By TIOL News Service

GANGTOK, NOV 19, 2013: IN this Writ Petition, the Petitioner seeks to assail letter issued by the Superintendent of Central Excise and Service Tax, Gangtok Range, informing the Petitioner that as per Notification No.36 /2012-ST dated 20-06-2012 read with Rule 6(7C) of the Service Tax Rules, the Petitioner was liable to pay service tax as per the prevailing provisions since they had been rendering service to the State Government in relation to promotion, marketing, organising and assisting in organising games of chance including lottery services.

The Petitioner is a Company registered under the Companies Act, 1956 and is engaged in the business of sale of lottery tickets organised by the Government of Sikkim, the Respondent No.4, under an agreement dated 10-08-2009 for a term of five years. By that agreement the Petitioner procures the lottery tickets in bulk from the Government of Sikkim and resells those to the public through various agents, stockists, resellers, etc.

The Petitioner asserts that by the amendment to the Finance Act, 1994 in 2012, 'lottery' and 'transaction in actionable claim' have been kept outside the purview of the service tax.

The next ground of attack is that there is no element of service in the Petitioner' s relation with the Government of Sikkim, Respondent No.4, in respect of the Sikkim State Lotteries. As per the Petitioner, the Petitioner purchases lottery tickets in bulk and sells them to stockists, resellers, etc., by adding a profit margin. The stockists, resellers, etc., in turn sell these tickets to retailers who in turn sell them to the ultimate participants of the draw. As the tickets are sold to the Petitioner by the Government of Sikkim, the transaction is one of sale and purchase of lottery ticket and not one of rendering of any service. Thus, it is submitted that the Petitioner is not involved in rendering any 'taxable service'.

It is further submitted that lottery tickets are outside the purview of service tax by name under the 'negative list' provided under Section 66D of the Finance Act, 1994 and also excluded from the ambit of the expression 'service' which excludes 'transaction in actionable claim'.That 'lottery' is an 'actionable claim' has been settled by a decision of a Constitution Bench of the Supreme Court of India in Sunrise Associates vs. Govt. of NCT of Delhi and Others (2006-TIOL-4O -SC-CT-LB).

The next plank of attack is on the question of legislative competence of the Parliament to pass a law on lottery tickets in view of List II to Seventh Schedule of the Constitution of India which under Entry 34 and Entry 62 vests the subject-matter of 'Betting and gambling' and 'Taxes on luxuries, including taxes on entertainments, amusements, betting and gambling' respectively within the sole competence of the State Legislature.

History :

By an amendment to the Finance Act, 1994, introduced by the Finance Act, 2003, a new category of taxable service called 'business auxiliary service' was introduced under Sub-Section (19) of Section 65 of the Finance Act, 1994 with effect from 01-07-2003. In terms of this the Service Tax Department demanded of the Petitioner to register itself under the Act for payment of service tax. This action came to be challenged before this Court in Writ Petition in the matter of M/s. Martin Lottery Agencies Limited vs. Union of India and Others - (2007-TIOL-731-HC-SKM -ST) on the ground that such levy was not liable to be imposed upon the sale of lottery tickets. This Writ Petition was ultimately allowed by this Court vide judgment dated 18-09-2007 upholding the plea raised by the Petitioner that no service tax was payable on the activity undertaken by the Petitioner which, of course, was challenged before the Hon' ble Supreme Court in Civil Appeal No.3239 of 2009. However, during the pendency of this Appeal, the Finance Act, 1994, was further amended incorporating an 'Explanation' to Section 65(19)(ii) of the Finance Act whereby it was declared that "for the purpose of this Sub-Clause, 'service' in relation to promotion or marketing of service provided by the client would include 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, etc."

The Supreme Court being apprised of the development took note of the Explanation and its impact on the judgment delivered by this Court and, in Union of India and Others vs. Martin Lottery Agencies Limited : (2009-TIOL-60-SC-ST), ultimately held the Explanation to be a substantive law and declared it to be enforceable prospectively leaving the issue as regards the validity of the Explanation open. The judgment of this Court, however, was not interfered with. In a later Writ Petition filed before this Court being WP(C) No.36 of 2009 in the matter of M/s. Future Gaming Solutions India Private Limited vs. Union of India and Others, the validity of the Explanation to Section 65(19)(ii) came to be challenged by the present Petitioner but was dismissed by judgment dated 30-07-2010. The Special Leave Petition being No.SLP (C) No. 26771 of 2010 filed before the Supreme Court challenging such decision is still pending consideration after the Union of India was put on notice.

During the pendency of the matter before the Supreme Court, the Finance Act, 1994, once again came to be amended by which the Explanation to Section 65(19)(ii) impugned Section 65(19)(ii) was deleted and a new category of 'taxable service' introduced vide Clause (zzzzn) to Sub-Section (105) of Section 65 vide Finance Act, 2010 with effect from 01-07-2010.

