Beer Falls Under ‘IMFL’ Category; No Obligation To Collect TCS On Sales Prior To June 2003: Telangana High Court

"A coherent reading is that Parliament prospectively widened the entry by removing the carve-out meaning that pre 01.06.2003 IMFL (including ‘Beer’) stood outside the TCS net," High Court for the State of Telangana, in a significant judgment, held that 'Beer' falls within the classification of Indian Made Foreign Liquor (IMFL) for the purposes of Section 206C of the Income Tax Act, 1961.

A Bench of Justice P. Sam Koshy and Justice Suddala Chalapathi Rao observed that since the statutory entry prior to June 1, 2003, expressly excluded IMFL from the requirement of Tax Collected at Source (TCS), the Revenue could not fasten liability on wholesale distributors for failing to collect tax on beer sales during that period.

The dispute arose when the Assessing Officer treated the A.P. Beverages Corporation Limited (APBCL), a State Government undertaking, as an "assessee in default" for failing to collect TCS on beer sales to retail licensees between 1999 and 2005. While the Commissioner of Income Tax (Appeals) initially upheld the Revenue's demand, the Income Tax Appellate Tribunal (ITAT) reversed the decision. The ITAT concluded that beer should be treated as IMFL, thereby falling outside the ambit of the then-existing tax collection mechanism, prompting the Revenue to approach the High Court.

The primary question before the court was whether 'Beer' sold by APBCL fell within the expression “alcoholic liquor for human consumption (other than IMFL)” as per the Table to Section 206C(1) prior to the 2003 amendment. The court was also called upon to determine if the ITAT’s classification of beer as IMFL was perverse and whether the Revenue could resurrect presumptive tax approaches associated with the omitted Section 44AC to justify the interest demands.

Interpretation of Undefined Commercial Terms

The Court noted that the term "IMFL" is not defined within the Income-tax Act, 1961. In the absence of a statutory definition, the Bench emphasized that courts must understand commercial terms in the way they are normally understood by traders, sellers, and those conversant with the business. The Court observed that the ITAT followed an accepted method by looking at the surrounding legal context and the trade understanding prevalent during the relevant period to classify the commodity.

“When a tax law uses a common commercial term but does not define it, Courts generally do not invent a new meaning on their own. Instead, they try to understand the term in the way it is normally understood by people who deal with that product in real life.”

Reference to State Excise Laws as Interpretive Aids

The Bench referred to the Andhra Pradesh [Telangana] Excise Act, 1968, which includes beer within the definition of "Indian Made Foreign Liquor." While the Revenue argued that excise classifications should not control central fiscal provisions, the Court held that these documents serve as essential background material to understand how a product is viewed in administration and trade. It was noted that the Revenue's preference for a different meaning did not suffice to raise a substantial question of law.

"At most, State excise practice and regulatory documents can be treated as supporting or background material. They may help the Court understand how the product is generally viewed in administration and trade."

Significance of the 2003 Statutory Amendment

A pivotal factor in the Court’s reasoning was the amendment to Section 206C effective from June 1, 2003, which deleted the words “other than IMFL” from the Table. The Bench reasoned that if beer were always intended to be covered under the TCS net, the removal of the IMFL exclusion would have been redundant. The Court held that the deletion indicated a deliberate legislative intent to broaden the tax base prospectively, meaning that prior to the amendment, IMFL—and by extension, beer—stood excluded.

"In ordinary statutory interpretation, when Parliament removes specific words from a taxing entry, Courts presume that the change was deliberate and intended to alter the scope of the provision."

Application of Pro-Assessee Interpretation in Taxing Statutes

The Court reiterated the settled principle that if two reasonable constructions of a taxing provision are possible, the construction which favours the assessee must be adopted. Citing the Supreme Court’s ruling in Vegetable Products Ltd., the Bench noted that the Revenue failed to show that the ITAT’s finding was perverse or based on a wrong legal test. Consequently, since beer fell within the excluded class during the pre-2003 period, the statutory trigger for TCS did not operate.

“If two reasonable constructions of a taxing provision are possible that construction which favours the assessee must be adopted. This is a well accepted rule of construction recognised by this Court.”

The High Court dismissed the batch of appeals filed by the Revenue, confirming that no substantial question of law arose from the ITAT's order. The Bench concluded that APBCL was not liable for TCS or interest under Section 206C(7) for the relevant assessment years as beer was legally classified as IMFL and thus exempted from the collection mechanism at that time.

Date of Decision: 12 June 2026