THE EXCISE COMMISSIONER KARNATAKA & ANR.versusMYSORE SALES INTERNATIONAL LTD. & ORS.

                  [2024] 7 S.C.R. 287 : 2024 INSC 484

           The Excise Commissioner Karnataka & Anr.
                               v.
             Mysore Sales International Ltd. & Ors.
                       (Civil Appeal No. 2168 of 2007)
                                  08 July 2024
              [B.V. Nagarathna and Ujjal Bhuyan,* JJ.]

                            Issue for Consideration
       Whether provisions of Section 206C of the Income Tax Act is
       applicable in respect of the appellant and whether the liquor
       vendors (contractors) who bought the vending rights from the
       appellant on auction, can be termed as “buyer” within the meaning
       of Explanation(a) to Section 206C of the Income Tax Act or excluded
       from the said definition of “buyer” as per clause (iii) of Explanation
       (a) to Section 206C of the said Act. Relatable to the above core
       issue is the question as to, whether, the High Court was justified
       in rejecting the challenge to the said orders made by the appellant.

                                   Headnotes†
       Income Tax Act, 1961 – Explanation(a)(iii) to section 206C –
       Karnataka Excise Act, 1965 – Karnataka Excise (Arrack
       Vend Special Conditions of Licenses) Rules, 1967 – Rule 4 –
       Karnataka Excise (Lease of the Right of Retail Vend of Liquors)
       Rules, 1969 – Karnataka Excise (Manufacture and Bottling
       of Arrack) Rules, 1987 – By the order dated 17.01.2001, the
       assessing officer held that the appellant is a “seller” and the
       liquor vendors are “buyers” in terms of Section 206C of the
       Income Tax Act and hence the appellant was under a legal
       obligation to collect income tax at source from the liquor
       vendors (contractors) – The challenge to the said order dated
       17.01.2001 was negatived first by the Single Judge and then
       by the Division Bench of the High Court – Justified or not:
       Held: Explanation(a)(iii) to section 206C of the Income Tax Act,
       1961 visualizes two conditions for a person to be excluded from
       the meaning of “buyer” as per the definition in Explanation(a) – The
       first condition is that the goods are not obtained by him 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

* Author
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       conditions are joined by the word ‘and’ – The word ‘and’ is conjunctive
       to mean that both the 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 – In the instant case, Mysore Sales is the licensee for the
       manufacture and bottling of arrack for specified area(s) – By a process
       of auction or tender or auction-cum-tender etc., excise contractors
       are shortlisted who are thereafter granted permits to vend arrack by
       retail in their respective area(s) – These retail vendors i.e. excise
       contractors have to procure the arrack from the warehouse or depot
       maintained by Mysore Sales on payment of the issue price fixed by
       the Excise Commissioner – The arrack is procured in sealed bottles
       or in sealed polythene sachets – So, 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 – Rule
       4 of the 1967 Rules enables the excise contractor to sell the arrack in
       retail at a price within the range of minimum floor price and maximum
       ceiling price which is fixed by the Excise Commissioner – The price
       of arrack to be sold in retail is not dependent on the market forces
       but pre-determined within a range – Therefore, 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 – Since both the conditions as mandated under Explanation(a)
       (iii) are satisfied, the excise contractors or the liquor vendors selling
       arrack would not come within the ambit of “buyer” as defined under
       Explanation(a) to Section 206C of the Income Tax Act – Thus, the
       question framed in issue for consideration, is answered in the negative
       by holding that Section 206C of the Income Tax Act is not applicable
       in respect of Mysore Sales and that the liquor vendors(contractors)
       who bought the vending rights from the appellant on auction cannot
       be termed as “buyers” within the meaning of Explanation(a) to Section
[2024] 7 S.C.R.                                                             289

             The Excise Commissioner Karnataka & Anr. v.
                Mysore Sales International Ltd. & Ors.

     206C of the Income Tax Act – Thus, the High Court was not justified
     in dismissing the writ petitions and consequently, the writ appeal
     challenging the orders dated 17.01.2001. [Paras 14.5, 15, 15.2, 16]
     Income Tax Act, 1961 – Karnataka Excise Act, 1965 – Karnataka
     Excise (Arrack Vend Special Conditions of Licenses) Rules,
     1967 – Karnataka Excise (Lease of the Right of Retail Vend
     of Liquors) Rules, 1969 – Karnataka Excise (Manufacture and
     Bottling of Arrack) Rules, 1987 – Essentials of the Principle
     of Natural Justice to be followed:
     Held: In the instant case, though show cause notice was issued
     to the assessee to which reply was also filed, the same would
     not be adequate having regard to the consequences that such
     an order passed under Section 206C(6) of the Income Tax Act
     would entail. 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 – Therefore, it is held 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. [Para 19]

                              Case Law Cited
     Union of India v. A. Sanyasi Rao [1996] 2 SCR 570 : (1996) 3
     SCC 465; Gian Chand Ashok Kumar and Company v. Union of
     India (1991) 187 ITR 188 (HP); K.K. Mittal v. Union of India (1991)
     187 ITR 208 (P&H); State of Bihar v. Commissioner of Income Tax
     (1993) 202 ITR 535 (PAT); M/s Naresh Kumar and Company v.
     Union of India ILR (2000) 2 P&H; Saini and Company v. Union of
     India (2000) 246 ITR 762 (HP); Chandigarh Distillers and Bottlers
     Ltd. v. Union of India (2002) 253 ITR 205 (P&H); Union of India
     v. Om Parkash S.S. and Company [2001] 1 SCR 1113 : (2001)
     3 SCC 593 – referred to.

                                List of Acts
     Income Tax Act, 1961; Karnataka Excise Act, 1965; Karnataka
     Excise (Arrack Vend Special Conditions of Licenses) Rules, 1967;
     Karnataka Excise (Lease of the Right of Retail Vend of Liquors)
     Rules, 1969; Karnataka Excise (Manufacture and Bottling of Arrack)
     Rules, 1987.
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                              List of Keywords
       Explanation(a)(iii) to section 206C of the Income Tax Act, 1961;
       Buyer as defined under Explanation(a) to Section 206C of the
       Income Tax Act, 1961; Liquor vendors; Process of auction or
       tender or auction-cum-tender; Retail vendors; Excise contractors;
       Rule 4 of the Karnataka Excise (Arrack Vend Special Conditions
       of Licenses) Rules, 1967; Principle of Natural Justice; Reasonable
       opportunity of hearing.

