Section 206C Income Tax Act Is Not Attracted On Licences Issued By Government Permitting Liquor Trade: SC

The Supreme Court has emphasized that provisions of Section 206C of the Income Tax Act would not be attracted on licences issued by the government permitting the licensee to carry on liquor trade, as the licensee does not fall within the concept of “buyer” referred to in that provision.

In that context, the Bench of Justice BV Nagarathna and Justice Ujjal Bhuyan observed that, "“buyer” would mean a person who by virtue of the payment gets a right to receive specific goods and not where he is merely allowed/permitted to carry on business in that trade. On licences issued by the government permitting the licensee to carry on liquor trade, provisions of Section 206C are not attracted as the licensee does not fall within the concept of “buyer” referred to in that section. This Court emphasized that a buyer has to be a buyer of goods and not merely a person who acquires a licence to carry on the business."

This appeal was filed against the judgment and order dated March 13, 2006, by the Division Bench of the High Court of Karnataka at Bengaluru. The Division Bench dismissed the writ appeal by the appellant and other appeals by Mysore Sales International, the State of Karnataka, and Mysore Sugar Company Limited. These appeals challenged the judgment dated October 27, 2003, by a Single Judge of the High Court and contested the orders dated January 17, 2001, by the Deputy Commissioner of Income Tax (TDS)–1, Bengaluru, under Section 206C(6) of the Income Tax Act, 1961, for the assessment years 1995-1996 to 2000-2001, and the related demand notices under Section 156 of the Income Tax Act.

The assessing officer had determined that the appellant was a "seller" and liquor vendors were "buyers" under Section 206C, obligating the appellant to collect income tax at source from the liquor vendors. The officer declared certain sums as tax collectible at source, which the appellant failed to collect, and directed the appellant to deposit the amounts. Interest was also levied, followed by demand notices. The appellant's challenge to these orders was first dismissed by the Single Judge and then by the Division Bench.

The key issue in the appeal was whether Section 206C of the Income Tax Act applied to the appellant and whether the liquor vendors could be classified as "buyers" under Explanation (a) to Section 206C or excluded as per clause (iii) of the same section. Another issue was whether the High Court was justified in rejecting the appellant's challenge.

Mysore Sales International Limited, a Karnataka Government undertaking, engaged in manufacturing arrack and was an assessee under the Income Tax Act. The appellant entered the arrack trade in 1993 under the state's excise laws. Before 1993, private bottling units in Karnataka manufactured and sold arrack, and auctions were held to grant retail vending rights. Successful bidders procured arrack from bottling units and sold it in designated areas. The state controlled the trade.

In 1993, Karnataka discontinued private bottling units' operations, restricting them to state undertakings like Mysore Sales and Mysore Sugar Company Limited. Mysore Sales managed the northern districts, while Mysore Sugar covered the rest. The state government controlled the entire operation, including the amount realizable by the appellant.

Successful excise contractors procured arrack from Mysore Sales or Mysore Sugar. Section 206C of the Income Tax Act, effective from June 1, 1988, required sellers to collect tax at source from buyers. However, a circular from the Excise Commissioner on June 16, 1998, clarified that since the selling price of arrack was fixed by the Excise Commissioner, no TDS was required from the liquor vendors.

Despite this, the assessing officer issued notices on October 26, 2000, requiring the appellant to pay TDS amounts not collected from the excise contractors. The appellant responded, but the officer's orders dated January 17, 2001, directed the appellant to pay the TDS amounts and issued demand notices. The appellant's writ petitions were dismissed by the Single Judge on October 27, 2023, and the Division Bench on March 13, 2006.

The Court held that Section 206C of the Income Tax Act was not applicable to Mysore Sales International Limited, and the liquor vendors (contractors) who bought the vending rights from the appellant on auction could not be termed as "buyers" within the meaning of Explanation(a) to Section 206C of the Income Tax Act.

The judgment clarified the definitions of "buyer" and "seller" under the Explanation to Section 206C. According to Explanation(a), a "buyer" means a person who obtains, through auction, tender, or any other mode, goods of the nature specified in the table in sub-section (1) or the right to receive such goods. However, the term "buyer" does not include "(i) a public sector company; (ii) a buyer in the further sale of such goods obtained in pursuance of such sale; (iii) a buyer where the goods are not obtained by him by way of auction and where the sale price of such goods to be sold by the buyer is fixed by or under any State Act." On the other hand, a "seller" is defined to mean the central government, a state government, any local authority, or a corporation or authority established by or under a central, state, or provincial act, or any company, firm, or cooperative society.

The Court emphasized that Explanation(a)(iii) sets out two conditions for a person to be excluded from the definition of "buyer." The first condition is that the goods are not obtained by the person by way of auction. The second condition is that the sale price of such goods to be sold by the buyer is fixed under a state enactment. These two conditions are conjunctive, meaning that both must be fulfilled for the exclusion to apply.

In applying these definitions to excise contractors, the Court noted that the contractors are only shortlisted by a process of auction or tender to receive the right to retail vend arrack in specific areas. "It cannot be said that by virtue of the auction, certain quantities of arrack are purchased by the excise contractors."

Therefore, the first condition under Explanation(a)(iii) is satisfied as the contractors do not obtain the arrack by way of auction but by acquiring the right to retail vend.

The second condition is also satisfied because the sale price of arrack, sold by the excise contractors, is fixed within a predetermined range by the Excise Commissioner under Rule 4 of the 1967 Rules. "Though price range is provided for by the statute, it cannot be said that because there is a price range providing for a minimum and a maximum, the sale price is not fixed." The sale price is statutorily fixed within a particular range, satisfying the second condition.

Since both conditions are satisfied, the excise contractors or liquor vendors selling arrack do not come within the ambit of "buyer" as defined under Explanation(a) to Section 206C of the Income Tax Act.

Additionally, the Court stressed the importance of natural justice and the requirement of notice and hearing before passing an order under Section 206C. "Even though the statute may be silent regarding notice and hearing, the court would read into such provision the inherent requirement of notice and hearing before a prejudicial order is passed."

Subsequently, the petition was allowed.

Cause Title: The Excise Commissioner Karnataka & Anr. vs Mysore Sales International Ltd. & Ors.

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