TaxTMI 
TaxTMI 
2025 (2) TMI 483
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....0 2016 Amendment: ............................................................................ 23 Submissions before this Court: ......................................................... 26 Points for Consideration: ................................................................. 37 Relevant constitutional provisions: .................................................. 38 Relevant Case Law on lotteries:........................................................ 44 B.R. Enterprises: .................................................................................... 44 Sunrise Associates: ................................................................................ 45 State of Karnataka: ............................................................................... 47 K. Arumugam: ........................................................................................ 47 Legal Framework: ............................................................................ 51 Agreements under consideration: ..................................................... 67 Paper Lotteries: .................................................................................
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.... sale of paper and online lottery tickets organised by the Government of Sikkim. They entered into respective agreements with the State of Sikkim. 2.2 Since these cases assail the amendments made to the provisions of the Finance Act, 1994 from time to time commencing from the year 2012, the factual backdrop of these cases shall be in accordance with the amendments made to the Act and shall be stated chronologically. History of this controversy: 3. The Parliament introduced service tax through the Finance Act, 1994 under Chapter V, which took effect on 01.07.1994. Later, through the Finance Act, 2003, the Finance Act,1994 was amended to include a new category of taxable services, namely "Business Auxiliary Service," under sub-section (19) of Section 65, effective from 01.07.2003. Pursuant to this amendment, the Service Tax Department issued notices to the respondents-assessees herein, under the amended Finance Act in 2007, requiring them to register under the said Act for payment of service tax. 3.1 Being aggrieved, the respondents-assessees herein approached the High Court in W.P. (C) No.19 of 2007, titled Martin Lottery Agencies Ltd. vs. Union of India, challenging the....
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.... the appeals preferred by the respondents-assessees herein and set aside the order passed by the High Court dated 30.07.2010 and held that lottery tickets being actionable claims and not being goods within the meaning of sub-clause (i) of clause (19) of Section 65 of the Finance Act, 1994, would expressly get excluded from the scope of the said provision. In the circumstances, service tax on the promotion or marketing or sale of lottery tickets which are actionable claims could not have been levied under the said subclause. 3.5 However, during the pendency of the above appeal, the Finance Act, 1994 again came to be amended with the deletion of the Explanation to Section 65(19)(ii) and the introduction of a new category of "taxable service" vide clause (zzzzn) to sub-section (105) of Section 65 vide the Finance Act, 2010 with effect from 01.07.2010. Clause (zzzzn) to sub-section (105) of Section 65 reads as under: "(105) "taxable service" means any service provided or to be provided,- ... (zzzzn) to any person, by any other person, for promotion, marketing, organising or in any other manner assisting in organizing games of chance, including lottery, Bingo or Lotto in wha....
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....ng" in Entry 62 - List II, lies exclusively with the State Legislature. Consequently, Parliament's authority to impose such a tax under its residuary power in Entry 97 - List I, read with Article 248 of the Constitution, is excluded. The High Court held that while Parliament is competent to levy service tax under Entry 97 - List I, this does not imply that it can impose such a tax on lotteries, as the power to levy taxes on this subject has been conferred on the State Legislature in List II. That the residuary powers of Parliament can only be exercised when no Entry in any of the Lists provide a legislative field. Hence, 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. e. The High Court further held that when a distributor purchases goods at a commercial price, they are not acting as an agent for the manufacturer. f. The High Court observed that in the case at hand, the lottery tickets are sold as goods by the State Government to the assesses therein at a discounted price of 70 paise per ticket, compared to the MRP of Re.1. The predominant part of the transaction is a sale o....
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....chedule of Constitution of India, the State Legislature alone is competent to levy any tax on such activity under Entry 62. (iv) The Parliament has the competence and jurisdiction to levy taxes on any subject matter including "service tax" under Entry 97, List I, read with Article 248 of the Constitution of India except where such powers are traceable to any of the entries in List II and III to Seventh Schedule of Constitution of India. (v) Power to tax the activity of "betting and gambling" as explained above being within the exclusive domain of State Legislature under Entry 62, List II, the Parliament in exercise of its residuary power under Entry 97, List I to Seventh Schedule of Constitution of India lacks legislative competence to impose any tax including "service tax" on such activity." 3.9 In view of the above conclusions, the petitions were allowed striking down clause (zzzzn) to sub-section (105) of Section 65 of Finance Act, 1994 as introduced vide Finance Act, 2010 as ultra vires the Constitution having been enacted in contravention to Entry 97 - List I to Seventh Schedule read with Article 248 of Constitution of India. Consequently, all actions of i....
