Section 394 TCS on Scrap Sale by Auto Component Manufacturers: Payment Code 1071 (FY 2026-27)

A finance controller at a stamping supplier in Aurangabad opens the FY 2026-27 scrap-sale ledger for the first quarter. ₹1.34 crore of scrap sold to six dealers across 47 transactions. ₹1.34 lakh of Tax Collected at Source — 1% on each sale — sitting against three monthly deposit windows, one quarterly Form 27EQ filing window, and six pending Form 27D certificates. None of this existed under the legacy code in this form. From 1 April 2026 every scrap-sale transaction is governed by Section 394 of the Income Tax Act 2025 with payment code 1071, replacing the Section 206C(1) lineage that ran for the 25 years prior. The buyer dealers are watching for their Form 27D so they can claim the TCS as advance tax. The TRACES portal is watching for the deposit by the 7th of next month, the Form 27EQ by the 15th of next-quarter-month, and the cross-era reconciliation against any lingering FY 2025-26 transactions still adjusting under code 6CR.

This is the Section 394 TCS scrap sale auto component India compliance corner — a low-rate, high-volume routine that every auto-component CFO must operationalise from FY 2026-27 onwards. This guide walks the full mechanics: what Section 394 says, what code 1071 specifies in the TRACES challan, which auto-component scrap categories are in scope, the parallel-but-separate GST Section 52 stream, cross-era handling against legacy Section 206C(1), and a worked example on a ₹4.8 crore annual scrap-sale Tier-1.

Quick reference

What does Section 394 require, and how is it different from legacy Section 206C(1)?

Section 394 of the Income Tax Act 2025, operative from 1 April 2026, restates and modernises the scrap-TCS regime that ran for 25 years under Section 206C(1) of the Income Tax Act 1961. The substantive obligation is unchanged: every seller of scrap collects 1% TCS from the buyer at the earlier of payment receipt or buyer-account debit. Three operational changes matter:

1. Payment code 1071 replaces legacy code 6CR. The TRACES challan code structure realigns under the new Act. A 1 April 2026 challan paid against the seller’s TAN must use code 1071. Using code 6CR on a post-2026-04-01 transaction will fail challan reconciliation at TRACES.
2. Form 27EQ format extends to carry both legacy and new codes during the cross-era window. A seller filing the Form 27EQ for Q1 FY 2026-27 reports new-code collections (1071). A seller with a residual FY 2025-26 transaction still in adjustment reports it on the legacy lineage. The two streams do not net.
3. Form 27D references update. The buyer’s Form 27D for FY 2026-27 collections carries the Section 394 reference. FY 2025-26 Form 27D continues to reference Section 206C(1).

The substantive rate, base, and timing have not changed — 1% of sale consideration before GST, deposited by the 7th of the following month, quarterly return on Form 27EQ, buyer certificate on Form 27D within 15 days of the Form 27EQ due date. For the cross-era TDS framework see TDS payment codes 1001-1092 India and Section 393 TDS new Income Tax Act reconciliation — Section 394 (TCS) sits parallel to the Section 393 (TDS) family.

Which auto-component scrap categories fall under Section 394?

The Section 394 definition of scrap inherits Section 206C(1)‘s framing: waste and scrap from the manufacture or mechanical working of materials which is definitely not usable as such because of breakage, cutting up, wear and other reasons. In auto-component manufacturing this covers six structural byproduct streams:

Stamping skeleton scrap. Press operations on HR / CR / GA coil produce the part plus a skeleton — the frame of the strip after the blanks are punched out. Skeleton scrap is the largest scrap stream by tonnage at a stamping plant — 18% to 32% of input coil weight at typical body-panel configurations. See free-issue material accounting for auto-stamping for the coil-yield mechanics that drive scrap economics.

Forging flash and trim loss. Drop-forging and press-forging operations produce excess metal (flash) along the parting line which is trimmed off post-forging. Flash and trim loss together run 8% to 15% of input billet weight on typical crankshaft, connecting-rod and axle-shaft forgings.

Machining swarf and chips. Turning, milling, boring and drilling operations on automotive components — engine blocks, cylinder heads, gear blanks, transmission shafts — generate continuous chips and swarf. Swarf is segregated by alloy grade (mild steel, alloy steel, cast iron, aluminium) for higher resale value.

Casting scrap. Sand-casting and pressure-die-casting operations generate scrap from melt loss, rejection at incoming inspection, sprue, runner and gating residue. Casting scrap is typically returned to the foundry’s own melt operation for recycling — only the externally-sold portion is in Section 394 scope.

