TaxTMI 
TaxTMI 
2013 (11) TMI 1002
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....ng lottery" as a new category of "taxable service". It is relevant to note the facts leading to filing of the present petitions. 2. Both the petitioners are companies incorporated as Private Limited companies under the Indian Companies Act, 1956. The petitioners are engaged in the business of sale of paper and online lottery tickets respectively organised by the Government of Sikkim. Petitioner in W.P. (C) No.36 of 2011, namely, M/s. Future Gaming Solutions Pvt. Ltd. dealing with paper lottery tickets, entered into an Agreement for the sale of lottery tickets on behalf of the State of Sikkim on 10.08.2009 (Annexure-3), whereas the petitioner in W.P. (C) No.23 of 2011, namely, Summit Online Trade Solutions Pvt. Ltd. dealing with online lottery tickets, entered into an Agreement with the State of Sikkim on 09.05.2005 (Annexure-P3 colly.) followed by a Supplementary Agreement dated 25.04.2008. Mutual terms and conditions concerning the sale and purchase of lottery tickets between the State Government and the petitioners are governed and regulated by the contractual stipulations contained in the aforesaid Agreements. The relevant conditions are reproduced hereunder:- &nbs....
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....ze the result of each draw: Provided that the sole purchaser is at liberty, on his own cost and expenses, to take up any kind of publicity of Sikkim state lotteries including telecast of result on any Satellite T.V. Channel every day, provided the publicity shall in no way undermine the prestige of the government. No claim for cost on these accounts will be entertained by the Government. 23. The sole purchaser may appoint stockists, selling agents or sellers for further resale in different parts of the country on his own terms and at his own risk and responsibility. 26. The sole purchaser shall pay the full amount for the tickets actually sole purchaser upon receipt of the invoice from the Government which shall be raised indicating the amount of wholesale rate and adjustment of prizes up to Rs. 5000/- (Rupees five thousand) to be disbursed by the sole purchaser for each lottery draw on the lottery tickets actually sold by the sole purchaser. 27. The sole purchaser shall pay State tax or any other kind of taxes imposed by the other State Governments on sale of lottery tickets. 30. The sole purchaser shall be entitled to appoint ....
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....ement or supervision, and includes services as a commission agent, but does not include any activity that amounts to "manufacture" within the meaning of clause (f) of section 2 of the Central Excise Act, 1944 (1 of 1944). Explanation. - For the removal of doubts, it is hereby declared that for the purposes of this clause, - (a) "commission agent" means any person who acts on behalf of another person and causes sale or purchase of goods, or provision or receipt of services, for a consideration, and includes any person who, while acting on behalf of another person - (i) deals with goods or services or documents of title to such goods or services; or (ii) collects payment of sale price of such goods or services; or (iii) guarantees for collection or payment for such goods or services; or (iv) undertakes any activities relating to such sale or purchase of such goods or services." 4. Service Tax Department issued a notice to the petitioners under the amended Finance Act in 2007 requiring the petitioners to register under the said Act for payment of service tax. Disputing the liability, W.P. (C) No.19 of 2007, titled Martin Lottery Agencies Ltd. v. Union of India & Ors. came to be....
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....n'ble Supreme Court delivered its judgment on 05.05.2009 reported in 2009(14) S.T.R. 503 (SC) : (2009) 12 SCC 209, titled Union of India & Ors. v. Martin Lottery Agencies Ltd. The relevant observations of the Hon'ble Supreme Court in this regard are quoted hereunder: - " 36. 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 notice issued to the assessee by the appellant has, thus, rightly been held to be liable to be set aside. Subject to the constitutionality of the Act, in view of the explanation appended to this, we are of the opinion that the service tax, if any, would be payable only with effect from May, 2008 and not with retrospective effect. 37. In a case of this nature, 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 u....
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....aken by them in terms of the amended clause (zzzzn) to Section 65(105) of the Finance Act, 1994 and have challenged the same in these petitions before us. 10. Challenge to the amended Clause (zzzzn) to Subsection (105) to Section 65 of the Finance Act, 1994 is primarily on the following two grounds - (A) that the activity being performed by the petitioners does not fall within the purview of "Taxable Service", the transaction between the petitioners and the State of Sikkim simpliciter being a purchase and sale of lottery tickets or at the best an actionable claim; and (B) the conduct of lottery is an act of "betting and gambling", the same being a game of chance, the State Legislature under entry 62 of List II of Schedule 7 to the Constitution of India has exclusive competence to enact law to impose taxes. The Parliament under its residuary legislative power under entry 97 of List I, Schedule 7 to the Constitution of India lacks legislative competence to levy any tax in respect to the activity falling under entries 34 and 62 of List II. 11. The learned couns....
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....chedule referred to as the "State List". As regards the residuary powers of Legislation are concerned under Article 248, Parliament alone has the power to make any law with respect to any matter not enumerated in the Concurrent List or State List. Clause (2) of Article 248 further empowers the central Parliament to make laws imposing a tax not mentioned in either of the above two lists. In the context of lottery which is "res extra commercium", entry 40 in List I empowers the Parliament to make laws whereas under entry 34 and entry 62 of List II, the State Legislature has power to make laws in respect to "betting and gambling" and levy of taxes thereon respectively. Entries 40 and 97 under List I and entries 34 and 62 under the List II are quoted hereunder:- " SEVENTH SCHEDULE [Article 246] List I - Union List ................................................................................................................. 40. Lotteries organized by the Government of India or the Government of a State. ................................................................................................................. 97. Any other matter not enumerated in List II or List III inc....
