SERVICE TAX ON SPORTS ACTIVITIES - THEN AND NOW- PART-II

[Dr. Sanjiv Agarwal]

Games of Chance

Games of chance have been included in scope of taxable service by Finance Act, 2008. Games may relate to games of chance generally known as lotteries, lotto, bingo etc. 'Chance' indicates a possibility of some thing happening, some thing unpredictable, with some degree of uncertainty. 'Bingo' is a game in which players mark off numbers on cards as the numbers are drawn randomly by a caller, the winner being the first person to mark off all their numbers so called. 'Lotto' is also a game similar to bingo wherein numbered or illustrated counters or cards are drawn by the players. It is a form of lottery. In case of 'lottery', the success or winning or outcome is governed by pure chance. It means raising of money by selling numbered tickets and giving prizes to the holders of numbers drawn at random.

The marketing or promotion of all such games of chance have been brought into service tax net and lottery, lotto, bingo are only illustrative examples. It may include raffle, tambola and other derived games of chance. It is not the games as such which are taxed but marketing or promotion of such games of chance shall attract service tax.

Prior to amendment in the definition of business auxiliary service in 2008 by Finance Act, 2008, in the case before Sikkim High Court, in Martin Lottery Agencies Ltd. v. Union of India 2007 -TMI - 2360 - HIGH COURT, SIKKIM, High Court held that where assessee was engaged in purchase of lottery tickets from State Government and subsequent sale and where lottery tickets have been held to be actionable claims and not goods as per Sale of Goods Act, 1930, it was held that petitioner was not rendering services in relation to promotion of client's goods and service tax liability did not.

In Union of India & Others v. Martin Lottery Agencies Ltd 2009 -TMI - 33336 - SUPREME COURT OF INDIA, the apex court has held that service tax can not be levied on sale of lottery tickets but sales promotion or marketing of lottery tickets shall be exigible to levy of service tax under business auxiliary service.

The gist of the apex court judgment including principles of interpretation cited can be summarized as follows:-

* Lottery tickets are not 'goods' but may amount to actionable claim.

* Lotteries are organized by state to raise revenue and raising of revenue by state by itself does not amount to any rendition of service.

* Explanation to clause (ii) of section 65(19) is not a simple clarification as it seeks to introduce a new concept of organizing lottery as a form of entertainment having constitutional implication.

* Though Parliament is entitled to bring new concept of imposition of tax and to raise legal fiction, the explanation widening the tax base is not retrospective in operation.

* The subject explanation is not clarificatory or declaratory in nature.

* Whether a subordinate legislation or a Parliamentary statute is clarificatory or declaratory or not depends on its nature and objects it seeks to achieve. If two views are possible, resort to clarification and/or declaration may not be permissible.

* The expressions like 'for the removal of doubts' are not conclusive. In this case, it was used in explanation under the assumption that organizing games of chance would be rendition of service.

* Explanation appears to be a charging provision. It states about need to tax. It can be termed as sui generies tax.

* If it is a different tax, it may be held to be running contrary to the ordinary concept of service tax.

* It (explanation) is a stand alone clause. Since by the reason of said explanation, taxing need has been widened, it can not be held to be retrospective in operation.

* Services provided in respect of matters envisaged [clause (i) to (vii)] under section 65(19) must be construed strictly.

* Substantive law may be introduced by reason of explanation. However, if substantive law is introduced, it will have no retrospective effect.

* Service tax purports to impose tax on services on two grounds, viz, service provided to a customer and service provided to a service provider. Before a tax is found leviable, it must come within the domain of legitimate business or trade. - By inserting the explanation appended to clause (19) of section 65, a new concept of imposition of tax has been brought in.

In the ultimate conclusion, the levy of service tax was upheld only from May 2008 and the Government's appeal was dismissed upholding the high court with costs of rupees one lakh.

