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TMI Blog2013 (11) TMI 1002X X X X Extracts X X X X X X X X Extracts X X X X ..... ule of Constitution of India, the State Legislature alone is competent to levy any tax on such activity under Entry 62. The Parliament has the competence and jurisdiction to levy taxes on any subject matter including “service tax” under Entry 97, List I, read with Article 248 of the Constitution of India except where such powers are traceable to any of the entries in List II and III to Seventh Schedule of Constitution of India. Power to tax the activity of “betting and gambling” as explained above being within the exclusive domain of State Legislature under Entry 62, List II, the Parliament in exercise of its residuary power under Entry 97, List I to Seventh Schedule of Constitution of India lacks legislative competence to impose any tax including “service tax” on such activity. Clause (zzzzn) to sub-section 105 of Section 65 of Finance Act, 1994 strike down as unconstitutional - Decided in favor of assessee. - Writ Petition (Civil) No. 36 of 2011 and Writ Petition (Civil) No. 23 of 2011 - - - Dated:- 29-11-2012 - MR. PERMOD KOHLI AND MR. S. P. WANGDI, JJ. For the Petitioner : M/s. A. K. Upadhyaya, Sr. Advocate with E.R. Kumar, Rajat Nair, Binita Chhetri and Dawa J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chemes per day, the sole purchaser shall pay a sum of ₹ 8 crores (Rupees Eight Crores) per annum to the Government for the 1st year of the extended period i.e. w.e.f. 18th October, 2009 to 17th October, 2010 and a sum of ₹ 10 crores (Rupees Ten Crores) per annum only from the second year of the extended period effective from 18th October, 2010 to 17th October, 2014. . 13. That the Government shall deliver the tickets to the sole purchaser at the destination as may be agreed upon. 14. That the Government shall deliver to and the sole purchaser shall take delivery from the Government whole of the lottery tickets printed for a draw of a particular scheme with a clear understanding that if the sole purchaser is not able to sell the whole tickets, he shall return the unsold tickets to the Government within 15 (fifteen) days from the date of draw, which shall then be destroyed after verification. The whole sale price of tickets sold shall be determined by the Government on the basis of the prize amount, cost of paper, cost of printing, draw expenses, transportation charges and the Government share of revenue as fixed under clause 4: Provided that the prices of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 07.1994. Vide Finance Act, 2003, Finance Act, 1994 was amended so as to introduce a new category of taxable service, i.e. Business Auxiliary Service , under Sub-section (19) of Section 65 of the Finance Act, 1994 with effect from 01.07.2003. Section 65(19) is reproduced hereunder:- (19) business auxiliary service means any service in relation to;- (i) promotion or marketing or sale of goods produced or provided by or belonging to the client;or (ii) promotion or marketing of service provided by the client; or Explanation.- For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, service in relation to promotion or marketing of service provided by the client: includes any service provided in relation to promotion or marketing of games of chance, organized, conducted or promoted by the client, in whatever form or by whatever name called, whether or not conducted online, including lottery, lotto, bingo; [Explanation inserted vide Finance Act, 2008 w.e.f. 16th May, 2008] (iii) any customer care service provided on behalf of the client; or (iv) procurement of goods or services, which are inputs for the client; or Explanation. For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt which delivered its judgment in the Sunrise Associates case (2006) 5 SCC 603 lottery tickets have to be held to be actionable claims. As such those would not be goods within the meaning of the definition clause in the Sale of Goods Act. If the lottery tickets are not goods, the writ petitioners cannot said to be rendering any service in relation to the promotion of their client s goods, or marketing of their client s goods, or sale of their client s goods. The aforesaid judgment came to be challenged before the Hon ble Supreme Court in Civil Appeal No.3239 of 2009. 5. During the pendency of this Civil Appeal, the Finance Act, 1994 was further amended with the introduction of an Explanation to Section 65(19)(ii) of the Finance Act. The Explanation is reproduced hereunder: - Explanation.- For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, service in relation to promotion or marketing of service provided by the client: includes any service provided in relation to promotion or marketing of games of chance, organized, conducted or promoted by the client, in whatever form or by whatever name called, whether or not cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 65 (19)(ii) of the Finance Act, 1994, titled M/s. Future Gaming Solutions Pvt. Ltd. v. Union of India Ors. This Writ Petition was dismissed by this Court vide its judgment dated 30.07.2010. Aggrieved by the dismissal of this petition, the petitioner filed a Special Leave Petition before the Hon ble Supreme Court, being SLP (C) No.26771 of 2010, wherein Union of India has been put on notice and petition is pending consideration. 