Service tax not applicable on distributors of lottery tickets issued by state govt & charge created by Finance Act, 2015 is unconstitutional

Brief of the case:

The Hon’ble Sikkim High Court in the case of Future Gaming & Hotel Services Private Limited and others held that activities of distributors & agents selling lottery tickets cannot be considered as activities for facilitating promotion of lottery tickets issued by state government because there is no principal-agent relationship between the Govt. and distributors, and as such sale of lottery tickets being actionable claims cannot be charged to tax as it not even includible in the definition of service as per Sec 65B(44).

 Facts of the case:

• The petitioner companies were engaged in the business of selling lottery tickets issued by the Government of Sikkim through various agents, stockists, resellers, etc.
• The petitioners’ grievance was that w.e.f 1^st June, 2015 certain amendments were made in Sections 65B, 66D and 67 of the Finance Act, 1994, with an effort to make service tax applicable to the lottery tickets distributors. It is the case of the Petitioners that the amended provisions of the Finance Act, 1994, as a consequence of the Finance Act, 2015, do not cover the activities of the Petitioners which involve purchase and sale of lotteries.
• As a consequence of the amendment, the department issued letters to petitioners dated 18-05-2015 and 12-06-2015 to the Petitioner-Company in WP(C) No.40 of 2015 bringing to their notice that service providers in respect of services provided by lottery tickets distributors and selling agents are subject to charge of service tax as prescribed under Sub-Rule (7C) of Rule 6 of the Service Tax Rules, 1994.
• Against such letters and challenging the amendment made, the petitioners filed writ petition before the Hon’ble Sikkim High Court.

 Contention of the Assessee:

• The amendment made in the definition of service would make activities of lottery distributors or selling agents that is carried out in relation to promotion, marketing, organising, selling of lottery or facilitating in organising lottery of any kind.
• The activity of petitioners was only of buying and selling of lottery tickets and that cannot be regarded as an activity for consideration in relation to promotion, marketing, organising, selling of lottery or facilitating in organising lottery of any kind. It is because The Petitioners are not carrying out their activities for someone else but are buying and selling the tickets and, therefore, is not promoting/marketing the lottery tickets for the State Government

• As such the activity of petitioner would be out of the purview of the definition of service as defined in Sec 65B (44).
• Further, lottery being an activity falling under the expression betting and gambling which is in the domain of the State Legislature and the Centre has no power to tax such an activity. Thus, the amendments introduced by the Finance Act, 2015, is ultra vires the Constitution and, therefore, deserve to be struck down.

 Contention of the Revenue:

• It was submitted that it was in the exclusive domain of Parliament alone to enact a law in respect of lottery and no State Legislature under Entry 34 would have the power to do so.
• It was also submitted that the power to levy service tax is vested in the Union Parliament under Entry 92C of List I in the Seventh Schedule to the Constitution of India. This considered along with Article 268A of the Constitution of India render the levy of service tax by the government as legal and valid.

 Held by Hon’ble High Court:

• This court had an occasion to examine the same issue two earlier times also in case of Future Gaming (2014&2015) in which it observed that lottery is an actionable claim and actionable claim has been defined in Sec 3 of the Transfer of Property Act, 1882.
• Actionable claim had been left out from the purview of service tax in the negative list by virtue of Section 66D of the Finance Act, 1994.It has also been confirmed by the Hon’ble Supreme Court in the case of Sunrise Associates vs. Govt. of NCT of Delhi that buying and selling of lottery tickets is nothing but actionable claim.

• Explanation 2 to Sec 65B(44) has been amended by Finance Act, 2015 to provide that “transaction in money or actionable claim” shall not include any activity carried out, for a consideration, in relation to, or for facilitation of, a transaction in money or actionable claim, including the activity carried out—(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 manner. Further, Sec 66D was amended to provide that the activity specified in Explanation 2 to Clause (44) of Section 65B to be specifically excluded from the definition of negative services.
• The activity carried out by the Petitioners in relation to promotion of marketing, organising, selling of lottery or facilitating in organising lottery would clearly not fall within the meaning of ‘service’ as provided under Clause (44) of Section 65B as the two essential elements (a) that the activity should be carried out by a person for another and (b) that such activity should be for a consideration, are lacking because the activity of the Petitioners comprising of promotion, organising, reselling or any other manner assisting in arranging the lottery tickets of a State Lottery does not establish the relationship of a principal and an agent but that of a buyer and a seller on principal to principal basis there being bulk purchase of lottery tickets by the Petitioners from the State Government on full payment on a discounted price as a natural business transaction and other related features and, of there being no privity of contract between the State Government and the Stockists, agents, sellers, etc., under the Petitioners.
• Further, the explanation 2 inserted to Sec 65B (44) was to exclude lottery from the definition of actionable claims. But it is a well settled position of law that an Explanation cannot enlarge the scope of a provision as held by Supreme Court in the case of Hardev Motor Transport. As such the explanation 2 trying to alter the scope of Sec 66D to be struck down.
• Even Further, Sub-Rule (7C) of Rule 6 of the Service Tax Rules, 1994, only provides an optional composite scheme for payment of tax and, therefore, does not create a charge of service tax and is being hereby stands quashed for being contrary to the statutory provisions
• Considering all these observations, the activities of petitioners engaged in buying & selling lottery tickets is not chargeable to tax.