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....rporate or other legal entity under law so appointed by the Organising State through an agreement to market and sell lotteries on behalf of the Organising State; ............................................................... (e) "online lottery" means a system created to permit players to purchase lottery tickets generated by the computer or online machine at the lottery terminals where the information about the sale of a ticket and the player's choice of any particular number or combination of numbers is simultaneously registered with the central computer server; (f) "Organising State" means the State Government which conducts the lottery either in its own territory or sells its tickets in the territory of any other State; ............................................................... (h) "sale proceeds" means the amount payable by the distributor to the Organising State in respect of sale of tickets calculated at the face value printed on each ticket in respect of lotteries of a particular draw or scheme of both;" 16. Rule 3 further permits the State Government to organize a paper or online lottery subject to conditions specified in the Act and the Rules. One of the condi....
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.... chance falls within the ambit, scope and purview of expression "betting and gambling". Entry 34, however, does not empower the State to enact any law imposing any tax upon the activity of betting and gambling like entry 40 of List I. It is Entry 62 that specifically provides for levy of taxes on "betting and gambling". 18. In the backdrop of aforesaid constitutional and statutory provisions, we shall take up the grounds noticed hereinabove for consideration in seriatim. GROUND - A (I) Terms and conditions of Agreement dated 10.08.2009 (Annexure 3) depict the mutual relationship between M/s. Future Gaming Solutions Pvt. Ltd. (petitioner) and the State Government. The preface of the Agreement shows that open tenders were invited for appointment of a purchaser for sale of lottery tickets of denomination of Re.1/- and above organized by the State Government for a period of 5 (five) years. Clause 4 of the Agreement further demonstrates that the petitioner was appointed as a sole purchaser on payment of lump sum amount of Rs. 8.00 crores p.a. for the first year of extension and Rs. 10.00 crores p.a. from the second year commencing from 18.10.2010 till 17.10.2014. Clause 13 further sh....
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....; " (h) "sale" and "purchase", with their grammatical variations and cognate expressions, mean any transfer of the possession of goods by one person to another in the ordinary course of trade or business for cash or deferred payment or other valuable consideration;" (IV) Regarding the applicability of the above definition to the service tax, reference is made to Section 65-A (121) of the Finance Act, 1994, which reads as under: - " (121) words and expressions used but not defined in this Chapter and defined under Central Excise Act, 1944 (1 of 1944) or the rules made thereunder, shall as far as may be, in relation to service tax as they apply in relation to a _____excise." (V) Admittedly, the expression "sale and purchase" has not been defined in the Finance Act and thus the above definition prescribed in the Central Excise Act shall be applicable to all such transactions which may fall within the purview of the expression "sale and purchase" in relation to service tax. In Sunrise Associates v. Government of NCT of Delhi : (2006) 5 SCC 603, the Hon'ble Supreme Court has held that the lottery tickets are goods in the wider sense of the term though the lott....
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.... it is argued that the State Government alone is entitled to sell the tickets either itself or through distributors or selling agents and thus any other arrangement whereby the sale of the tickets is made by the State Government to a distributor who buys the tickets in bulk and then further sells to selling agents, is impermissible in law. His further submission is that the State sells the lottery tickets on commission basis. The MRP of the ticket is Re.1/- and it is sold at 70 paise per ticket to the petitioners in bulk and the 30% commission received by the petitioners is for purposes of organizing and promoting the sale of the lottery ticket for the State, which activity is nothing but a "service" rendered to the State. Referring to various conditions of the Agreement between the petitioners and the State, it is argued that unsold tickets are returned to the State and refunded. According to him, the only conclusion which can thus be, is that the petitioners are rendering services to the State of Sikkim and hence liable to "service tax" in terms of the Section 65 (105) (zzzzn) of the Finance Act, 1994. He submits that similar provision introduced by way of an explanation to Secti....
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....rned counsel appearing for the petitioner, submits that the activity of the petitioners of purchasing and selling the lottery tickets through its stockists and selling agents is a normal business activity of any purchaser of any goods. His submission is that the State has right to sell the tickets either itself or through distributors or selling agents and where the sale is absolute without any further prohibition on resale against the full sale consideration even to a distributor or a selling agent, the transaction is in the nature of sale and purchase and not between the principal and agent. It does not constitute an agency as submitted on behalf of the respondents. As regards the 30% discounted price of the lottery tickets carrying MRP Re.1/- is concerned, his contention is that 30 paise difference between the MRP of the lottery ticket at Re.1/- and the purchase price of 70 paise, is not a commission but a discount to the petitioner. This discount is towards the establishment expenditure of business and margin of profit for the petitioners and their stockists/selling agents, which is a normal and common business practice in every case of sale and purchase in commercial parlance.....
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....rrectness of the averment made in the petition. It must, therefore, be accepted that this was the real nature of the transaction between them. This being so, it is immaterial that Rallis India is described as the distributor of the first petitioners." [Emphasis supplied] (X) Above observations are sought to be applied to the present case on the basis of the agreemental stipulations which, inter alia, provide for payment of lump sum sale considerations for the entire financial year. Under Clause 4 of the Agreement the petitioner is required to pay Rs. 10.00 crores p.a. as the minimum guaranteed amount to the State Government for purchase of the tickets irrespective of the fact whether petitioners suffer any loss or earn profit. The contractual stipulations noticed and discussed hereinabove further make it clear that the State Government has no concern with the further sale of the tickets by the petitioners except to comply the regulatory statutory provisions contained in the Lotteries (Regulation) Act, 1998 and rules made thereunder in public interest. The State Government is also not concerned with the amount of discount or margin of profit given by the petitioners to their stocki....
