2015 (10) TMI 1114 - HC - Service Tax

Liability of Service Tax on lottery tickets - Liability of Petitioners vide Notification No.7/2015-ST on reverse charge basis - Sub-Rule (7C) of Rule 6 does not enable charging of tax - whether Direct transaction in regard to an actionable claim would not fall under Clause (44) of Section 65B? - Transactions entered on Principal to Principal basis Respondent contends that Parliament is duly empowered to enact law in relation to service tax on said services - Lottery ticket is actionable claim; thus goods, lottery is a game; thus service; thus included in negative list - whether Petitioners activities fall under definition of lottery distributor or selling agent ; Sub-Rule (7C) Rule 6 applicable. Held That - There is no change in the circumstances as in the case of Future Gaming 2013 (11) TMI 1002 - SIKKIM HIGH COURT and Future Gaming 2014 2013 (11) TMI 1003 - SIKKIM HIGH COURT The Petitioners in buying and selling the lottery tickets is not rendering service to the State and, therefore, their activity does not fall within the meaning of service as provided under Clauses (31A) and (44) of Section 65B and, therefore, outside the purview of Explanation 2 to the said Section; In any case, since by the Explanation the scope of Section 66D which is the main provision which is to be expanded, it would be ultra vires the Finance Act, 1994 and is accordingly struck down; Letters having been issued on an erroneous interpretation of Section 66D of the Finance Act, 1994, as amended by the Finance Act, 2015 requiring the Petitioners to pay tax under the Service Tax Rules, 1994, as amended, in the absence of specific provision in the Finance Act and that 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 a Subordinate piece of Legislation, hereby stands quashed. Resultantly, Circular under D.O.F. No.334/5/ 2015-TRU dated 19-05-2015 referred to in the aforesaid letters in the two Writ Petitions also stand quashed; and The Respondents, their agents, servants, officers and representatives are restrained directly or indirectly, and in any manner whatsoever, from demanding any amounts by way of service tax or enforcing the provisions of the Finance Act, 1994 on the activity of the Petitioners in relation to lottery tickets. Decided in favour of the Assessee.

Issues Involved:
1. Jurisdiction and legality of enforcing the Finance Act, 1994 (as amended by the Finance Act, 2015) on the petitioner companies.
2. The nature of the transaction between the petitioners and the state government, and whether it constitutes a service.
3. The applicability of service tax on the activities of lottery distributors and selling agents.
4. The legislative competence of the Union Parliament to levy service tax on lotteries.
5. The validity of amendments to the Finance Act, 1994, by the Finance Act, 2015, and their impact on previous judgments.
6. The interpretation and application of Sub-Rule (7C) of Rule 6 of the Service Tax Rules, 1994.

Detailed Analysis:

1. Jurisdiction and Legality of Enforcing the Finance Act, 1994:
The petitioners challenged the jurisdiction of the respondents and the legality of their actions in enforcing the Finance Act, 1994, as amended by the Finance Act, 2015, upon them. They argued that the amended provisions do not cover their activities of purchasing and selling lotteries, asserting that their transactions are purely of sale and purchase, not services. The court found that the amendments sought to bring the activities of the petitioners within the scope of service tax but ultimately held that the nature of the transactions did not constitute services.

2. Nature of the Transaction:
The court examined the agreements between the petitioners and the state government, concluding that the transactions were on a principal-to-principal basis, involving the bulk purchase of lottery tickets at a discounted price. The relationship was found to be that of a buyer and seller, not principal and agent. The court held that the activities of the petitioners did not constitute services as defined under the Finance Act, 1994, and thus were not subject to service tax.

3. Applicability of Service Tax:
The court noted that the amendments to the Finance Act, 1994, aimed to include activities related to the promotion, marketing, and selling of lotteries within the scope of service tax. However, it found that the essential elements of a service-an activity carried out by one person for another for consideration-were lacking in the petitioners' activities. The court reiterated that the petitioners' activities were purely transactions in actionable claims, which are excluded from the definition of services.

4. Legislative Competence:
The court reaffirmed its previous rulings that the Union Parliament lacks the legislative competence to levy service tax on activities related to betting and gambling, including lotteries, as these fall within the exclusive domain of the state legislature under Entry 62 of List II of the Seventh Schedule to the Constitution of India. The court held that the amendments to the Finance Act, 1994, by the Finance Act, 2015, did not remove the cause for invalidity identified in earlier judgments.

5. Validity of Amendments:
The court found that the amendments to the Finance Act, 1994, by the Finance Act, 2015, were an attempt to overcome previous judgments but did not effectively address the issues of legislative competence and the nature of the transactions. The court held that the amendments did not change the fundamental nature of the transactions, which remained outside the scope of service tax.

6. Interpretation of Sub-Rule (7C) of Rule 6:
The court held that Sub-Rule (7C) of Rule 6 of the Service Tax Rules, 1994, only provides an optional composition scheme for payment of service tax and does not create a charge of service tax. It reiterated that subordinate legislation cannot override the statutory provisions of the Finance Act, 1994.

Conclusion:
The court quashed the impugned letters and circulars demanding service tax from the petitioners, holding that their activities did not constitute services under the Finance Act, 1994, as amended by the Finance Act, 2015. It restrained the respondents from enforcing the provisions of the Finance Act, 1994, on the petitioners' activities related to lottery tickets. The writ petitions were allowed, and no costs were awarded.

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