8. While the aforesaid issue is pending consideration before the Hon ble Supreme Court, the Finance Act, 1994 again came to be amended with the deletion of the Explanation to Section 65(19)(ii) and introduction of a new category of taxable service vide clause (zzzzn) to Subsection (105) of Section 65 vide the Finance Act of 2010 with effect from 01.07.2010. The relevant amendment thus introduced reads as under:- (105) taxable service means any service provided or to be provided,- (zzzzn) to any person, by any other person, for promotion, marketing, organising or in any other manner assisting in organizing games of chance, including lottery, Bingo or Lotto in whatever form or by whatever name called, whether or not con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (3), Parliament and, subject to clause (1), the Legislature of any State also, have power to make laws with respect to any of the matters enumerated in List III in the Seventh Schedule (in this Constitution referred to as the Concurrent List ). (3) Subject to clauses (1) and (2), the Legislature of any State has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List Ii in the Seventh Schedule (in this Constitution referred to as the State List ). (4) Parliament has power to make laws with respect to any matter for any part of the territory of India not included in a State notwithstanding that such matter is a matter enumerated in the State List. xxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxx 248. Residuary powers of legislation. (1) Parliament has exclusive power to make any law with respect to any matter not enumerated in the Concurrent List of State List. (2) Such power shall include the power of making any law imposing a tax not mentioned in either of those Lists. 13. Clause (1) of Article 246 confers exclusive power upon the Parliament to make laws with respect to any of the matters enumerated in List I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch manner that the authenticity of the lottery ticket is ensured; (c) the State Government shall sell the tickets either itself or through distributors or selling agents; (e) the State Government itself shall conduct the draws of all the lotteries; (k) such other conditions as may be prescribed by the Central Government. 15. Section 11 confers power on the Central Government to make rules to carry out the provisions of the Act whereas under Section 12, the State Government has been empowered to make rules for the same purpose. The Central Government in exercise of rule-making power under sub-section (1) of Section 11 of the Act has framed rules known as the Lotteries (Regulation) Rules, 2010. Rule 2 of the Rules defines various expressions. The relevant being reproduced hereunder: - 2. (c) distributor or selling agent means an individual or a firm or a body corporate or other legal entity under law so appointed by the Organising State through an agreement to market and sell lotteries on behalf of the Organising State; (e) online lottery means a system created ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Organising State through the sale of tickets. (6) The unsold tickets and unused counterfoils of lottery tickets shall be disposed of in the manner specified by the Organising State from time to-time. 17. From the constitutional scheme contained in entry 40 of List I and consequential law enacted by the Parliament, it is abundantly clear that the entry 40 empowers the Parliament to make a regulatory law in respect to the lotteries. It is the common case of the parties that power to tax does not emanate from the power to make regulatory law. Similarly, entry 34 of the List II deals with the subject of betting and gambling and the State legislature has power to make regulatory law in respect of betting and gambling . It goes without saying and as interpreted by a plethora of judicial pronouncements, the conduct of lottery which is a game of chance falls within the ambit, scope and purview of expression betting and gambling . Entry 34, however, does not empower the State to enact any law imposing any tax upon the activity of betting and gambling like entry 40 of List I. It is Entry 62 that specifically provides for levy of taxes on betting and gambling . 18. In the backd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any interference of the State Government. It is thus submitted that the appointment of the petitioner as a distributor and purchaser of lottery tickets is on principal to principal basis where under the petitioner purchases the tickets subject to right of resale, which is one of the permitted jural relationship between the seller and the purchaser in common law. (III) Mr. A. R. Madhav Rao, learned arguing counsel appearing for the petitioner, while explaining the conduct of lottery business, submits that lottery tickets are goods and actionable claim and thus excluded from various State sales tax legislations. To harness, he has referred to the definition of sale and purchase as provided under the Central Excise Act. Section 2(h) of the Central Excise Act, 1944 defines sale and purchase and reads as under: - (h) sale and purchase , with their grammatical variations and cognate expressions, mean any transfer of the possession of goods by one person to another in the ordinary course of trade or business for cash or deferred payment or other valuable consideration; (IV) Regarding the applicability of the above definition to the service tax, reference is m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the petitioners, Mr. Farooq