2010 (7) TMI 947 - HC - VAT and Sales Tax

Whether the nature of the transactions between the State Government and distributors in relation to lottery tickets is not in the nature of sale? Held that - The value of lottery tickets without the promotional and marketing activity of the petitioner is 70 paise, which by reason of marketing and promotional activity of the petitioner becomes ₹ 1 when the same reaches the ultimate purchaser of lottery tickets. The petitioner thus makes a value addition to the activity of organizing or conducting or promoting games of chance as that of lottery by the State Government from 70 paise to ₹ 1 by providing marketing and promotional service thereto by its activities as above. There is thus value addition by the petitioner in relation to game of chance, organized, conducted or promoted by the client of the petitioner, namely, the State Government. It was not urged that the residuary clause contained in List I of the Seventh Schedule to the Constitution of India or entry 92C thereto does not authorize levy of service tax on service provided in relation to an activity which though may not be service or which may be res extra commercium, but a legal and permissible activity. Appeal dismissed.

Issues Involved:
1. Nature of transactions between the State Government and distributors regarding lottery tickets.
2. Applicability of service tax under "business auxiliary service."
3. Constitutional validity of the Explanation added to Section 65(19)(ii) of the Finance Act, 1994.
4. Whether organizing or conducting lotteries by the State is a service.
5. Value addition by distributors in the marketing of lottery tickets.

Issue-wise Detailed Analysis:

1. Nature of Transactions Between the State Government and Distributors Regarding Lottery Tickets:
The Central Revenue issued a notice on April 30, 2007, to Martin Lottery Agencies Ltd., stating that the transactions between the State Government and distributors concerning lottery tickets are not sales but rather activities of promotion or marketing of lottery tickets for the State Government. The Board of Revenue categorized these activities under "business auxiliary service," making them subject to service tax. Martin Lottery Agencies Ltd. challenged this notice in a writ petition.

2. Applicability of Service Tax Under "Business Auxiliary Service":
The court noted that the Finance Act, 1994, defines "business auxiliary service" under Section 65(19)(i) and (ii) as services related to the promotion or marketing of goods or services provided by the client. The court initially concluded that lottery tickets are actionable claims and not "goods," based on the Supreme Court's judgment in Sunrise Associates v. Government of NCT of Delhi. Therefore, Martin Lottery Agencies Ltd. was not rendering any service in relation to the promotion or marketing of their client's goods.

3. Constitutional Validity of the Explanation Added to Section 65(19)(ii) of the Finance Act, 1994:
The Supreme Court, in Union of India v. Martin Lottery Agencies Ltd., examined the Explanation added by the Finance Act, 2008, which clarified that "service in relation to promotion or marketing of service provided by the client" includes services related to games of chance, such as lotteries. The Supreme Court held that this Explanation introduced substantive law and was effective from May 2008, not retrospectively. The constitutional validity of this Explanation was not decided by the Supreme Court and was left open for determination.

4. Whether Organizing or Conducting Lotteries by the State is a Service:
The court discussed whether the State Government's activity of organizing lotteries constitutes a service. It was argued that organizing lotteries is not a service since it is res extra commercium (beyond commerce). However, the Supreme Court in Union of India v. Martin Lottery Agencies Ltd. observed that organizing lotteries does not render a service to society but is a means for the State to generate revenue. The court concluded that the Explanation should be viewed as substantive law, indicating that services related to the promotion or marketing of games of chance are taxable, even if the primary activity (organizing lotteries) is not considered a service.

5. Value Addition by Distributors in the Marketing of Lottery Tickets:
The court examined whether the activities of Martin Lottery Agencies Ltd. added value to the State Government's lottery tickets. It was argued that the price of lottery tickets is discounted, and there is no value addition. However, the court found that the distributors' promotional and marketing activities increased the value of lottery tickets from 70 paise to Rs. 1, thus adding value. This value addition through marketing and promotional activities rendered by the distributors is considered a taxable service under "business auxiliary service."

Conclusion:
The court dismissed the writ petitions, concluding that the Explanation introduced by the Finance Act, 2008, constitutes substantive law, making services related to the promotion or marketing of games of chance taxable. The court refused to stay the judgment.

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