The application of Section 206C of the Income Tax Act, 1961, regarding tax collection at source on the sale of alcoholic liquor, particularly focusing on Karnataka's Mysore Sales International Limited (Mysore Sales) and retail liquor vendors (excise contractors). It discusses whether Mysore Sales qualifies as a "seller" and whether the excise contractors are "buyers" under Section 206C. The court concludes that the contractors are indeed "buyers," thus requiring Mysore Sales to collect TDS from them. The appeal against this interpretation lacks merit, and previous orders demanding tax collection are upheld.

Introduction

• Section 17 of the Excise Act allows the state government to grant leases for manufacturing liquor.
• Rule 3(1) of the 1987 Rules empowers the Excise Commissioner to grant licenses for manufacturing or bottling arrack.

Licensing and Retail Vend of Arrack

• From 01.07.1993, Rule 3(2) restricts licenses to state-controlled entities.
• Mysore Sales was granted a license for arrack manufacture and bottling.
• Retail vendors are selected through auctions and required to sell only sealed bottles or sachets.
• The Excise Commissioner fixes the price for arrack procurement and retail pricing is regulated.

Section 206C of the Income Tax Act

• Mandates sellers to collect tax at source on specified goods, including alcoholic liquor.
• Tax collected must be credited to the central government within seven days.
• Subsection (4) clarifies that collected tax is deemed income tax payment for the buyer.
• Subsections (5)-(8) outline reporting, interest, and penalties for non-compliance.
• Definitions of "buyer" and "seller" are crucial to the application of Section 206C.

Analysis of Excise Contractors as "Buyers"

• Excise contractors obtain the right to retail vend through auctions, not the arrack itself.
• They procure arrack from Mysore Sales at fixed prices and sell within a regulated price range.
• Both conditions under Explanation(a)(iii) for exclusion from "buyer" status are satisfied.

Judicial Precedents and Decisions

• Reference to Om Parkash case, which held licensees are not "buyers" under Section 206C.
• Mysore Sales was wrongly ordered to collect and deposit tax from excise contractors.
• The importance of following principles of natural justice before passing prejudicial orders.

Conclusion and Orders

• The Court concludes Section 206C does not apply to Mysore Sales or the excise contractors.
• Sets aside previous orders and judgments requiring tax collection from Mysore Sales.
• The appeal is allowed without any cost implications.