‘No service tax leviable on transactions between purchaser of lottery tickets and Sikkim Govt.’; SC dismisses appeals by Union of India

Supreme Court: While deciding the instant appeals concerning challenge to the amendments made to the provisions of the Finance Act, 1994 from time to time commencing from the year 2012; the Division Bench of B.V. Nagarathna* and N. Kotiswar Singh, JJ., found that at each stage the amendments made to the Finance Act, 1994, in order to impose service tax on the sole distributor/purchaser of the lottery tickets (respondents-assessees herein) have been unsuccessful. There being no agency and no service rendered by the respondents-assessees herein as an agent to the Government of Sikkim, service tax is not leviable on the transactions between the purchaser of the lottery tickets (respondents-assessees herein) and the Government of Sikkim.

Background:

The respondent-assessees are companies incorporated as private limited companies under the Companies Act, 1956 and are engaged in the business of the sale of paper and online lottery tickets organised by the Government of Sikkim. They entered into respective agreements with the State of Sikkim.

The Parliament introduced service tax through the Finance Act, 1994 under Chapter V, which took effect on 01-07-1994. Later, in 2003, the Finance Act, 1994 was amended to include a new category of taxable services, namely “Business Auxiliary Service,” under Section 65(19), effective from 01-07-2003. Pursuant to this amendment, the Service Tax Department issued notices to the respondents-assessees herein, under the amended Finance Act in 2007, requiring them to register under the said Act for payment of service tax.

The aggrieved respondent-assessees filed petitions and appeals and during the pendency of these appeals the Finance Act, 1994 again came to be amended with the deletion of the Explanation to Section 65(19)(ii) and the introduction of a new category of “taxable service” vide clause (zzzzn) to sub-section (105) of Section 65 vide the Finance Act, 2010. This amendment was challenged before the Sikkim High Court, wherein it was held that the lottery is organised by the state government through its various stockists etc. but cannot be construed to be a service rendered to the State Government. Hence, the question of service tax does not arise. Consequently, all actions of imposing service tax upon the respondents-assessees herein being distributors of lottery organized by State of Sikkim were set aside. Since the respondents-assessees herein had secured registration and had paid service tax under the impugned provision on their own, the judgment was to operate prospectively.

Being aggrieved by the judgement of the High Court of Sikkim allowing the writ petitions filed by the respondents-assessees herein and striking down Section 65 (105)(zzzzn) of Finance Act, 1994 as introduced vide Finance Act, 2010 as ultra vires the Constitution in contravention of Article 248 read with Entry 97 – List I to the Seventh Schedule thereto and setting aside all consequential actions of the Revenue in imposing service tax upon the respondents-assessees herein (distributors of lottery organised by State of Sikkim), the Revenue has preferred the present Civil Appeal.

In 2012, the Finance Act was amended to whereby several provisions were introduced giving a new dimension to the meaning of ‘taxable service’ as services that would be taxable thereunder. When this amendment was challenged, the High Court held that the lottery being an ‘actionable claim’ does not fall within the purview of the service tax laws as introduced by the new provisions of the Finance Act, 2012.

In 2015, the Parliament again made amendments to the Finance Act, 1994 vide the Finance Act, 2015, which was challenged by the respondent-assessees. The High Court held that in buying and selling the lottery tickets are not rendering any service to the State and therefore, their activity does not fall within the meaning of ‘service’ as provided under clauses (31A) and (44) of Section 65B and, therefore, outside the purview of Explanation 2 to the said Section.

The Finance Act, 1994 was again amended in 2016, which was challenged and the High Court via the impugned judgment held that taxation is a distinct matter for the purpose of legislative competence, and it must flow from the specific Entry provided for levy and imposition of taxes. The High Court further held that there is no mechanism to ascertain and compute the service rendered by a person for promoting, marketing, selling or facilitating in organizing a lottery of any kind, in any manner, organized by such State in accordance with the provisions of the Lotteries (Regulation) Act, 1998.

Court’s Assessment:

Perusing the matter, the Court had to consider whether Sikkim High Court’s impugned judgments required any interference.