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....ion of the issue. Certain stipulations may be consistent with both sale (and especially sale or return) and agency, and, therefore, cannot be taken as indicative of either: for instance, the transfer to the consignee of the property in goods shipped upon the acceptance of drafts; a provision that the property in goods shall remain in the consignor until disposed of; of the fact that the price of sale to third parties is fixed by the consignor. Exceptionally an agent may be remunerated by keeping the surplus over and above a specified price which is received on account of the principal, while the buyer may be paid a sum described as commission. It is, however, evidence towards a sale that the recipient is entitled to sell at whatever price the recipient thinks fit, accounting to the supplier only for a predetermined sum, and this interpretation is given further support if the recipient is free to alter or improve the goods. An agent, even a del credere agent, acts in accordance with the principal, and is normally remunerated by commission. The nature of the consignee's obligation to account to the consignor is perhaps the strongest indication. The consignee is probably an agent if ....
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.... may also be paid commission, or an agent remunerated by being allowed to keep the excess over and above a stipulated price. But the making of such a profit by an agent would normally be improper. Conversely, there may be difficulty in deciding whether a person who has agreed to procure goods for another is acting as that other's agent or selling to him. Again, the first question is to ask whether he takes a profit on the resale which will make him a seller, or a commission, in which case he is likely to be an agent and indeed the making of any further profit would usually be improper." (XIII) The Hon'ble Supreme Court in Alwaye Agencies v. Deputy Commission of Agricultural Income Tax : 1998 (Supp) SCC 394, has held as under: - "6. In our opinion, since both the parties have proceeded on the footing that the transactions in question were effected pursuant to the said agreement, the primary task to which we must address ourselves is to examine whether under the agreement the assessee firm was an agent of the said company, or whether the assessee firm was really a purchaser of the goods which were booked by it. In this connection, it must be noticed that sub-clause (a) of clause 2....
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....the bills were endorsed and handed over to the assessee. When considered in the light of the agreement, these circumstances clearly show that in respect of these transactions the property in the goods despatched passed to the distributor on the bills being endorsed and handed over to the distributors." (XIV) A similar view has been expressed by the Hon'ble Supreme Court in Gordon Woodroffe & Co. v. Shaik M.A. Majid & Co. : AIR 1967 SC 181. "9. It is well-established that even an agent can become a purchaser when as agent pays the price to the principal on his own responsibility. In Ex parte White, in re Nevil, (1871) 6 Ch. 397 t & Co. were in the habit of sending goods for sale to N who was a partner in the firm of N & Co., but received these goods on his private account. The course of dealing between T & Co. and N was that the goods were accompanied by a price list, N sold the goods on what terms he pleased, and each month sent to T & Co., an account of the goods he had sold, debiting himself with the prices named for them in the price list, and at the expiration of another month he paid the amount in cash without any....
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....ed and there was no privity of contract between the manufacturers and the ultimate purchasers." (XV) In furtherance of his submission on the above questions, Mr. A. R. Madhav Rao, Ld. Counsel appearing for the petitioner, has also produced a Model Agreement circulated by the Ministry of Home Affairs, Government of India, vide its letter dated 28.12.2011 to all the Chief Secretaries of States to be signed by the State Government and agent for running the lottery business including Online lottery. Referring to some of the conditions of this Agreement, it is stated that mutual arrangement between the State Government organising and conducting lottery business and the distributor/agent referred to under the provisions of the regulatory law and the rules made thereunder is also understood by the Government of India as that of a seller and purchaser and it is in that context that the conditions/arrangement between the State Government and the distributor have been settled. In particular, reference has been made to the following - " ............................................................... 8.1 The Agent shal....
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....tral Government in what manner the provisions of the regulatory law and the rules made thereunder have been understood and interpreted by the Central Government, the State Government as also the distributor appointed by the State. His submission is that all the lottery organizing States like Sikkim and Kerala have entered into similar kinds of agreements with their distributors wherein the relationship between the State Government organizing lottery and the distributors are that of a seller and buyer and not principal and agent. There is absolutely no dispute that from the nature of arrangement made between the State Government and the petitioner, who is termed as a distributor, it is evident that the State Government is selling its entire lot of lottery tickets published by it through the distributor (petitioner) for minimum guaranteed sale price with complete liberty to the distributor, the purchaser of the lottery tickets to further sell it by appointing selling agents, sub-agents etc. without any interference by the State Government except to monitor the adherence of the regulatory provisions contained in the Regulatory Act and the rules made thereunder. (XVII) Another related....
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....f transaction where a different intention appears." (XVIII) The sum and substance of the above discussion is that once the transaction between two contracting parties involves only sale and purchase including "on sale or return", the relationship is simply that of a seller and purchaser, it does not constitute any service. In Bharat Sanchar Nigam Ltd. & Anr. v. Union of India & Ors. : (2006) 3 SCC 1, it has been held as under: - " 88. No one denies the legislative competence of the States to levy sales tax on sales provided that the necessary concomitants of a sale are present in the transaction and the sale is distinctly discernible in the transaction. This does not however allow the State to entrench upon the Union List and tax services by including the cost of such service in the value of the goods. Even in those composite contracts which are by legal fiction deemed to be divisible under Article 366 (29- A), the value of the goods involved in the execution of the whole transaction cannot be assessed to sales tax. As was said in Larsen & Toubro v. Union of India : (SCC p.395, para 47) &n....
