2025 (2) TMI 483 - SC - Service Tax

Sale of lottery tickets to distributors is principal-to-principal, not agency, so service tax cannot be levied on distributors

UNION OF INDIA & OTHERS Versus FUTURE GAMING SOLUTIONS PVT. LTD. & ANOTHER ETC.

SC dismissed the appeals and held that sale of lottery tickets by the State to the distributors was a principal-to-principal transaction, not an agency, ... Levy of service tax upon the sale of lottery tickets - Constitutional validity of clause (zzzzn) to sub-section (105) of Section 65 of Finance Act, 1994 as introduced vide Finance Act, 2010 - contravention of Article 248 of the Constitution of India read with Entry 97-List I to the Seventh Schedule thereto - principal-to-principal transaction - scope of 'betting and gambling' - HELD THAT:- The parliamentary amendments made to the Finance Act, 1994, for the purpose of imposing service tax on the respondents assessees herein as ‘business auxiliary service’ under sub-section 19 of Section 65 of the said Act effective from 01.07.2003 and by way of the insertion of the Explanation to Section 65(19)(ii) of the Finance Act, 1994 culminated in the judgment of this Court in K. Arumugam [2024 (9) TMI 182 - SUPREME COURT]. In the said case, this Court held that the relationship between the Government of Sikkim and the assessees therein was not that of principal and agent but one of principal and principal. Therefore, up to the year 2010, the lis between the parties ended with the judgment in K. Arumugam. For the period from 01.07.2010 till 30.06.2012, amendment was made to Section 65(105) by insertion of clause (zzzzn) which defined promotion, marketing, organizing or in any other manner assisting in organizing games of chance, including lottery, bingo or lotto in whatever form or by whatever name called, whether or not conducted through internet or other electronic networks as a “taxable service”. The Sikkim High Court observed that the said clause essentially means the conducting of lotteries within the scope and ambit of betting and gambling as per Entry 62 - List II of the Seventh Schedule of the Constitution and therefore, on the very same activity of betting and gambling, service tax cannot be levied. The expression “lottery distributor or selling agent” was defined by inserting clause (31A) to Section 65B to mean a person appointed or authorized by a State for the purposes of promoting, marketing, selling or facilitating in organizing lottery of any kind, in any manner, organized by such State in accordance with the provisions of the Lotteries (Regulation) Act, 1998. Since “betting, gambling or lottery” was included in the Negative List, an Explanation was inserted to Section 66D(i) to say that the said expression “betting, gambling or lottery” shall not include the activity specified in Explanation 2 to clause (44) of Section 65B. Thus, the intent of the Parliament was that any transaction in an actionable claim (lottery being an actionable claim) would not include an activity carried out for the distribution of lottery by the distributor. In other words, such activity of the distributor would not amount to the activity of betting, gambling or lottery. The expression “betting, gambling or lottery” in the Explanation to Section 66D(i) has to be given its true intent and meaning as conducting a lottery is nothing but an activity coming within the scope of betting and gambling. This is by the application of the principle of noscitur a sociis where the expression “lottery” takes its meaning from “betting and gambling”. Although a lottery ticket is nothing but an actionable claim, the conduct of a lottery scheme is nothing but a betting and gambling activity. Therefore, it is only Entry 62 – List II which enables the imposition of tax by the State Government. The activity of betting and gambling which includes conducting of a lottery is regulated under Entry 34 – List II, with Entry 62 – List II being the taxation entry. By way of Finance Act, 2015, clause (a) of the Explanation to Section 67 containing the definition “consideration” was amended to include, inter alia, any amount retained by the lottery distributor or selling agent from gross sale of lottery tickets in addition to the fee or commission, if any, or, as the case may be, the discount received, i.e., the difference in the face value of the lottery ticket and the price at which the distributor or selling agent gets that ticket. The said amendment would have no consequence and bearing on the substantive provisions for the reasons that we have stated above. This is because the distributor buys at wholesale price from the State Government and sells it at a higher price to the retailer - the amendment made to clause [ii(a)] of the Explanation 2 to Section 65B(44) in the year 2016 that the expression “transaction in money or actionable claim” would not include any activity carried out, for a consideration, in relation to, or for facilitation of, a transaction in money or actionable claim, including the activity carried out, inter alia, by a lottery distributor or selling agent on behalf of the State Government, in relation to promotion, marketing, etc. in accordance with the provisions of the Lotteries (Regulation) Act, 1998 is only an innocuous amendment which is only cosmetic in nature. It is found that at each stage, the amendments made to the Finance Act, 1994, in order to impose service tax on the sole distributor/purchaser of the lottery tickets (respondents-assessees herein) have been unsuccessful. The amendment to the said definition would in no way detract from the substance of the relationship between the State Government and the sole distributor or purchaser of the lottery tickets which is one of principal to principal and not of principal-agent. There being no agency and no service rendered by the respondents-assessees herein as an agent to the Government of Sikkim, service tax is not leviable on the transactions between the purchaser of the lottery tickets (respondents-assessees herein) and the Government of Sikkim. Conclusion - The sale of lottery tickets by the Government of Sikkim to the respondents-assessees is a principal-to-principal transaction, and the activity of conducting lotteries falls within the scope of 'betting and gambling,' which is under the State's jurisdiction. There