By TIOL News Service

GANGTOK, OCT 14, 2015: LOTTERY: A tax on people who are bad at math - Anonymous

Clause 5.2 of the D.O.F. No. 334/5/2015-TRU dated 28.02.2015 issued after presentation of the Union Budget 2015 mentions the following -

(ii) The intention in law has been to levy Service Tax on the services provided by:

(a) chit fund foremen by way of conducting a chit.

(b) distributor or selling agents of lottery, as appointed or authorized

by the organizing state for promoting, marketing, distributing,selling, or assisting the state in any other way for organizing and conducting a lottery. However, Courts have taken a contrary view in some cases, while in some cases the levy has been upheld. An Explanation is being inserted in the definition of “service” tospecifically state the intention of the legislature to levy Service Tax on activities undertaken by chit fund foremen in relation to chit, and lottery distributors and selling agents, in relation to lotteries [section 65 B (44)]. Further, an explanation is being added in entry (i) of section 66D to specifically state that these activities are not covered by the Negative List.

Before going to the case on hand, a bit of recapitulation.

The Sikkim High Court in the case of Future Gaming Solutions India Pvt. Ltd. - 2012-TIOL-1096-HC-SIKKIM-ST & 2013-TIOL-904-HC-SIKKIM-ST has heldas following:-

(i) That lottery consists of whole gamut of activities commencing from the buying and selling of lottery between the State Government and the Petitioners, between the Petitioners and the Stockists and then between the Stockists and the sellers, then between the sellers and the buyers and ultimately winning of the prize.

(ii) That lottery is an actionable claim; (iii) That "actionable claim" is defined under Section 3 of the Transfer of Property Act, 1882; (iv) That actionable claim is left out from the purview of service tax in the negative list by virtue of Section 66D of the Finance Act, 1994, as amended by the Finance Act, 2010 and the Finance Act, 2012; (v) That lotteries fall within the meaning of "betting and gambling" as provided in Entry 34 of List II following the jurisdiction in R.M.D. Chamarbaugwala Case (supra) and, therefore, by virtue of Entry 62, "taxes on betting and gambling" lies in the exclusive domain of the State Legislature; (vi) That buying and selling of lottery tickets is nothing but actionable claim following the decision in Sunrise Associates Case (supra);

(vii) That in the garb of a Subordinate Legislation, i.e., Sub-Rule (7C) of Rule 6 of the Service Tax Rules, 1994, it is not permissible to charge service tax as it would be beyond the scope of the parent Legislation. All the more so as Sub- Rule (7C) of Rule 6 only provides an optional composition scheme for payment of service tax and that unless there is levy of service tax under the statutory provisions, the alternate scheme cannot be extended so as to provide for such levy.

Incidentally, the above findings are under examination of/by the Supreme Court in the Special Leave Petitions filed by the Respondent Revenue but there is no order of stay.

On to the case - Petitioners are engaged in the business of sale of paper and online lottery tickets respectively organised by the Government of Sikkim.

Inasmuch as the Respondents had issued letters to the Petitioners bringing to their notice that service providers in respect of services provided by lottery distributors and selling agents were amenable to service tax as prescribed under Sub-Rule (7C) of Rule 6 of the Service Tax Rules, 1994.

The Petitioners are aggrieved by the enforcement of the provision of Finance Act, 1994, as amended by the Finance Act, 2015, upon them with effect from 01.06.2015 which sought to make service tax applicable to the Petitioner-Companies.

The Petitioner Companies, inter alia, challenge the jurisdiction of the Respondents and the legality of their actions in enforcing provisions of the Finance Act, 1994 as amended by the Finance Act, 2015, upon the Petitioner-Companies with effect from 01.06.2015.

It is averred that the activities of the Petitioners involve purchase of lottery tickets in bulk from the State Government and selling them to stockists, resellers, etc., by adding a profit margin. The stockists, resellers, etc., in turn sell these tickets to retailers which in turn sell them to the ultimate participants of the draw. It has been stated that the transaction by which tickets are sold to the Petitioner- Companies by the Government of Sikkim is one of sale and purchase of lottery tickets and not one of rendering services. Thus, the Petitioners being not involved in rendering services, the provisions of the Finance Act, 1994 (as amended by the FA, 2015) have no application on the activities undertaken by them.

After considering the exhaustive submissions made by both sides, the High Court observed thus -

Déjà vu - noimpact on the earlier findings by the amendments

++ The primary finding in both the cases (Future Gaming) is that the activities of the lottery distributors, i.e., the Petitioners, did not constitute a service and thus beyond the purview of taxable service as the activity of the Petitioners comprising of promotion, organising, reselling or in any other manner assisting or arranging the lottery tickets of the State, did not establish the relationship of principal and agent but rather that of a buyer and a seller on principal to principal basis in view of the nature of the transaction being bulk purchase of the lottery tickets by the Petitioners from the State Government on full payment of price as a natural business transaction and, other related features and there being no privity of contract between the State Government and the Stockists, agents, resellers, etc., under the Petitioners.

++ On a close examination of the provisions inserted by FA, 2015, it becomes quite evident that the object of the amendment was to get over the finding in the Future Gaming Cases.

++ In Future Gaming cases it has been held most unequivocally, inter alia, that the activity of the Petitioners comprising of promotion, organising, reselling or any other manner assisting in arranging the lottery tickets of a State Lottery does not establish the relationship of a principal and an agent but that of a buyer and a seller on principal to principal basis there being bulk purchase of lottery tickets by the Petitioners from the State Government on full payment on a discounted price as a natural business transaction and other related features and, of there being no privity of contract between the State Government and the Stockists, agents, sellers, etc., under the Petitioners. In our view, in this case also the very same conclusion would be applicable as the nature of the relationship between the Petitioners and the State Government and the Petitioners and the Stockists, agents, resellers, etc., does not appear to have been altered.

