TAXABILITY OF LOTTERY COMMISSION UNDER BUSINESS AUXILIARY SERVICES

[Dr. Sanjiv Agarwal]

In Union of India & Others v. Martin Lottery Agencies Ltd [2009 -TMI - 33336 - SUPREME COURT OF INDIA], the apex court has held that service tax can not be levied on sale of lottery tickets but sales promotion or marketing of lottery tickets shall be exigible to levy of service tax under business auxiliary service.

Let's look at the legal provisions first. Section 65(19) of Finance Act, 1994 defines business auxiliary services. As amended by Finance Act 2008, clause (i) and (ii) of section 65(19) read as under -

"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

Explanation.— For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, "service in relation to promotion or marketing of service provided by the client" includes any service provided in relation to promotion or marketing of games of chance, organised, conducted or promoted by the client, in whatever form or by whatever name called, whether or not conducted online, including lottery, lotto, bingo;

Games of chance have been included in scope of taxable service by Finance Act, 2008. Games may relate to games of chance generally known as lotteries, lotto, bingo etc. 'Chance' indicates a possibility of some thing happening, some thing unpredictable, with some degree of uncertainty. 'Bingo' is a game in which players mark off numbers on cards as the numbers are drawn randomly by a caller, the winner being the first person to mark off all their numbers so called. 'Lotto' is also a game similar to bingo wherein numbered or illustrated counters or cards are drawn by the players. It is a form of lottery. In case of 'lottery', the success or winning or outcome is governed by pure chance. It means raising of money by selling numbered tickets and giving prizes to the holders of numbers drawn at random.

The marketing or promotion of all such games of chance have been brought into service tax net and lottery, lotto, bingo are only illustrative examples. It may include raffle, tambola and other derived games of chance. It is not the games as such which are taxed but marketing or promotion of such games of chance shall attract service tax.

The amendment made states 'for the removal of doubts' which implies that it is clarificatory in nature. It is surprising that this phrase is used when games of chance, have been included only from a notified date (w.e.f. 16.5.2008) as the amendment it self is enforceable from (w.e.f. 16.5.2008) after enactment.

CBEC has vide Letter No. 334/1/2008 - TRU dated 29.2.2008 clarified as under -

"Services provided in relation to promotion or marketing of service provided by the client is leviable to service tax under business auxiliary service. Organization and selling of lotteries are globally treated as supply of service. Lotteries (Regulation) Act, 1998 enables State Governments to organize, conduct or promote lotteries. Lottery tickets are printed by the State Governments and are sold through agents or distributors. Tickets are delivered by the State Government to the distributors at a discounted price as compared to the face value of the tickets. Services provided by the distributors or agents in relation to promotion or marketing of lottery tickets are leviable to service tax under the existing business auxiliary service.

Lotteries fall under the category of games of chance. Games of chance are known under various names like lottery, lotto, bingo etc. and are also conducted through internet or other electronic networks.

To clarify as removal of doubts, an explanation is added under business auxiliary service stating that services provided in relation to promotion or marketing of games of chance organized, conducted or promoted by the client are covered under the existing definition of business auxiliary service. Amendment is only for removal of doubts and field formations are, therefore, requested to ensure that service tax is collected on such services"

Prior to amendment in the definition of business auxiliary service, in the case before Sikkim high court, in Martin Lottery Agencies Ltd. v. Union of India [2007 -TMI - 2361 - HIGH COURT, SIKKIM], High Court held that where assessee was engaged in purchase of lottery tickets from State Government and subsequent sale and where lottery tickets have been held to be actionable claims and not goods as per Sale of Goods Act, 1930, it was held that petitioner was not rendering services in relation to promotion of client's goods and service tax liability did not arise.

The high court observed as under -

Games of chance have been included in scope of taxable service by Finance Act, 2008. Games may relate to games of chance generally known as lotteries, lotto, bingo etc. 'Chance' indicates a possibility of some thing happening, some thing unpredictable, with some degree of uncertainty. 'Bingo' is a game in which players mark off numbers on cards as the numbers are drawn randomly by a caller, the winner being the first person to mark off all their numbers so called. 'Lotto' is also a game similar to bingo wherein numbered or illustrated counters or cards are drawn by the players. It is a form of lottery. In case of 'lottery', the success or winning or outcome is governed by pure chance. It means raising of money by selling numbered tickets and giving prizes to the holders of numbers drawn at random.

The marketing or promotion of all such games of chance have been brought into service tax net and lottery, lotto, bingo are only illustrative examples. It may include raffle, tambola and other derived games of chance. It is not the games as such which are taxed but marketing or promotion of such games of chance shall attract service tax.

What are goods?

Section 65(50) of the Finance Act defines 'goods' as having the meaning assigned to it in

Section 2(7) of the Sales of Goods Act. As per Section 2(7) of Sales of Goods Act, 'Goods' means every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sales or under the contract of sale.

