Sale Of Lottery By State Not Service; Lottery Wholesalers Not Liable To Service Tax : Supreme Court

The sale of lottery tickets by a State Government is not a service but an activity to earn additional revenue, observed the Supreme Court. Hence, the wholesale lottery purchasers are not promoting or marketing any service rendered by the State so as to attract service tax liability under the head "business auxiliary service."

The appellants before the Supreme Court were wholesale lottery purchasers, who bulk purchase lotteries from the State at a discount and sell them to retailers on a margin.

The issue before the Court was whether the lottery wholesalers were liable to pay service tax under the heading 'business auxiliary service' in terms of the provisions of the Finance Act, 1994. The tax authorities contended that the activity of the appellants amounted to "promotion or marketing of services provided by the client" which comes under the head "business auxiliary service" as per Section 65(19) of the Finance Act 1994.

A bench comprising Justices BV Nagarathna and N Kotiswar Singh observed that there existed no business auxiliary service between the State and the appellants when the lotteries were sold and hence, no service tax could be levied and demanded from the Appellants.

“...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. 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."

The appellants challenged the judgments of the Kerala and Sikkim High Courts which rejected their challenges. They argued that the profit made from the difference between the purchase price and the face value of the tickets did not constitute a 'taxable service”. According to them, an outright purchase does not involve any service to the State in terms of promotion or marketing under the Explanation to Section 65(19)(ii) of the Finance Act, 1994 as amended by the Finance Act, 2008 to make it a taxable service.

Accepting the appellant's contention, the Court said that since there was no service rendered to the state in terms of promoting or marketing the lotteries therefore a service tax cannot be levied or demanded on the sale of the lottery tickets.

Also, the Court read down the Explanation to Section 65(19)(ii) of the Finance Act, 1994 which 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.

In Sunrise Associates vs. Govt. of NCT of Delhi (2006), the Supreme Court interpreted Section 65(19)(i) and held that lottery was an actionable claim and not goods. However, by 2008 amendment, an Explanation was added to this Section to bring "lottery" under the ambit of  "business auxiliary service"

“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 conduct of lottery is a revenue generating activity by a State or any other entity in the field of actionable claims…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.”, the Court said.

“The Explanation, therefore, cannot over-ride the main text of the provision as the Explanation which was sought to remove doubts is in fact contrary to the main provision which defines business auxiliary service and also contrary to the judgment of this Court in Sunrise Associates and having regard to clause (50) of Section 65 of the Finance Act, 1994.”, the Court added.

In a nutshell, the Court held that the High Courts committed an error in not recognizing the definition of goods as mentioned in the Sale of Goods Act, 1930 which excludes actionable claims from the definition of the good, therefore lotteries being actionable claims cannot be categorized as goods under Section 65(19) (i) of the Finance Act, 1994 to levy and demand service tax on the Appellants.

“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”. As already noted, the definition of 'goods' in clause (7) of Section 2 of Sale of Goods Act, 1930, that is expressly incorporated in clause (50) of Section 65 of the Act, which expressly excludes actionable claims. 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 Court held.

Accordingly, the appeals were allowed and the impugned judgments of the High Courts of Sikkim and Kerala were set aside.

Appearance:

For Appellant(s) Mr. B. Krishna Prasad, AOR M/S. Parekh & Co., AOR Mr. Gautam Narayan, AOR Ms. Asmita Singh, Adv. Mr. Anirudh Anand, Adv. Mr. Tushar Nair, Adv. Mr. S. Ganesh, Sr. Adv. Ms. Rohini Musa, AOR Mr. Mukunda Rao, Adv. Mr. Nipun Katyal, Adv. Mr. George Poonthottam, Sr. Adv. Mr. Atul Shankar Vinod, Adv. Mr. Dileep Pillai, Adv. Mr. Kannan Gopal Vinod, Adv. Mr. M. P. Vinod, AOR Mr. Chirag M. Shroff, AOR Mr. Dhananjay Kataria, Adv. Mr. Raj Bahadur Yadav, AOR Mr. Mukesh Kumar Maroria, AOR

For Respondent(s) Mr. A.R. Madhav Rao, Adv. Mr. Arjun Garg, AOR Mr. Aakash Nandolia, Adv. Ms. Sagun Srivastava, Adv. Ms. Kriti Gupta, Adv. Mr. Arvind Kumar Sharma, AOR Mr. Raj Bahadur Yadav, AOR Ms. Usha Nandini V., AOR Mr. Biju P. Raman, Adv. Mr. John Thomas Arakal, Adv. Mr. Gautam Narayan, AOR Ms. Asmita Singh, Adv. Mr. Anirudh Anand, Adv. Mr. Tushar Nair, Adv. Mr. Vikramjit Banerji, A.S.G. Mr. Arijit Prasad, Sr. Adv. Mrs. Nisha Bagchi, Adv. Mr. Mukesh Kumar Maroria, AOR Mr. Shubhendu Anand, Adv. Mr. Meru Sagar Samantaray, Adv. Mr. Annirudh Sharma Ii, Adv. Mr. G. S. Makker, Adv. Mr. Mukunda Rao Angara , AOR Ms. Rohini Musa, AOR Mr. B. Krishna Prasad, AOR Mr. Raghvendra Kumar, AOR Mr. Anand Kumar Dubey, Adv. Mr. Nishant Verma, Adv. Mr. Simanta Kumar, Adv. Mr. Maneesh Pathak, Adv. Ms. Harsha Sharma, Adv. Mr. Devvrat Singh, Adv. Mr. Jainendra Kumar, Adv. Mr. Varun Singh, Adv. Mr. Sameer Abhyankar, AOR Mr. Kushagra Aman, Adv. Mr. Aakash Thakur, Adv. Mr. Rahul Kumar, Adv. Ms. Ayushi Bansal, Adv. M/S. Arputham Aruna And Co, AOR Mr. C. K. Sasi, AOR Ms. Meena K Poulose, Adv. Ms. Anupriya, Adv.

Case Title: K. ARUMUGAM VERSUS UNION OF INDIA & OTHERS ETC., CIVIL APPEAL NOS.2842-2848 OF 2012 (and connected matters)

Citation : 2024 LiveLaw (SC) 639

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