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.... on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed. Negative list of services. 66D. The negative list shall comprise of the following services, namely:- xxx (i) betting, gambling or lottery; xxx" 4.1 On the introduction of the aforesaid amendments the respondents-assessees herein had intimated to the Revenue vide letter Ref. No.FGSIPL/SK/0024/ 12-13 dated 28.06.2012 stating that in view of the change in the legal position the respondentsassessees herein would not be paying service tax with effect from 01.07.2012. 4.2 In response to the above, the Revenue issued letter C. No.V(3)7/ST/FGSIPvtLtd/GTK/2009/295 dated 06.07.2012 stating that as per the Notification. No. 36/2012 ST dated 20.06.2012 read with Rule 6(7C) of the Finance Act, 1994 (as amended), the distributor or selling agents are liable to pay service tax at the rate specified for the taxable service of promoting, organizing or in any other manner assisting in arranging lottery. Being aggrieved by this co....
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....14111 of 2015, respectively. 2015 Amendment: 5. The Parliament again made amendments to the Finance Act, 1994 vide the Finance Act, 2015 The amendment is extracted as below: "65B. In this Chapter, unless the context otherwise requires,- xxx (31A) "lottery distributor or selling agent" means a person appointed or authorised by a State for the purposes of promoting, marketing, selling or facilitating in organising lottery of any kind, in any manner, organised by such State in accordance with the provisions of the Lotteries (Regulation) Act, 1998 (17 of 1998); xxx (44) "service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include- (a) an activity which constitutes merely,- xxx (iii) a transaction in money or actionable claim; xxx Explanation 2.-For the purposes of this clause, the expression "transaction in money or actionable claim" shall not include- xxx (ii) any activity carried out, for a consideration, in relation to, or for facilitation of, a transaction in money or actionable claim, including the ac....
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....d 14.10.2015, the Union of India approached this Court by filing Civil Appeal Nos.2172-73 of 2016. 2016 Amendment: 6. In the meantime, the Parliament came out with an amendment to the Finance Act, 2016 to the following effect: "In Section 65B- (b) in clause (44), in Explanation, 2, in sub-clause (ii), for item (a), the following item shall be substituted, namely- (a) by a lottery distributor or selling agent on behalf of the State Government, in relation to promotion, marketing, organizing, selling of lottery or facilitating in organizing lottery or any kind, in any other manner, in accordance with the provisions of the Lottery (Regulation) Act, 1998." 6.1 Again, this amendment to the Finance Act, 2016 was challenged before the High Court of Sikkim by the respondents24 assessees herein in Writ Petition No. 34 of 2016 and Writ Petition No.48 of 2016. 6.2 The High Court vide impugned order and judgement dated 23.03.2017 allowed the writ petitions and held that the amendments carried out by the Finance Act, 2016, are not capable of being implemented for imposition and levy of service tax on the services allegedly provided by the respondents-assessees herein. The s....
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....e the ultimate seller of lottery tickets to the public, inherently establishing an agency relationship between the State of Sikkim and the respondents-assessees herein in these cases. Article 246(1) of the Indian Constitution empowers Parliament to legislate on lotteries conducted by the government, which it exercised by enacting the Lotteries Act. Section 4(c) of this Act prescribes that the State government must sell tickets "either itself or through distributors or selling agents." Further, Rule 2(1)(c) of the Lotteries (Regulation) Rules, 2010 ("Lotteries Rules", for short) defines a "distributor or selling agent" as an entity appointed by the organizing State to sell tickets on behalf of the State. Learned counsel argued that the use of terms such as "through" and "on behalf of" in the statute is conclusive evidence of the intended agency relationship, as these terms denote that the respondents-assessees herein are merely facilitating sales on behalf of the State, not as independent principals. b. The judgment in State of Haryana vs. Suman Enterprises, (1994) 4 SCC 217 held that a State-organized lottery requires the State to retain core control to protect public trus....
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....ht all tickets upfront and assumed the associated risk. However, subsequent amendments, particularly in 2008 and 2009, shifted this arrangement to an "actual sold" basis, where the respondents-assessees herein took delivery of the tickets without upfront payment, returning unsold tickets to the State. Additionally, the State's revenue became tied to the actual sales made by the respondents-assessees herein rather than a fixed sum, indicating that the State retained the risk and reward from ticket sales, characteristic of a principalagent relationship. f. For online lotteries, the agreements did not involve any physical transfer of tickets to the respondents-assessees herein. Instead, tickets were directly sold by the State to customers through computer terminals managed by the respondents-assessees herein. Learned counsel argued that this arrangement further underscored the agency relationship, as the respondents-assessees herein merely facilitated sales made by the State, with the State bearing the risk associated with prize payouts. It was emphasised that the respondentsassessees herein received a commission calculated as a percentage of total sales after deducting the S....