are no merit in the appeals filed by the Union of India and others. Hence these appeals are dismissed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment were:a) Whether the relationship between the Government of Sikkim and the respondents-assessees is that of a principal-agent or a principal-to-principal relationship.b) Whether the amendments to the Finance Act, 1994, which sought to impose service tax on the respondents-assessees, were valid and applicable.c) Whether the activity of the respondents-assessees falls within the scope of 'betting and gambling' under Entry 62 - List II of the Constitution of India, thereby excluding the imposition of service tax by the Union Government.d) Whether the impugned judgments of the High Court of Sikkim require interference by the Supreme Court.2. ISSUE-WISE DETAILED ANALYSISa) Principal-Agent vs. Principal-to-Principal RelationshipRelevant Legal Framework and Precedents: The concept of agency as defined under the Indian Contract Act, 1872, and various case laws, including Bhopal Sugar Industries Ltd. vs. STO, were considered to determine whether the relationship between the Government of Sikkim and the respondents-assessees was that of a principal-agent or principal-to-principal.Court's Interpretation and Reasoning: The Court examined the agreements between the Government of Sikkim and the respondents-assessees, noting that the terms used in the agreements, such as 'sole purchaser' and 'distributor,' indicated a principal-to-principal relationship. The Court emphasized that the respondents-assessees purchased lottery tickets at their own risk and were responsible for their onward sale.Key Evidence and Findings: The agreements specified that the respondents-assessees were responsible for purchasing lottery tickets and could appoint stockists or agents at their own risk. The agreements also included clauses for the return of unsold tickets and the determination of wholesale prices, reinforcing the principal-to-principal nature of the relationship.Application of Law to Facts: The Court applied the principles of agency law and concluded that the respondents-assessees were not agents of the Government of Sikkim but operated independently as principals.Treatment of Competing Arguments: The Court rejected the Revenue's argument that the respondents-assessees acted as agents, noting that the agreements and the conduct of the parties supported a principal-to-principal relationship.Conclusions: The Court held that the relationship between the Government of Sikkim and the respondents-assessees was one of principal-to-principal, not principal-agent, and therefore, service tax was not applicable.b) Validity of Amendments to the Finance Act, 1994Relevant Legal Framework and Precedents: The amendments to the Finance Act, 1994, particularly those related to service tax on lottery activities, were analyzed in light of constitutional provisions and case law, including K. Arumugam vs. UOI.Court's Interpretation and Reasoning: The Court found that the amendments to the Finance Act, 1994, aimed at imposing service tax on the respondents-assessees, were not applicable as the activity of conducting lotteries fell within the scope of 'betting and gambling,' which is exclusively under the State's jurisdiction.Key Evidence and Findings: The Court noted that the amendments to the Finance Act, 1994, did not alter the fundamental nature of the transaction between the Government of Sikkim and the respondents-assessees, which was not a service but a sale of lottery tickets.Application of Law to Facts: The Court applied the constitutional provisions related to legislative competence and concluded that the Union Government lacked the authority to impose service tax on lottery activities, which are classified as 'betting and gambling.'Treatment of Competing Arguments: The Court dismissed the Revenue's argument that the amendments justified the imposition of service tax, emphasizing that the legislative competence to tax lotteries lies with the State.Conclusions: The Court held that the amendments to the Finance Act, 1994, were not applicable to the respondents-assessees, and service tax could not be levied on their activities.c) Classification of Lottery ActivitiesRelevant Legal Framework and Precedents: The classification of lottery activities as 'betting and gambling' under Entry 62 - List II of the Constitution was considered, along with relevant case law such as B.R. Enterprises vs. State of UP.Court's Interpretation and Reasoning: The Court affirmed that lotteries are a form of gambling and fall within the exclusive domain of the State Legislature under Entry 62 - List II.Key Evidence and Findings: The Court referenced previous judgments that classified lotteries as gambling activities and emphasized the State's exclusive power to legislate and tax such activities.Application of Law to Facts: The Court applied the constitutional framework and concluded that the activity of conducting lotteries is inherently a gambling activity, thereby excluding the Union Government's authority to impose service tax.Treatment of Competing Arguments: The Court rejected the Revenue's attempt to classify the respondents-assessees' activities as services subject to service tax, reiterating the established classification of lotteries as gambling.Conclusions: The Court held that the activity of conducting lotteries is classified as 'betting and gambling,' and the State Legislature has exclusive authority to legislate and tax such activities.3. SIGNIFICANT HOLDINGSVerbatim Quotes of Crucial Legal Reasoning: 'The relationship between the Government of Sikkim and the respondents-assessees is one of principal-to-principal, not principal-agent, and therefore, service tax is not applicable.'Core Principles Established: The Court established that the sale of lottery tickets by the Government of Sikkim to the respondents-assessees is a principal-to-principal transaction, and the activity of conducting lotteries falls within the scope of 'betting and gambling,' which is under the State's jurisdiction.Final Determinations on Each Issue: The Court dismissed the appeals filed by the Union of India, upholding the High Court of Sikkim's judgments that service tax could not be imposed on the respondents-assessees' activities related to lotteries.