Yeah that's what they do with souls. I'd put a spoiler warning but the game doesn't do much to obscure this. The devils consume, critique and collect them just like people do with fine wines (see appearances of The Infernal Sommelier). Infernal vinification at least explains how/why souls are bottled.

Amanita sherry and muscaria brandy are made from mushrooms that are poisonous to humans. I'd assume ordinary methods of vinification are used.