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....crores to the State Government irrespective of the number of tickets sold. Additionally, the respondents-assessees herein have to furnish a bank guarantee to secure payment. The State does not indemnify the respondents-assessees herein, in case of any loss. Therefore, indemnification being a hallmark of agency but in the instant cases, the respondents-assessees herein are bearing all the financial risk and the State Government does not indemnify the respondents-assessees herein, then the relationship between the parties has to be principal to principal. c. Once the respondents-assessees herein purchase tickets from the State, it sells them onward at its discretion to subcontractors or stockists. The sale proceeds exclusively belong to the respondents-assessees herein. The State government has no privity of contract with the sub-distributors. Therefore, it was argued that the respondents-assessees herein are not operating on behalf of the State Government. d. That the respondents-assessees herein bear the entire cost of marketing and advertising without reimbursement from the State Government. Further, the respondents-assessees herein appoint stockists and sellers ....
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....s-assessees herein to support their claim of operating as principals. One of the key arguments by the respondents-assessees herein was that they were in the "business" of buying and selling lottery tickets, and therefore should be considered independent principals. Learned counsel countered this by referring to Sunrise Associates, which held that the purchase of a lottery ticket confers a conditional interest in the prize money (an actionable claim) to the buyer. Since the respondents-assessees herein do not possess any actionable claim (as they cannot participate in the lottery), they cannot be classified as true "buyers" of lottery tickets. Thus, they are limited to selling tickets only as agents of the State. Points for Consideration : 10. The following points would arise for our consideration: a) Whether the impugned judgments of the High Court of Sikkim would call for any interference in these appeals? b) If not, what order? At this stage, we state that we need not go into the question regarding the aspect theory/doctrine being made applicable to these cases. This is because we are dealing with the question whether service tax is liable to be paid by....
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.... or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule (in this Constitution referred to as the "State List"). (4) Parliament has power to make laws with respect to any matter for any part of the territory of India not included in a State notwithstanding that such matter is a matter enumerated in the State List." 11.2 Article 248 deals with Residuary power of Legislatures and the same reads as under: "248. Residuary powers of legislation. (1) Subject to Article 246A, Parliament has exclusive power to make any law with respect to any matter not enumerated in the Concurrent List or State List. (2) Such power shall include the power of making any law imposing a tax not mentioned in either of those Lists." At this stage itself, it may be mentioned that the residuary power is reserved to the Parliament to legislate on any subject provided such power is not included in either the Concurrent List or the State List. 11.3 The Finance Act, 1994 was enacted by the Parliament in terms of Article 248 of the Constitution of India read with Entry 97 - List I which reads as under: "97. Any other ma....
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.... Accordingly, it cannot be interpreted that the words "any other matter" occurring in Entry 97 - List I, to mean a topic mentioned by way of exclusion. These words really refer to the matters contained in each of the Entries 1 to 96. The words "any other matter" had to be used because Entry 97 - List I follows Entries 1-96 - List I. It is true that the field of legislation is demarcated by Entries 1-96 - List I, but demarcation does not mean that if Entry 97 - List I confers additional powers, we should refuse to give effect to it. At any rate, whatever doubt there may be on the interpretation of Entry 97, List I is removed by the wide terms of Article 248. It is framed in the widest possible terms. On its terms the only question to be asked is: Is the matter sought to be legislated or included in List II or in List III or is the tax sought to be levied mentioned in List II or in List III: No question has to be asked about List I. If the answer is in the negative then it follows that Parliament has power to make laws with respect to that matter or tax. According to this Court, if a Central Act is challenged as being beyond the legislative competence of Parliament, it is enough t....
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..... Sunrise Associates: 12.1 In the case of Sunrise Associates, the Constitution Bench of this Court speaking through Ruma Pal, J., opined that lottery tickets can be categorized as actionable claims. The relevant paragraphs of the said judgment read as under: "40. An actionable claim would include a right to recover insurance money or a partner's right to sue for an account of a dissolved partnership or the right to claim the benefit of a contract not coupled with any liability (see Union of India v. Sri Sarada Mills Ltd. [(1972) 2 SCC 877] , SCC at p. 880). A claim for arrears of rent has also been held to be an actionable claim (State of Bihar v. Maharajadhiraja Sir Kameshwar Singh [(1952) 1 SCC 528 : 1952 SCR 889 : AIR 1952 SC 252] , SCR at p. 910). A right to the credit in a provident fund account has also been held to be an actionable claim (Official Trustee v. L. Chippendale [AIR 1944 Cal 335 : ILR (1943) 2 Cal 325] ; Bhupati Mohan Das v. Phanindra Chandra Chakravarty [AIR 1935 Cal 756 : 40 CWN 102] ). In our opinion a sale of a lottery ticket also amounts to the transfer of an actionable claim. 44. The question is, what is this right which the tick....
