Gameskraft Technologies Private Limited Vs Directorate General of Goods Services Tax Intelligence (Karnataka High Court)
HC held that
- There is a distinct difference between games of skill and games of chance; games such as rummy, etc. as was discussed in several decisions above and particularized in the Division Bench decision of this Court in All India Gaming Federation’s case supra, whether played online or physical, with or without stakes would be games of skill and test of predominance would apply; the said judgment is a total and complete answer not only to the various contentions urged by the respondents but also covers the issues / questions that arise for consideration in the instant petitions.
- Though Section 2(17) of the CGST Act recognises even wagering contracts as included in the term business, but that in itself would not mean that lottery, betting and gambling are the same as games of skill.
- The meaning of the terms “lottery, betting and gambling” as contemplated in Entry 6 of Schedule III of the CGST Act should be construed nomen juris in the light of the decisions of the Hon’ble Supreme Court, this Court and other High Courts supra which do not include games of skill.
- Entry 6 in Schedule III to the CGST Act taking actionable claims out of the purview of supply of goods or services would clearly apply to games of skill and only games of chance such as lottery, betting and gambling would be taxable.
- Taxation of games of skill is outside the scope of the term “supply” in view of Section 7(2) of the CGST Act, 2017 read with Schedule III of the Act.
- A game of chance whether played with stakes is gambling;
- A game of skill whether played with stakes or without stakes is not gambling;
- A game of mixed chance and skill is gambling, if it is substantially and preponderantly a game of chance and not of skill;
- A game of mixed chance and skill is not gambling, if it is substantially and preponderantly a game of skill and not of chance;
- Rummy is substantially and preponderantly a game of skill and not of chance;
- Rummy whether played with stakes or without stakes is not gambling;
- There is no difference between offline/physical Rummy and Online/Electronic/Digital Rummy and both are substantially and preponderantly games of skill and not of chance;
- Online/Electronic/Digital Rummy whether played with stakes or without stakes is not gambling;
- Other Online/Electronic/Digital games which are also substantially and preponderantly games of skill and not of chance are also not gambling;
- The expressions, ‘Betting’ and ‘Gambling’ having become nomen juris, the same are applicable for the purpose of GST also and consequently, the said words, ‘Betting’ and ‘Gambling’ contained in Entry 6 of Schedule III to the CGST Act are not applicable to Online/Electronic/Digital Rummy, whether played with stakes or without stakes as well as to any other Online/Electronic/Digital games which are also substantially and preponderantly games of skill;
- The subject Online/Electronic/Digital Rummy game and other Online/Electronic/Digital games played on the Petitioners’ platforms are not taxable as ‘Betting’ and ‘Gambling’ as contended by the respondents under the CGST Act and Rules or under the impugned show cause notice issued by the respondents;
- Consequently, the impugned Show Cause Notice dated 23.09.2022 issued by the respondents to the petitioners is illegal, arbitrary and without jurisdiction or authority of law and deserves to be quashed.
FULL TEXT OF THE ORDER OF KARNATAKA HIGH COURT
The main question/issue that arises for consideration in these petitions is, whether offline/online games such as Rummy which are mainly/preponderantly/substantially based on skill and not on chance, whether played with/without stakes tantamount to ‘gambling or betting’ as contemplated in Entry 6 of Schedule III of the Goods and Services Act, 2017.
I. FACTUAL MATRIX
M/s.Gameskraft Technologies Pvt. Ltd., (for short ‘the GTPL’) claims to be an Online Intermediary Company incorporated in June 2017, who runs technology platforms that allow users to play skill based online games against each other. Petitioner – GTPL contends that it has over 10 lakh users from across India and is headquartered in Bangalore and registered under the Central Goods and Services Tax Act, 2017 (for short ‘ the CGST Act’) and the Karnataka Goods and Services Tax Act, 2017 (for short ‘the KGST Act’). It is contended that the said company is a legally compliant company, who has been duly filing GST returns and has paid GST and is a bonafide tax payer having paid tax returns on a timely basis and has paid substantial tax to the tune of Rs.1,600/- crores under GST and Income Tax Laws upto June 2022.
2. During the period between 11.11.2021 and 13.11.2021, the respondents – Revenue undertook search and seizure operations of the premises of GTPL, during which, various documents and devices were seized and panchanamas were issued. On 17.11.2021, respondents passed Provisional Attachment Orders attaching the Bank accounts of GTPL under Section 83 of the CGST Act, to which, objections were filed by GTPL, pursuant to which, respondents passed an Attachment Confirmation order dated 30.11.2021.
3. W.P.No.22010/2021 is preferred by GTPL challenging the aforesaid attachment orders and on 03.12.2021, this Court passed an interim order permitting the petitioner to operate the Bank accounts for limited purposes mentioned in the said order.
