Service tax on lottery distribution upheld where commission was treated as consideration for taxable marketing services

The Kerala HC considered whether the Explanation inserted to Section 65(19)(ii) of the Finance Act, 1994, which brings services relating to promotion or marketing of lotteries within service tax, was unconstitutional or inapplicable to lottery distributors. It held that the amendment validly extended the scope of business auxiliary service, operated prospectively, and was not displaced by the earlier Supreme Court ruling treating lottery tickets as actionable claims. The Court further found that lottery tickets are not goods for this purpose, so the provision relating to promotion or marketing of goods did not apply. Discount or commission received by distributors and retailers was treated as consideration for taxable service to the lottery organisers.

---

---

Issues: Whether the Explanation inserted to Section 65(19)(ii) of the Finance Act, 1994, which brings services in relation to promotion or marketing of lotteries within the levy of service tax, is unconstitutional and inapplicable to lottery distributors.

Analysis: The Explanation was enacted to extend the scope of business auxiliary service to services connected with promotion or marketing of games of chance, including lotteries. The Court held that the earlier Supreme Court ruling concerning lottery tickets as actionable claims did not negate the validity of the later amendment, and that the amendment operated prospectively. It further held that lottery tickets are outside the scope of goods for this purpose, so the petitioners could not invoke the provision dealing with promotion or marketing of goods. The Court found that the discount or commission earned by distributors and retailers constituted consideration for service rendered to the lottery organisers, and that the marketing and distribution chain necessarily involved taxable service in relation to lottery.

Conclusion: The constitutional challenge failed, and the service rendered by the petitioners in relation to lottery was held taxable under Section 65(105)(zzb) read with the Explanation to Section 65(19)(ii) of the Finance Act, 1994.

---