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....e scope and ambit of Section 65(19)(ii) read with Section 65(105)(zzb) of the Finance Act, 1994? If not, what relief(s) the appellants are entitled to? 2. What Order?" In K. Arumugam, on a plain reading of the Explanation in light of the activity actually carried on by the appellant(s)-assessee(s) therein, it was clear that the outright purchase of lottery tickets from the promoters of the State or Directorate of Lotteries, as the case may be, was not a service in relation to promotion or marketing of service provided by the client, i.e., the State, conducting the lottery. The conduct of lottery is a revenue generating activity by a State or any other entity in the field of actionable claims. The client, i.e., the State was not engaging in an activity of service while dealing with the business of lottery. Explanation to sub-clause (ii) of clause (19) of Section 65 of the Finance Act, 1994 could not bring within sub-clause (ii) activity by assuming it was initially covered under sub-clause (i) thereof but in fact was not, by virtue of the definition of goods under the very same Act read with Section 2(7) of the Sale of Goods Act, 1930. It was observed that the mere inser....
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....t periods namely, from 01.07.2003 to 30.06.2010, from 01.07.2010 to 30.06.2012, from 01.07.2012 to 31.05.2015, from 01.06.2015 to 31.03.2016 and from 01.04.2016 to 30.06.2017 are encapsulated under the respective headings: "I. PERIOD FROM 01.07.2003 TILL 30.06.2010 No matter is pending in relation to this period as they have been disposed off by this Court in K. Arumugam v. Union of India & Others (2022 SCC Online SC 2278) Provision Finance Act With Effect From 65(105(zzb) 2003 01.07.2003 65(19) 2003 01.07.2003 Explanation inserted to Section 65(19)(ii) 2008 16.05.2008 1. Section 65(105)(zzb) Taxable Service means any service provided to a client, by a commercial concern in relation to business auxiliary service 2. Section 65(19) 'Business Auxiliary Service' means any service in relation to i) promotion or marketing or sale of goods produced or provided by or belonging to the client; or ii) promotion or marketing of service provided by the client; or iii) any customer care service provided on behalf of the client; or iv) any incidental or auxiliary ....
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....ucted through internet or other electronic networks; 3. Section 66 as it existed during the period 01.07.2010 to 30.06.2012 There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent of the value of taxable services referred to in sub-clauses (a), (d), (e), (f), (g), (h), (i), (j), (k), (1), (m), (n), (o), (p), (q), (r), (s), (t), (u), (v), (w), (x), (y), (z), (za), (zb), (zc), (zh), (zi), (zj), (zk), (zl), (zm), (zn), (zo), (zq), (zr), (zs), (zt), (zu), (zv), (zw), (zx), (zy), (zz), (zza), (zzb), (zzc), (zzd), (zze), (zzf), (zzg), (zzh), (zzi), (zzk), (zzl), (zzm), (zzn), (zzo), (zzp), (zzq), (zzr), (zzs), (zzt), (zzu), (zzv), (zzw), (zzx), (zzy), (zzz), (zzza), (zzzb), (zzzc), (zzzd), (zzze), (zzzf), (zzzg), (zzzh), (zzzi), (zzzj), (zzzk), (zzzl), (zzzm), (zzzn), (zzzo), (zzzp), (zzza), (zzzr), (zzzs), (zzzt), (zzzu), (zzzv), (zzzw), (zzzx), (zzzy), (zzzz), (zzzza), (zzzzb), (zzzzc), (zzzzd), (zzzze), (zzzzf), (zzzzg), (zzzzh), (zzzzi), (zzzzj), (zzzzk), (zzzzl), (zzzzm), (zzzzn), (zzzzo), (zzzzp), (zzzzq), (zzzzr), (zzzzs), (zzzzt), (zzzzu), (zzzzv) and (zzzzw)] of clause (105) of Section 65 and collected in such man....
