Supreme Court rules Mysore Sales not liable to collect Tax at Source from arrack vendors
Justices BV Nagarathna & Ujjal Bhuyan [08-07-2024]

Read Order: THE EXCISE COMMISSIONER KARNATAKA & ANR v. MYSORE SALES INTERNATIONAL LTD. & ORS [SC- CIVIL APPEAL NO. 2168 OF 2007]

LE Correspondent

New Delhi, July 9, 2024: The Supreme Court has held that Mysore Sales International Ltd., a Karnataka government undertaking engaged in manufacturing arrack (local alcoholic beverage), is not liable to collect income tax at source (TDS) from arrack vendors under Section 206C of the Income Tax Act, 1961.

The apex court allowed the appeal filed by Mysore Sales against the orders of the Karnataka High Court which had upheld the Income Tax department's demand for TDS from Mysore Sales for the assessment years 1995-96 to 2000-01. The Supreme Court bench comprising Justice BV Nagarathna and Justice Ujjal Bhuyan set aside the High Court orders and quashed the TDS demand raised by the Income Tax authorities.

The key issue was whether arrack vendors who obtained retail vending rights from Mysore Sales through auction could be considered as "buyers" under Section 206C, making Mysore Sales liable to collect TDS from them. The Supreme Court analyzed the excise laws and rules in Karnataka and held that the auction process only determined the persons who would get the right to retail vend of arrack. The actual procurement of arrack by the vendors was a separate transaction based on permits, and not through auction. Hence, the first condition for exclusion from the definition of "buyer" under Section 206C stood satisfied.

Further, the retail price of arrack is fixed by the Excise Commissioner within a statutorily prescribed range. Therefore, the second condition that sale price is fixed under a state law was also met. Since both conditions were fulfilled, the Court ruled that the arrack vendors cannot be considered as "buyers" under Section 206C. The apex court emphasized that before passing an order under Section 206C(6) for payment of TDS amount, the assessing officer must issue notice and provide adequate opportunity of hearing to the assessee, even if the provision is silent on this.

Setting aside the High Court judgment, the Supreme Court quashed the TDS demand notices issued to Mysore Sales, providing relief to the state-owned company. The decision is likely to impact similar TDS cases against state beverage corporations involved in wholesale supply of liquor.