The Court had to deal with the issue that whether the respondent- assessees distributors of lottery organised by State of Sikkim, according to the appellant- Union of India they are liable to pay service tax as they are rendering a service to State of Sikkim as an agent. On the other hand, it is the case of the respondent- assessees that they are not agents of the Government of Sikkim but their relationship is on principal to principal basis. It was necessary for the Court to consider whether the respondents-assessees are engaged as agents by the principal- Government of Sikkim or the relationship is one of principal to principal, because respondent-assessees have a liability to pay tax on gambling as the conduct of lotteries is nothing but a gambling activity.

Taking note of the relevant Articles of the Constitution and Entries, the Court said that if a Central Act is challenged as being beyond the legislative competence of Parliament, it is enough to enquire if it is a law with respect to matters or taxes enumerated in List II. If it is not, no further question arises. Thus, the wide words of a substantive Article like Article 248 should be given full effect and they cannot be cut down by the wording in the Lists in Schedule VII merely because certain known taxes have not been included therein.

The Court also referred to relevant case laws on lotteries and pointed out that even though lotteries were permitted under the regulating power of the State, they could not be given the status of trade and commerce “as understood in common parlance”. Trade and commerce within the meaning of Articles 301 to 304. That there are three ingredients in the sale of lottery tickets, namely (i) price, (ii) chance, and (iii) consideration. That Entry 62 — List II refers to taxes on betting and gambling and lotteries whether conducted by private agencies or by the State are nothing but gambling. That even though the state may conduct lotteries, the element of chance remains, with no skill involved, while in a trade there is skill involved with no chance.

Perusing the agreements between the State of Sikkim and the respondent-assessees, the Court noted that the agreements are two-fold in nature. One set of agreements deal with paper lottery and another set of agreements deal with online computerised lotteries. The Court also touched upon the concept of Agency.

The Court pointed out that Suppliers of the goods of a manufacturer, whether on a retail or wholesale basis, who have some form of concession as a regular stockist, distributor or franchisee, are often described as agent, selling agent, main agent, etc. for the manufacturer of goods which they supply. However, nowadays the distributor actually buys from the manufacturer and resells it to his own customers. In such cases, the term ‘agent’ is used in a complimentary sense only, i.e., not to transact any business on behalf of the principal, except as regards purchase of the goods from the principal.

Perusing the relevant clauses of the agreements including the nomenclature used to describe the respondent-assessee (exclusive sole purchaser/distributor/promoter), the Court pointed out that respondent-assessee was not an agent of the State Government but purchased the lottery tickets at his own risk for the purpose of selling it through stockists, etc. The unsold lottery tickets had to be returned to the State Government in order to avoid misuse of the same and in order to ascertain the number of tickets sold. The prices of tickets were determined as wholesale prices which were paid by the respondent-assessee herein to the State Government. The sale proceeds for sale of lottery tickets had to be credited by the sole purchaser or distributor into the treasury etc. of the State of Sikkim as per the invoice raised by the State Government on the sole purchaser or distributor. The sole purchaser or distributor had to deposit the sale proceeds ensuring Guaranteed Revenue. The sole purchaser or distributor had the responsibility to indemnify the State Government against all claims in relation to the sale of lottery tickets during the term of the agreement.

Perusing the agreement between the respondent-assessee and State of Sikkim vis-a-vis online computerised lottery, the Court pointed out that the clauses of the said agreement are similar in substance to the clauses of the agreement with regard to paper lotteries which have been discussed above. Merely because the online agreement uses the expression “marketing agent”, it would not imply that respondent-assessee is an agent within the meaning of the expression under the provisions of the Contract Act dealing with agency. Hence, on a consideration of the agreements for the sale of online lottery tickets in juxtaposition with the agreement for the sale of paper lotteries, the Court found that there is a great similarity in the clauses of the agreement and hence, agreement concerning sale of online lottery tickets also is one between principal and principal and not between principal and agent.

The expression “betting, gambling or lottery” in the Explanation to Section 66D(i) has to be given its true intent and meaning as conducting a lottery is nothing but an activity coming within the scope of betting and gambling. This is by the application of the principle of noscitur a sociis where the expression “lottery” takes its meaning from “betting and gambling”. Although a lottery ticket is nothing but an actionable claim, the conduct of a lottery scheme is nothing but a betting and gambling activity. Therefore, it is only Entry 62 — List II which enables the imposition of tax by the State Government. The activity of betting and gambling which includes conducting of a lottery is regulated under Entry 34 — List II, with Entry 62 — List II being the taxation entry.

The Court hence dismissed the appeals finding no merit in them.