                             Case Arising From
       CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2168 of 2007
       From the Judgment and Order dated 13.03.2006 of the High Court
       of Karnataka at Bangalore in WA No. 7825, 7926 and 8021 of 2003
                          Appearances for Parties
       Avishkar Singhvi, A.A.G., V. N. Raghupathy, Vivek Kumar Singh,
       Naved Ahmed, Bharat Garg, Manendra Pal Gupta, Advs. for the
       Appellants.
       Balbir Singh, A.S.G. Arijit Prasad, Sr. Adv., Raj Bahadur Yadav,
       Mrs. Archana Pathak Dave, Anmol Chandan, Ms. Niranjna Singh,
       Prashant Singh Ii, Udai Khanna, Indrajit Prasad, Vijay Nand Tripathi,
       Deepak Kumar, Dr. Nanda Kishore, Rajesh Mahale, Advs. for the
       Respondents.
                  Judgment / Order of the Supreme Court

                                  Judgment
       Ujjal Bhuyan, J.
       Heard learned counsel for the parties.
2.     This appeal has been preferred against the judgment and order
       dated 13.03.2006 passed by the Division Bench of the High Court
       of Karnataka at Bengaluru (briefly “the High Court” hereinafter)
       in Writ Appeal No. 7926/2003. By the aforesaid judgment and
       order, the Division Bench had dismissed the writ appeal filed by
       the appellant as well as other writ appeals filed by Mysore Sales
       International, State of Karnataka and Mysore Sugar Company
       Limited assailing the common judgment and order dated 27.10.2003
       passed by the learned Single Judge of the High Court, dismissing
[2024] 7 S.C.R.                                                       291

             The Excise Commissioner Karnataka & Anr. v.
                Mysore Sales International Ltd. & Ors.

     Writ Petition Nos. 6869-6874 of 2001 filed by the appellant and
     other writ petitions filed by the above parties against the orders
     dated 17.01.2001 passed by the Deputy Commissioner of Income
     Tax (TDS)–1, Bengaluru (referred to hereinafter as “the assessing
     officer” or “the revenue”) under Section 206C(6) of the Income tax
     Act, 1961 (referred to hereinafter as “the Income Tax Act”) for the
     assessment years 2000-2001, 1999-2000, 1998-1999, 1997-1998,
     1996-1997 and 1995-1996 as well as the consequential demand
     notices of even date issued under Section 156 of the Income Tax Act.
     By the orders dated 17.01.2001, the assessing officer held that the
     appellant is a “seller” and the liquor vendors are “buyers” in terms
     of Section 206C of the Income Tax Act and hence the appellant
     was under a legal obligation to collect income tax at source from
     the liquor vendors (contractors) for the financial years relevant to
     the aforesaid assessment years. Accordingly, the assessing officer
     declared certain sums as income tax collectible at source by the
     appellant which it failed to do. Therefore, the appellant was directed
     to deposit the amounts so quantified as income tax deductible at
     source. Further, interest was also levied on the aforesaid amounts.
     This was followed by the demand notices. As noticed above, the
     challenge to the said orders dated 17.01.2001 by the appellant was
     negatived first by the learned Single Judge and then by the Division
     Bench of the High Court.
3.   The short point for consideration in this appeal is whether provisions
     of Section 206C of the Income Tax Act is applicable in respect of the
     appellant and whether the liquor vendors (contractors) who bought
     the vending rights from the appellant on auction, can be termed as
     “buyer” within the meaning of Explanation(a) to Section 206C of the
     Income Tax Act or excluded from the said definition of “buyer” as
     per clause (iii) of Explanation (a) to Section 206C of the said Act.
     Relatable to the above core issue is the question as to, whether, the
     High Court was justified in rejecting the challenge to the said orders
     made by the appellant.
4.   Before attempting to answer the question(s) so framed above, it
     would be apposite to briefly narrate the relevant facts of the case.
     Mysore Sales International Limited (also referred to “Mysore Sales”
     hereinafter) is a Karnataka Government undertaking, inter alia,
     engaged in the business of manufacturing arrack. Mysore Sales is
     an assessee under the Income Tax Act. Appellant had entered the
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       arrack trade in July, 1993 in terms of the excise laws of the State
       of Karnataka. Prior to 1993, there were several private bottling units
       in the State of Karnataka and they were manufacturing and selling
       arrack. Auctions were conducted periodically for the purpose of
       conferring lease right for retail vending of arrack. It was conducted
       with reference to designated areas. Successful bidders were entitled
       to procure arrack from the bottling units and then to sell it in retail
       trade within their respective allotted areas. The arrack trade is
       controlled by the state government.
       4.1. The Karnataka Excise Act, 1965 (briefly “the Excise Act”
            hereinafter) has been enacted to provide for a uniform excise
            law in the State of Karnataka. Preamble to the Excise Act
            says that it is expedient to provide for a uniform law relating to
            production, manufacture, possession, import, export, transport,
            purchase and sale of liquor and intoxicating drugs and the levy
            of duties of excise thereon in the State of Karnataka and for
            certain matter related thereto. Under the Excise Act, several
            rules have been framed for appropriate enforcement of the
            excise law. These rules, inter alia, are:
            (i)    The Karnataka Excise (Arrack Vend Special Conditions
                   of Licenses) Rules, 1967 (“the 1967 Rules” hereinafter);
            (ii)   The Karnataka Excise (Lease of the Right of Retail Vend of
                   Liquors) Rules, 1969 (briefly “the 1969 Rules” hereinafter);
            (iii) The Karnataka Excise (Manufacture and Bottling of Arrack)
                  Rules, 1987 (“the 1987 Rules” hereinafter).
       4.2. In the year 1993, the state government discontinued private
            bottling units from engaging in the manufacture or bottling
            of arrack and instead decided as a policy to restrict those
            operations in the hands of state government companies or
            undertakings, such as, Mysore Sales and Mysore Sugar
            Company Limited (appellant in Civil Appeal No. 2169/2007
            which was dismissed for non-prosecution by this Court on
            12.10.2023). Thus, Mysore Sales and Mysore Sugar were
            entrusted with the task of bottling arrack and marketing it on
            behalf of the state government. Mysore Sales was entrusted
            with the above task for the northern districts of the State of
            Karnataka while for the rest of the state, Mysore Sugar was
[2024] 7 S.C.R.                                                         293

             The Excise Commissioner Karnataka & Anr. v.
                Mysore Sales International Ltd. & Ors.

