2024 (9) TMI 182 - SC - Service Tax

Levy of service tax - Business Auxiliary services or not - sale of Lotteries - constitutionality of the Explanation added to Section 65 (19) (ii) of the Finance Act, 1994 - HELD THAT - On a reading of clause (19) of Section 65 of the Finance Act, 1994 and on analyzing the same, it is evident that tax on a business auxiliary service is relatable to (i) any service concerning promotion or marketing or sale of goods, produced or provided by, or belonging to the client and (ii) promotion or marketing of service provided by the client. The definition of goods has also been noted in clause (50) of Section 65 of the Finance Act, 1994 which refers to clause (7) of Section 2 of the Sale of Goods Act, 1930. The expression goods under the Sale of Goods Act expressly excludes actionable claims as well as money - This Court in Sunrise Associates 2006 (4) TMI 118 - SUPREME COURT has held that lottery tickets are actionable claims. Therefore, as lottery tickets would not come within the meaning of the expression goods under clause (7) of Section 2 of the Sale of Goods Act, 1930, they would also not come within the scope and ambit of clause (50) of Section 65 of the Finance Act, 1994. The conduct of lottery is a revenue generating activity by a State or any other entity in the field of actionable claims. The client, i.e., the State is not engaging in an activity of service while dealing with the business of lottery. Explanation to subclause (ii) of Clause 19 of Section 65 of the Finance Act, 1994 cannot bring within sub-clause (ii) by assuming an activity which was initially sought to be covered under sub-clause (i) thereof but could not be by virtue of the definition of goods under the very same Act read with Section 2(7) of the Sale of Goods Act, 1930. The mere insertion of an explanation cannot make an activity a taxable service when it is not covered under the main provision (which has to be read into the said subclause by virtue of the legislative device of express incorporation). This is because sale of lottery tickets is not a service in relation to promotion or marketing of service provided by a client, i.e., the State in the instant case. Conducting a lottery which is a game of chance is ex facie a privilege and an activity conducted by the State and not a service being rendered by the State. Either under sub-clause (i) of clause (19) of Section 65 or under the Explanation to sub-clause (ii) of Clause 19 of Section 65 of the Finance Act, 1994, after it was introduced with effect from 16.05.2008 and until it was omitted, service tax could not have been levied on the promotion or marketing of sale of goods or service provided by the client, on the premise that it was a business auxiliary service . The High Courts have lost sight of the definition of goods in clause (50) of Section 65 of the Act while interpreting the expression lottery . The definition of goods in clause (7) of Section 2 of Sale of Goods Act, 1930, that is expressly incorporated in clause (50) of Section 65 of the Act, which expressly excludes actionable claims. This Court has by the Constitution Bench in Sunrise Associates 2006 (4) TMI 118 - SUPREME COURT opined that lottery tickets are actionable claims. The High Courts have also lost sight of the fact that the sale of lottery tickets by the State is a privileged activity by itself and not rendering of a service for which the assessees are rendering promotion or marketing service. The appeals filed by the appellants-assessees are liable to be allowed and are allowed by setting aside the impugned judgments of the High Courts of Sikkim and Kerala.

Summary

Issues Involved:
1. Whether the activity of the appellants-assessees would attract service tax within the scope and ambit of Section 65(19)(ii) read with Section 65(105)(zzb) of the Finance Act, 1994.
2. What relief(s) the appellants are entitled to.

Detailed Analysis:

Issue 1: Applicability of Service Tax

The appellants, who are engaged in the business of buying and selling lottery tickets, challenged the constitutionality of the Explanation added to Section 65(19)(ii) of the Finance Act, 1994, which was introduced by the Finance Act, 2008. The appellants contended that their activities did not constitute a 'taxable service' under the relevant provision. They argued that the profit made from the difference between the purchase price and the face value of the tickets did not amount to a 'taxable service'. They referenced the Supreme Court's ruling in *Sunrise Associates vs. Govt. of NCT of Delhi* (2006) which held that lottery tickets are not goods but actionable claims.

The High Courts of Kerala and Sikkim had dismissed the appellants' petitions, holding that service tax was leviable on their activities under the category of 'business auxiliary service'. The appellants contended that the sale of lottery tickets was an outright purchase and did not involve any service to the State in terms of promotion or marketing.

The Union of India argued that the appellants provided a service to the State by marketing and promoting lotteries, as evidenced by agreements between the appellants and the State of Sikkim. The Union contended that the appellants were not merely engaged in outright sale of lottery tickets but rendered expansive services, including advertising and organizing the lottery.

The Supreme Court analyzed the provisions of the Constitution and the Finance Act, 1994. Article 246 of the Constitution pertains to the division of legislative subjects between the Central and State Legislatures. Article 248 reserves residuary powers to the Parliament to legislate on any subject not included in the Concurrent List or the State List. The Finance Act, 1994 was legislated by the Parliament under Article 248 read with Entry 97 of List I.

The Court noted that Section 65(19) of the Finance Act, 1994 defines 'business auxiliary service' to include services related to the promotion or marketing of goods or services provided by the client. However, the definition of 'goods' under Section 65(50) of the Finance Act, 1994, which refers to Section 2(7) of the Sale of Goods Act, 1930, expressly excludes actionable claims. The Court in *Sunrise Associates* held that lottery tickets are actionable claims and not goods.

The Court observed that the Explanation added to Section 65(19)(ii) of the Finance Act, 1994, sought to include the promotion or marketing of lottery tickets as a taxable service. However, since lottery tickets are actionable claims and not goods, they are excluded from the scope of 'business auxiliary service' under Section 65(19)(i). The Court held that the insertion of the Explanation could not make an activity a taxable service when it was not covered under the main provision.

The Court concluded that the sale of lottery tickets by the State is a revenue-generating activity and not a service rendered by the State. The relationship between the State and the appellants is on a principal-to-principal basis, and there is no 'principal-agent' relationship that would constitute a business auxiliary service. The Court held that service tax could not be levied on the promotion or marketing of lottery tickets under Section 65(19) of the Finance Act, 1994.

Issue 2: Relief to the Appellants

The Supreme Court set aside the impugned judgments of the High Courts of Sikkim and Kerala. The appeals filed by the appellants-assessees were allowed with all consequential reliefs. The Court directed that if any representations are made seeking refund of the amounts paid, the same shall be considered expeditiously by the concerned departments of the respondents. The Court did not pass any order as to costs.

Conclusion:

The Supreme Court allowed the appeals, holding that the activities of the appellants-assessees did not attract service tax under Section 65(19)(ii) read with Section 65(105)(zzb) of the Finance Act, 1994. The Court emphasized that lottery tickets are actionable claims and not goods, and therefore, the promotion or marketing of lottery tickets could not be considered a 'taxable service' under the relevant provisions. The Court provided consequential reliefs to the appellants and directed the concerned departments to consider refund representations expeditiously.