The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Delhi bench has held that the term “scrap” used in the Income Tax Act, 1961 has a different purpose and therefore, the service tax authorities cannot rely on the same definition while interpreting the CENVAT rules.
The bench comprising CESTAT President Justice Dilip Gupta and Technical Member Mr. Subba Rao was considering an appeal where the Additional Director, while denying cenvat credit to the appellants, Bharati Infratel Ltd, relied upon the definition of scrap as given in Explanation (b) of section 206C of the Income Tax Act, 1961, wherein scrap has been defined as a waste generated out of manufacture or mechanical working of materials and is not usable as such due to breakage, cutting, wear and other reasons.
In the instant case, the appellant removed certain capital goods after their usage which were waste/scrap. At the time of removal, neither credit was reversed, nor any amount was paid as the appellant believed that there was no requirement of payment/reversal by an output service provider under rule 3(5A) of the CENVAT Credit Rules 2004 during the relevant period. However, with respect to capital goods which were removed as used capital goods, the appellant paid the amount in terms of rule 3(5A) of Credit Rules.
While quashing the order of the Additional Director, the bench observed that “the definition of “scrap” in the Income Tax Act could not have been resorted to by the Additional Director as it was defined in a different context. The term “scrap” has been used in the Income Tax in the sense of a waste by-product generated during the manufacturing, but the Credit Rules envisage clearance of capital goods in the form of “scrap” when the same can no longer be used.”
“This apart, in case a term has not been defined in a particular Statue, reference can always been made to the definition of the said term in dictionaries,” the bench said.
The bench further quoted the dictionary meaning of the terms “scrap” and “used” and observed that the capital goods cleared as scrap by the appellant undergo an extensive procedure, after which based on the evaluation of a third-party vendor, the goods are declared scrap and sold to scrap management companies who have taken certificates for recycling the said scrap under the Hazardous E-waste Management Rules.
“The items which were declared as scrap were sold to companies specializing in scrap management and these companies have also been granted a certificate for procurement and recycling of scrap under the Hazardous Waste Management Rues. The appellant, therefore, could not have undertaken the process of breaking the items and it cannot be urged that these items would not be scrap merely because they have not been broken before disposal,” the bench said.
Granting relief to the appellants, the bench held that “the inevitable conclusion that follows from the above discussion is that the capital goods cleared as “scrap” by the appellant are scrap and, therefore, the appellant, being an output service provider, was not required to pay any amount in terms of rule 3(5A) of the Credit Rules.”
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