           entrusted with the responsibility. It is the case of the appellant
           that the job entrusted i.e. bottling of arrack and marketing it
           on behalf of the state was in the nature of works contract.
     4.3. Once arrack is manufactured and bottled, it becomes the
          property of the State of Karnataka in as much as the property
          vests with the state. The Excise Commissioner determines the
          amount realizable by the appellant from the excise (liquor)
          vendors or contractors taking into consideration the cost
          incurred by the appellant. The excise contractors are required
          to remit the requisite amount of excise duty into the state
          government treasury and then secure permit on production of
          which, appellant delivers arrack to them. The State of Karnataka
          controls the entire operation including the amount realizable
          by the assessee in terms of the Excise Act.
     4.4. Successful excise contractors secure arrack from Mysore
          Sales and Mysore Sugar depending upon the areas allotted to
          them. The lease for the right to retail vend of liquor provides
          auctioning of such right with reference to a designated area.
          The retail sale price is fixed by the state government in terms
          of the 1967 Rules. The margin would depend upon various
          factors.
     4.5. Section 206C was inserted in the Income Tax Act by the
          Finance Act, 1988 with effect from 01.06.1988. It casts an
          obligation on the “seller” of alcoholic liquor etc. of deducting
          tax at source (TDS) at the time of payment by the “buyer”. As
          per Explanation(a), certain persons were not included within,
          rather excluded from, the definition of “buyer”.
     4.6. A circular came to be issued by the Excise Commissioner of
          Karnataka on 16.06.1998 to which an addendum was also
          issued. The circular clarified that since arrack was not obtained
          through auction and since the selling price of arrack was fixed
          by the Excise Commissioner, there was no question of recovery
          of TDS from the excise (liquor) vendors or contractors.
     4.7. In view of the above, appellant did not deduct any TDS from
          the liquor vendors.
     4.8. Assessing officer issued notices dated 26.10.2000 calling
          upon the assessee to show cause as to why it should not
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             pay the requisite TDS amount which it had failed to collect
             from the “buyers” i.e. the excise contractors for the financial
             years relevant to the assessment years under consideration.
             It appears that the assessee had submitted its reply to such
             notice. Thereafter, the assessing officer passed orders dated
             17.01.2001 under Section 206C(6) of the Income Tax Act for
             the assessment years under consideration. As pointed out
             earlier, by the aforesaid orders, the assessee was directed
             to pay certain sums of money as TDS which it had failed
             to collect from the liquor vendors or contractors. Following
             such orders, consequential demand notices for the respective
             assessment years under Section 156 of the Income Tax Act
             were also issued to the assessee by the assessing officer.
       4.9. Mysore Sales filed writ petitions before the High Court. While
            the main contention was that Section 206C(6) of the Income
            Tax Act was not applicable to it, a corollary issue raised was
            that before passing the order under Section 206C(6) of the
            Income Tax Act, no opportunity of hearing was given to it.
            Therefore, there was violation of the principles of natural
            justice. Learned Single Judge vide the judgment and order
            dated 27.10.2023 dismissed the writ petitions confirming the
            orders passed under Section 206C(6) of the Income Tax Act.
       4.10. Thereafter, Mysore Sales and others preferred writ appeals
             before the Division Bench. However, by the judgment and
             order dated 13.03.2006, the writ appeals were dismissed by
             affirming the orders passed by the assessing officer and also
             that of the learned Single Judge.
5.     Aggrieved by the aforesaid, SLP(C) No. 12524 of 2006 was preferred.
       After leave was granted on 23.04.2007, the same came to be
       registered as Civil Appeal No. 2168 of 2007.
6.     Sh. Avishkar Singhvi, learned AAG appearing for the appellant submits
       that Section 206C of the Income Tax Act is not applicable in respect
       of Mysore Sales which is a public sector undertaking controlled by
       the Government of Karnataka. In fact, it is a government company.
       It is engaged in the manufacture of arrack. Arrack is bottled under
       the supervision of the Excise Commissioner. Whatever arrack is
       manufactured, the same belongs to the state government alone.
[2024] 7 S.C.R.                                                         295

                The Excise Commissioner Karnataka & Anr. v.
                   Mysore Sales International Ltd. & Ors.

     Excise buyers i.e. liquor contractors do not obtain any arrack in
     auction. They only obtain the right/licence to carry out retail vending
     of arrack. Therefore, such contractors are not “buyers” as defined in
     the Explanation under Section 206C of the Income Tax Act.
     6.1. Learned AAG argued that what is disposed of in the auction
          is the retail or vending right of arrack and not auctioning of
          the arrack itself. The final sale of arrack is carried out by the
          contractors at the retail price fixed by the government. He,
          therefore, submits that Section 206C is not applicable to a
          public sector undertaking like Mysore Sales. Both Explanations
          (a)(ii) and (iii) clearly exclude retail vendors from the ambit and
          purview of “buyers” as defined under the Explanation.
     6.2. Elaborating further, he submits that “buyers” falling in the above
          exception were exempted from paying income tax at source
          at the time of obtaining licence for retail vending of arrack in
          their respective assigned areas as per the price fixed by the
          state government. The auction is only regarding transferring
          the right or privilege which is vested in the state to the liquor
          contractors who would thereafter operate the retail business
          of vending in arrack. Therefore, there is no sale involved in
          the auction transaction.
     6.3. Assessing officer had wrongly relied upon the decision of the
          Supreme Court in Union of India Vs. A. Sanyasi Rao1. In the
          said decision, the constitutional validity of Section 206C of the
          Income Tax Act was challenged and the same was negatived
          by this Court. However, the judgment clarifies that there are
          just exceptions carved out in Section 206C in which cases,
          income tax is not required to be collected at source.
     6.4. Learned counsel further submits that the objective behind
          introduction of Section 206C in the Income Tax Act was to
          ensure proper tax collection in matters relating to profits and
          gains from the business of trading in alcoholic liquor etc.
          However, a taxing statute has to be interpreted strictly. It cannot
          be interpreted in an overly expansive and wide manner so as



1   [1996] 2 SCR 570 : (1996) 3 SCC 465
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             to bring persons within the tax net who are otherwise exempted
             from paying tax. Both the Single Bench and the Division Bench
             had erred in adopting such an interpretation and wrongly holding
             that Section 206C was applicable in respect of Mysore Sales
             and since it had not deducted TDS, the same was required to
             be recovered. Both the Benches had erred in taking the view
             that purchase of arrack was by way of public auction only and
             not in any other manner and that the “seller” (Mysore Sales)
             had an obligation to collect income tax at source from such
             “buyers” who would be further vending the same in retail.
       6.5. Even if the view taken by the revenue and affirmed by the High
            Court is accepted, it cannot be said that there was sale of arrack
            by Mysore Sales to the licence holders. Such sale, if at all it
            can be said so, was at the price fixed by the state government
            under the Excise Act and the Rules framed thereunder. The
            sale was wholly for the purpose of retail vending and not a
            sale within the meaning of Section 206C of the Income Tax Act;
            moreover, under the aforesaid provision, a sale must be made
            to a “buyer” defined under the Explanation to Section 206C
            of the Income Tax Act. As a matter of fact, it is the contention
            of the appellant that there is no sale between Mysore Sales
            and the excise contractors.
       6.6. The revenue has wrongly taken the view that the act of auction
            and purchase of arrack by the successful liquor contractors is
            inextricably intertwined and is part of one collective action. In
            the auction, the excise contractors are granted permits/licences
            for retail sale of arrack by the successful excise contractors in
            their allotted areas. It is thereafter that sale of arrack is affected
            by the excise contractors at a price fixed by the government
            between a minimum floor value and maximum ceiling value.
            Therefore, such a transaction cannot be said to be a sale or
            purchase through auction.
       6.7. Learned counsel also submitted that the assessing officer
            was not conferred the jurisdiction to pass the orders under
            Section 206C(6) of the Income Tax Act. Jurisdiction was
            conferred upon the Assistant Commissioner of Income Tax
            (TDS)-1, Bengaluru. This contention of the appellant regarding
[2024] 7 S.C.R.                                                            297