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....o be correct." (XX) In Indian Railways C. & T. Corpn. Ltd. v. Govt. of NCT of Delhi : 2010 (20) S.T.R. 437 (Del.), the question before Delhi High Court was whether the supplier of food and beverages to the Railways for consumption of passenger travelling therein includes the element of service and subject to levy of service tax. Considering this question, Delhi High Court observed as under: " 4. The next question raised is with regard to the respondent's liability for service tax on collections for disposal of garbage. Even though there is no written agreement for the collections, the Tribunal, on facts, found that the charges represent value for the materials sold and not for any service rendered by the respondent. So much so, we do not find any ground to interfere with the Tribunal's order vacating the service tax demands from the respondent for the collections and from the parties referred above. We do not find any merit in the appeals filed by the Department. Consequently, the appeals are dismissed." (XXI) From the discussion and consideration of judgments noticed hereinabove, it clearly emerges that wh....
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....the petitioner's case is that the 30% discounted price is for the purposes of the petitioner and his stockists/sellers profit components and other expenditure that would be incurred for sale of the lottery tickets. According to Mr. Rao, the discounted price in any sale transaction is normal and common business practice between a seller and a purchaser. After the lottery tickets are printed by the State Government, the same are required to be delivered to the petitioner at the agreed destination in terms of clause 13 of the Agreement and thereafter, it is the sole responsibility of the petitioner to sell the lottery tickets through stockists, selling agents or retail sellers as may be deemed convenient and the State Government can neither interfere with nor have any control over the stockists and selling agents appointed by the petitioner. Thus the State Government receiving the minimum guaranteed price sits pretty safe without any liability for profit or loss as the case may be. It becomes the exclusive responsibility of the petitioner to sell the tickets and, even if the petitioner is unable to sell the entire lot and sale proceeds of the sold tickets are less than the minimum gua....
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.... agency. The learned counsel relied upon Division Bench decision of this Court in the case of Amer Dye-Chem Limited and another v. Union of India and another reported in 1981 Excise Law Times, 348 and submitted that the mere use of the word 'Distributor' would not lead to the conclusion that the agreement is not an agreement of agency. The Division Bench observed that the distributor in the commercial world is understood to be person who distributes goods of the manufacturer to the consumer and in so doing he acts for and on behalf of the manufacturer. The distributor normally is, therefore, an agent of the manufacturer for the purpose of reaching out the goods to the consumers. Shri Dalal relied upon this observation and claims that Voltas were merely acting as Agents of the petitioners for reaching out the tractors to the consumers. The submission is not correct, as the Division Bench has further observed in the judgment that in the case of the buyer who purchases goods on payment of a commercial price to the manufacturer and transaction in effect is a sale, such a buyer is different from the distributor earlier noticed, though even such a buyer is sometimes described as a distri....
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....e tractors till they are sold to the consumers cannot be treated as transfer of manufacturer's activity in favour of the buyer. The fact that the expenses in regard to the advertisements were to be shared by the petitioners and Voltas merely indicate that both the wholesale buyer and the petitioners were interested in having greater production and sale thereof and that condition, in my judgment, cannot be considered as relevant to reach the conclusion that the agreement was not at arms length." (XXIV) In Pioneer Tools and Appliances (P) Ltd. v. Union of India : 1989 (42) E.L.T. 384 (Bom.), it has been held as under:- "5. This judgment clearly demonstrates the fallacy of the reasoning adopted by the first respondent in the order passed in revision. Mr. R. L. Dalal, learned counsel for the respondents, however, laid emphasis upon the fact that Rallis India was described as the first petitioner's distributor. He referred me to the decision of the division bench of this court in Amar Dye-Chem Limited and another v. Union of India and another, 1981 E.L.T. 348. The court held that the distributor normally was an agent o....
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....od by the appellant's dealers anywhere in the country. Thus, though one dealer might have to repair goods sold by another dealer and incur costs in that regard, he also had the benefit of having the goods he sold reparable throughout the country. The provision as to after sales service, therefore, benefitted not only the appellant; it was a provision of mutual benefit to the appellant and the dealer." (XXVI) Similarly, in Collector of Central Excise, Baroda v. Besta Cosmetics Ltd. reported as 2005 (183) E.L.T. 122 (SC), it has been held that the clause of advertisement being purely optional would not militate against the price which is at arm's length. The following observations are relevant: - " 2. In addition, we may note that the relevant clause in the agreement between the assessee and its Marketing Agent relating to advertisements reads as follows (wherein the marketing agent is referred to as BHPL) : "BHPL shall market the said product in the trade name or the trademark of BCL in respect of the said product. BHPL may, at its own free will, make it known....
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....,001 and above 28% * For the purchase of 70,00,001 and above 28.5% 5. The import of the order will be that for a ticket worth Re. 1 an agent need pay between 75 paise to 71.5 paise only, depending on the off take. The petitioner submits that there is no agency agreement, and the petitioners are termed as agents only on a loose basis. From the nature of the transactions, the Government and the petitioners deal as principal to principal. The tickets purchased are thereafter distributed through other agents, and sub-agents, according to them, on commission basis. They point out that after purchase of the tickets, it is not the Government's look out as to how and when they are divided or distributed, and there is no control over the affairs thereafter. Therefore, the principal contention of the petitioner is that there is only payment of the price of the tickets fixed as payable by the principal, and no commission or discount are paid to them by the Government. As such, it is the contention of the petitioners that Section 194G of the Act has no application, and hence the demand of tax, as coming through exhibit P-4 is unsustainable and without jurisdiction. ............................
