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Manufacturing scrap disposal creates a four-leg reconciliation: the scrap sale ledger (recognition of revenue), the TCS collected ledger (1% under Section 394 code 1071), the quarterly Form 27EQ return (which must include every buyer's PAN), and the bank receipt from the scrap buyer (which must include both the scrap value and the TCS amount) — plus a cross-era handling problem when FY 2025-26 sales under legacy Section 206C(1) are reconciled by buyers in FY 2026-27.
Tag every scrap sale invoice with Section 394 code 1071 (FY 2026-27 onwards) or legacy 206C(1) reference (pre-1-April-2026); compute TCS at 1% on the scrap sale value (excluding GST); accrue collected TCS to a payable ledger; remit monthly through the TCS challan; file Form 27EQ quarterly with buyer PAN mapping; issue Form 27D from TRACES; reconcile bank credit to scrap sale plus TCS; on the buyer side, map Form 27D to Form 26AS and to the buyer's purchase ledger.
Scrap item master with HSN code, GST rate and TCS applicability flag; buyer master with PAN and GSTIN; Section 394 payment code 1071 with cross-era legacy 206C(1) reference; monthly TCS challan calendar (7th of following month); quarterly Form 27EQ filing window; bank receipt mapping rule (scrap value + TCS = expected credit).
A monthly close where every scrap invoice ties to a scrap sale entry, TCS collected ties to the monthly challan and quarterly Form 27EQ, bank credit reconciles to invoice + TCS, Form 27D is downloadable for every buyer, cross-era references (pre-Apr-2026 sales under 206C, post-Apr-2026 sales under 394) are visible side by side, and the buyer-side Form 26AS reconciliation closes within the quarterly cycle.
An auto-component manufacturer in Pune disposes ₹4.2 crore of ferrous scrap and ₹68 lakh of non-ferrous turnings across the year, sold to 23 different scrap buyers under contracts and one-off lots. The finance team books the scrap revenue, charges GST, deposits TCS, and files Form 27EQ each quarter — but every audit cycle surfaces the same problem: TCS deposited does not exactly tie to TCS that should have been collected, the bank-credit reconciliation against scrap invoices misses the TCS component on a third of transactions, and buyer queries about missing Form 27D entries arrive in May or June for sales completed nine months earlier. This guide walks through Section 394 scrap TCS manufacturing reconciliation end-to-end — the four-leg match, the cross-era handling against legacy Section 206C(1), and the operational discipline that closes the loop within the quarterly cycle.
What Section 394 covers
Section 394 of the Income Tax Act 2025 governs Tax Collection at Source (TCS) on a specified list of goods, replacing legacy Section 206C(1) of the Income Tax Act 1961 from 1 April 2026 (FY 2026-27 onwards). The categories covered include:
- Scrap — ferrous and non-ferrous waste, mill scale, turnings, borings, dross, used machinery (when sold as scrap), and similar production waste — at 1% TCS on sale value
- Timber and forest produce — at the rate specified in the schedule
- Alcoholic liquor licence — at the rate specified
- Specified minerals — at rates per the schedule
For a manufacturer the dominant case is the scrap leg. The payment code on the monthly challan from FY 2026-27 onwards is 1071 for scrap. The legacy code under Section 206C(1) (used for pre-1-April-2026 collections) remains visible on Form 27D for historical reconciliation.
The collection event is the earlier of debiting the buyer’s account in the seller’s books or actual receipt of the consideration — analogous to the TDS deduction event under Section 393.
Who collects, who reports, who claims
The mechanics of the four parties involved:
| Role | Action |
|---|---|
| Manufacturer (seller) | Invoices scrap with GST + adds 1% TCS line; collects TCS from buyer |
| Manufacturer (seller) | Deposits TCS via monthly challan, code 1071, by 7th of next month |
| Manufacturer (seller) | Files quarterly Form 27EQ on the e-filing portal with buyer PAN |
| Manufacturer (seller) | Generates Form 27D from TRACES after 27EQ is processed |
| Scrap buyer | Pays scrap value + GST + TCS to the manufacturer |
| Scrap buyer | Downloads Form 27D from the seller (or via own Form 26AS / AIS) |
| Scrap buyer | Claims TCS credit against own income tax liability |
The misalignment usually happens in the second and fourth row — the manufacturer deposits the TCS but does not file 27EQ on time, so Form 27D is not generated, and the buyer cannot find the credit in Form 26AS even though their own bank-debit ledger shows the TCS paid. The structural fix is to treat the four legs as a single reconciliation rail with explicit closure checkpoints.
The four-leg reconciliation
Per scrap invoice, the recon must close four legs:
Leg 1 — Scrap sale ledger. Each invoice ties to a sale of scrap recorded against an inventory issue from the scrap yard. The HSN code, GST rate and TCS applicability flag come from the scrap item master. The invoice must show the scrap value, GST charged, TCS collected, and the total receivable.
Leg 2 — TCS collected ledger. The 1% TCS goes into a separate “TCS payable” account on the manufacturer’s books. This account is cleared when the monthly TCS challan (code 1071) is deposited by the 7th of the following month. The reconciliation control is that the TCS payable balance at any month-end should equal the TCS collected on the previous month’s invoices minus the TCS deposited for that month.