                The Excise Commissioner Karnataka & Anr. v.
                   Mysore Sales International Ltd. & Ors.

              jurisdiction was rejected by the learned Single Judge as being
              merely a technical one.
     6.8. Learned counsel also submits that orders dated 17.01.2001
          passed by the assessing officer under Section 206C(6) of
          the Income Tax Act were in breach of the principles of natural
          justice. No opportunity of hearing was given to the assessee.
          Without such hearing, the aforesaid orders were passed. Such
          orders being in violation of the principles of natural justice are
          void ab initio. This aspect was overlooked by the Single Bench
          as well as by the Division Bench of the High Court.
     6.9. He therefore submits that both the orders of the learned Single
          Judge and the Division Bench are liable to be set aside. Orders
          dated 17.01.2001 passed by the assessing officer under Section
          206C(6) of the Income Tax Act for the assessment years under
          consideration are also liable to be set aside and quashed. The
          civil appeal may be allowed accordingly.
     6.10. In support of his submissions, learned counsel for the appellant
           has placed reliance on the following decisions:
              (i)      Gian Chand Ashok Kumar and Company Vs. Union of
                       India 2;
              (ii)     K.K. Mittal Vs. Union of India 3;
              (iii) State of Bihar Vs. Commissioner of Income Tax 4;
              (iv) M/s Naresh Kumar and Company Vs. Union of India 5;
              (v)      Saini and Company Vs. Union of India 6;
              (vi) Chandigarh Distillers and Bottlers Ltd. Vs. Union of India 7;
              (vii) Union of India Vs. Om Parkash S.S. and Company 8.



2   (1991) 187 ITR 188 (HP)
3   (1991) 187 ITR 208 (P&H)
4   (1993) 202 ITR 535 (PAT)
5   ILR (2000) 2 P&H
6   (2000) 246 ITR 762 (HP)
7   (2002) 253 ITR 205 (P&H)
8   [2001] 1 SCR 1113 : (2001) 3 SCC 593
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7.     Learned senior counsel for the revenue at the outset submits that
       the impugned order of the Division Bench of the High Court does
       not suffer from any error or infirmity to warrant interference. The civil
       appeal is misconceived and is, therefore, liable to be dismissed.
       7.1. Learned senior counsel submits that the assessing officer had
            issued notices to the assessee and had also verified relevant
            materials. Thereafter, the assessing officer held that the sale
            price of liquor was not fixed. What was fixed was only the range
            of minimum and maximum selling price. As per the gazette
            notification furnished by the Excise Department of the State
            of Karnataka for the year 2000, the minimum and maximum
            selling price was fixed at Rs. 55/- and Rs. 85/- per bulk litre
            respectively. Nowhere did it mention that liquor had to be sold
            at a specific fixed price. The contractors were at liberty to sell
            the liquor at any rate between the minimum and maximum
            price. There being a wide range within which the sale of liquor
            could be affected, the assessing officer has rightly held that
            the sale price of liquor was not fixed.
       7.2. Learned senior counsel further submits that the assessing
            officer was right in taking the view that the excise vendors had
            obtained goods by way of auction because the goods(arrack)
            were obtained only on production of permits which were
            available on successful bidding in the auction.
       7.3. Thus, the liquor contractors clearly came within the ambit of
            the meaning of “buyer” under Explanation(a) to Section 206C
            of the Income Tax Act. Therefore, Mysore Sales was under an
            obligation to deduct income tax at source(TDS) from the liquor
            contractors. Since it failed to do so, the assessing officer was
            fully justified in passing the orders dated 17.01.2001 under
            Section 206C(6) of the Income Tax Act.
       7.4. Learned Single Judge had elaborately examined the entire
            gamut of the issues and rightly affirmed the orders dated
            17.01.2001. Similarly, the Division Bench also made a
            threadbare examination of the entire issues and, thereafter,
            came to the conclusion that the assessing officer was fully
            justified in passing the orders dated 17.01.2001. That being the
            position, there is no reason why, at this stage, the concurrent
            findings of the assessing officer as affirmed by the Single and
[2024] 7 S.C.R.                                                           299

             The Excise Commissioner Karnataka & Anr. v.
                Mysore Sales International Ltd. & Ors.