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.... and he derives a profit of half paise per ticket. He may be right or that may be a misleading statement. But he has been able to obtain a ticket worth Re. 1 for 72 paise. His total input therefore is 72 paise, and in that context it is difficult to describe the transaction as one whereby because of investment of 72 paise he has simultaneously made a profit of 28 paise. Several "ifs" have to be employed, which do not exist in real life, for this court to accept the case of the Department that by the factum of purchase he had already made a profit. .............................................................................. 23. Therefore, the demand of tax is to be shown as one on the income of the person concerned. There is neither payment of cash or by cheque, and the Government never credits any income to the account of the persons like the petitioners. When the deduction is contemplated at the time of payment to the person concerned and when it is shown that there is no payment to the agent at the time of purchase of the ticket, the section automatically becomes inapplicable. If any prize or remuneration is payable by the Government, to any person, deduction at source as env....
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....he Assessee. Both the Assessee and the distributor have been collecting and paying their sales tax separately. Both the parties have clearly understood and accepted the agreement between them. That being the arrangement between the Assessee and the distributor, it could not be said that the relation between them was that of principal-agent. On the other hand it was clearly stipulated to be an agreement between them on principal-to-principal basis. Both the Commissioner (Appeals) and also the ITAT rightly held that the payments being made by the Assessee to the distributor were incentives and discounts and not commissions. We find no infirmity in the findings of the Commissioner (Appeals) and also ITAT." (XXIX) It is the common case of the parties that the service tax has been levied vide Finance Act, 1994 as amended in 2010 by introducing organization, promotion of lottery etc. as a taxable service. Section 66 prescribes 12% as the rate of service tax of the value of the taxable service whereas Section 67 deals with valuation of taxable services for charging service tax. The relevant extract of both the sections are reproduced hereunder: - &nbs....
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....otion, marketing, organizing or in any manner assisting in organizing lottery is concerned. The relevant extract of the said Rule reads as under: - "(7C) The distributor or selling agent, liable to pay service tax of promotion, marketing, organizing or in any other manner assisting in organizing lottery, shall have the option to pay an amount at the rate specified in column (2) of the Table given below, subject to the conditions specified in the corresponding entry in column (3) of the said Table, instead of paying service tax at the rate specified in section 66B of Chapter V of the said Act: Table Sl. No. Rate Condition (1) (2) (3) 1. Rs.7000/- on every Rs. 10 Lakh (or part of Rs. 10 Lakh) of aggregate face value of lottery tickets printed by the organizing State for a draw If the lottery or lottery scheme is one where the guaranteed prize payout is more than 80% 2. Rs.11000/- on every Rs. 10 Lakh (or part of Rs. 10 Lakh) of aggregate face value of lottery tickets printed by the organizing State for a draw If the lottery or lottery scheme is one where the guaranteed prize payout is less than 80% Provided that in case of online lottery, the aggregate face val....
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....clarificatory circular dated 10.11.2006 laying down the criterion for levy of service tax. The relevant extract is reproduced hereunder:- "4. To levy service tax, the following criteria are to be satisfied: The service provided or to be provided satisfies the definition of taxable service. There should be receipt of consideration for the taxable service provided." (XXXII) In view of the above clarification, it is pleaded on behalf of the petitioners that receipt of consideration for providing "taxable service" is one of the essential ingredients to establish that any service is a "taxable service". It is submitted that in the instant case, the Government does not pay any consideration in any form for the activities to be performed by the petitioner for promotion of the sale by advertisement etc. To the contrary, the petitioner is paying the minimum guaranteed sum towards the full sale consideration to the Government and thus the entire claim of the respondents that the petitioner is providing taxable service is belied by its own circular and understanding of the nature of the petitioner's activity. GROUND (B) (I) This gro....
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....tion 294A of the IPC punishes a person who keeps any office or place for the purpose of drawing any lottery or even the proposal to pay any money or to deliver any goods on any event or contingency of any ticket or any figure in the lottery as an offence except where it is run or authorized by the State Government. The lottery, per se, does fall within the expressions "betting and gambling" which Act is pernicious in nature. It gets a legal umbrella only if it is run or authorized by the State Govt. subject to the conditions enumerated under Section 4 of the Lotteries (Regulation) Act, 1998. It is a privilege of the State which can be partially parted to any other person subject to the performance of statutory conditions contained in the regulatory Act. (b) Lottery has been declared to be falling within the expressions "betting and gambling" by the Hon'ble Supreme Court in B. R. Enterprises v. State of U.P. & Ors. : (1999) 9 SCC 700. The relevant observations are quoted hereunder:- " 64. For this, we revert to scrutinize as to what made lotteries gambling and how State lotteries cleanses this character. As w....
