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Synopsis

The Supreme Court has on recently held sale of lottery tickets by the State is a privileged activity by itself and not rendering of a service as it involved no activity of promotion or marketing of a service, so no service tax can be levied on the premise that it was a ‘business auxiliary service’.

A bench of Justices B V Nagarathna and N Kotiswar Singh allowed appeals filed by K Arumugam and others against the High Courts of Kerala and Sikkim, which rejected their plea against the central government's move to levy service tax on the premise that the activity which the appellants were carrying on was a business auxiliary service within the definition of Section 65(19) of the Finance Act, 1994 and therefore, chargeable to service tax. 

"Conducting a lottery which is a game of chance is ex facie a privilege and an activity conducted by the State and not a service being rendered by the State. The said activity would have a profit motive and is for the purpose of earning additional revenue to the State exchequer. The activity is carried out by sale of lottery tickets to persons, such as the assessees herein, on an outright basis and once the lottery tickets are sold and the amount collected, there is no further relationship between the assessees herein and the State in respect of the lottery tickets sold," the bench said.

Here, the High Courts have held service tax is leviable on their activity under the nomenclature of business auxiliary service. 

The court thus examined a legal issue whether the activity of the appellants –assessees would attract service tax within the scope and ambit of Section 65(19)(ii) read with Section 65(105)(zzb) of the Finance Act, 1994.

The appellants were/are all carrying on the business of buying and selling of lottery tickets. They purchased the lottery tickets from the State Governments which organised the lotteries and sold the same in various other States or in the States where the lottery business was organized, through stockists and distributors.

The Central Government sought to levy service tax on the premise that the activity which the appellants were/are carrying on was a business auxiliary service within the definition of Section 65(19) of the Finance Act, 1994 and therefore, chargeable to service tax. 

The court observed that the Finance Act, 1994 is relatable to Entry 97 of List I of the Seventh Schedule of the Constitution. Subsequently, by the same Constitution (One Hundred and First Amendment) Act, 2016, Article 246A was inserted as special provision with respect to goods and services tax.

It noted the definition of goods has also been noted in clause (50) of Section 65 of the Finance Act, 1994 which refers to clause (7) of Section 2 of the Sale of Goods Act, 1930. The expression “goods” under the Sale of Goods Act expressly excludes actionable claims as well as money.

The bench also pointed out this court in Sunrise Associates Vs Govt of NCT of Delhi (2006) held that lottery tickets are actionable claims. Therefore, as lottery tickets would not come within the meaning of the expression goods under clause (7) of Section 2 of the Sale of Goods Act, 1930, they would also not come within the scope and ambit of clause (50) of Section 65 of the Finance Act, 1994. 

"If that is so, they would also not come within the scope and ambit of clause (19)(i) of Section 65 of the Finance Act, 1994. Lottery tickets being actionable claims and not being goods within the meaning of sub-clause (i) of clause (19) of Section 65 of the Finance Act, 1994, would expressly get excluded from the scope of the said provision. In the circumstances, service tax on the promotion or marketing or sale of lottery tickets which are actionable claims could not have been levied under the said sub-clause," the bench said.

The court also said when lottery ticket is an actionable claim and not “goods” and is therefore outside the scope of sub-clause (i) of clause 19 of Section 65 of the Finance Act, 1994, it could not have been included as lottery per se in the Explanation to sub-clause (ii) of Clause 19 of Section 65 of the Finance Act, 1994 as “service in relation to promotion or marketing of service provided by the client” including any service provided in relation to promotion or marketing of games of chance, organised, conducted or promoted by the client, in whatever form or by whatever name called, whether or not conducted online, including lottery, lotto, bingo.

The Explanation sought to bring the activity of sale of lottery tickets within sub-clause (ii) of Clause 19 of Section 65 of the Finance Act, 1994, when it was excluded from subclause (i) on account of the lottery tickets being interpreted as actionable claims and not goods on the premise that it was a service within the meaning of said sub-clause, it noted.

However, the bench said, "On a plain reading of the Explanation in light of the activity actually carried on by the appellant(s)-assessee(s) herein, it becomes clear that the outright purchase of lottery tickets from the promoters of the State or Directorate of Lotteries, as the case may be, is not a service in relation to promotion or marketing of service provided by the client, i.e., the State conducting the lottery," the bench said.

The bench also said the conduct of lottery is a revenue generating activity by a State or any other entity in the field of actionable claims. The client, i.e., the State is not engaging in an activity of service while dealing with the business of lottery. 

Explanation to subclause (ii) of Clause 19 of Section 65 of the Finance Act, 1994 cannot bring within sub-clause (ii) by assuming an activity which was initially sought to be covered under sub-clause (i) thereof but could not be by virtue of the definition of goods under the very same Act read with Section 2(7) of the Sale of Goods Act, 1930, the bench said.

"The mere insertion of an explanation cannot make an activity a taxable service when it is not covered under the main provision (which has to be read into the said subclause by virtue of the legislative device of express incorporation). This is because sale of lottery tickets is not a service in relation to promotion or marketing of service provided by a client, i.e., the State in the instant case," it said.

In the sale of lottery tickets, the court noted the burden is on the assessees herein to further sell the lottery tickets to the divisional / regional stockists for a profit as their business activity. 

"This activity is not a promotion or a marketing service rendered by the assessees herein to the State within the meaning of sub-clause (ii) of Clause 19 of Section 65 of the Finance Act, 1994. This is because, to reiterate, the States are not rendering a service but engaged in the activity of conducting lottery to earn additional revenue," the bench said.

Moreover, once the lottery tickets are sold by the Directorate of Lotteries—a Department of the State, there is transfer of the title of the lottery tickets to the appellants, who, as owners of the said lottery tickets, in turn sell them to stockists and others. Thus, there is no promotion of the business of the State as its agent. Thus, there is no ‘principal—agent’ relationship which would normally be the case in a relationship where a business auxiliary service is rendered. The relationship between the State and the appellants is on a principal to principal basis, the bench said.

Thus, there is no activity of promotion or marketing of a service on behalf of the State. Neither is the State, which conducts the lottery, rendering a service within the meaning of the Finance Act, 1994.

"No doubt the Explanation was omitted with effect from 01.07.2010. However, these cases pertain to the period prior to 01.07.2010. Therefore, either under sub-clause (i) of clause (19) of Section 65 or under the Explanation to sub-clause (ii) of Clause 19 of Section 65 of the Finance Act, 1994, after it was introduced with effect from 16.05.2008 and until it was omitted, service tax could not have been levied on the promotion or marketing of sale of goods or service provided by the client, on the premise that it was a ‘business auxiliary service’," the bench said.

The court said the High Courts have lost sight of the definition of ‘goods’ in clause (50) of Section 65 of the Act while interpreting the expression “lottery".

"This court has by the Constitution Bench in Sunrise Associates opined that lottery tickets are actionable claims. The High Courts have also lost sight of the fact that the sale of lottery tickets by the State is a privileged activity by itself and not rendering of a service for which the assessees are rendering promotion or marketing service," the bench said.

The apex court set aside the judgments by the High Courts by clarifying that if any representations are made seeking refund of the amounts paid, the same shall be considered expeditiously by the concerned departments of the respondents.