           Division Benches of the High Court should be disturbed. As
           such, the civil appeal should be dismissed.
8.   Submissions made by learned counsel for the parties have received
     the due consideration of the Court.
9.   Before we proceed to Section 206C of the Income Tax Act, we may
     have a broad overview of the excise law framework in the State of
     Karnataka relevant for the purpose of the present lis. As already noted
     above, the parent enactment is the Excise Act which is an Act to
     provide for an uniform excise law in the State of Karnataka. It covers
     the entire spectrum from production to sale of liquor and intoxicating
     drugs and the levy of excise duty thereon. Section 2 defines various
     words and expressions used in the Excise Act. Section 2 (2) defines the
     expression “to bottle” to mean transferring liquor from a cask or other
     vessel to a bottle, jar, flask, polythene sachet or similar receptacle for
     the purpose of sale, whether any process of manufacture be employed
     or not and includes re-bottling. “Manufacture” is defined in Section 2
     (19) to include every process whether natural or artificial, by which
     any fermented, spirituous or intoxicating liquor or intoxicating drug is
     produced or prepared and also redistillation and every process for
     the rectification of liquor. As per Section 3(1), the state government
     may appoint, by notification, an officer not below the rank of Deputy
     Commissioner as the Excise Commissioner in the State of Karnataka.
     He shall be the chief controlling authority in all matters connected
     with the administration of the Excise Act. Powers of the Excise
     Commissioner are dealt with in sub-section (2) of Section 3. He shall
     have the overall control of the administration of the Excise Department.
     9.1. Section 17 deals with the power to grant lease of right to
          manufacture etc. Sub-section (1) thereof says that the state
          government may grant lease to any person on such conditions
          and for such period, as it may think fit, the exclusive or other
          right-
           (a)      of manufacturing or sale by wholesale or of both; or
           (b)      of selling by wholesale or by retail; or
           (c)      of manufacturing or supplying by wholesale, or of both
                    and of selling by retail,
     any Indian liquor or intoxicating drug within any specified area.
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       9.2. Though sub-section (1A) provides that no lease granted
            under sub-section (1) shall be transferred, the proviso thereto
            empowers the state government to grant permission to the
            lessee to transfer the lease or a part thereof in favour of any
            other person. As per sub-section (2), the licencing authority
            may grant to a lessee under sub-section (1) or to a transferee
            under sub-section (1A), a licence in terms of his lease. Sub-
            section (3) deals with determination of a lease for violation
            of the conditions mentioned therein. Under sub-section (4),
            when a lease is determined in terms of sub-section (3), the
            state government may direct the Deputy Commissioner to take
            over the right under his management and to lease it again by
            resale or otherwise.
       9.3. Section 71 confers power on the state government to make
            rules to carry out the purposes of the Excise Act.
10. The Karnataka Excise (Arrack Vend Special Conditions of Licenses)
    Rules, 1967 (already referred to “the 1967 Rules” hereinabove)
    have been framed by the Government of Karnataka in exercise of
    the powers conferred by Section 71 of the Excise Act. Rule 2 of the
    1967 Rules deals with selling of arrack of prescribed strength etc.
    by the licensee. Rule 2(1) says that every licensee licensed to vend
    arrack by retail sale shall sell only arrack of prescribed strength.
    As per sub-rule (2), no arrack except in sealed bottles or in sealed
    polythene sachets obtained from a warehouse or depot shall be
    kept for sale or sold in the licensed premises. Rule 3 provides for
    construction of counter. As per Rule 3, the licensee to vend arrack
    shall construct a counter in the shop which is not more than one
    metre high. Rule 4 deals with retail price. It says that subject to such
    minimum and maximum price fixed by the Deputy Commissioner or
    by the Excise Commissioner, the licensee may vend arrack on such
    rates as he may deem fit. Heading of Rule 5 is, licensee to buy
    arrack only from warehouse, etc. As per sub-rule (1), the licensee
    to vend arrack by retail shall purchase the required quantity of
    arrack for sale only from the warehouse or depot authorized by the
    Excise Commissioner, on payment of issue price fixed by the Excise
    Commissioner from time to time. This provision, being relevant, is
    extracted hereunder:
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                Mysore Sales International Ltd. & Ors.

            5. Licensee to buy arrack only from Warehouse, etc.: -
            (1) The licensee to vend arrack by retail shall purchase
            the required quantity of arrack for sale only from
            the warehouse or depot authorized by the Excise
            Commissioner, on payment of issue price fixed by the
            Excise Commissioner from time to time.
     10.1. Rule 5(2) clarifies that no arrack except in sealed bottles of the
           approved sizes with the excise labels or in sealed polythene
           sachets obtained from the authorized warehouse or depot shall
           be sold in the licenced premises.
     10.2. Rule 6 says that the consignment of arrack should be
           under seal. All the consignments of arrack issued from the
           warehouse or depot shall be sealed by the officer-in-charge
           of the warehouse or depot in such a manner that the letters
           of the seal are distinct. The licensees shall be responsible for
           any breakage of seal in transit. The arrack so transported may
           be packed by the licensee at his own cost for the purpose of
           sale in such containers as may be approved by the Excise
           Commissioner and under supervision of the officer-in-charge
           of the warehouse.
11. Government of Karnataka has also framed the Karnataka Excise
    (Lease of the Right of Retail Vend of Liquors) Rules, 1969 (already
    referred to as “the 1969 Rules” hereinabove) exercising powers under
    Section 71 of the Excise Act. As per Rule 2(c), the expression “right
    of retail vend of liquors” means the lease of the right of retail vend of
    liquors. Rule 3 deals with lease of retail vend. As per Rule 3(1), the
    right of retail vend of liquors may be disposed of either by tender or
    by auction or by tender-cum-auction or in any other manner as the
    state government may by order specify. Rule 3(3) provides that the
    right of retail vend of arrack shall be the exclusive right but in such
    districts as may be specified by the government and only bottled
    arrack or arrack in polythene sachet shall be sold to consumers. Rule
    3A deals with grant of lease to government companies etc. As per
    sub-rule (1), notwithstanding anything contained in the 1969 Rules,
    the state government may, if it is considered expedient in the interest
    of government revenue or for any other reasons to be recorded in
    writing, grant the lease of right of retail vend of liquor in favour of any
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       company or agency owned or controlled by the state government or
       a state government department on such terms and conditions as it
       deems fit.
       11.1. Registration of excise contractors is provided for in Rule 4A.
             As per sub-rule (1), every application for registration as excise
             contractor shall be made to the Excise Commissioner in the
             prescribed format. After following the procedure prescribed in
             sub-rules (2) to (4), the Excise Commissioner under sub-rule
             (5) may register such an applicant as an excise contractor and
             grant a certificate of registration in the prescribed format which
             is not transferable. Sub-rule (8) clarifies that the registration
             certificate so issued shall be valid for participation in tender/
             auction for the disposal of the right of retail vend of liquor for
             the excise year specified in such certificate.
       11.2. As per Rule 10(1), where the right of retail vend of liquor
             within a district is to be disposed of by auction, the Deputy
             Commissioner of that district and where the disposal of the
             right is in more than a district in a Division, the Divisional
             Commissioner of that Division shall hold the auction on the
             date, time and place as may be notified. The procedure to be
             followed in the auction is laid down in Rule 11.
12. Under Section 71 of the Excise Act, Government of Karnataka has
    framed another set of rules called the Karnataka Excise (Manufacturing
    and Bottling of Arrack) Rules, 1987 (already referred to as “the 1987
    Rules” hereinabove). Rule 2(b) defines “arrack” to mean the spirit
    manufactured by blending or reducing the spirit and includes spiced
    arrack, but does not include Indian or foreign liquor. “Blending” is
    defined in Rule 2(c) to mean the mixing of spirits with other spirits
    of the same or different strengths. As per Rule 2(e), “commissioner”
    means the Excise Commissioner. Rule 2(n) defines “warehouse” to
    mean any distillery or other place where spirit is stored, blended,
    matured, fortified, diluted or flavoured to produce arrack and also a
    place for bottling such arrack, but does not include a manufactory
    where wine or Indian liquor, beer or toddy is manufactured.
       12.1. As per Rule 3(1), a licence may be granted by the Excise
             Commissioner for the manufacture and bottling of arrack for
             any specified area or areas. Sub-rule (2) of Rule 3 was inserted
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             The Excise Commissioner Karnataka & Anr. v.
                Mysore Sales International Ltd. & Ors.