Leg 3 — Form 27EQ quarterly return. Form 27EQ is filed on the income tax e-filing portal for each quarter (Q1 by 31 July, Q2 by 31 October, Q3 by 31 January, Q4 by 31 May). The return lists every buyer’s PAN, the gross scrap sale, the TCS collected, and the challan reference. The reconciliation control is that the sum of TCS per quarter on the scrap sale ledger must equal the sum of TCS reported in Form 27EQ for that quarter.
Leg 4 — Bank receipt. The scrap buyer pays scrap value + GST + TCS as a single bank transfer or instrument. The bank credit must reconcile to the invoice value (including TCS). Receipts that arrive short of the invoice total — a common pattern where the buyer pays the scrap and GST but forgets or disputes the TCS line — trigger a short-receipt exception that must be cleared before the quarterly close.
Cross-era handling: 206C(1) before April 2026, 394 from April 2026
The cross-era problem is that scrap sales made in FY 2025-26 were under Section 206C(1) of the Income Tax Act 1961, with the corresponding legacy challan code. Sales from 1 April 2026 onwards are under Section 394 of the Income Tax Act 2025, with payment code 1071.
The reconciliation engine must handle three cross-era scenarios:
- FY 2025-26 sale, FY 2025-26 buyer claim. Both under Section 206C(1). No cross-era complication.
- FY 2025-26 sale, Form 27D downloaded in FY 2026-27. The 27D references Section 206C(1) because the collection was under the old Act. The buyer’s reconciliation must map the legacy 206C reference to its own ledger entry from FY 2025-26.
- FY 2026-27 sale. Section 394, code 1071. Form 27EQ and Form 27D are issued against the new section.
The manufacturer’s TCS sub-ledger should keep both code histories visible side by side until the final FY 2025-26 returns are accepted by CPC-TDS — typically through Q2 of FY 2026-27. For the consolidated payment-code map covering both TDS and TCS codes, see TDS payment codes 1001-1092 India, and for the parallel cross-era handling on the TDS side under Section 393, see Section 393 TDS new Income Tax Act reconciliation.
GST on scrap — the parallel rail
Scrap sales attract GST in addition to Section 394 TCS. The seller charges GST at the applicable HSN rate — commonly 18% on most ferrous scrap, with non-ferrous waste, mill scale and specified categories at their own rates — on the scrap sale invoice, and reports the outward supply in GSTR-1. The buyer’s GSTR-2B reflects this as inward supply with GST ITC available, subject to Section 17(5) eligibility.
The TCS leg sits entirely on the income tax side and does not flow through the GST returns. Reconciliation runs two parallel rails:
- GST rail: seller’s GSTR-1 outward supply versus buyer’s GSTR-2B inward supply
- TCS rail: seller’s Form 27EQ versus buyer’s Form 26AS / Form 27D
A scrap sale invoice that closes cleanly on the GST rail but fails on the TCS rail (or vice versa) is a partial reconciliation — both rails must close for the transaction to be “fully reconciled” in the manufacturer’s books.
Reference: variance taxonomy on scrap TCS
| Variance code | Description | Resolution |
|---|---|---|
| TCS_NOT_COLLECTED | Scrap sold without TCS line on invoice | Recover from buyer or absorb; restate 27EQ |
| TCS_NOT_DEPOSITED | TCS collected but missed monthly challan | Pay with interest; restate 27EQ |
| TCS_27EQ_OMISSION | Quarterly 27EQ missed an invoice or buyer | File correction statement |
| TCS_BANK_SHORT | Bank credit less than invoice + TCS | Pursue buyer for shortfall |
| CROSS_ERA_206C | FY 2025-26 sale, 27D downloaded post-Apr-2026 | Map legacy 206C reference to buyer ledger |
| TCS_PAN_INVALID | Buyer PAN invalid; higher rate triggered | Apply higher Section 206CC rate; restate |
What automated scrap TCS reconciliation changes
A manufacturer with 20-30 scrap buyers across the year, ferrous and non-ferrous lines, weekly lifting cycles and quarterly Form 27EQ deadlines cannot close this on spreadsheets without leakage. The four-leg recon — scrap sale ledger, TCS collected, Form 27EQ, bank credit — and the cross-era handling against legacy 206C data needs structured matching. Purpose-built reconciliation software India for manufacturing carries the Section 394 sub-model in its preset library, tags every invoice with code 1071, runs the monthly challan ageing, surfaces 27EQ-pending lines before the quarterly deadline, and reconciles bank credits against invoice + TCS automatically. Build is two-to-four weeks on AWS Mumbai (ISO 27001:2022), with the manufacturer’s match rate moving from a 51% baseline to 88% across the broader AP and AR surface. For the headline three-way match rail see three-way matching software India, and for the pillar guide to all five manufacturing reconciliation rails see manufacturing reconciliation in India.
The current text of Section 394, the Form 27EQ filing utility, the Form 27D download facility and the payment code map are maintained on the Income Tax portal.