2013 (11) TMI 1002 - HC - Service Tax

Constitutional validity of levy of service tax on promotion, marketing, organising or in any other manner assisting in organising game of chance, including lottery - Held that - the activities of the lottery distributors i.e. the petitioners herein do not constitute a service and thus beyond the purview of taxable service as statutorily defined under clause (zzzzn) of sub-section 105 of Section 65 of the Finance Act, 1994 as amended vide Finance Act, 2010. The activity of promotion, marketing, organizing or in any other manner assisting in organizing game of chance including lottery is an activity included in the expression betting and gambling as incorporated under Entry 34 and 62 of List II to Seventh Schedule of Constitution of India. (iii) The activity of promotion, marketing, organizing or in any other manner assisting in organizing game of chance including lottery being an activity of betting and gambling under Entry 62, List II to Seventh Schedule of Constitution of India, the State Legislature alone is competent to levy any tax on such activity under Entry 62. 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. 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. Clause (zzzzn) to sub-section 105 of Section 65 of Finance Act, 1994 strike down as unconstitutional - Decided in favor of assessee.

Issues Involved:
1. Constitutional validity of clause (zzzzn) of Sub-section (105) of Section 65 of the Finance Act, 1994.
2. Whether the activity of the petitioners falls within the purview of "Taxable Service".
3. Legislative competence of the Parliament to levy service tax on the activity of organizing, marketing, and promoting lotteries.
4. Whether the conduct of lottery is an act of "Betting and Gambling" under entries 34 and 62 of List II of Schedule 7.
5. Whether the State Legislature has exclusive competence to levy taxes on activities of betting and gambling.
6. Whether the Parliament can levy service tax under its residuary legislative power.

Issue-wise Detailed Analysis:

1. Constitutional Validity of Clause (zzzzn):
The petitioners challenged the constitutional validity of clause (zzzzn) of Sub-section (105) of Section 65 of the Finance Act, 1994, which introduced the activity of "promotion, marketing, organizing or in any other manner assisting in organizing game of chance, including lottery" as a new category of "taxable service". The petitioners argued that their activities do not constitute a service and are merely a purchase and sale of lottery tickets, which are considered actionable claims and not goods.

2. Whether the Activity of the Petitioners Falls within the Purview of "Taxable Service":
The petitioners contended that their relationship with the State Government is that of a buyer and seller, not principal and agent, and the discounted price of lottery tickets is not a commission but a normal business discount. They argued that the activities of purchasing and selling lottery tickets through stockists and selling agents are standard business activities. The court examined the contractual stipulations and concluded that the petitioners' activities do not constitute a service and are beyond the purview of "taxable service" as defined under clause (zzzzn).

3. Legislative Competence of the Parliament to Levy Service Tax:
The court discussed the legislative competence of the Parliament to levy service tax under its residuary power (Entry 97 of List I read with Article 248 of the Constitution). It was held that the power to regulate does not include the power to tax, and the power to tax on lotteries or betting and gambling falls exclusively under Entry 62 of List II, which is within the domain of the State Legislature.

4. Whether the Conduct of Lottery is an Act of "Betting and Gambling":
The court referred to the definition of "lottery" under the Lotteries (Regulation) Act, 1998, and various judicial pronouncements, including B. R. Enterprises v. State of U.P. and Union of India v. Martin Lottery Agencies Limited, to conclude that the conduct of lottery is an act of "betting and gambling" under entries 34 and 62 of List II. The court emphasized that lottery is a game of chance, and the element of chance remains even in State-organized lotteries.

5. Exclusive Competence of the State Legislature to Levy Taxes on Betting and Gambling:
The court held that the power to tax on betting and gambling, including lotteries, falls exclusively within the domain of the State Legislature under Entry 62 of List II. The Parliament lacks legislative competence to impose any tax, including service tax, on such activities under its residuary power.

6. Whether the Parliament Can Levy Service Tax under Its Residuary Legislative Power:
The court reiterated that the Parliament's residuary power to levy taxes under Entry 97 of List I read with Article 248 of the Constitution is restricted where the power to impose tax is traceable to any entry in List II or III. Since the power to tax on betting and gambling is specifically provided under Entry 62 of List II, the Parliament cannot exercise its residuary power to levy service tax on such activities.

Conclusions:
1. The activities of the petitioners do not constitute a service and are beyond the purview of "taxable service" as defined under clause (zzzzn) of Sub-section (105) of Section 65 of the Finance Act, 1994.
2. The activity of promotion, marketing, organizing, or in any other manner assisting in organizing a game of chance, including lottery, falls within the expression "betting and gambling" under Entry 34 and 62 of List II.
3. The State Legislature alone is competent to levy any tax on such activities under Entry 62 of List II.
4. The Parliament lacks legislative competence to impose any tax, including service tax, on such activities under its residuary power.
5. Clause (zzzzn) of Sub-section (105) of Section 65 of the Finance Act, 1994, as introduced by the Finance Act, 2010, is ultra vires to the Constitution of India and is struck down.
6. All consequential actions of the respondents imposing service tax upon the petitioners are set aside. The judgment operates prospectively, and no order as to costs is made.

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