Sprue and runner residue from injection moulding. Plastic injection moulding on instrument panels, bumpers, exterior trims and under-bonnet components produces sprue and runner that is either ground in-house or sold to plastic recyclers.

Heat-treatment and plating-line scrap. Reject parts from carburising, nitriding, induction-hardening, zinc-plating and e-coating lines that cannot be reworked.

Each category goes to a different buyer profile — skeleton scrap to re-rolling mills and sponge-iron units, forging flash and machining swarf to steel melt shops, casting scrap to foundries, plastic residue to plastic recyclers — but the Section 394 1% TCS obligation is the same across all categories.

How Section 394 (Income Tax TCS) and Section 52 (GST TCS) differ — they are separate streams

A recurring confusion in auto-component finance teams: when the year-end Form 26AS / Form 168 reconciliation throws up TCS entries, are these from scrap sale or from e-commerce? The two are entirely separate provisions and must be reconciled separately.

Section 394 of the Income Tax Act 2025 is a seller-side obligation. The auto-component manufacturer (the seller of scrap) collects 1% from the buyer (the scrap dealer), deposits it as Income Tax TCS under code 1071, and issues Form 27D. The buyer claims it as a tax credit in their income tax return.

Section 52 of the CGST Act is an e-commerce-operator obligation. An operator (e.g. an industrial procurement marketplace) collects 0.5% CGST + 0.5% SGST (or 1% IGST) from the supplier on supplies routed through the operator’s platform. It is filed in GSTR-8 monthly. The supplier sees it as a tax credit in their electronic cash ledger.

An auto-component manufacturer that sells skeleton scrap to a registered scrap dealer is in Section 394 territory only — there is no Section 52 implication on direct B2B scrap sale. If the same manufacturer sells aftermarket spare parts through an industrial procurement marketplace, Section 52 applies on that separate stream — but the scrap-sale TCS and the e-commerce GST TCS never mix.

The cross-stream confusion typically surfaces in two places. First, in the year-end Form 168 reconciliation when both TCS streams show up against the manufacturer’s PAN — Section 394 entries from scrap dealers and Section 52 entries from e-commerce operators. Second, in the monthly cash-ledger walk at GSTR-3B prep when the Section 52 GSTR-8 credit lands but the Section 394 deposits are sitting on the income-tax side of the books. See Form 26AS reconciliation for auto-component suppliers for the cross-era and cross-stream reconciliation workflow.

How the monthly and quarterly Section 394 workflow runs

The Section 394 routine compresses into four recurring deadlines per quarter:

Monthly TCS deposit — by the 7th of the next month. All Section 394 collections during a month are aggregated, deposited via challan under code 1071 against the seller’s TAN. For March collections the deadline extends to 30 April. Failure to deposit on time attracts interest at 1% per month from the collection date to the deposit date under Section 466.

Quarterly Form 27EQ filing — by 15 July / 15 October / 15 January / 15 May. The Form 27EQ on TRACES reports every collection during the quarter, line by line, with buyer PAN, transaction date, sale consideration, TCS collected, deposit challan reference, and code 1071. Late filing attracts a fee of ₹200 per day under Section 471, capped at the TCS amount.

Form 27D issuance — within 15 days of Form 27EQ due date. The buyer’s certificate, generated from the TRACES system post-Form 27EQ processing, must be downloaded and issued to each buyer. The buyer uses Form 27D to claim the TCS in their income tax return.

Annual Form 168 reconciliation. Every scrap-buyer PAN’s TCS credit reflects in the consolidated Form 168 (the new tax-credit statement from FY 2026-27, replacing legacy Form 26AS). Any mismatch between the seller’s records and the buyer’s Form 168 is resolved through TRACES correction statements.

Worked example — Tier-1 stamping supplier with ₹4.8 crore annual scrap sale

Consider a stamping Tier-1 in Sanand running press operations on body-panel coils with the following FY 2026-27 scrap profile:

At 1% Section 394 TCS, total annual TCS collected is ₹4,92,000 spread across 144 transactions. The monthly TCS deposit run sees ₹40,000 to ₹46,000 deposited under code 1071 on the 7th of each following month — 12 deposits per FY plus the 30 April finalisation for March collections.

Quarterly Form 27EQ filings — four per year, each carrying 30 to 40 transactions, with combined TCS in the ₹1.2 lakh band per quarter.