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....aforementioned submission. The law, as it stands today (although it is possible that this Court in future may take a different view), recognises lottery to be gambling. Gambling is res extra commercium as has been held by this Court in State of Bombay v. R.M.D. Chamarbaugwala and B.R. Enterprises v. State of U.P." Thus, in view of the clear and categorical opinion of the Apex Court, we have no hesitation in concluding that the conduct of lottery is an act of "betting and gambling" envisaged under entries 34 and 62 of List II to Schedule 7. (ii) whether it is within the exclusive domain of State legislature to impose taxes on organising lotteries being an act of "Betting and Gambling" (iii) whether the Parliament has the competence to enact law in exercise of its residuary legislative power under entry 97 of List I to Schedule 7 dehors the entries 34 and 62 of List II; Since both these limbs are interrelated, the same are being taken up for consideration conjointly. (d) Entry 34 of List II to Schedule 7 prescribes "Betting and Gambling" as a field of legislation within the domain of the State. Entry 40 also provides lotteries organized by the Government of India or the Governmen....
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....erewith. This enactment does not, in our opinion, fetter the legislative power or competence of the State to levy tax on luxuries including taxes on entertainments, amusements, betting and gambling falling under Entry 62 of List II of the Seventh Schedule to the Constitution. The power of regulation or control under the said Central enactment is separate and distinct from the power of taxation by the State Legislature under Entry 62 of List II; being a specific power, the power of taxation cannot be cut down or fettered by the general power of regulation as exercised by Parliament in enacting the said 1995 Act. .............. ....................................................................................................." (f) Indubitably, there is no specific entry under List I empowering the Parliament to levy tax on lotteries or even on "betting and gambling". The service tax sought to be imposed is in exercise of the residuary power vested in the Parliament under entry 97 of List I read with Article 248 of the Constitution of India. In so far the List II is concerned, entry 62 specifically provides for levy of taxes on "betting and gambling". As observed by us above and h....
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....ch of the Hon'ble Supreme Court held as under:- "10. It was further urged by Mr. Setalvad that the proper way of testing the validity of a parliamentary statute under our Constitution was first to see whether the parliamentary legislation was with respect to a matter or tax mentioned in List II, if it was not, no other question would arise. The learned counsel for the respondent contended tha this manner of enquiry had not been even hinted in any of the decisions of the Court during the last 20 years of its existence and there must accordingly be something wrong with this test. He urged that in so far as this test is derived from the Canadian decisions, the Canadian Constitution is very different and those decisions ought not to be followed here and applied to our Constitution. 11. It seems to us that the best way of dealing with the question of the validity of the impugned Act with the contentions of the parties is to ask ourselves two questions first is the impugned Act legislation with respect to Entry 49, List II and secondly if it is not, is it beyond the legislative competence of Parliament. 12. We have put these....
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....ent, then we are unable to see why we should not, when dealing with a Central Act, enquire whether it is legislation in respect of any matter in List II for this is the only field regarding which there is a prohibition against Parliament. If a Central Act does not enter or invade these prohibited fields there is no point in trying to decide as to under which entry or entries of List I or List III a Central Act would rightly fit in. 67. ..................................... Be that as it may, we have the three lists and a residuary power and therefore it seems to us that in this context if a Central Act is challenged as being beyond the legislative competence of Parliament, it is enough to enquire if it is a law with respect to matters or taxes enumerated in List II. If it is not, no further question arises. 103. The expression "any matter not enumerated in the Concurrent List or State List" in Article 248 must mean, in the context of clause (1) of Article 246, which gives Parliament exclusive power in respect of matters in List I, any matter other than those enumerated in any of the three Lists. Obviously, the residuary power given to Parliament in Article 248 cannot include powe....
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....ry powers of legislation confers exclusive power on Parliament to make any law with respect to any matter not enumerated in the Concurrent List or the State List. At the same time, it provides that such residuary power shall include the power to making any law imposing a tax not mentioned in either of those Lists. It is, thus, clear that if any power to tax is clearly mentioned in List II, the same would not be available to be exercised by Parliament based on the assumption of residuary power." (j) Hon'ble Bench relied upon the Constitution Bench judgment in Union of India v. Shri Harbhajan Singh Dhillon (supra) and the commentary on constitutional law by H. M. Seervai, 4th Edition (Silver Jubilee Edition). The relevant observations quoted in the above judgment are reproduced hereunder: - " 102. Vide para 22.194 the eminent jurist poses a question: "22.194. Does Article 248 add anything to the exclusive residuary power of Parliament under Article 246(1) read with Entry 97 List I, to make laws in respect of 'any other matter' not mentioned in List II and List III, including any tax....
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....in the Parliament in terms of entry 40 of List I, power to tax is not an incidental power. The Hon'ble Bombay High Court relying upon West Bengal v. Kesoram Industries Ltd. & Ors. : (2004) 10 SCC 201 and various other judgments, while considering the validity of State law enacted by the Maharashtra State imposing tax on lotteries, observed as under:- "3. It is the contention of the Petitioners that the legislature of State of Maharashtra has no legislative power to enact Laws relating to State Lotteries including Laws relating to taxation, and therefore, according to the Petitioners, the State Act is beyond the legislative competence of the legislature of State of Maharashtra. The second submission is that the enactment of the State Act is colourable exercise of the legislative power in as much as it is another method of levying tax on lottery tickets. The third submission is that the State Act seeks to levy tax on lottery schemes, tax is collected in advance in respect of each draw in the lottery scheme at the rate specified in Section 3 of the State Act. It is submitted that lottery scheme of all other Stat....