CBEC has vide Letter No. 334/1/2008-TRU dated 29.2.2008 clarified as under -

"Services provided in relation to promotion or marketing of service provided by the client is leviable to service tax under business auxiliary service. Organization and selling of lotteries are globally treated as supply of service. Lotteries (Regulation) Act, 1998 enables State Governments to organize, conduct or promote lotteries. Lottery tickets are printed by the State Governments and are sold through agents or distributors. Tickets are delivered by the State Government to the distributors at a discounted price as compared to the face value of the tickets. Services provided by the distributors or agents in relation to promotion or marketing of lottery tickets are leviable to service tax under the existing business auxiliary service.

Lotteries fall under the category of games of chance. Games of chance are known under various names like lottery, lotto, bingo etc. and are also conducted through internet or other electronic networks.

The promotion, marketing or organizing of games of chance including lottery will now be a new taxable service from a notified date rather than being clubbed with business auxiliary services, as proposed by Finance Bill, 2010.

According to clause (zzzzn) of section 65(105) of Finance Act, 1994, any service provided or to be provided to any person, by any other person, for promotion, marketing, organizing or in any other manner assisting in organizing games of chance, including lottery ,Bingo or lotto in whatever from or by whatever name called, whether or not conducted through internet or other electronic network will be a taxable service. Many big events do run games and lotteries based on chance . For example, before a match, there could be a contest as to who will be man of the match or the series or which team will win. The services provided for promotion or marketing or organizing such games of change will now be taxable services

Sponsorship Services (Clause zzzn)

Service tax has been imposed on sponsorship services by the Finance Act, 2006 with effect from 1st May, 2006 (Notification No. 15/2006-ST dated 25.4.2006 refers). The gross amount charged by service provider to a body corporate or firm in relation to sponsorship services is chargeable to service tax and such service receiver shall have to pay service tax under reverse charge method.

Taxable service means any services provided or to be provided to any body corporate or firm, by any person receiving sponsorship, in relation to such sponsorship, in any manner, but does not include services in relation to sponsorship of sports events.

Taxable service shall mean both, services provided and to be provided to the body corporate or firm by the service provider being any person. It may be noted that service tax shall be leviable only when the sponsor is any body corporate or firm. Thus, if the sponsor is any person other than firm or body corporate, it will not constitute a taxable service. Individuals and Government Departments shall not fall under the scope of taxable service. Sponsorship of sports events is also excluded from the scope of levy of service tax.

By the Finance Bill, 2010 amendment, in the definition of sponsorship services, exclusion of sponsorship relating to sponsorship pertaining to sports has been removed and any service provided or to be provided to any person, by any other person receiving sponsorship in relation to such sponsorship , in any manner will be taxed. This has been done with a view to tax all such sponsorships relating to games and sports which involve thousands of crores or rupees. It is generally seen that leading business entities lend/ associate their brand name, services or products by sponsoring popular games, sports, event etc for spreading their name, goodwill, reputation etc in the public at large. The visibility thus created is immense. This is done with an intention to commercially exploit the brand which may otherwise not be possible. Though sponsorships are taxable since July 2006, sports related sponsorships were kept out of tax net to promote and encourage sports activities. Looking to the present day size and ever increasing dimensions of sports sponsorships (IPL, commonwealth games etc), service tax on sports related sponsorships will be applicable. However, government may exempt certain category of sports and games in larger national interest and in the interest of that particular sport. Who knows, even commonwealth games may be exempted.

Companies like Coca cola, HP, Airtel, Royal Challengers, Samsung, HSBC, Idea Cellular, Hero Honda, Sail etc are going to have good times in this twenty 20 season. Thanks to the timing of the tournament and the Finance Act, 2010 still being in nascent stage of enactment.

In this match between Ministry of Finance and IPL organizers, of fixing tax liability on brand endorsements, sponsorships and event promotions, certainly IPL is the winner. For North Block team - may be next time, they will have a strong hold on the same and charge all service tax due.