), both buyer and seller can face severe penalties including prosecution for providing false declaration.

  • If the buyer is the Central Government, State Government, an embassy, a high commission, a consulate, a trade representative of a foreign country, or a local authority.

Government/Diplomatic Exemptions - Examples:

Example 1 - Government Purchase: Indian Railways purchases old track scrap from a private railway contractor for Rs. 1 crore for reuse/recycling. Since the buyer is Central Government, NO TCS is applicable.

Example 2 - Embassy Purchase: The Embassy of Japan in New Delhi purchases electronic scrap worth Rs. 5 lakhs from a local dealer for proper disposal. No TCS required as buyer is an embassy.

Example 3 - Local Authority: Delhi Municipal Corporation purchases construction debris (scrap) worth Rs. 20 lakhs for road filling. Being a local authority, exempt from TCS.

Example 4 - Mixed Buyer Type: A government-owned company (like SAIL or BHEL) purchases scrap. These are NOT exempt just because they're government companies - they're separate legal entities. TCS applies normally unless they specifically fall under "Government" definition as per Income Tax Act.

Compliance and Importance

For sellers of scrap, ensuring compliance with Section 206CE is essential. This includes:

Complete Compliance Workflow - Step by Step:

Month 1 (April) - Collection Phase:

  • April 5: Sold scrap worth Rs. 2,00,000 to Buyer A, collected TCS Rs. 2,000
  • April 15: Sold scrap worth Rs. 3,50,000 to Buyer B, collected TCS Rs. 3,500
  • April 28: Sold scrap worth Rs. 1,50,000 to Buyer C, collected TCS Rs. 1,500
  • Total TCS collected in April: Rs. 7,000

May 7 - Deposit Phase:

  • Deposit Rs. 7,000 using Challan 281 via online banking
  • Select Assessment Year, mention TAN
  • Get challan counterfoil/acknowledgment

Quarterly (July 31) - Statement Filing:

  • File Form 27EQ for Q1 (April-June)
  • Include details of all buyers (Name, PAN, TCS amount)
  • Include all challan details
  • File online through TRACES portal

Certificate Issuance:

  • Within 15 days of filing 27EQ, download Form 27D for each buyer
  • Issue to Buyer A (showing Rs. 2,000 TCS)
  • Issue to Buyer B (showing Rs. 3,500 TCS)
  • Issue to Buyer C (showing Rs. 1,500 TCS)

Record Keeping:

  • Maintain ledger of all scrap sales
  • Keep copies of invoices with TCS shown separately
  • Maintain buyer PAN database
  • Keep challan copies for 7 years
  • Preserve Form 27C declarations received

This section plays a significant role in formalizing the scrap trade by ensuring tax collection at the source, thus improving tax transparency and compliance in this sector.

Why Compliance Matters - Real Impact: A scrap dealer with Rs. 15 crore annual turnover selling to 200+ buyers monthly might collect Rs. 15 lakhs TCS annually. Proper compliance ensures:

  • No penalty costs (which could be equal to TCS amount)
  • No interest burden (1% per month = 12% per year)
  • Clean tax record for business loans and tenders
  • Buyers get proper certificates for their ITR claims
  • Smooth business operations without tax department notices

Dealing in Scrap?

Navigating the TCS provisions under Section 206CE requires clear understanding and diligent execution. DisyTax provides specialized tax advisory and compliance services for businesses and individuals involved in the sale or purchase of scrap. We can help you understand your specific TCS obligations, ensure timely collections and deposits, and maintain accurate records for seamless compliance. Reach out to us for expert guidance on your scrap trade tax matters.

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