State Not Liable To Collect Tax At Source While Giving Contractors Permit To Vend Liquor At Fixed Retail Price : Supreme Court

The Supreme Court recently held that any vendor who buys liquor from state manufacturers without obtaining it through auction and sells in retail at a fixed price would be excluded from the definition of 'buyer' under Section 206C of the Income Tax Act. Such a trade would be exempted from TCS (Tax Collected at Source)."If the buyer is a public sector company or it has obtained the goods in further sale or if 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 enactment, then such a person would not come within the ambit of “buyer” as per the definition in Explanation(a) of Section 206C," the Court stated.The bench of Justices BV Nagarathna and Ujjal Bhuyan observed that a twin test is to be applied to be excluded from the definition of 'buyer' under S. 206 C of the Income Tax Act 1961 as provided under explanation (a)(iii). This includes (a) obtaining the goods without auction and (b) selling the goods at a price fixed by the state government.The Court went a step further to observe that an auction of the right to sell the liquor (goods in this case) would not be considered as the auction of the liquor itself."...it is evidently clear that arrack is not obtained by the excise contractors by way of auction. What is obtained by way of auction is the right to vend the arrack on retail on the strength of permits granted, following successful shortlisting on the basis of auction."The Court also held that the revenue officer responsible for collecting tax and paying it to the central government under S. 206 C (6) has to mandatorily follow the principles of natural justice by issuing notice to the other side and ensuring fair opportunity for hearing. The Excise Commissioner of the State of Karnataka (appellant) appealed against the order of the Division Bench of the Karnataka High Court which upheld the order dated 17.01.2001 passed by the Deputy Commissioner of Income Tax under Section 206C(6) of the Income-tax Act, 1961 (IT Act). The revenue officers assessment order and demand notices were passed in light of the assessment years 2000-2001, 1999-2000, 1998-1999, 1997-1998, 1996-1997 and 1995-1996. By the orders dated 17.01.2001, the assessing officer held that the appellant is a “seller” and the liquor vendors (contractors of the State) are “buyers” in terms of Section 206C of the Income Tax Act and hence the appellant or the state manufacturer was under a legal obligation to collect income tax at source from the contractors for the financial years relevant to the aforesaid assessment years. The assessment order was first challenged before a Single Bench and then before a Division Bench both of which dismissed the petitions of the appellant. The key contention in the case began in 1993 when the appellant(State) discontinued private bottling units and entrusted the task to state companies like Mysore Sales (respondent no. 1). Mysore Sales International Limited was a Karnataka Government undertaking engaged in arrack manufacturing. It was responsible for bottling and marketing arrack in northern Karnataka districts. Arrack bottling in the rest of the state was covered by another state-owned company called Mysore Sugar (respondent no.5). It may be noted that once the arrack was manufactured and bottled it became the property of the appellant. The Excise Commissioner decided how much the manufacturer can charge vendors. The state-controlled the entire process, including pricing. Vendors/ contractors were required to pay excise duty to the government before getting the bottled arrack. They received a permit after paying, which they used to collect arrack from the manufacturers (respondents 1 and 5). The retail pricing of the arrack was fixed by the appellant and governed by the Karnataka Excise (Arrack Vend Special Conditions of Licenses) Rules, 1967 (the 1967 Rules). The right to sell arrack in an area was auctioned off. S. 206C of the IT Act came into effect on June 1, 1988. As per the section, the 'seller' of alcoholic liquor was obligated to collect tax at source at the time of payment by the 'buyer' of such liquor. However, under Explanation (a), it excluded certain persons from being considered as 'buyers'. Subsequently, the Excise Commissioner of Karnataka issued a circular on June 16, 1998. An addendum was also issued to this circular which clarified that since Arrack was (1) not obtained through auction and (2) its selling price was fixed by the Excise Commissioner, there was no need to collect TCS from excise vendors or contractors. As a result of this circular, the appellant did not collect TCS from liquor vendors/ contractors Arguments Raised By The Parties Additional Advocate General (AAG) Avishkar Singhvi appearing for the State of Karnataka argued the following points : (1) Section 206C of the Income Tax Act doesn't apply to Mysore Sales, a government-controlled company; (2) The arrack belongs to the state ...

State Not Liable To Collect Tax At Source While Giving Contractors Permit To Vend Liquor At Fixed Retail Price : Supreme Court

Anmol Kaur Bawa

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