           subsequently w.e.f. 01.07.1993. Sub-rule (2) of Rule 3 clarifies
           that a licence under Rule 3 shall be issued only to a company
           or agency owned or controlled by the state government or to a
           state government department. This provision, being important,
           is extracted as under:
                3. Licence to be granted only to a company etc : -
                (1) A licence shall be granted by the Commissioner,
                whenever necessary for any specified area or areas
                for the manufacture and bottling of arrack.
                (2) The licence under this rule shall be issued only to
                a company or agency owned or controlled by the state
                government or to a state government department.
     12.2. Rule 8 provides that in case where a warehouse serves more
           than one district, the warehouse shall be deemed to be a
           depot for storing bottled arrack and for supply of arrack to the
           person holding a licence to sell arrack in retail. Under Rule
           9, the Commissioner may fix the number of warehouses, the
           area to be served by each of the warehouse and their location.
           Removal of arrack from the warehouse is provided for in Rule
           16. As per sub-rule (1), no arrack shall be removed from the
           warehouse without payment of excise duty. Sub-rule (2) says
           that arrack shall not be issued from the warehouse or depot
           except in bottles or in polythene sachets of approved capacity
           and design. As per sub-rule (3), the same shall be issued from
           the warehouse or depot only to the persons holding a licence
           to sell arrack in retail. Rule 17 says that the price to be paid by
           the government to the distillery for the rectified spirit supplied
           by the distillery to the warehouse, the price to be paid by the
           government to the warehouse for manufacture and bottling of
           arrack and the price to be paid by the lessees for the right of
           retail vend of arrack to the government for the supply of bottled
           arrack shall be fixed by the Excise Commissioner from time
           to time with prior approval of the government. Rule 17, being
           relevant, is extracted hereunder:
                17. Fixation of price: -
                The price to be paid by government to the
                distillery for the rectified spirit supplied by the
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               distillery to the warehouse, the price to be
               paid by the government to the warehouse for
               manufacture and bottling of arrack and the
               price to be paid by the lessees for the right
               of retail vend of arrack to the government for
               the supply of bottled arrack shall be fixed by
               the Commissioner from time to time with prior
               approval of the government and the same shall
               be communicated to the persons concerned.
13. From the above conspectus, we find that under Section 17 of
    the Excise Act, the state government grants lease of right to any
    person for manufacture etc. of liquor, arrack in this case. The
    licencing authority i.e. Excise Commissioner may grant to the
    lessee a licence in terms of his lease. In supplement to the above
    provision, Rule 3(1) of the 1987 Rules provides that the Excise
    Commissioner shall grant a licence for any specified area or areas
    for the manufacture or bottling of arrack. From 01.07.1993, sub-
    rule (2) of Rule 3 has come into force as per which provision the
    licence under Rule 3 of the 1987 Rules shall be issued only to a
    company or agency owned or controlled by the state government
    or to a state government department. This is how Mysore Sales
    was granted licence for manufacture and bottling of arrack. Through
    a process of auction, excise contractors are shortlisted who are
    thereafter granted licence or permits to vend arrack by retail in
    their respective area(s). They are required to procure the arrack
    from the warehouse or depot on payment of the issue price fixed
    by the Excise Commissioner as per Rule 5(1) of the 1967 Rules.
    Rule 2 makes it very clear that no arrack in retail vend shall be sold
    except in sealed bottles or in sealed polythene sachets obtained
    from either a warehouse or a depot. For such retail vending, Rule
    3 of the 1967 Rules requires the excise contractor to construct a
    counter in the shop. The right to retail vend of liquor is granted
    either by tender or by auction or by a combined process of tender-
    cum-auction etc. As per Rule 17 of the 1987 Rules, the price to
    be paid by the lessee for the right of retail vend of arrack to the
    government for the supply of bottled arrack shall be fixed by the
    Commissioner with prior approval of the government. In so far the
    retail price is concerned, Rule 4 of the 1967 Rules says that the
    excise contractor can sell the arrack at a price within the range of
[2024] 7 S.C.R.                                                         305

                 The Excise Commissioner Karnataka & Anr. v.
                    Mysore Sales International Ltd. & Ors.

     minimum floor price and maximum ceiling price that may be fixed
     by the Excise Commissioner.
14. Having broadly surveyed the statutory framework of the business of
    arrack in the State of Karnataka, let us now deal with Section 206C
    of the Income Tax Act. For ready reference, the said provision is
    extracted hereunder:
           206-C. Profits and gains from the business of trading
           in alcoholic liquor, forest produce, scrap, etc.—(1)
           Every person, being a seller shall, at the time of debiting
           of the amount payable by the buyer to the account of the
           buyer or at the time of receipt of such amount from the
           said buyer in cash or by the issue of a cheque or draft
           or by any other mode, whichever is earlier, collect from
           the buyer of any goods of the nature specified in column
           (2) of the Table below, a sum equal to the percentage,
           specified in the corresponding entry in column (3) of the
           said Table, of such amount as income tax:
                                      TABLE

           SI.               Nature of Goods               Percentage
           No.
           (i)     Alcoholic liquor for human             Ten percent
                   consumption (other than India-made
                   foreign liquor) and tendu leaves
           (ii)    Timber obtained under a forest lease   Fifteen
                                                          percent
           (iii) Timber obtained by any mode other        Five percent
                 than under a forest lease
           (iv) Any other forest produce not being        Fifteen
                timber or tendu leaves                    percent
           Provided that where the Assessing Officer, on an
           application made by the buyer, gives a certificate in
           the prescribed form that to the best of his belief any of
           the goods referred to in the aforesaid Table are to be
           utilized for the purposes of manufacturing, processing or
           producing articles or things and not for trading purposes,
           the provisions of this sub-section shall not apply so long
           as the certificate is in force.
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       (2) The power to recover tax by collection under sub-
       section (1) shall be without prejudice to any other mode
       of recovery.
       (3) Any person collecting any amount under sub-section (1)
       shall pay within seven days the amount so collected to the
       credit of the Central Government or as the Board directs.
       (4) Any amount collected in accordance with the provisions
       of this section and paid under sub-section (3) shall be
       deemed as payment of tax on behalf of the person from
       whom the amount has been collected and credit shall be
       given to him for the amount so collected on the production
       of the certificate furnished under sub-section (5) in the
       assessment made under this Act for the assessment year
       for which such income is assessable.
       (5) Every person collecting tax in accordance with the
       provisions of this section shall within ten days from the
       date of debit or receipt of the amount furnish to the buyer
       to whose account such amount is debited or from whom
       such payment is received, a certificate to the effect that tax
       has been collected, and specifying the sum so collected,
       the rate at which the tax has been collected and such
       other particulars as may be prescribed.
       (5A) Every person collecting tax in accordance with the
       provisions of this section shall prepare half yearly returns
       for the period ending on 30th September and 31st March in
       each financial year, and deliver or cause to be delivered to
       the prescribed income-tax authority such returns in such
       form and verified in such manner and setting forth such
       particulars and within such time as may be prescribed.
       (5B) Notwithstanding anything contained in any other
       law for the time being in force, a return filed on a floppy,
       diskette, magnetic cartridge tape, CD-ROM or any other
       computer readable media as may be specified by the Board
       (hereinafter referred to as the computer media) shall be
       deemed to be a return for the purposes of sub-section (5A)
       and the rules made thereunder and shall be admissible
       in any proceedings thereunder, without further proof of
[2024] 7 S.C.R.                                                            307