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....ntry in a legislative list may be with respect to both. Article 246 makes it clear that the exclusive powers conferred on Parliament or the States to legislate on a particular matter includes the power to legislate with respect to that matter. Hence, where the entry describes an object to tax, all taxable events pertaining to the object are within that field of legislation unless the even is specifically provided for elsewhere under a different legislative head. Where there is the possibility of legislative overlap, courts have resolved the issue according to settled principles of construction of entries in the legislative lists. ...................................................................................................... 72. In view of the decision in Sea Customs Act case the second premise propounded by Mr. Salve is unacceptable. As we have seen, in that case this Court held that the taxable event of ownership is implicit in the concept of taxes on goods. That the entries on taxable events in the legislative lists are not exhaustive is also recognized and provided for in Article 248(2) which provides for the power of Parliament to make any law imposing a tax not menti....
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....article of luxury. One can assume that the coupling of these taxes under one entry was not fortuitous but because of these common characteristics." (n) It has been vehemently argued by Mr. Razzaq that the service tax levied vide clause (zzzzn) under sub-section (105) of Section 65 is a tax on various activities comprising services rendered by the distributors to the State in promotion, marketing, organizing of lottery, etc. It is not a tax on betting and gambling, per se and is beyond the purview of entry 62 of List II. Entry 62 empowers the State Legislature to impose tax on luxuries, entertainment, amusement, betting and gambling. (o) For the purpose of the present petition, the relevant subject matter under entry 62 is "betting and gambling". As held by the Hon'ble Supreme Court in Express Hotels Private Ltd. v. State of Gujarat & Anr.: (1989) 3 SCC 677, the entries must be construed by giving them the widest possible meaning. Relevant observations are:- "15. .........................The entries should not be read in a narrow or pedantic sense but must be given their fullest meaning and the widest amplitude and be held to extend to all ancillary and subsidiary matters which ....
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....e, one would think, would be a tax on betting and gambling under Entry 62. The Appeal Court has expressed the view that s. 12A does not fall within Entry 62, for it does not impose a tax on the gambler but imposes a tax on the petitioners who do not themselves gamble but who only promote the prize competitions. So far as the promoters are concerned, the tax levied from them can only be regarded as tax on the trade of prize competitions carried on by them. This, with respect, is taking a very narrow view of the matter. Entry 62 talks of taxes on betting and gambling and not of taxes on the men who bet or gamble. It is necessary, therefore, to bear in mind the real nature of the tax. The tax imposed by s. 12A is, in terms, a percentage of the sums specified in the declaration made under s. 15 by the promoter or a lump sum having regard to the circulation and distribution of the newspaper or publication in the State. ............................................................................... ............................................................................................ If taxation on betting and gambling is to be regarded as a means of controlling betting and gamb....
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....ing no independent role to offer or provide entertainments to the subscribers inasmuch as franchisees have to depend entirely on the respondents' communication network and this communication network of the respondents consists of receiving and sending visual images and audio and other information for preparation of the subscribers and/or viewers; without the communication network service of the respondents, no entertainments can be offered or provided to the subscribers and/or viewers. 39. In the tax matters, the State Legislature is free, if it has legislative competence, to choose the persons from whom the tax levied on entertainments is to be collected. In other words, what are taxed are the entertainments, which is very much within the ambit of Entry 62 of List II of the Seventh Schedule. It is the respondents who as cable operator for the purpose of the said 1982 Act are engaged in the business of providing or offering entertainments which include showing of films, various serials, cricket matches and dramatic performances to the subscribers, and the tax is imposed on the act of offering such entertainments in this way to such subscribers and/or viewers. The entire communicat....
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..... Kesoram Industries Ltd. (supra) if any law enacted by Parliament is not traceable to any legislative entry in List II or List III, it is irrelevant whether the power of the Parliament is traceable to a specific entry and Parliament shall be deemed to have legislative competence. Its natural corollary would be if power to enact law on a subject matter including levy of taxes is traceable to any entry in List II and List III, residuary power under entry 97 of List I read with Article 248 of the Constitution of India will not be available to it, the same having been specifically restricted under entry 97 of List I and Article 248 of the Constitution. (u) In the instant case, the power to tax on lotteries or even "betting and gambling" is not available under any of the entries of List I. However, such power is germane to and emanates from entry 62 of List II in Seventh Schedule, meaning thereby that the residuary power to enact a law imposing tax on lotteries would not be available to the Parliament. (v) Mr. Razzak, Learned Additional Solicitor General, submits that since the service tax is a new concept and a new tax regime, it could not be said that at the time of enacting the en....
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....ble amplitude and encompasses within its field any kind of tax that could be visualized or conceptualized. In D. G. Gose and Co. Pvt. Ltd. & Ors. v. State of Kerala & Anr. : (1980) 2 SCC 410, a Constitution Bench of the Hon'ble Supreme Court, while considering clause (28) of Article 366 of the Constitution, observed as under:- "5. The word "tax" in its widest sense includes all money raised by taxation. It therefore includes taxes levied by the Central and the State legislatures, and also those known as "rates", or other charges, levied by local authorities under statutory powers. "Taxation" has therefore been defined in clause (28) of Article 366 of the Constitution to include "the imposition of any tax or impost, whether general or local or special", and it has been directed that "tax" shall be "construed accordingly"." (y) Various entries empowering the Parliament and State Legislatures to enact laws for levy of tax do not mean or confine the kind of taxes prevalent or in vogue at the time these entries were enacted in Seventh Schedule. The word "tax" includes all kinds of taxation present or future that ....