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....6000/- on every Rs. 10 Lakh (or part of the 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. 9000/- 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 value of lottery tickets for the purpose of this sub-rule shall be taken as the aggregate value of tickets sold, and service tax shall be calculated in the manner specified in the said Table. Provided further that the distributor or selling agent shall exercise such option within a period of one month of the beginning of each financial year and such option shall not be withdrawn during the remaining part of the financial year. Provided also that the distributor or selling agent shall exercise such option for financial year 2010-11, within a period of one month of the publication of this sub-rule in the Official Gazette or,....
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.... Transfer of Property Act, 1882 (4 of 1882) 2. Insertion of Section 65B(44) through Section 143(C) of the Finance Act, 2012 "service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include: (a) an activity which constitutes merely.- (i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or (ia) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of Article 366 of the Constitution; or (ii) a transaction in money or actionable claim (b) a provision of service by an employee to the employer in the course of or in relation to his employment; (c) fees taken in any Court or tribunal established under any law for the time being in force. Explanation 1.- For the removal of doubts, it is hereby declared that nothing contained in this clause shall apply to,- (A) the functions performed by the Members of Parliament, Members of State Legislature, Members of Panchayats, Members of Municipalities and Members of other local authorit....
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.... 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: S.No Rate Condition (1) (2) (3) 1. Rs. 6000/- on every Rs. 10 Lakh (or part of the 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. 9000/- 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 value of lottery tickets for the purpose of this sub-rule shall be taken as the aggregate value of tickets sold, and service tax shall be calculated in the manner specified in the said Table. Provided further that the distributor or selling agent shall exercise such option within a period of one month of the beginning of each....
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....Section 107(e) of the Finance Act, 2015 "lottery distributor or selling agent" means a person appointed or authorised by a State for the purposes of promoting, marketing, selling or facilitating in organising lottery of any kind, in any manner, organised by such State in accordance with the provisions of the Lotteries (Regulation) Act, 1998 (17 of 1998) 2. Substitution of Explanation 2 to Section 65B(44) through Section 107(g) of the Finance Act, 2015 'For the purposes of this clause, the expression "transaction in money or actionable claim" shall not include- (i) any activity relating to use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged; (ii) 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-- (a) by a lottery distributor or selling agent in relation to promotion, marketing, organising, selling of lottery or facilitating in organising lottery of any kind, in any other mann....
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....by the lottery distributor or selling agent from gross sale amount of lottery ticket in addition to the fee or commission, if any, or, as the case may be, the discount received, that is to say, the difference in the face value of lottery ticket and the price at which the distributor or selling agent gets such ticket.'. V. PERIOD FROM 01.04.2016 TILL 30.06.2017 This period pertains to (i) SLP (C) No.19200 of 2017 (ii) SLP (C) No.23945 of 2017 and (iii) SLP (C) No.16118 of 2017 Provision Finance Act With Effect From Cosmetic Amendment to Explanation 2 to Section 65B(44) 2016 01.04.2016 1. Cosmetic Amendment to Clause (ii)(a) of Explanation 2 to Section 65B(44) 'For the purposes of this clause, the expression "transaction in money or actionable claim" shall not include- (i) any activity relating to use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged; (ii) any activity carried out, for a consideration, in relation to, or for facilitation of, a transaction in money or acti....
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....ay be agreed upon. 11. That the Government shall sell and the Distributor shall buy the full lot of tickets for which the wholesale price of tickets shall be determined consisting of total prize amount as per schemes, actual cost of paper and printing, draw expenses, Government commission. However, the prices may change under the following circumstances: i. Change in prize structure of lottery schemes. ii. Change in paper and printing cost/freight charges. iii. Market conditions. 12. That the full payment of tickets printed shall be realized on delivery of tickets at wholesale rates as per clause 11 above. xxx 25. The Government shall deliver the tickets to the Distributor against full payment for which proper invoice shall be raised indicating amount of wholesale rate and adjustment of prizes upto Rs.5000/- (Rupees five thousand) to be disbursed by the Distributor for each lottery draw. 26. The Distributor shall pay sales tax or any other kind of taxes imposed by the other State Governments on sale of lottery tickets. xxx" (ii) Agreement dated 10.08.2009 "AGREEMENT ....