             The Excise Commissioner Karnataka & Anr. v.
                Mysore Sales International Ltd. & Ors.

           production of the original, as evidence of any contents of
           the original or of any fact stated therein.
           (5C) A return filed under sub-section (5B) shall fulfill the
           following conditions, namely:-
                (a)   while receiving returns on computer media,
                      necessary checks by scanning the documents
                      filed on computer media will be carried out and
                      the media will be duly authenticated by the
                      Assessing Officer; and
                (b)   the Assessing Officer shall also take due care
                      to preserve the computer media by duplicating,
                      transferring, mastering or storage without loss
                      of data.
           (6) 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).
           (7) Without prejudice to the provisions of sub-section (6),
           if the seller does not collect the tax or after collecting the
           tax fails to pay it as required under this section, he shall
           be liable to pay simple interest at the rate of one and one-
           fourth percent per month or part thereof on the amount of
           such tax from the date on which such tax was collectible
           to the date on which the tax was actually paid.
           (8) Where the tax has not been paid as aforesaid, after it is
           collected, the amount of the tax together with the amount
           of simple interest thereon referred to in sub-section (7)
           shall be a charge upon all the assets of the seller.
           (9) Where the Assessing Officer is satisfied that the total
           income of the buyer justifies the collection of the tax at any
           lower rate than the relevant rate specified in sub-section
           (1), the Assessing Officer shall, on an application made
           by the buyer in this behalf, give to him a certificate for
           collection of tax at such lower rate than the relevant rate
           specified in sub-section (1).
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            (10) Where a certificate under sub-section (9) is given, the
            person responsible for collecting the tax shall, until such
            certificate is cancelled by the Assessing Officer, collect the
            tax at the rates specified in such certificate.
            (11) The Board may, having regard to the convenience of
            assessees and the interests of revenue, by notification in
            the Official Gazette, make rules specifying the cases in
            which, and the circumstances under which, an application
            may be made for the grant of a certificate under sub-section
            (9) and the conditions subject to which such certificate may
            be granted and providing for all other matters connected
            therewith.
            Explanation. – For the purposes of this section,-
            (a)   “buyer” means a person who obtains in any sale, by
                  way of auction, tender or any other mode, goods of
                  the nature specified in the table in sub-section (1)
                  or the right to receive any such goods but does not
                  include, -
                  (i)    a public sector company,
                  (ii)   a buyer in the further sale of such goods obtained
                         in pursuance of such sale, or
                  (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;
            (b)   “seller” means the Central Government, a State
                  Government or any local authority or corporation or
                  authority established by or under a Central, State or
                  Provincial Act, or any company or firm or co-operative
                  society.
       14.1. Sub-section (1) of Section 206C says that every person who
             is a seller shall collect from the buyer of the goods specified
             in the table, a sum equal to the percentage specified in the
             corresponding entry of the table. The collection is to be made
             at the time of debiting of the amount payable by the buyer to
             the account of the buyer or at the time of the receipt of such
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             The Excise Commissioner Karnataka & Anr. v.
                Mysore Sales International Ltd. & Ors.

           amount from the said buyer, be it in cash or by way of cheque
           or by way of draft etc. In so far alcoholic liquor for human
           consumption (other than India made foreign liquor i.e., IMFL), the
           amount to be collected is 10 percent. Sub-section (3) provides
           that any person collecting such amount under sub-section (1)
           shall pay the said amount within 7 days of the collection to the
           credit of the central government or as the Central Board of
           Direct Taxes (CBDT) directs. Sub-section (4) clarifies that any
           amount so collected under Section 206C(1) and paid under
           sub-section (3) shall be deemed as payment of income tax on
           behalf of the person from whom the amount has been collected
           and credit shall be given to such person for the amount so
           collected and paid at the time of assessment proceeding for
           the relevant assessment year. Sub-section (5) says that every
           person collecting such tax shall issue a certificate to the buyer
           within 10 days of debit or receipt of the amount. Sub-section
           (5A) requires the person collecting tax to prepare half yearly
           returns for the periods ending on 30th September and 31st March
           for each financial year and submit the same in the prescribed
           form before the competent income tax authority.
     14.2. Sub-section (6) is relevant. Sub-section (6) says that any
           person responsible for collecting the tax but fails to collect the
           same shall notwithstanding such failure be liable to pay the tax
           which he ought to have collected to the credit of the central
           government in accordance with the provisions of sub-section
           (3). Sub-section (7) deals with a situation where such tax is
           not collected in which event the seller is liable to pay interest
           at the prescribed rate. Sub-section (8) on the other hand deals
           with a situation where the seller does not deposit the amount
           even after collecting the tax. In such an event also, he would
           be liable to pay interest.
     14.3. That brings us to the Explanation to Section 206C of the Income
           Tax Act. The Explanation defines “buyer” and “seller” for the
           purposes of Section 206C. While Explanation(a) defines “buyer”,
           (b) defines “seller”. As per Explanation(a), “buyer” means a
           person who obtains in any sale by way of auction, tender or
           by any other mode, goods of the nature specified in the table
           in sub-section (1) or the right to receive any such goods but
           “buyer” would not include:
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             (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.
       14.4. On the other hand, “seller” has been defined to mean the
             central government, a state government or any local authority
             or corporation or authority established by or under a central,
             state or provincial act or any company or firm or cooperative
             society.
       14.5. Adverting to the definition of “buyer”, Explanation (a) says that
             a person who obtains in any sale by way of auction, tender or
             by any other mode, goods of the nature specified in the table
             in sub-section (1) or the right to receive any such goods is
             a buyer. But as we have seen above, there is an exclusion
             clause to the definition of “buyer”. 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). Since much emphasis has been placed on
             Explanation(a)(iii), we may extract the same again to understand
             the significance thereof: 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. Thus, Explanation(a)(iii) visualizes two conditions
             for a person to be excluded from the meaning of “buyer” as
             per the definition in Explanation(a). The first condition is that
             the goods are not obtained by him 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 joined by the word ‘and’. The word ‘and’ is
             conjunctive to mean that both the 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.
[2024] 7 S.C.R.                                                          311

             The Excise Commissioner Karnataka & Anr. v.
                Mysore Sales International Ltd. & Ors.

