2023 (5) TMI 926 - HC - GST

Karnataka HC rules rummy games skill-based not gambling under GST law Entry 6 Schedule III CGST Act applies

Karnataka HC ruled that online/offline rummy games are predominantly skill-based, not chance-based, and therefore do not constitute gambling under GST ... Game of skill vs game of chance - predominance test - betting and gambling as nomen juris - Actionable claims (Schedule III) - exclusion of lottery, betting and gambling - supply and Schedule III exclusion under CGST Act - writ jurisdiction under Article 226 - challenge to show-cause notice - exceptions to alternate remedy ruleGame of skill vs game of chance - predominance test - betting and gambling as nomen juris - Actionable claims (Schedule III) - exclusion of lottery, betting and gambling - supply and Schedule III exclusion under CGST Act - Whether online or offline Rummy and other games that are substantially/preponderantly based on skill, when played with or without stakes, amount to 'betting and gambling' for the purposes of Entry 6 of Schedule III to the CGST Act and thus fall within taxable actionable claims. - HELD THAT: - The Court applied established precedent and the predominance test to conclude that a game in which the exercise of skill predominates over chance remains a game of skill even when played for stakes. Decisions of the Supreme Court (R.M.D. Chamarbaugwala I & II, K. Satyanarayana, K.R. Lakshmanan) and subsequent High Court rulings were treated as authoritative for the proposition that competitions dependent to a substantial degree on skill are not gambling. The Court rejected the Revenue's attempt to treat staking as an independent act of forecasting that converts a skill game into gambling, distinguishing prize-competition jurisprudence (RMDC-1/2) which addressed different factual categories (newspaper prize competitions and forecasts). The statutory scheme under GST was analysed: Schedule III excludes actionable claims other than lottery, betting and gambling from supply; where a platform merely facilitates play and holds players' prize-pool funds in trust and charges a platform fee (on which GST is paid), it is not supplying actionable claims of lottery/betting/gambling. The Court relied on principles that terms which have acquired a judicial/constitutional meaning (nomen juris) must be read in that legal sense; accordingly, 'betting and gambling' in Entry 6 of Schedule III must be interpreted consistently with the constitutional and judicial meaning and does not cover games of skill. Applying these principles to the facts, Rummy (online or offline) was held to be substantially and preponderantly a game of skill and therefore not within 'betting and gambling' for GST purposes.Rummy and other games that are substantially and preponderantly games of skill, whether played online or offline and whether played with stakes or without stakes, do not amount to 'betting and gambling' under Entry 6 of Schedule III to the CGST Act; such activities are not taxable as lottery/betting/gambling under the impugned show-cause notice.Writ jurisdiction under Article 226 - challenge to show-cause notice - exceptions to alternate remedy rule - prematurity of challenge to SCN - Whether writ petitions challenging the impugned Show Cause Notice (and related provisional measures) were maintainable in the High Court. - HELD THAT: - The Court considered the doctrine of alternate remedies and the exceptions permitting exercise of writ jurisdiction (as summarised from Radha Krishan Industries v. State of Himachal Pradesh and related authority). Because the petitioners specifically contended that the impugned SCN was issued without jurisdiction or contrary to settled constitutional and judicial principles (i.e., classification of games of skill), the Court held that the writ jurisdiction was appropriately invoked. The Court identified established exceptions where a writ court may interfere with a show-cause notice (notice without jurisdiction, abuse of process, premeditation/prejudgment, violation of natural justice, vires of enactment, etc.) and found the petitioners' contention that the SCN was without jurisdiction or authority to be a fit case for exercise of writ jurisdiction. The Court therefore declined the Revenue's contention of prematurity.The writ petitions challenging the impugned Show Cause Notice were maintainable and hence entertained; the objections to maintainability/prematurity were rejected.Final Conclusion: The writ petitions were allowed: the Show Cause Notice dated 23.09.2022 was quashed. The Court held that rummy and other games that are substantially and preponderantly games of skill (online or offline, with or without stakes) do not constitute 'betting and gambling' under Entry 6 of Schedule III to the CGST Act and are not taxable as lottery/betting/gambling as alleged in the impugned notice; related petitions were disposed of and interim orders stood dissolved. Issues Involved:1. Whether online/offline games such as Rummy, which are mainly based on skill and not on chance, constitute 'gambling or betting' under the Goods and Services Act, 2017.Summary of Judgment:Issue 1: Nature of Rummy as Gambling or Skill-Based GameThe main question was whether games like Rummy, which are primarily based on skill, constitute 'gambling or betting' under Entry 6 of Schedule III of the Goods and Services Act, 2017. The court analyzed various precedents and legal principles to determine the nature of Rummy.Key Findings:- Rummy as a Game of Skill: The court reiterated that Rummy is a game that requires a significant amount of skill. The fall of the cards must be memorized, and the building up of Rummy requires considerable skill in holding and discarding cards.- Precedent Analysis: The court referred to multiple judgments, including RMDC-1, RMDC-2, and K.R. Lakshmanan, which have consistently held that games involving substantial skill are not gambling.- Legal Interpretation: The court applied the principle of nomen-juris, interpreting 'betting and gambling' in its legal sense, which excludes games of skill from its ambit.Issue 2: Applicability of GST on Games of SkillThe court examined whether the activities of the petitioner (GTPL) in facilitating online Rummy games could be taxed under the GST regime.Key Findings:- Section 2(17) of CGST Act: Though this section recognizes wagering contracts as part of business, it does not equate games of skill with lottery, betting, and gambling.- Entry 6 of Schedule III: The court held that this entry, which excludes actionable claims other than lottery, betting, and gambling, applies to games of skill. Thus, games of skill are not subject to GST under this entry.- Taxation of Games of Skill: The court concluded that taxation of games of skill is outside the scope of 'supply' under Section 7(2) of the CGST Act, 2017, read with Schedule III.Issue 3: Legality of the Show Cause NoticeThe court evaluated the legality of the Show Cause Notice issued to the petitioner, demanding GST on the entire 'buy-in' amount of the Rummy games.Key Findings:- Jurisdiction and Authority: The court found the Show Cause Notice to be without jurisdiction and authority of law, as it misclassified the nature of the petitioner's business.- Quashing of Notice: The court quashed the Show Cause Notice dated 23.09.2022, deeming it illegal and arbitrary.Conclusion:The court concluded that online/offline Rummy, whether played with or without stakes, is a game of skill and not gambling. Consequently, it does not fall under 'betting and gambling' for the purposes of GST. The impugned Show Cause Notice was quashed as it was issued without proper jurisdiction and authority.