2011 (8) TMI 653 - HC - Service Tax

Court upholds service tax on lottery services, distributors' activities deemed taxable

The court upheld the constitutional validity of the Explanation to levy service tax on lottery services, ruling that distributors' activities in marketing ... Constitutionality of the Explanation to Section 65(19)(ii) read with Section 65(105)(zzb) - levy of service tax on services in relation to lotteries - classification of distributors' and agents' activities as business auxiliary service (promotion, marketing and distribution) - exclusion of actionable claims (lottery tickets) from the definition of 'goods' and its effect on applicability of sub clause (i) of business auxiliary service - amendment introduced to overcome judicial precedents and its prospective effect as observed by the Supreme CourtConstitutionality of the Explanation to Section 65(19)(ii) read with Section 65(105)(zzb) - levy of service tax on services in relation to lotteries - amendment introduced to overcome judicial precedents - Constitutional validity of the Explanation introduced to Section 65(19)(ii) (with effect from 16/05/2008) read with Section 65(105)(zzb) to subject services in relation to lotteries to service tax - HELD THAT: - The Court examined the amendment which declares that services in relation to promotion or marketing of games of chance (including lotteries) fall within business auxiliary service. The amendment was enacted in the context of earlier judicial rulings (including the Martin Lottery Agencies litigation) and was intended to enable taxation of services connected with lotteries. The Court held that the Explanation is not constitutionally infirm. It observed that the Sale of Goods Act exclusion of actionable claims from 'goods' means sub clause (i) (services in relation to promotion or marketing of goods) does not cover lotteries; consequently the Explanation to sub clause (ii) legitimately operates to bring services in relation to lotteries within the taxable ambit. The Court agreed with the reasoning of the Sikkim High Court which had upheld the constitutional validity of the Explanation and rejected the petitioners' submissions that earlier decisions on lotteries precluded the amendment's operation.The Explanation to Section 65(19)(ii) read with Section 65(105)(zzb) is constitutionally valid and can serve to subject services in relation to lotteries to service tax.Classification of distributors' and agents' activities as business auxiliary service (promotion, marketing and distribution) - exclusion of actionable claims (lottery tickets) from the definition of 'goods' and its effect on applicability of sub clause (i) - Whether the activities of the petitioners (distributors/agents buying at discount and distributing/selling lottery tickets) constitute taxable services in relation to marketing/promotion of lotteries - HELD THAT: - The Court found that the petitioners, who purchase tickets at discounted rates and pass on discounts/commissions to downstream dealers and retailers, perform tangible marketing and distribution services for the promoters/organisers. The receipt of discount or commission was treated as consideration for services rendered to the promoter. The Court rejected the contention that the transactions are mere purchase and sale devoid of service: without the distributors' marketing and distribution services the tickets would not reach participants. The later introduction of a compounding scheme for similar transactions did not alter the legal character of the activities; the existence of compounding does not imply absence of service prior to its introduction.The petitioners' distribution and marketing activities are services falling within the scope of business auxiliary service and are taxable under the Explanation to Section 65(19)(ii) read with Section 65(105)(zzb).Final Conclusion: All writ petitions were dismissed; the Explanation to Section 65(19)(ii) read with Section 65(105)(zzb) (in force from 16/05/2008 to 30/06/2010) was held constitutionally valid and the distributors' activities in relation to lotteries were held to constitute taxable business auxiliary services. Issues:Constitutional validity of the Explanation to Section 65(19)(ii) of the Finance Act 1994 regarding levy of service tax on lotteries marketed by clients.Detailed Analysis:1. Background and Introduction of Explanation:The case involves distributors challenging notices for service tax on lottery sales under the Business Auxiliary Service. The Central Board of Direct Taxes issued a circular allowing service tax on lottery-related services. The Sikkim High Court initially ruled against taxing lottery services, later upheld by the Supreme Court. An explanation to Section 65(19)(ii) was added to include lottery services for tax purposes.2. Arguments and Contentions:Petitioners argued that lottery tickets are actionable claims and not goods, thus not subject to service tax. They claimed no service is involved in lottery marketing as they only resell tickets bought at a discount. Respondents contended that the amendment aimed to overrule the Supreme Court's decision and tax lottery services.3. Interpretation and Decision:The court rejected the petitioners' argument that lottery tickets are goods, citing the exclusion clause in the Sale of Goods Act. It found that service tax applies to lottery marketing services, as distributors play a crucial role in reaching customers. The court upheld the constitutional validity of the Explanation to levy service tax on lottery services. It noted that petitioners started paying tax under amended provisions from 2010, indicating the service nature of their activities.4. Conclusion:The court dismissed the writ petitions, emphasizing that the service rendered by distributors in lottery marketing is taxable under Section 65(105)(zzb) read with the Explanation to Section 65(19)(ii) of the Act. Despite various Supreme Court decisions cited by petitioners, the court found no direct relevance to the specific issue at hand.