15. In view of the above, let us examine the position of an excise
    contractor. In the scheme under consideration which we have
    discussed above, would such an excise contractor be construed
    as a “buyer” within the meaning of Explanation(a) to the Section
    206C of the Income Tax Act? Going back to the Excise Act and
    the rules framed thereunder, it is seen that Mysore Sales is the
    licensee for the manufacture and bottling of arrack for specified
    area(s). By a process of auction or tender or auction-cum-tender
    etc., excise contractors are shortlisted who are thereafter granted
    permits to vend arrack by retail in their respective area(s). These
    retail vendors i.e. excise contractors have to procure the arrack from
    the warehouse or depot maintained by Mysore Sales on payment
    of the issue price fixed by the Excise Commissioner. The arrack is
    procured in sealed bottles or in sealed polythene sachets. Pausing
    here for a moment, what is discernible is that by a process of auction
    etc., excise contractors are shortlisted. Thereafter, they are provided
    permits. On the strength of the permits, they obtain arrack in bottled
    condition (or in sealed polythene sachets) from the warehouse or
    depot on payment of issue price fixed by the Excise Commissioner.
    Such arrack either in sealed bottled condition or in sealed polythene
    sachets are then sold in retail by the excise contractors in the area
    or areas allotted to them. 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.
     15.1. In Om Parkash (supra), this Court considered the issue of tax
           collection at source in respect of the liquor trade under Section
           206C of the Income Tax Act and as to whether a licensee who
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             is issued a licence by the government permitting him to carry
             on the liquor trade would be a “buyer” as defined in Explanation
             (a) to Section 206C (11) of the Income Tax Act. This Court
             held 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.
       15.2. After the arrack is obtained in the above manner by the
             excise contractor, the requirement of the second condition
             under Explanation(a)(iii) is that he has to sell the same in the
             area(s) allotted to him at the sale price fixed as per Rule 4 of
             the 1967 Rules. The language of the second condition is that
             the sale price of such goods to be sold by the buyer is fixed
             by or under any state statute. As already noted above, Rule
             4 of the 1967 Rules enables the excise contractor to sell the
             arrack in retail at a price within the range of minimum floor
             price and maximum ceiling price which is fixed by the Excise
             Commissioner. A minimum price and a maximum price are fixed
             within which range the arrack has to be sold by the excise
             contractor. Thus, the price of arrack to be sold in retail is not
             dependent on the market forces but pre-determined within a
             range. Therefore, 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.
16. Since both the conditions as mandated under Explanation(a)(iii)
    are satisfied, the excise contractors or the liquor vendors selling
    arrack would not come within the ambit of “buyer” as defined under
    Explanation(a) to Section 206C of the Income Tax Act.
[2024] 7 S.C.R.                                                       313

             The Excise Commissioner Karnataka & Anr. v.
                Mysore Sales International Ltd. & Ors.

17. We have perused the orders dated 17.01.2001 passed by the
    assessing officer under Section 206C(6) of the Income Tax Act. From
    a perusal of the said orders, more particularly the order in respect of
    the assessment year 2000-2001 which is the main order passed by
    the assessing officer followed in other assessment proceedings, it is
    seen that the same was passed under Section 206C(6) of the Income
    Tax Act. By the said order dated 17.01.2001 for the assessment
    year 2000-01, the assessing officer declared that Mysore Sales had
    failed to collect and deposit an amount of Rs. 3,90,57,516.00 as TDS
    from the excise contractors and, therefore, directed the appellant to
    deposit the said amount to the credit of the central government. That
    apart, interest was also charged and levied under Section 206C(6)
    following which demand notice of even date under Section 156 of
    the Income Tax Act was issued. Before passing the said order, it
    is seen that the assessing officer had considered Section 206C of
    the Income Tax Act and the reply submitted by Mysore Sales to the
    show cause notice issued.
18. We have already analysed the various sub-sections of Section 206C
    of the Income Tax Act. As per sub-section (3), any person collecting
    TDS under sub-section (1) shall have to pay the same to the credit of
    the central government within seven days. Requirement under sub-
    section (5A) is that every person collecting TDS in terms of Section
    206C (1) shall prepare half yearly returns for the periods ending on
    30th September and 31st March respectively for each financial year
    and thereafter to submit the same before the competent assessing
    officer. Sub-rule (6) mandates that if any person responsible for
    collecting TDS fails to collect the same, he shall have to deposit the
    said amount to the credit of the central government notwithstanding
    failure to deduct TDS.
19. Though there is no express provision in sub-section (6) or any other
    provision of Section 206C of the Income Tax Act regarding issuance
    of notice and affording hearing to such a person before passing an
    order thereunder, nonetheless, it is evident that an order passed
    under Section 206C(6) of the Income Tax Act, as in the present
    case, is prejudicial to the person concerned as such an order entails
    adverse civil consequences. It is trite law that when an order entails
    adverse civil consequences or is prejudicial to the person concerned,
    it is essential that principles of natural justice are followed. In the
314                                                         [2024] 7 S.C.R.

                       Digital Supreme Court Reports


       instant case, though show cause notice was issued to the assessee
       to which reply was also filed, the same would not be adequate having
       regard to the consequences that such an order passed under Section
       206C(6) of the Income Tax Act would entail. 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.
20. In view of the discussions made above and the conclusions reached,
    it is not necessary for us to delve into other contours of the lis. Thus,
    the question framed in paragraph 3 above, is answered in the negative
    by holding that Section 206C of the Income Tax Act is not applicable
    in respect of Mysore Sales and that the liquor vendors(contractors)
    who bought the vending rights from the appellant on auction cannot
    be termed as “buyers” within the meaning of Explanation(a) to Section
    206C of the Income Tax Act. 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.
21. Having regard to the discussions made above, we are of the view that
    the appeal should be allowed. Accordingly, we pass the following order:
            (i)    judgment and order dated 13.03.2006 passed by
                   the Division Bench of the High Court of Karnataka
                   at Bengaluru in Writ Appeal No. 7926/2003 and
                   connected writ appeals, is hereby set aside;
            (ii)   judgment and order dated 27.10.2003 passed by the
                   learned Single Judge of the High Court of Karnataka
                   at Bengaluru in Writ Petition Nos. 6869-6874 of
                   2001 and other connected writ petitions, is hereby
                   set aside; and
            (iii) orders dated 17.01.2001 passed by the Deputy
                  Commissioner of Income Tax (TDS)–1, Bengaluru
                  under Section 206C(6) of the Income Tax Act for
                  the assessment years 2000-2001, 1999-2000, 1998-
                  1999, 1997-1998, 1996-1997 and 1995-1996 as well
[2024] 7 S.C.R.                                                         315

                The Excise Commissioner Karnataka & Anr. v.
                   Mysore Sales International Ltd. & Ors.

                   as the consequential demand notices of even date
                   issued under Section 156 of the Income Tax Act, are
                   hereby set aside and quashed.
22. Civil Appeal accordingly stands allowed. However, there shall be no
    order as to cost.

     Result of the case: Appeal allowed.



     †
         Headnotes prepared by: Ankit Gyan