"(zzzzn) to any person, by any other person, for promotion, marketing organising or in any other manner assisting in organising games of chance, including lottery, Bingo or Lotto in whatever form or by whatever name called, whether or not conducted through internet or other electronic networks;"

This provision was also challenged before this Court by the Petitioner in WP(C) No.36 of 2011 in the matter of M/s. Future Gaming Solutions Pvt. Ltd. on various grounds bulwark of which was that as the activities of lottery distributors like the Petitioner, did not constitute service it was beyond the purview of taxable service as defined under the impugned Clause (zzzzn) of Sub-Section (105) of Section 65 of the Finance Act, 2010, and that the Parliament lacked the necessary legislative competence to pass such law in view of Entries 34 and 62 of List II read with Entry 97 of List I to the Seventh Schedule of the Constitution of India as well as Article 248 thereof. This Writ Petition was allowed by judgment dated 29-11-2012 - (2012-TIOL-1096-HC-SIKKIM-ST) and is at present the subject-matter of a Special Leave Petition filed by the Respondents No.1 to 3 before the Supreme Court.

Finance Act, 1994, was amended once again by the Finance Act, 2012, whereby several provisions were introduced giving a new dimension to the meaning of 'taxable service' as services that would be taxable thereunder. A new concept called 'Negative List' came into existence and it is the petitioner' s plea that lottery falls in the negative list.

So, the petitioner wrote to the Department that in view of the change in the legal position the Petitioner would not be paying service tax with effect from 01-07-2012.

In response to the above, the Respondent No. 3 issued the impugned letter C. No. V(3)7/ST/ FGSI Pvt Ltd/ GTK /2009/295 dated 06-07-2012 stating inter alia as follows:-

"In this matter, I have been directed by the Assistant Commissioner, Central Excise and Service Tax, Gangtok Division, Siliguri to inform you that as per the Not. No. 36/2012 ST dated 20.06.2012 read with Rule 6(7C) of the Finance Act 1994 (as amended), the distributor or selling agents are liable to pay service tax at the rate specified for the taxable service of promoting, organizing or in any other manner assisting in arranging lottery. Since you are rendering service to the State Govts.in relation to Promotion, Marketing, Organizing and assisting in organizing games of chance including lottery services, you are liable to pay service tax as the prevailing provisions.

Therefore, I have been directed to instruct you to continue the payment of service tax on the aforesaid service. This is for favor of your kind information and necessary action, please."

It is this letter which is under challenge in this Writ Petition.

Petitioner's Submissions: The summary of the petitioner' s submissions is:

(a) That the activities undertaken by the Petitioner do not fall under the definition of 'taxable services' defined under the Finance Act, 1994, as amended.

(b) As the definition of the expression 'service' under Section 65B (44) of the Finance Act, 1994 excludes 'transaction in actionable claim', no service tax can be levied on sale and purchase of lottery tickets which have been declared by the Hon' ble Supreme Court to be actionable claim. Therefore, in terms of the amended provisions of the Finance Act, 1994 (with effect from 01-07-2012) lottery tickets are outside the scope of service tax levied under the said Act of 1994.

(c) That sale of lottery tickets is excluded from service tax purview in terms of the negative list under the Section 66D of the Finance Act, 1994 (as amended by Finance Act, 2012).

(d) That by the judgment dated 29-11-2012 of this Court in (2012-TIOL-1096-HC-SIKKIM-ST) filed by very same Petitioner as in the present case, it has inter alia been held that the Parliament lacks the necessary legislative competence to enact a law on levy of tax on lotteries.

Clearly, therefore, the impugned letter dated 06-07-2012 and the action of the Respondents to enforce the provisions of the Finance Act, 1994 (as amended by the Finance Act, 2012) is illegal and without jurisdiction.

The moot question that calls for determination by the High Court is as to whether or not the activity of the Petitioner of promoting, organising or assisting in arranging the sale of lottery tickets of the Government of Sikkim is a taxable service falling within the purview of the Finance Act, 1994, as amended by the Finance Act, 2012. The cognate question that would then arise in the determination of this question would be as to whether there is an element of service in the activity of the Petitioner.

After detailed discussion on various issues and reference to decided cases, the High Court concluded,

(i) In the light of Sub-Section (1) to Section 65B read with Sub-Section (44) thereof lottery is excluded from the definition of 'service' being 'actionable claim';

(ii) Even under Sub-Section (34) of Section 65B read with Sections 66B and 66D lottery stands excluded from the purview of service tax under the Finance Act, 2012 as being one in the 'negative list';

(iii) The activity of the Petitioner comprising of promotions, organising, reselling or any other manner assisting in arranging of lottery tickets of the State Lotteries does not establish the relationship of a principal or an agent but rather that of a buyer and a seller and, on principal to principal basis in view of the nature of the transaction consisting of bulk purchases of lottery tickets by the Petitioner from the State Government on full payment on a discounted price as a natural business transaction and, other related features like there being no privity of contract between the State Government and the stockists, agents, resellers under the Petitioner.

(iv) The impugned letter C. No.V (3)7/ST/ FGSIPvt Ltd/ GTK /2009/295 dated 06-07-2012 does not have the sanction and authority of either the Constitution or the law as there is no provision anywhere for imposing of service tax on 'lottery' and the action of the Respondents to impose such tax on the Petitioner on the basis of Notification No.36 /2012-ST dated 20-06-2012 and the Service Tax Rules is ultra vires the very provisions of the Finance Act being in excess of the powers vested therein.

For all these reasons, the High Court was of the view that transactions in lottery tickets are not liable to service tax under the provisions of the Finance Act, 1994, as amended by the Finance Act, 2012. It is accordingly declared so. Consequently the impugned letter dated 06-07-2012 issued by the Respondent No.3 stands hereby quashed.

In the result, the Writ Petition is allowed.

(See 2013-TIOL-904-HC-SIKKIM-ST)