By CA Surekha S Ahuja
Section 206C(1) | Form 27C | Rule 37CA | Form 27EQ | TRACES | CPC-TDS
Tax Collected at Source (TCS) on sale of scrap under Section 206C(1) is one of the most procedurally sensitive areas in Indian tax compliance. In real-world practice, TCS demands rarely arise due to incorrect taxability; they arise due to procedural lapses, particularly incorrect or non-reporting of Form 27C in Form 27EQ on TRACES. This guidance note is designed as a litigation-safe, CPC-aligned, and practitioner-ready manual, with special emphasis on TRACES-based reporting mechanics, which is the most common failure point.
Statutory Framework – At a Glance
| Provision | Subject |
|---|---|
| Section 206C(1) | TCS on specified goods including scrap |
| Explanation (b) to 206C | Definition of scrap |
| First Proviso to 206C(1) | Exemption via Form 27C |
| Rule 37C | Declaration by buyer |
| Rule 37CA(3) | Electronic reporting of Form 27C |
| Form 27C | Buyer declaration |
| Form 27EQ | Quarterly TCS return |
| Form 27D | TCS certificate |
Meaning of ‘Scrap’ – Legal Precision Required
As per Explanation (b) to Section 206C:
“Scrap” means waste and scrap from the manufacture or mechanical working of materials which is definitely not usable as such.
Practical Implication:
Scrap must arise from manufacturing or mechanical processes
It must be commercially unusable in original form
Sale of usable items, obsolete machinery, or surplus goods does not qualify as scrap
Misclassification invalidates Form 27C exemption and exposes the seller to full TCS liability.
Applicability of TCS on Scrap – Absolute Charge
Scrap is covered only under Section 206C(1)
No monetary threshold applies
Section 206C(1H) is not applicable to scrap under any circumstance
TCS is required at the time of receipt or debit, whichever is earlier.
Rate of TCS on Scrap
| Particulars | Rate |
| PAN furnished | 1% |
| PAN not furnished | 5% |
TCS collected is not an expense of the seller and is credited to the buyer’s tax account.
Exemption for Sale of Scrap to Manufacturing Units
Statutory Basis:
First Proviso to Section 206C(1) provides that no TCS shall be collected if:
Buyer purchases scrap for:
Manufacturing
Processing of articles or things
Generation of power
Goods are not for trading or resale
Buyer furnishes Form 27C to the seller
Form 27C – Nature, Responsibility & Legal Effect
Form 27C does not automatically grant exemption. Exemption becomes effective only when the declaration is correctly reported in Form 27EQ.
Responsibility Matrix:
| Activity | Responsible Party |
| Furnishing Form 27C | Buyer |
| Verification of declaration | Seller |
| Reporting to Income-tax Dept. | Seller |
| Consequence of default | Seller |
Reporting of Form 27C – Correct TRACES-Based Procedure
Important Clarification:
❌ Form 27C is not filed separately with Assessing Officer, Commissioner, CPC, or TRACES as an independent form.
Statutory Authority:
📌 Rule 37CA(3) mandates that particulars of Form 27C must be furnished electronically in the quarterly TCS statement (Form 27EQ). Failure results in automated TCS demand, interest under Section 206C(7), and fee under Section 234E.
Correct & Mandatory Compliance Flow:
Buyer furnishes Form 27C to Seller before sale/receipt containing Buyer PAN, Purpose of purchase, Declaration of non-trading use, and Verification.
Seller verifies PAN validity, nature of buyer’s business, and consistency with scrap usage.
Seller files Form 27EQ (Quarterly TCS Return), reporting the transaction.
In Form 27EQ/ TRACES, select “No TCS collected” with reason “Declaration received under Form 27C”.
No ITNS 281 challan is required.
CPC Verification:
Scrap transaction reported in Form 27EQ
TCS amount
Exemption reason
Form 27C indicator
Physical Form 27C is examined only during assessment, not by CPC.
Common Errors Triggering Demand:
Transaction not reported
Exemption flag missing
Wrong section selected
Late filing of Form 27EQ
PAN mismatch
Golden Rule: If Form 27C is not reported in Form 27EQ, it is deemed non-existent for CPC.
Interaction with Section 194Q
Scrap is specifically covered under Section 206C(1)
Section 194Q applies only when Form 27C is not furnished
Once valid Form 27C exists, neither TDS nor TCS applies
CBDT Circular No. 13/2021 supports this interpretation.
Seller’s Procedural Compliance Checklist
Before Sale: Identify whether goods qualify as scrap, Obtain Form 27C in advance, Verify buyer PAN and purpose.
Quarterly: Report transaction in Form 27EQ, Select Form 27C exemption flag, File within due date.
Record Retention: Preserve Form 27C, Reconcile with AIS / TCS ledger.
Consequences of Procedural Lapses
Even without tax intent, seller may face Interest under Section 206C(7), Fee under Section 234E, Penalty under Section 271CA, CPC rectification, and litigation burden.
Final Professional Takeaway
In scrap transactions, the law is clear, but procedure is decisive.
A correctly obtained but incorrectly reported Form 27C is legally ineffective. For CPC and TRACES, compliance is data-driven, not document-driven.
