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

SC held the explanation to clause (19) of Section 65 was not merely clarificatory but introduced a new concept-treating organizing lotteries as taxable ... Business auxiliary service - service tax - actionable claim - definition of goods - res extra commercium - clarificatory or declaratory explanation - retrospective operation of statute - promotion or marketing of servicesDefinition of goods - actionable claim - Whether lottery tickets are 'goods' for the purposes of Section 65(50) of the Finance Act, 1994 and therefore whether transactions in lottery tickets can be treated as sale of goods - HELD THAT: - The Court accepted the conclusion in Sunrise Associates that lottery tickets do not constitute 'goods' within the meaning of the Sale of Goods Act but are transferable only as an actionable claim. The Court rejected the view that transfer of a lottery ticket involves transfer of property in the sense of goods or title to goods; a purchaser of a ticket acquires a conditional interest in the prize which falls within the definition of an actionable claim rather than sale of goods. [Paras 12]Lottery tickets are not 'goods' but are actionable claims; transactions in such tickets do not amount to sale of goods.Business auxiliary service - promotion or marketing of services - service tax - Whether the distributor's activities in purchasing and reselling state-printed lottery tickets amount to a taxable 'business auxiliary service' of promotion or marketing of the State's services - HELD THAT: - Having held that lottery tickets are actionable claims and noting the State's role in organizing lotteries, the Court observed that mere raising of revenue by the State or toleration of lotteries does not ipso facto amount to rendition of a service within clause (19)(ii). The factual arrangements (bulk purchase at discounted price, resale through stockists, publicity and limited involvement in arrangement) did not lead the Court to conclude that the distributor was rendering a taxable promotional service to the State for periods prior to the statutory explanation; the question of whether the State renders a service to the public in organizing lotteries was examined but left largely undetermined as unnecessary to the dispositive point. [Paras 14, 21]The distributor's transactions were not held to constitute a business auxiliary service attracting service tax for the periods in dispute under the existing law as interpreted by the Court.Clarificatory or declaratory explanation - retrospective operation of statute - Whether the Explanation inserted in sub-clause (ii) of clause (19) of Section 65 by Finance Act, 2008 is clarificatory/declaratory (thereby retrospective) or substantive (thereby prospective) - HELD THAT: - The Court analysed the nature and effect of the Explanation which declared that promotion or marketing of games of chance (including lotteries) falls within clause (19)(ii). Noting the legislative context, the Board's earlier circular, and the novel concept introduced by the Explanation (treating organization of lotteries as a form of service), the Court concluded that the Explanation does not merely clarify an existing ambiguity but introduces a new taxing concept that widens the tax net. Reliance on parliamentary speech and comparative precedents confirmed that phrases like 'for removal of doubts' are not conclusive; where an amendment effects a substantive change it will not be construed retrospectively. [Paras 24, 27, 36, 37]The Explanation is substantive and not merely clarificatory or declaratory; it does not have retrospective effect and service tax based on that Explanation is payable only prospectively (with effect from the date specified by Parliament).Service tax - retrospective operation of statute - Validity of the departmental notice dated 30.4.2007 directing registration and payment of service tax in respect of the respondent's lottery distribution activities - HELD THAT: - Because the Explanation enacted by Parliament in 2008 introduced a substantive change and does not operate retrospectively, the Court held that the impugned departmental notice issued in 2007 could not validly impose service tax on the respondent for the earlier period. The Court observed that if any service tax liability arises under the Explanation, it would be payable only from the date the Explanation came into force. [Paras 5, 36]The notice dated 30.4.2007 was quashed; service tax (if any) under the Explanation is payable only with effect from the Explanation's commencement.Final Conclusion: The High Court's allowance of the writ petition is sustained: lottery tickets are actionable claims and not goods; the Explanation to clause (19)(ii) of Section 65 introduces a substantive change and is not clarificatory with retrospective effect, and the departmental notice dated 30.4.2007 is quashed. Any service tax liability under the Explanation arises only from its operative date (mid-May 2008). 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.