4. Meanwhile, the officials / founders / employees of GTPL were summoned by the respondents for recording of statements and the same continued upto August, 2022. On 02.08.2022, in addition to the interim order passed earlier in W.P.No.22010/2021, this Court directed that no precipitative action be taken against the petitioner – GTPL and the matter was heard finally and reserved for orders on 07.09.2022 by continuing the interim orders / directions.
5. Subsequently, on 08.09.2022, respondents issued Intimation Notice under Section 74(5) of the CGST Act, calling upon GTPL to deposit a sum of Rs.2,09,89,31,31,501/- along with interest and penalty by 16.09.2022. The said Notice is challenged in W.P.No.18304/2022, in which, this Court passed an interim order of stay dated 23.09.2022.
6. Immediately thereafter, the respondents issued the impugned Show Cause Notice under Section 74(1) of the CGST Act to the petitioner – GTPL as well as its Founders, CEOs and CFOs, who have preferred W.P.No.19570/2022, W.P.No.19561/2022, W.P.No.20119/2022 and W.P.No.20120/2022. Accordingly, the details of the instant writ petitions are as under:
(a) W.P.No.22010/2021 has been preferred by GTPL challenging the Attachment orders dated 17.11.2021 and 30.11.2021;
(b) W.P.No.18304/2022 is preferred by GTPL against the Intimation Notice dated 08.09.2022 issued under Section 74(5) of the CGST Act;
(c) W.P.No.19570/2022 is filed by GTPL assailing the impugned Show Cause Notice (SCN) dated 23.09.2022;
(d) W.P.No.19561/2022 is preferred by the Chief Financial Officer of GTPL challenging the impugned SCN dated 23.09.2022;
(e) W.P.No.20119/2022 is preferred by the Founders of GTPL challenging the impugned SCN dated 23.09.2022;
(f) W.P.No.20120/2022 is preferred by the Chief Executive Officers of GTPL challenging the impugned SCN dated 23.09.2022;
7. At the outset, it is relevant to state that the impugned Attachment orders having been passed on 17.11.2021 and 30.11.2021, the period of one year prescribed in Section 83 of the CGST Act having expired during the pendency of the subsequent petitions challenging the impugned SCN, this Court while reserving the petitions on 17.11.2022 directed that the said Attachment orders would continue till disposal of these petitions. Further, the impugned Intimation dated 08.09.2022 issued under Section 74(5) of the CGST Act having been subsumed by issuance of the impugned SCN dated 23.09.2022, the legality, validity and correctness of the impugned SCN is the core / main issue to be adjudicated upon in these petitions.
8. It is significant to state that in W.P.No.19570/2022 preferred by GTPL, Intervention Applications have been filed by the Intervenors i.e., All India Gaming Federation and E-Gaming Federation, who are also supporting the petitioners and are aggrieved by the actions of the respondents. The said Intervention Applications have also been heard along with these petitions.
II. SUMMARY OF PLEADINGS OF PETITIONERS AND INTERVENORS
(i) It is contended that the basic construct of an online skill-based game facilitated by the Petitioner is that the Petitioner has no role/ influence insofar as the playing of the games are concerned. The users/players choose the games based on the amount they want to stake to match their skills against other players who want to play for a similar amount. The Petitioner merely hosts the games and the discretion to play a game and the stake for which it is to be played entire lies with the players with no role of the Petitioner, who seeks to demonstrate the same by the following illustration:
Assuming that ‘A’ and ‘B’ have downloaded the mobile application of the Petitioner and intend to play a game of rummy against each other by using the Petitioner’s online platform/mobile application. As per the construct of the game, ‘A ’ and ‘B’ has to deposit INR 200 each for participation in the game. The winner at the end of the game gets INR 360 as winnings. Further, for allowing ‘A’ and ‘B’ to use its platform for participating in the game of rummy hosted by the Petitioner, it would charge INR 20 each from ‘A’ and ‘B’. Therefore while ‘A ’ and ‘B’ deposit INR 200 each, the winner gets INR 360 and INR 40 is retained by the Petitioner as its ‘platform fee’. During the course of the game, INR 360 is held by the Petitioner in a designated account and on this amount, the Petitioner has no lien or right. The money is transferred back to the winner at the end of the game. Therefore, what the Petitioner retains is INR 40 which is its consideration for facilitation of the game play and on which the Petitioner has been depositing GST.
(ii) It is contended that the Respondents have issued the Impugned SCN whereby it has been alleged that the Petitioner is involved in ‘betting/gambling’ and supplies ‘actionable claims’ and that the petitioner is guilty of evasion of GST by misclassifying their supply as services under SAC 998439 instead of actionable claims which are goods and mis-declaring their taxable value, though the activities undertaken by the petitioner were in the form of betting/gambling which is an actionable claim and not a service.
(iii) It is contended that the Impugned SCN is completely fallacious, perverse, and without jurisdiction or authority of law and the same is vitiated with malice and deserves to be quashed for the following grounds:
