2009 (5) TMI 1 - SC - Service Tax

Service tax on activity of lottery business - Service Tax on the lottery business was not applicable before May 2008 - However, after introduction of explanation to the section 65(19) Meaning of Business Auxiliary Service service tax may be levied after May 2008 - The issue of constitutional validity of levy of service tax on lottery business remains open - the issue of power to levy service tax on the impugned activity remains open - Revenue appeal dismissed with cost ₹ 1,00,000/-

Issues Involved:
1. Whether the sale, promotion, and marketing of lottery tickets are exigible to 'Service Tax' under Section 65(105) of the Finance Act, 1994.
2. Whether lottery tickets are considered 'goods' under the Sale of Goods Act, 1930.
3. The retrospective application of the explanation appended to Section 65(19) of the Finance Act, 1994.
4. The constitutional validity of imposing service tax on the promotion and marketing of lotteries.

Issue-wise Detailed Analysis:

1. Exigibility of Service Tax on Sale, Promotion, and Marketing of Lottery Tickets:
The core question was whether the sale, promotion, and marketing of lottery tickets fall under 'Service Tax' as per Section 65(105) of the Finance Act, 1994. The respondents, being agents of the State of Sikkim, purchase lottery tickets in bulk and sell them to principal stockists, who further distribute them. The High Court of Sikkim had earlier ruled that the activities of the respondents were not subject to service tax under 'business auxiliary service' as defined in Section 65(19) of the Act. However, the Supreme Court analyzed whether the activities involved constituted 'promotion or marketing of service provided by the client' under sub-clause (ii) of Section 65(19).

2. Classification of Lottery Tickets as 'Goods':
The Supreme Court referenced the Constitution Bench decision in Sunrise Associates, which held that lottery tickets are actionable claims and not 'goods' under the Sale of Goods Act, 1930. This distinction was crucial because if lottery tickets are not 'goods,' the respondents cannot be said to be rendering services related to the promotion or marketing of goods. The Court reiterated that the sale of lottery tickets does not involve the transfer of goods but rather an actionable claim.

3. Retrospective Application of Explanation to Section 65(19):
The explanation appended to Section 65(19) by the Finance Act, 2008, was examined to determine if it was clarificatory or declaratory, thus having retrospective effect. The explanation included services related to the promotion or marketing of games of chance, including lotteries, under 'business auxiliary service.' The Court concluded that the explanation introduced a new concept and could not be considered merely clarificatory. Therefore, it could not have retrospective effect and would only apply from May 2008 onwards.

4. Constitutional Validity of Imposing Service Tax:
The Court discussed whether the Parliament had the authority to impose service tax on the promotion and marketing of lotteries, considering the entries in List II of the Seventh Schedule of the Constitution, which empower State Legislatures to tax betting, gambling, and other luxuries. The Supreme Court noted that while the State can impose taxes on the organization and conduct of lotteries, the service tax imposed by the Parliament on the services rendered in promoting and marketing lotteries is a separate aspect and constitutionally valid. However, this tax would only apply prospectively from May 2008, following the insertion of the explanation in Section 65(19).

Conclusion:
The Supreme Court upheld the High Court's decision, albeit for different reasons, concluding that the activities of the respondents did not attract service tax under the provisions of the Finance Act, 1994, prior to May 2008. The appeal was dismissed with costs.

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