This definition must be satisfied thus, the goods mean any movable article, which can be bought and sold. The goods include all types of articles, commodities bought and sold by merchants and traders. It includes machineries, food grains, furniture, etc.

(a) The following meanings have been attributed to the term 'goods' in the various judgments of the Supreme Court:

•An article can be called "goods" if it is known to the market as such and can ordinarily come to the market for being bought and sold.

•Actual sale of the article is not important, but it should be capable of being bought and sold.

(b) The term 'goods' cannot include immovable property.

Goods, therefore, mean or include —

(i) all kinds of moveable articles and properties,

(ii) stocks and shares,

(iii) growing crops, gross and other agricultural produce, and

(iv) things attached to or forming part of land which can be bought or sold,

(v) software packed in media.

but would exclude -

(i) money,

(ii) actionable claims, and

(iii) immovable property

Goods should have a commercial aspect of capable of being purchased and sold and served as a result of such sale. Supreme Court in Union of India v. Delhi Cloth General Mils 1977 (I) ELT J 199 held that 'goods' in order to be called as 'goods' should satisfy the test of marketability, i.e., they should be something which can ordinarily come to the market to be bought and sold. It must be something which is known to the customers and the commercial community.

Now, let's come to the apex court verdict arising out of an appeal preferred by Union of India against the aforesaid  Sikkim high court judgment. The apex court has considered various principles of interpretation vis-a vis the explanation added by Finance Act, 2008 in clause (ii) of section 65(19). This explanation to sub clause (ii) which states that services in relation to promotion or marketing of services provided by the client shall include services provided in relation to promotion or marketing of lottery can only be prospective in nature as it was not at all clear in law that whether a lottery was a taxable service and that it was only because the explanation added to clause (ii) held it to be taxable. The apex court also decided whether a clarification issued by a department is clarificatory or declaratory  which determines the date from which a tax comes into effect. It concluded that a clarificatory explanation can not have retrospective effect . The court observed that lottery tickets are evidently not 'goods' [also refer Sunrise Associates v Government of NCT of Delhi [2009 -TMI - 33335 - SUPREME COURT of INDIA] where in it was held that sale of lottery tickets does not involve sale of goods and that at the highest stage , transfer of it would amount to transfer of an actionable claim].

As the explanation seeks to levy service tax on commission on lottery sales, Apex court held that '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 effective. 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.  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 under assumption that organizing games of chance would be rendition of service. We are herein not concerned as to whether it was constitutionally permissible for the Parliament to do so as we are not called upon to determine the said question but for our purpose, it would be suffice to hold that the explanation is not clarficatory or declaratory in nature'.

The court, however did not dealt with the question as the whether if was constitutionally permissible for the Parliament to do so ( ie, levy service tax on marketing of lotteries) but limited it self to address the issue of whether the explanation inserted by Finance Act 2008 is declaratory or clarificatory in nature.

The gist of the apex court judgment including principles of interpretation cited can be summarized as follows-

- Lottery tickets are not 'goods' but may amount to actionable claim.

- Lotteries are organized by state to raise revenue and raising of revenue by state by itself does not amount to any rendition of service.

- Explanation to clause (ii) of section 65(19) is not a simple clarification as it seeks to introduce a new concept of organizing lottery as a form of entertainment having constitutional implication.

- Though Parliament is entitled to bring new concept of imposition of tax and to raise legal fiction, the explanation widening the tax base is not retrospective in operation.

- The subject explanation is not clarificatory or declaratory in nature.

- Whether a subordinate legislation or a Parliamentary statute is clarificatory or declaratory or not depends on its nature and objects it seeks to achieve . If two views are possible, resort to clarification and / or declaration may not be permissible.

- The expressions like 'for the removal of doubts' are not conclusive. In this case, it was used in explanation under the assumption that organizing games of chance would be rendition of service.

- Explanation appears to be a charging provision. It states about need to tax. It can be termed as sui generies tax.

- If it is a different tax, it may be held to be running contrary to the ordinary concept of service tax.

- It (explanation) is a stand alone clause. Since by the reason of said explanation, taxing need has been widened , it can not be held to be retrospective in operation.

- Services provided in respect of matters envisaged [clause (i) to (vii)] under section 65 (19) must be construed strictly.

- Substantive law may be introduced by reason of explanation. However, if substantive law is introduced, it will have no retrospective effect.

- Service tax purports to impose tax on services on two grounds, viz, service provided to a customer and service provided to a service provider . Before a tax is found leviable, it must come within the domain of legitimate business or trade.

- By inserting the explanation appended to clause (19) of section 65, a new concept of imposition of tax has been brought in.

In the ultimate conclusion, the levy of service tax was upheld only from May 2008. Not only this, the Government's appeal was dismissed upholding the high court with costs of rupees one lakh.