2021 (6) TMI 230 - HC - GST

Valuation - Levy of GST on gross amount - constitutional validity of Rule 31A(3) - - carrying on the business of a race club, which includes lay-out and preparing any land for running of horse races, steeplechases of races of any other kind - entire bet amount received by the totalisator - Validity of amendments dated 25-01-2018 which inserted Rule 31A(3) to the CGST Rules - HELD THAT - The Government has used the word totalisator . Therefore, it becomes necessary to consider what is a totalisator . The word totalisator ordinarily means a system of betting on horse races in which the aggregate stake, less an administration charge and tax, is paid out to winners in proportion to their stakes. This software installed will have number of terminals handled by the staff of the petitioners. The totalisator keeps a record of the amount punted by the punter, automatically retains certain percentage towards commission of the petitioners and taxes thereon. It even depicts the amount collected in the totalisator which would be available for distribution among the winner who placed his stake. A punter who wishes to bet pays certain amount of money through these terminals for backing a particular horse. A receipt is issued representing the monies put in by the punter on the horse that he has backed. There ends the work performed by the petitioners through the totalisator . In the case at hand, the amount that gets into the totalisator is not the prior determined face value of the entire bet, which is before the beginning of the race and exit of it from the totalisator after the race is over by paying the money to its last pie to the winner of the stake can neither be construed to be business, consideration, goods or supply as defined under the Act, as the amount that lies in the totalisator is only for a brief period which is held by the petitioners/Race Club in its fiduciary capacity. All that the petitioners would become liable for payment of tax under the Act is the commission that it receives for rendering service of holding the bet in the totalisator for a brief period in a fiduciary capacity. Though the Apex Court has considered what is actionable claim qua sale of a lottery ticket that would be inapplicable to the case at hand as the challenge before the Apex Court and the answer was on a different facts and circumstances. Therefore, the supply of an actionable claim as indicated in the Rule cannot include the entire amount brought into the totalisator. The totalisator is brought under a taxable event without it being so defined under the Act nor power being conferred in terms of the charging section which renders the Rule being made beyond the provisions of the Act. The same follows to the impugned KSGST Rules which are identical to the impugned CGST Rules. Therefore, Rule 31A(3) which does not conform to the provisions of the Act will have to be held ultra vires the enabling Act and consequently opens itself for being struck down. The issue is answered in favour of the petitioners striking down Rule 31A(3) of the CGST Rules and Rule 31A of the KSGST Rules as being contrary to the CGST Act and hold that the petitioners are liable for payment of GST on the commission that they receive for the service that they render through the totalisator and not on the total amount collected in the totalisator - petition allowed.

Summary

Issues Involved:
(1) Whether Rule 31A(3) of the CGST Rules is ultravires the CGST Act?
(2) Whether the petitioners are liable to pay GST on the commission set apart or on the total amount collected in the totalisator?

Issue-Wise Detailed Analysis:

1. Whether Rule 31A(3) of the CGST Rules is ultravires the CGST Act?

The petitioners challenged the legislative intent of making them liable to pay GST on the entire bet amount received by the totalisator and sought to declare the amendments dated 25-01-2018, which inserted Rule 31A(3) to the CGST Rules, as ultra vires the CGST Act. The petitioners argued that Rule 31A(3) violates Article 246A read with Article 366 (12A) and exceeds the constitutional mandate given to the Parliament and Legislature to levy tax only on the supply of goods and services. They contended that Rule 31A(3) imposes tax on the entire bet value without the petitioners supplying any bet, thus violating the constitutional mandate of Article 246A. The petitioners further argued that the impugned Rule is ultravires Section 7 of the CGST Act since the supply of bets is not in the course or furtherance of their business and is made liable to pay tax.

The respondents countered that the Act itself has mandated levying of tax on an actionable claim, and betting is also an actionable claim in terms of the Rules. They argued that the amendment has only clarified the role of the petitioners in the field of betting and should not be construed as ultra vires the Act.

The court analyzed the components of tax, including taxable event, taxable person, rate of tax, and measure of tax, as interpreted by the Apex Court in various cases. It emphasized that the measure of tax must have a nexus to the taxable event. The court noted that the CGST Act defines various terms such as actionable claim, business, consideration, goods, recipient, and supplier. The spirit of these definitions is that there must be goods and supply for a taxable event to occur. The court concluded that Rule 31A(3) perforates the nexus between the measure of tax and the taxable event by making the petitioners liable to pay tax on the entire amount received in the totalisator, which is held in a fiduciary capacity.

2. Whether the petitioners are liable to pay GST on the commission set apart or on the total amount collected in the totalisator?

The court considered the activities of the petitioners and the function of the totalisator. It noted that the totalisator is a system of betting on horse races where the aggregate stake, less an administration charge and tax, is paid out to winners in proportion to their stakes. The petitioners retain a commission and distribute the remaining amount to the winners. The court referred to judgments from English Courts and the Apex Court, which held that a contract by a backer who puts money into a totalisator is not a contract by way of gaming or wagering.

The court observed that the petitioners' activity of providing totalisator service and receiving commission for it does not constitute betting. It held that betting is neither in the course of business nor in furtherance of business of a race club for the purposes of the Act. The court emphasized that the petitioners hold the amount received in the totalisator for a brief period in a fiduciary capacity and are liable to pay tax only on the commission received for the service of holding the amount in the totalisator.

The court further analyzed the definition of consideration under Section 2(31) of the Act, which includes any payment made in respect of the supply of goods or services. It concluded that the consideration received by the petitioners is only the commission for providing totalisator service. The petitioners do not supply bets to the punters and, therefore, cannot be held liable to pay tax on the entire amount collected in the totalisator.

Conclusion:

The court declared Rule 31A(3) of the CGST Rules and Rule 31A of the KSGST Rules as ultra vires the provisions of the CGST Act and KSGST Act, respectively. It held that the petitioners are liable for payment of GST on the commission they receive for the service rendered through the totalisator and not on the total amount collected in the totalisator. The court quashed the impugned rules and the related clarification/circular, entitling the petitioners to all consequential benefits.