++ As would appear from the clauses of the agreement [dated 24-01-2015] extracted above, the Petitioner is in fact a wholesaler as held in Future Gaming Case and the relationship between the Petitioner and the Government of Sikkim is on a principal to principal basis. The very words used in the recital that the Petitioner "has agreed to be appointed as the sole Purchaser/Distributor to market and sell tickets of lottery schemes ………………………" would reveal that the Petitioner is not an agent of the Government of Sikkim who is carrying on the activity of marketing or selling of lottery on a consideration of promotion of a commission or the like.

++ Thus, as we find no change in the circumstance by introduction of the new provisions by the Amendment Act of 2015 from that which existed earlier in Future Gaming cases, we have no hesitation to hold that the finding of this Court in Future Gaming case still continue to hold good. The activity carried out by the Petitioners in relation to promotion of marketing, organising, selling of lottery or facilitating in organising lottery of any kind in any other manner, would clearly not fall within the meaning of 'service' as provided under Clause (44) of Section 65B as the two essential elements (a) that the activity should be carried out by a person for another and (b) that such activity should be for a consideration, are unmistakably lacking.

++ This position appears to be further reinforced by Circular No.354/59/2006-TRU dated 10-11-2006 by which it has been clarified by the Central Board of Excise and Customs that the service tax can be levied only when a consideration is received for taxable services provided. The Circular having been issued in terms of Section 37B of the Central Excise Act, 1994 (as applicable to Finance Act, 1994) in terms of Section 83 of the Finance Act, 1994, would be binding on all field formations of the department.

++ In Future Gaming case we have held that Sub-Rule of (7C) Rule 6 only provides on optional composition scheme for payment of service tax which by itself does not create a charge of service tax and that this Rule is only a piece of Subordinate Legislation framed under the rule making power provided in the Finance Act, 1994 and, therefore, in view of the position of law that Subordinate Legislation cannot be override the statutory provisions, Sub-Rule (7C) of Rule 6 cannot go beyond the provision of the Finance Act, 1994. This provision has not changed even now and, therefore, the finding would apply even in this case.

++ It is trite that when a Legislature sets out to validate a tax declared by a Court to be illegally collected under an ineffective or an invalid law, the cause for ineffectiveness or invalidity must be removed before the validation can be said to take place effectively.

++ The main object of Section 66D is to exclude actionable claim which includes lottery. This obviously is being said to be set at naught by Explanation.It is a settled position of law that an Explanation cannot enlarge the scope of a provision.

++ Thus, even if we assume that the law has been validly passed, the amendment to the Finance Act, 1994 by the amendment Act, 2015, cannot be held to be valid and, therefore, is liable to be struck down.

++ Since the selling and marketing agents purchase the tickets from the Petitioners/Distributors as goods on payment of price leaving the former charged with all the liabilities down the line to the second tier agents it cannot, in our view, be considered as an activity carried out for consideration in relation to or for facilitation of a transaction in money carried out by a lottery distributor or a selling agent in relation to promotion, marketing, organising, selling of lottery or facilitating in organising lottery of any kind in any other manner as provided under Explanation 2 to Clause (44) of Section 65B.

++ There is no dispute of the fact that like the Petitioners/Distributors in the first tier who purchase the lottery tickets in bulk as goods for price from the State Government, the second tier comprising of the selling and marketing agents also purchase from the Petitioners/Distributors lottery tickets in bulk as goods on payment of price severing all other relations. There is no privity of contract between the Petitioners/ Distributors and the sellers and buyers down the line after the second tier. Thus, the levy of reverse service tax vide Notification No.30/2012-ST dated 20-06-2012 as amended by Notification No.7/2015-ST dated 01-03- 2015 is clearly unsustainable and liable to struck down.

In the matter of the submissions of the Counsel for the Respondents and the decisions cited, the High Court commented that they - appear to be purely academic having only a remote connection with the matter in lis and, therefore, do not deem it necessary to deal with those and, therefore reject them as irrelevant.

Conclusion:

(i) The Petitioners in buying and selling the lottery tickets is not rendering 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;

(ii) In any case, since by the Explanation the scope of Section 66D which is the main provision which is to be expanded, it would be ultra vires the Finance Act, 1994 and is accordingly struck down;

(iii) The impugned letters to the Petitioners having been issued on an erroneous interpretation of Section 66D of the Finance Act, 1994, as amended by the Finance Act, 2015 requiring the Petitioners to pay tax under the Service Tax Rules, 1994, as amended, in the absence of specific provision in the Finance Act and that Sub-Rule (7C) of Rule 6 of the Service Tax Rules, 1994, only provides an optional composite scheme for payment of tax and, therefore, does not create a charge of service tax and is a Subordinate piece of Legislation, hereby stands quashed. Resultantly, Circular under D.O.F. No. 334/5/2015-TRU dated 19-05-2015 referred to in the aforesaid letters in the two Writ Petitions also stand quashed.

(iv) The Respondents, their agents, servants, officers and representatives are restrained directly or indirectly, and in any manner whatsoever, from demanding any amounts by way of service tax or enforcing the provisions of the Finance Act, 1994 on the activity of the Petitioners in relation to lottery tickets.

The Writ Petitions were allowed.

(See 2015-TIOL-2398-HC-SIKKIM-ST)