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....iew the residuary powers of the Parliament would come into play only where none of the entries in any of the Lists provide for a legislative field. As held by the Hon'ble Apex Court in State of West Bengal v. Kesoram Industries Ltd. (supra), the only embargo in the exercise of the residuary power of Parliament under entry 97 List I read with Article 248 of the Constitution would be nonexistence of legislative power of any of the Legislatures under Lists II and III, Schedule 7. At the cost of repetition we may say that where the legislative power whether to enact a law in general or for levy of tax in particular, is not envisaged under Lists II and III, the Parliament would be fully competent to enact a law including imposing a tax (Service Tax) under entry 97 List I. We are of the considered view that Parliament would have had the legislative competence to impose tax including service tax upon lotteries but for entry 62, List II. It is the exclusive legislative domain of the State Legislature to levy tax of any nature on lotteries by virtue of entry 62 List II, Schedule 7. (iv) whether the State legislature and Parliament both can simultaneously impose taxes on the conduct of lott....
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.... of the writ petitioners who challenged the vires of the levy was that the transaction of equipment leasing and hire purchase and financing has been constitutionally defined as sale and purchase under Article 366 (29A) and thus falls within the exclusive competence of State Legislature under entry 54 of List II, hence the Parliament in exercise of its legislative competence under entry 97 of List I of Seventh Schedule of the Constitution is not competent to levy service tax. Hon'ble Apex Court on consideration of entire issue came to the conclusion that part of the transaction constitute sale for which the State Legislature is competent to impose tax under entry 54 of List II whereas the components of the transaction constituting service fall within the legislative competence of the Parliament under its residuary power under entry 97 of List I. Validity of the service tax imposed under Section 65(105)(zm) was thus upheld. The relevant observations in this regard are quoted hereunder:- "59. Applying the above decisions to the present case, on examination of the impugned legislation in its entirety, we are of the view that the impugne....
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....aluation purposes inter alia "finance/interest charges" are taken into account and merely because service tax is imposed on financial services with reference to "hiring/interest" charges, the impugned tax does not cease to be service tax and nor does it become tax on hire-purchase/leasing transactions under Article 366(29-A) read with Entry 54, List II. Thus, while the State Legislature is competent to impose tax on "sale" by legislation relatable to Entry 54 of List II of the Seventh Schedule, tax on the aspect of the "services", vendor not being relatable to any entry in the State List, would be within the legislative competence of Parliament under Article 248 read with Entry 97 of List I of the Seventh Schedule to the Constitution." (ac) It may be noticed that the Hon'ble Supreme Court split the transaction into two components i.e. "sale" and "service". It is pertinent to note that the service tax was imposed only on the component of the service @ 10 % of the contract value. While considering the nature of transaction it was noticed by the Hon'ble Supreme Court that the part of the transaction like interest/ financing charges with lease management fee, processing fee and docume....
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....customer is definitely not in the nature of a sale or hire-purchase of goods. It is essentially that of providing a service. In fact, as pointed out earlier, the manner of service provided assumes predominance over the providing of food in such situations which is a definite indicator of the supremacy of the service aspect. The legislature in its wisdom noticed the said supremacy and identified the same as a potential region to collect indirect taxes. Moreover, it has been a well-established judicial principle that so long as the legislation is in substance, on a matter assigned to a legislature enacting that statute, it must be held valid in its entirety even though it may trench upon matters beyond its competence. Incidental encroachment does not invalidate such a statute on the grounds that it is beyond the competence of the legislature (Prafulla Kumar v. Bank of Commerce [ AIR 1947 PC 60 : 74 IA 23] ). Article 246(1) of the Constitution specifies that Parliament has exclusive powers to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule to the Constitution. As per Article 246(3), the State Government has exclusive powers to make laws with r....
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....ent, the chartered accountant/cost accountant is his service provider. It is a tax on "services". The activity undertaken by the chartered accountant or cost accountant is similar to saleable or marketable commodities produced by the assessee and cleared by the assessee for home consumption under the Central Excise Act. 35. For each contract, tax is levied under the Finance Acts, 1994 and 1998. Tax cannot be levied under that Act without service being provided whereas a professional tax under Entry 60 is a tax on his status. It is the tax on the status of a cost accountant or a chartered accountant. As long as a person/firm remains in the profession, he/it has to pay professional tax. That tax has nothing to do with the commercial activities which he undertakes for his client. Even if the chartered accountant has no work throughout the accounting year, still he has to pay professional tax. He has to pay the tax till he remains in the profession. This is the ambit and scope of Entry 60, List II which is a taxing entry. Therefore, Entry 60 contemplates tax on professions, as such. Entry 60, List II refers to "tax on employments"." (a....
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....logistics and some component of profit. The State Government is unable to sell the tickets to the ultimate buyers and for that purpose the petitioners are appointed as stockists or distributors on payment of full sale consideration on discounted price. Further the sale by the petitioners to their stockists, selling agents etc. is on discounted price from MRP after keeping the establishment and other expenditure and margin of profit for themselves. The last sale to the consumer of the lottery is on the MRP of Re.1/- per ticket. Thus, all the intermediaries have to be given discount from MRP for the purpose of meeting their expenditure and some component of profit. The advertisement etc. is only to popularize the State lottery but that does not mean that it is a service rendered to the State Government. As argued by Mr. Madhav Rao, this is for promotion of their own sale at their own expense without recovering it from the State Government. In any case service tax is being levied and collected on the gross amount without even isolating the discounted cost of lottery ticket. Thus in the present case there does not seem to be any circumstance where the activity of sale of State organiz....