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 government not the contractors; (3) Liquor contractors only get a license to sell arrack, not the actual product; (4) These contractors aren't "buyers" as defined in Section 206C; (5) the arrack is not obtained by the contractors through an auction, the auction is only for the right to sell in retail area; (6) the taxing statute has to be interpreted strictly and not expansively to include exempted persons in its ambit; (7) sale by the manufacturers to contractors was wholly for retail vending at prices fixed by the state and doesn't fall in the definition of 'sale' as per S. 206C; (8) the order of the revenue officer was in violative of principle of natural justice as it did not give a hearing to the manufacturers and is void ab initio.

The counsel for the Revenue Authorities on the other contended that : (1) the High Court's decision to affirm the assessment order suffers from no infirmity; (2) The assessing officer found that there wasn't a fixed price for liquor. Instead, there was a range of prices set by the Karnataka Excise Department. (3) In 2000, the minimum price was Rs. 55 and the maximum was Rs. 85 per bulk litre and Sellers could choose any price within this range;

(4) The assessing officer was of the opinion that the vendors got the arrack only through auction by winning bids and getting permits; (5) contractors came in the definition of "buyer" under Section 206C of the Income Tax Act and Manufacturers failed to collect TCS.

Court's Analysis Of Explanation To 'Buyer' Under S. 206 C of IT Act

The Court observed that the main issue in contention is the interpretation of the term 'buyer' under S. 206C and exemptions to the definition. It noted that the Explanation to Section 206C defines "buyer" as a person who obtains goods specified in the table in sub-section (1) through auction, tender, or other means. However, certain entities are excluded from this definition:

(1) Public sector companies; (2) Buyers in further sales of such goods; (3) Buyers who do not obtain goods by auction and where the sale price is fixed by a State Act

"Seller" is defined as the central government, state government, local authority, or any company, firm, or cooperative society established under a central, state, or provincial act.

The Court then zoomed into understanding the third exemption- Explanation (a)(iii) Buyers who do not obtain goods by auction and where the sale price is fixed by a State Act. Under the said exemption, two conditions were required to be met conjointly - (1) The goods are not obtained by auction and (2) The sale price of the goods is fixed by a State Act.

It was held that both the conditions were twin requirements because of the presence of the term 'and'.

“The word 'and' is conjunctive to mean that both conditions must be fulfilled; it is not either of the two. Therefore, to be excluded from the ambit of the definition of “buyer” as per Explanation(a)(iii), both the conditions must be satisfied.”

Applying the present conditions on the vendors/contractors, the Court concluded that the vendors would not fall under the definition of 'buyer' due to the following reasons : (1) They obtain the right to vend arrack through auction, not the arrack itself- the vendors are only shortlisted and then provided permits ; (2) with help of the permits they procure arrack from warehouses at prices fixed by the Excise Commissioner and (3) The vendors sell arrack at prices within a range set by Rule 4 of the 1967 Rules

“Therefore, by the process of auction etc., the excise contractors are only shortlisted and conferred the right to retail vend of arrack in their respective areas. It cannot be said that by virtue of the auction, certain quantities of arrack are purchased by the excise contractors. Thus, at this stage there are two transactions, each distinct. The first transaction is shortlisting of excise contractors by a process of auction etc. for the right to retail vend. The second transaction, which is contingent upon the first transaction, is obtaining of arrack for retail vending by the excise contractors on the strength of the permits issued to them post successful shortlisting following auction. Therefore, 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. Thus, the first condition under clause (iii) is satisfied.”

“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 fixed by the statute but within a particular range beyond which price, either on the higher side or on the lower side, the arrack cannot be sold by the excise contractor in retail. Therefore, the arrack is sold at a price which is fixed statutorily under Rule 4 of the 1967 Rules and thus the second condition stands satisfied.”

Therefore the Court expressly held that since the twin conditions are satisfied, the liquor vendors/ contractors cannot be considered as 'buyers' under S. 206 C of the IT Act.

Revenue Officer's Obligation To Follow Principles Of Natural Justice In Absence Of Express Provision Under S. 206 C

The Court further observed that the assessment order passed by the revenue authorities without giving a fair chance to Manufacturers was perverse as it was against the principles of natural justice.

S. 206C (6) provides that If a person responsible for collecting tax fails to do so, they are still liable to pay the tax to the Central Government as per subclause (3). According to sub clause (3) Any person who collects tax must pay it to the Central Government or as directed by the Board within the prescribed time.

(3) Any person responsible for collecting the tax who fails to collect the tax in accordance with the provisions of this section, shall, notwithstanding such failure, be liable to pay the tax to the credit of the Central Government in accordance with the provisions of sub-section (3).

The Court held that while there is no express requirement under subclause (6) for the tax collector to follow principles of natural justice before passing orders under Section 206C(6). It is implied that the following be mandatorily followed : (1) Issuing a notice to the person concerned and (2)Providing an adequate opportunity for hearing, including a personal hearing

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. We, therefore, hold that before an order is passed under Section 206C of the Income Tax Act, it is incumbent upon the assessing officer to put the person concerned to notice and afford him an adequate and reasonable opportunity of hearing, including a personal hearing.

The Court had also set aside the orders of the High Court in affirming the revenue officer's dated January 17, 2001.

“We also hold that the High Court was not justified in dismissing the writ petitions and consequently, the writ appeal challenging the orders dated 17.01.2001.”

Case Details : THE EXCISE COMMISSIONER KARNATAKA & ANR. v. MYSORE SALES INTERNATIONAL LTD. & ORS CIVIL APPEAL NO. 2168 OF 2007

Citation : 2024 LiveLaw (SC) 496

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