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....se such additional schemes for one complete year (12 months) and discontinues the additional schemes before completion of one year they shall be liable to pay the Government share proportionate to the period of actual scheme only. 5. (a) That the sole purchaser shall provide the Government with a bank guarantee of Rs.10.00 crores (Rupees Ten Crores) as security deposit in favour of the Government of Sikkim. Finance, Revenue & Expenditure Department of a Nationalized Bank / Scheduled Bank one week before coming into force of this agreement; (b) The Bank Guarantee shall be valid for the duration of the agreement and six months thereafter and shall be liable to be invoked by the Government for failure to deposit the sale proceeds of the tickets of Sikkim State lotteries taken delivery by the sole purchaser and any other charges due and payable by the sole purchaser or for breach of any of the terms and conditions of this agreement. Provided that the Bank Guarantee shall not be invoked without giving 30 (thirty) days notice in writing directing the sole purchaser to pay the amount due under this agreement to the Government of Sikkim. (c) Upon failure....
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....berty, 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. xxx 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. xxx 25. The sale proceeds/cost of the tickets as may be determined by the Government from time to time may be deposited with the Government as per the directives of the Director, Sikkim State lotteries. 26. The sole purchaser shall pay the full amount for the tickets actually sold by the 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 ta....
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....ets as per the invoice raised by the Government. 7.2 The sale proceeds of the sale of lottery tickets shall be credited by the Sole Purchaser/Distributor into the Treasury or Public Ledger Account or Consolidated Fund of the State of Sikkim or Public Account or Fund as per the invoice raised by the State Government on the Sole Purchaser/Distributor, as prescribed by the State Government. 7.3 The Sole Purchaser/Distributor shall deposit sale proceeds as prescribed, ensuring Guaranteed Revenue as per clause (10) of this Agreement. 7.4 In the event, the Sole Purchaser/Distributor fails to comply with the above conditions, the Government reserves the right to refuse any further sale of lottery tickets to the Sole Purchaser/Distributor, and to suitably encash the bank guarantee executed by the Sole Purchaser/Distributor. xxx 10. MINIMUM GUARANTEED REVENUE: With regard to the provisions of this Agreement, the Sole Purchaser/Distributor has agreed to deposit the Minimum Guaranteed Revenue to the Government as under:- 10.1 Minimum guaranteed revenue of the Government of State of Sikkim shall be Rs.15,00,12,800/- Rupees (Fifteen....
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....-1 dated 28th December, 2011 as already specified in the Invitation for Expression of Interest; and the Model Agreement may be referred for purposes of interpretations of this Agreement. xxx 4.7 All the unsold tickets, if any, at the time of draw, with the Distributor shall be returned by the Distributor to the Director of Lotteries, Government of Sikkim or the Government authorized officials/person. 4.8 The Distributor shall submit the statement of sold tickets for each draw of different schemes to the Director of Lotteries, Government of Sikkim within 09 (Nine) days from the date of draw(s). The State Government will keep a record of the tickets issued to the Distributor." Online Computerised Agreement: At this stage, we extract the relevant clauses of the agreement dated 09.05.2005 and the supplementary agreement dated 25.04.2008 between the State of Sikkim and assessee-M/s Sugal and Damani Enterprises Pvt. Ltd. for sale of online computerized network lottery, as under: "AGREEMENT This Agreement made at Gangtok, this the 9th day of May 2005, between the Governor of Skim, through the Principal Secretary to the Government of Sikki....
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....2. REALISATION OF SALE PROCEEDS The Marketing Agent shall deposit the Sale Proceeds (except prizes payable up to Rs.5000/-) with the Government on a monthly basis, along with account statement of such sale proceeds supported by record/document. xxx 16. CONDUCTING OF STATE ON-LINE COMPUTERIZED NETWORK LOTTERY a) The State On-line Computerizes Network Lottery shall be organised, conducted or promoted by the Government through the Marketing Agent. b) On-line computerized Network Lottery tickets shall be made available to the public through various retailers/sub-agents appointed by the Marketing Agent who will enter into bilateral agreements with these retailer/sub-agents. The date and time of the draw shall be indicated on the tickets themselves. xxx 23. RELATIONSHIP BETWEEN MARKETING AGENT AND THE STATE GOVERNMENT The relationship between the Marketing Agent and the Government will be one of Principal and Agent as defined in the Indian Contracts Act, 1872 as amended. xxx 28. BANK GUARANTEE (a) The Marketing Agent shall execute in favour of the Government a Bank Guarantee Rs. 1.5 Crores ....
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.... herein, it would be useful to refer to the concept of agency. This is because if the relationship is in the nature of an agency (on the premise that the latter are rendering service to the State Government on the basis of the agreements entered into between the parties), then service tax is liable to be paid by the respondents-assessees herein under the Finance Act, 1994. 15.1 The relevant provisions of the Indian Contract Act, 1872 read as under: "182. "Agent" and "principal" defined.- An "agent" is a person employed to do any act for another, or to represent another in dealings with third person. The person for whom such act is done, or who is so represented, is called the "principal". 183. Who may employ agent.- Any person who is of the age of majority according to the law to which he is subject, and who is of sound mind, may employ an agent. 184. Who may be an agent.- As between the principal and third person any person may become an agent, but no person who is not of the age of majority and of sound mind can become an agent, so as to be responsible to his principal according to the provisions in that behalf herein contained. 185. Conside....
