2009 (5) TMI 1 - SC - Service Tax

Explanation to clause (19) of Section 65 creates new taxable class treating organised lotteries as entertainment and is not retrospective

Union of India & Ors. Versus M/s Martin Lottery Agencies Ltd.

SC held the explanation to clause (19) of Section 65 was not merely clarificatory but introduced a new concept-treating organizing lotteries as taxable ... Exigible to Service Tax - sale, promotion and marketing of lottery tickets - considered 'goods' under the Sale of Goods Act, 1930​​​​​​​ - concept of res extra commercium - whether the `explanation' appended to clause (19) of Section 65 is declaratory or clarificatory in nature - HELD THAT:- The explanation, in our opinion, cannot be said to be a simple clarification as it introduces a new concept stating that organizing of the lottery is a form of entertainment. Introduction of such new concept itself would have a constitutional implication. In the year 2003, while amending the provisions of 1994 Act, the Constitution was also amended and Article 268A and Entry 92C in List I were inserted. The courts are in future required to determine whether a service tax within the meaning of Entry 92C would cover sale of lottery or it would come within the purview of residuary entry containing Entry 97 List I. If it is held to be a taxing provision within the purview of Entry 97, the same will have a bearing on the States. The Explanation so read appears to be a charging provision. It states about taxing need. It can be termed to be a sui generis tax. If it is a different kind of tax, the same may be held to be running contrary to the ordinary concept of service tax. It may, thus, be held to be a stand alone clause. A constitutional question may have to be raised and answered as to whether the taxing power can be segregated. If by reason of the said explanation, the taxing net has been widened, it cannot be held to be retrospective in operation. We have no other option but to hold that by inserting the explanation appended to clause (19) of Section 65 of the Act, a new concept of imposition of tax has been brought in. The Parliament may be entitled to do so. It would be entitled to raise a legal fiction, but when a new type of tax is introduced or a new concept of tax is introduced so as to widen the net, it, in our opinion, should not be construed to have a retrospective operation on the premise that it is clarificatory or declaratory in nature. It is, therefore, evident that by reason of an explanation, a substantive law may also be introduced. If a substantive law is introduced, it will have no retrospective effect. The Court must be satisfied that the Parliament did not intend to introduce a substantive change in the law. As stated hereinbefore, for the aforementioned purpose, the expressions like `for the removal of doubts' are not conclusive. The said expressions appear to have been used under assumption that organizing games of chance would be rendition of service. We are herein not concerned as to whether it was constitutionally permissible for the Parliament to do so as we are not called upon to determine the said question but for our purpose, it would be suffice to hold that the explanation is not clarificatory or declaratory in nature. we have no other option but to hold that the High Court judgment albeit for different reasons warrants no interference. This appeal is dismissed with costs. Issues Involved:1. Whether the sale, promotion, and marketing of lottery tickets are exigible to 'Service Tax' under Section 65(105) of the Finance Act, 1994.2. Whether lottery tickets are considered 'goods' under the Sale of Goods Act, 1930.3. The retrospective application of the explanation appended to Section 65(19) of the Finance Act, 1994.4. The constitutional validity of imposing service tax on the promotion and marketing of lotteries.Issue-wise Detailed Analysis:1. Exigibility of Service Tax on Sale, Promotion, and Marketing of Lottery Tickets:The core question was whether the sale, promotion, and marketing of lottery tickets fall under 'Service Tax' as per Section 65(105) of the Finance Act, 1994. The respondents, being agents of the State of Sikkim, purchase lottery tickets in bulk and sell them to principal stockists, who further distribute them. The High Court of Sikkim had earlier ruled that the activities of the respondents were not subject to service tax under 'business auxiliary service' as defined in Section 65(19) of the Act. However, the Supreme Court analyzed whether the activities involved constituted 'promotion or marketing of service provided by the client' under sub-clause (ii) of Section 65(19).2. Classification of Lottery Tickets as 'Goods':The Supreme Court referenced the Constitution Bench decision in Sunrise Associates, which held that lottery tickets are actionable claims and not 'goods' under the Sale of Goods Act, 1930. This distinction was crucial because if lottery tickets are not 'goods,' the respondents cannot be said to be rendering services related to the promotion or marketing of goods. The Court reiterated that the sale of lottery tickets does not involve the transfer of goods but rather an actionable claim.3. Retrospective Application of Explanation to Section 65(19):The explanation appended to Section 65(19) by the Finance Act, 2008, was examined to determine if it was clarificatory or declaratory, thus having retrospective effect. The explanation included services related to the promotion or marketing of games of chance, including lotteries, under 'business auxiliary service.' The Court concluded that the explanation introduced a new concept and could not be considered merely clarificatory. Therefore, it could not have retrospective effect and would only apply from May 2008 onwards.4. Constitutional Validity of Imposing Service Tax:The Court discussed whether the Parliament had the authority to impose service tax on the promotion and marketing of lotteries, considering the entries in List II of the Seventh Schedule of the Constitution, which empower State Legislatures to tax betting, gambling, and other luxuries. The Supreme Court noted that while the State can impose taxes on the organization and conduct of lotteries, the service tax imposed by the Parliament on the services rendered in promoting and marketing lotteries is a separate aspect and constitutionally valid. However, this tax would only apply prospectively from May 2008, following the insertion of the explanation in Section 65(19).Conclusion:The Supreme Court upheld the High Court's decision, albeit for different reasons, concluding that the activities of the respondents did not attract service tax under the provisions of the Finance Act, 1994, prior to May 2008. The appeal was dismissed with costs.