Lottery promotion and resale: no taxable service and no Union competence where the levy was really a tax on betting and gambling.

A principal-to-principal arrangement for the purchase and resale of lottery tickets did not amount to a taxable service, because the promoters bore commercial risk, dealt on their own account, and any publicity was undertaken for their own business interest rather than for consideration from the State. The levy also failed on legislative competence: lottery was treated as falling within "betting and gambling" under Entry 62 of List II, and the doctrine of pith and substance showed that the impugned charge was in substance a tax on the lottery activity itself. On that basis, residuary power under Entry 97 read with Article 248 could not sustain the levy, and the consequential demands and registrations could not stand.

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Issues: (i) Whether the activity of promoting, marketing, organising or otherwise assisting in organising lottery constitutes a taxable service under clause (zzzzn) of sub-section (105) of Section 65 of the Finance Act, 1994. (ii) Whether the Parliament had legislative competence under Entry 97 of List I read with Article 248 of the Constitution of India to levy service tax on such lottery-related activity, or whether the subject falls within Entry 62 of List II.

Issue (i): Whether the activity of promoting, marketing, organising or otherwise assisting in organising lottery constitutes a taxable service under clause (zzzzn) of sub-section (105) of Section 65 of the Finance Act, 1994.

Analysis: The transaction between the State and the petitioners was found to be one of purchase and resale of lottery tickets on a principal-to-principal basis. The petitioners paid the agreed sale consideration, bore the commercial risk, and dealt with stockists and selling agents on their own account. The advertisement and publicity undertaken by them were for their own business interest and not for any consideration paid by the State. The levy under the impugned provision proceeded on the gross value of the tickets and did not isolate any identifiable service component. On these facts, the activity did not amount to rendition of service within the meaning of the charging provision.

Conclusion: The activity of the petitioners did not constitute a taxable service under clause (zzzzn) of sub-section (105) of Section 65 of the Finance Act, 1994.

Issue (ii): Whether the Parliament had legislative competence under Entry 97 of List I read with Article 248 of the Constitution of India to levy service tax on such lottery-related activity, or whether the subject falls within Entry 62 of List II.

Analysis: Lottery was held to be a game of chance and therefore within the expression "betting and gambling". Tax on the activity of betting and gambling was treated as falling within Entry 62 of List II, and taxing power was held to be distinct from mere regulatory power. Applying the doctrine of pith and substance, the impugned levy, though styled as a service tax, was in substance a tax on the lottery activity itself. Since that field was specifically assigned to the State Legislature, the residuary power under Entry 97 and Article 248 could not be invoked to sustain the levy.

Conclusion: The Parliament lacked legislative competence to impose the impugned tax on lottery-related activity in exercise of its residuary power.

Final Conclusion: The impugned levy was held unconstitutional, and the consequential demands and registrations founded upon it could not survive.

Ratio Decidendi: Where the substance of the levy is a tax on an activity falling within a specific State taxing entry, the Union cannot sustain it under residuary powers merely by describing it as a service tax; and a mere commercial arrangement for sale of lottery tickets, without an identifiable service element supported by consideration, does not attract service tax.

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