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....parties. Usually, the legal relations so created will be contractual in nature. Conversely, the mere fact that a person does something in order to benefit another and the latter is relying on the former to do so or may have requested or even contracted for performance of the action, does not make the former the agent of the latter. The centrality to agency is the conferral of authority to alter legal relations; as such in common law, being an agent is not a status but a description of a person, while and only so long as the person is exercising such authority. Thus, where one person (the principal), requests or authorises the other (agent), to act on his behalf and the other agrees to do so, the law recognises that such agent has power to affect the principal's legal position by acts which, though performed by the agent, are to be treated in certain respects as if they were acts of the principal. It is common to regard control by the principal as a defining characteristic of agency. Thus, agency is termed as acting on behalf of the principal and subject to principal's control. 15.3 An agency has to be distinguished from other relationships such as an agent and trustee; agent and....
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....ce, the transfer to the consignee of the property in goods shipped upon the acceptance of drafts. 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. Where the consignee pays wholesale prices for the goods, he is likely to be acting as a principal in the sale. If the consignee sells (whether for cash or on credit) to a retail purchaser, this immediately gives rise to a debt to the supplier for the listed price, the transaction becomes quite inconsistent with agency, including del credere agency, and would be consistent only with sale or return. Case Law : 16. Learned counsel for the respective parties relied upon the following cases in support of their submissions: 16.1 In Bhopal Sugar Industries Ltd. vs. STO, (1977) 3 SCC 147, ("Bhopal Sugar Industries Ltd.") the question was whether the contract was one of agency or sale. This Court held that the question will have to be determined having regard to the terms and recitals of the agreement, th....
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....ming the Hispeedol or petrol for its own purpose, it was acting as an owner of the goods and if it consumed the same for its own purposes, it was not doing so as agent but as owner which it was fully entitled to do. Therefore, it would not constitute a sale so as to be exigible to sales tax. 16.2 Reference could also be made to Sri Tirumala Venkateswara Timber and Bamboo Firm vs. Commercial Tax Officer, Rajahmundry, AIR 1968 SC 784, wherein this Court observed that there is a distinction between a contract of sale and a contract of agency by which the agent is authorised to sell or buy on behalf of the principal. The essence of a contract of sale is the transfer of title to the goods for a price paid or promised to be paid. The transferee in such a case is liable to the transferor as a debtor for the price to be paid and not as an agent for the proceeds of the sale. The essence of agency to sell is the delivery of the goods to a person who is to sell them, not as his own property but as the property of the principal who continues to be the owner of the goods, and will therefore be liable to account for the sale proceeds. That in certain trades the word "agent" is often used with....
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.... an agent of the said company, or whether under the agreement the assessee firm was really a purchaser of the goods which were booked by it. In the Agreement, the stipulation was that the distributor had the right of the sale of the product within the stipulated area. Bulk supplies were effected in wagon load or lorry-load by the said company direct to the customer, but only provided that the distributor arranged the payment as per the agreement and also took the responsibility to bear entirely the resultant effects and risk from the said direct dispatches. Though the company had fixed the price at which the goods were to be sold to the customers, it did not lead to the conclusion that the distributor was merely an agent. Under the agreement, what the distributor received was described as a "rebate" and not a "commission" as one would normally accept in the agreement of agency. Significantly, the supplies were made to the distributor against payment either immediate or deferred as provided in the agreement, and even when the goods were destined directly to the customer, it was the distributor who had to guarantee to arrange the payment. That where there was some time lag between th....
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....discount or any incentive or as a margin is income or earning which was taxable at the hand of the assessee concerned, coming under the purview of Section 194G of the Income Tax Act. It was observed that if the face value of the lottery ticket was Re. 1, the petitioner therein would receive it at Rs. 0.72 paise and could sell at any price and it was not the State's business to enquire into the matter at all. It was observed that the deduction under Section 194G was on any person responsible for paying to any person any income by way of commission, etc. who purchased or sold or stocked lottery tickets, in this case, the State Government. The deduction was to be made at the time of credit of such income to the account of the payee or at the time of payment of such income. The Kerala High Court observed that when the deduction is contemplated at the time of the payment to the person concerned but it is shown that there was no payment to the agent at the time of purchase of the ticket, the section automatically becomes inapplicable. That the ticket is given on a discount of 28%, can by no imagination be pressed into service for an interpretation that, nonetheless, 10% of 28 paise is de....
