Summary
Lottery ticket distributors who bought State lottery tickets outright in bulk and resold them were held not liable to service tax as a 'business auxiliary service' under Section 65(19) of the Finance Act, 1994. Lottery tickets are actionable claims, not goods, so sub-clause (i) does not apply. The 2008 Explanation to sub-clause (ii) could not make the activity taxable, because a State conducting a lottery renders no service and the buyer deals with it principal to principal. The Kerala and Sikkim High Court judgments were set aside.
Issues
- Whether the outright purchase and resale of State lottery tickets by distributors attracted service tax as a business auxiliary service under Section 65(19)(ii) read with Section 65(105)(zzb) of the Finance Act, 1994.
- Whether the Explanation to Section 65(19)(ii), inserted with effect from 16.05.2008, could bring the sale of lottery tickets within the levy.
Provisions considered
- Section 65(19)(i), Finance Act, 1994Covers promotion, marketing or sale of 'goods' of the client; since lottery tickets are actionable claims and not goods, their promotion, marketing or sale falls outside this sub-clause. (¶¶ 6.5, 6.8, 6.9)
- Section 65(19)(ii) and its Explanation (inserted by Finance Act, 2008), Finance Act, 1994The Explanation deeming services relating to promotion or marketing of games of chance, including lottery, to be covered could not override the main provision, since the State conducting a lottery renders no service and the distributors, as owners after outright purchase, deal with the State principal to principal and not as its agents. (¶¶ 6.5, 6.10, 7)
- Sections 65(50), 65(105)(zzb) and 66, Finance Act, 1994Section 65(50) adopts the Sale of Goods Act definition of goods; the charge under Section 66 on the taxable service in Section 65(105)(zzb) depends on the activity being a business auxiliary service, which it was not. (¶¶ 5, 6.5, 6.6, 6.9, 7)
- Section 2(7), Sale of Goods Act, 1930'Goods' expressly excludes actionable claims and money; read with Sunrise Associates (lottery tickets are actionable claims), lottery tickets are not goods. (¶¶ 6.6, 6.7, 6.9)
- Articles 246 and 248; Entry 97 of List I; Entries 33, 34 and 62 of List II, Constitution of IndiaSet out as background: the Finance Act, 1994 levy of service tax was traced to the residuary power under Article 248 read with Entry 97 of List I. (¶¶ 6.1, 6.2, 6.3, 6.4)
- Article 265, Constitution of IndiaInvoked in granting the assessees all consequential reliefs, since tax cannot be collected without authority of law. (¶ 9)
Held
- Since Section 65(50) of the Finance Act, 1994 adopts the Sale of Goods Act definition of goods, which excludes actionable claims, and the Constitution Bench in Sunrise Associates held lottery tickets to be actionable claims, lottery tickets are not goods; service tax on their promotion, marketing or sale could not be levied under Section 65(19)(i). (¶¶ 6.6, 6.7, 6.9)
- Conducting a lottery is a privilege and a revenue-earning activity of the State, not a service rendered by it. The outright purchase of tickets passes title to the distributors, who resell them for their own profit with no further relationship with the State; the relationship is principal to principal, not principal and agent, so there is no promotion or marketing of a service of the client within Section 65(19)(ii). (¶¶ 6.10, 7)
- An explanation inserted to remove doubts cannot make taxable an activity not covered by the main provision. The 2008 Explanation, which sought to bring lotteries under sub-clause (ii) after they fell outside sub-clause (i), is contrary to the main definition of business auxiliary service and to Sunrise Associates, and cannot override them. (¶ 6.10)
- For the period before 01.07.2010, when the Explanation was omitted, service tax could not be levied on the appellants' activity as a business auxiliary service either under sub-clause (i) or under the Explanation to sub-clause (ii); the High Courts overlooked the definition of goods and the nature of the State's lottery activity. (¶¶ 6.10, 7)
Result
Appeals by the assessees allowed; judgments of the High Courts of Sikkim and Kerala set aside with all consequential reliefs in view of Article 265; any refund representations to be considered expeditiously; no order as to costs.