Quarterly Form 27D issuance — six certificates per quarter, one per buyer PAN, downloaded from TRACES within 15 days of the Form 27EQ due date and issued to each scrap dealer.

If any monthly deposit slips by 22 days (e.g. 7 August deadline missed, deposit made on 29 August), interest at 1% per month under Section 466 lands at ₹400 to ₹500 on the affected month’s ₹40,000 to ₹46,000 base. Late Form 27EQ filing attracts ₹200/day under Section 471, capped at the quarterly TCS amount. A Tier-1 missing one quarterly filing by 30 days pays ₹6,000 in fees — small per occurrence but compounding fast if the discipline breaks down repeatedly.

Auto component reconciliation software India treats the Section 394 scrap-sale TCS workflow as a structured variance stream in the same engine that handles OEM settlement reconciliation, Section 393 contractor TDS on Tier-2 conversion charges, and Section 393(1)(k) purchase TDS on raw-material recoveries. TransactIG’s auto-component preset is part of 24+ industry presets, deployed on AWS Mumbai under ISO 27001:2022, with documented customer outcomes including match-rate improvement from 51% to 88%. The build window is 2 to 4 weeks.

Cross-era handling — legacy Section 206C(1) code 6CR and new Section 394 code 1071

Through FY 2026-27 and parts of FY 2027-28, every auto-component supplier carries two parallel TCS lineages:

Legacy lineage (Section 206C(1) code 6CR). Any scrap sale transaction with a sale date on or before 31 March 2026. Even if the buyer disputes the rate in FY 2026-27 and forces a refund or rate adjustment, the lineage stays under code 6CR for the entire correction cycle. Form 27D for FY 2025-26 references Section 206C(1).

New lineage (Section 394 code 1071). Every scrap sale transaction with a sale date on or after 1 April 2026. Form 27D for FY 2026-27 references Section 394.

The two streams must be reported separately in Form 27EQ during the cross-era window. Mixing codes on a single challan or in a single quarterly return triggers TRACES challan-mismatch errors that delay buyer Form 27D processing.

For the official text of Section 394 and the TRACES infrastructure see the Income Tax Department of India.

Tax overlay — adjacent codes that auto-component suppliers must run in parallel

Section 394 sits inside a broader new-framework tax overlay that auto-component finance teams operate from FY 2026-27 onwards. See manufacturing scrap TCS reconciliation under Section 394 for the manufacturing-pillar treatment.

• Section 393(1)(a) code 1002 — Contractor TDS at 1% / 2% on Tier-2 job-work conversion charges
• Section 393(1)(k) code 1012 — Purchase TDS at 0.1% on raw-material purchases above ₹50 lakh aggregate per supplier per FY
• Section 394 code 1071 — Scrap sale TCS at 1% (the subject of this article)
• Section 413 code 1062 — Foreign-currency commission TDS on overseas agent payments for export sales

These four codes are the recurring new-framework tax surface for an auto-component manufacturer. The full code map across the 1001-1092 range is in TDS payment codes 1001-1092 India.

Audit defence — what the statutory auditor will test

Statutory auditors test Section 394 compliance through five standard checks:

1. Scrap-sale ledger reconciliation to Form 27EQ. Every scrap-sale invoice in the books must map to a Form 27EQ line in the relevant quarter.
2. Challan code accuracy. All FY 2026-27 deposits must use code 1071; no stray code 6CR challans.
3. Form 27D issuance evidence. Every buyer’s Form 27D must be downloaded from TRACES and dispatched within the 15-day window.
4. Section 466 interest accuracy. Where any monthly deposit slipped, the interest computation and payment must be on file.
5. Cross-stream isolation from Section 52. No conflation of Income Tax TCS (Section 394) with GST TCS (Section 52); separate ledgers and separate reporting.

A Tier-1 running scrap-sale TCS in Excel typically passes checks 1 to 3 by manual diligence but fails checks 4 and 5. A reconciliation engine passes all five by construction.

Continue reading

Sibling articles in the auto-component cluster:

• Manufacturing scrap TCS reconciliation under Section 394
• Free-issue material accounting for auto-stamping
• Free-issue steel and skeleton scrap reconciliation

Up the chain:

• Sub-pillar: Automotive component manufacturing reconciliation in India
• Pillar: Manufacturing reconciliation in India
• Money pages: auto component reconciliation software India · three-way matching software India