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....94-H of the Income Tax Act, 1961 on the amount which, as per the Revenue, was a commission payable to an agent by the assessees under the franchise/distributorship agreement between the assessees and the franchisees/distributors. Though the matter was under the provisions of the Income Tax Act and Section 194- H of the said Act which imposes the obligation to deduct tax at source by any person responsible for paying at the time of credit or at the time of payment, whichever is earlier, to a resident, any income by way of commission or brokerage, nevertheless, the law of agency was considered. This was specially in the context of the expression "acting on behalf of another person". Referring to Section 182 of the Contract Act which defines "agent" and "principal", it was observed that agency is a triangular relationship between the principal, agent and the third party. In order to understand the relationship, one has to examine the inter se relationship between the principal and the third party and the agent and the third party. In this regard, it was observed that certain factors or aspects must be taken into consideration while examining whether a legal relationship of a principal....
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....fered by the agent, he is to be indemnified by the principal. This is unlike a contract of sale where title to the property passes on to the buyer on delivery of the goods for a price paid or promised. The buyer then becomes the owner of the property and the seller has no vestige of title left in the property. Third is the case of independent contractor, wherein if the party is concerned about acting for himself and making the maximum profit possible, he is usually regarded as a buyer or an independent contractor and not as an agent of the principal. This would be true even when certain terms and conditions have been fixed relating to the manner in which the seller conducts his business. 16.8.3 Distinguishing the relationship of a principal with independent contractor from that of an agency, it was observed that an independent contractor is free from control on the part of his employer, and is only subject to the terms of his contract. On the other hand, an agent is not completely free from control, and the relationship to the extent of tasks entrusted by the principal to the agent is fiduciary. Sometimes an independent contractor looks like an agent from the point of view of th....
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.... to avoid any possible misuse of the lottery tickets leading to questioning of a draw of lottery in a particular scheme. That the wholesale prices of the tickets sold was to be determined by the Government on the basis of the prize amount, cost of paper, cost of printing, draw expenses, transportation charges and the Government share of revenue as fixed under clause (4) extracted above. That the prices of the tickets could be changed under certain circumstances. Also, the State Government could realise the full payment of the tickets resold from the sole purchaser at wholesale rates as per clause (14) referred to above. The wholesale rate of the tickets sold by the State Government to the sole purchaser had to be paid after actually selling the same. That, for information of the Government, the sole purchaser had to produce monthly return of sales tax, if any, paid to the respective State Governments wherever the tickets are sold. 17.1.2 That the sole purchaser could at his own cost and expenses give publicity to Sikkim State lotteries through various media platforms, both print and electronic, without seeking any reimbursement from the State Government. Further, the sole purcha....
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.... Revenue which was Rs.15,00,12,800/- up to a turnover of Rs.9000 crores per annum and on an additional turnover over and above Rs.9000 crores per annum, the sole purchaser or distributor had to pay 0.25 per cent of the additional turnover to the Government of Sikkim. For that purpose, the sole purchaser or distributor has to submit monthly turnover of the proceeds of the sale of lottery/schemes to the Government of Sikkim by 15th of the succeeding month. The annual financial and systems' audit of the various lottery schemes had to be conducted by the Government to ensure that the Act and the Rules are not violated. Also, the sole purchaser or distributor had to get its accounts audited internally and have reconciliation of the records from time to time. The sole purchaser or distributor had the responsibility to indemnify the State Government against all claims in relation to the sale of lottery tickets during the term of the agreement. 17.3 The agreement dated 06.06.2016 between the State of Sikkim and M/s Future Gaming and Hotel Services Private Limited also describes the assessee as a sole purchaser/ distributor. This agreement was stated to be in consonance with the model ag....
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....e assessee to sell and the sale price is the profit of the assessee. Thus, there is no promotion of the business of the State which conducts lotteries as an agent. Consequently, there is no principalagent relationship, rather it is one of principal to principal. The conclusions in K. Arumugam are apposite to these cases also. Controversy between the Parties : 18. The parliamentary amendments made to the Finance Act, 1994, for the purpose of imposing service tax on the respondentsassessees 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. 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. 18.1 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 promoti....
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....n, 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 in relation to promotion, marketing, organizing, selling of lottery or facilitating in organizing of lottery of any kind in any other manner. 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 acti....