Md. Razzak, Ld. Addl. Solicitor General (Kolkata) appearing for the Union of India, submits that the definition of taxable service has been statutorily provided under the impugned provision contained in Clause (zzzzn) to sub-section 105 of Section 65 of the Finance Act, 1994 as amended vide Amendment Act of 2010 with effect from 01.07.2010, which, inter alia, includes the promotion and organising etc. of lotteries as a taxable service . The activities of the petitioners fall within the above mentioned provision. According to Mr. Razzak, the petitioners arrangement with the State Government for appointment as a buyer and distributor is dehors the provision of Section 4 of the Lotteries (Regulation) Act, 1998. Referring to Section 4(c), it is argued that the State Government alone is entitled to sell the tickets either itself or through distributors or selling agents and thus any other arrangement whereby the sale of the tickets is made by the State Government to a distributor who buys the tickets in bulk and then further sells to selling agents, is impermissible in law. His further submission is that the State sells the lottery tickets on commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State Government from 70 paise to ₹ 1/- by providing marketing and promotional service thereto by its activities as above. There is thus value addition by the petitioner in relation to game of chance, organized, conducted or promoted by the client of the petitioner namely, the State Government. (VII) It is submitted that these observations denote correct interpretation of the law and are applicable with all force notwithstanding the deletion of the Explanation and introduction of the new provision akin to the Explanation. His submission is that the judgment though challenged before the Hon ble Supreme Court is operative, there being no interim stay on it. (VIII) To counter the above arguments, Mr. A. R. Madhav Rao, learned counsel appearing for the petitioner, submits that the activity of the petitioners of purchasing and selling the lottery tickets through its stockists and selling agents is a normal business activity of any purchaser of any goods. His submission is that the State has right to sell the tickets either itself or through distributors or selling agents and where the sale is absolute without any further prohibition on resale against the full sale considera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in effection was a sale, such a buyer even though a kind of distributor was different from the distributor who acted as an agent of or on behalf of the manufacturer. In such a case the distributor was in fact the wholesale buyer and the property and the goods passed such a buyer. It is difficult to see how this judgment furthers the respondents case. It is averred in the petitioner and, indeed, has been averred at all the times by the first petitioners before the authorities that they sold their products to Rallis India on an outright basis in a arms length transaction. There is no statement by the authorities which disputes this. There is no affidavit-in-reply which disputes the correctness of the averment made in the petition. It must, therefore, be accepted that this was the real nature of the transaction between them. This being so, it is immaterial that Rallis India is described as the distributor of the first petitioners. [Emphasis supplied] (X) Above observations are sought to be applied to the present case on the basis of the agreemental stipulations which, inter alia, provide for payment of lump sum sale considerations for the entire financial year. Under Clause 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is reasonably possible, and the agent s remuneration is normally by way of commission. 1-049. To determine the nature of the transaction in these cases, the whole agreement must be looked at: the test is ultimately one of substance rather than form . There are certain indicators. It is not conclusive that the consignee should be described in the contract as an agent or even sole agent , or conversely that the transaction should be called as sale , although the way in which the parties label the transaction will, typically, play a significant part in the court s determination of the issue. Certain stipulations may be consistent with both sale (and especially sale or return) and agency, and, therefore, cannot be taken as indicative of either: for instance, the transfer to the consignee of the property in goods shipped upon the acceptance of drafts; a provision that the property in goods shall remain in the consignor until disposed of; of the fact that the price of sale to third parties is fixed by the consignor. Exceptionally an agent may be remunerated by keeping the surplus over and above a specified price which is received on account of the principal, while th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate buyer for the quality of the goods, and the manufacturer is liable. ... The distinction between agent and buyer for resale normally turns on whether the person concerned acts for himself to make such profit as he can, or is remunerated by prearranged commission. A supplier who himself fixes the resale price is likely to be a buyer for resale: but the fact that the resale price if fixed by the manufacturer does not necessarily make the supplier an agent, for resale prices are frequently fixed by manufacturers. Exceptionally a buyer for resale may also be paid commission, or an agent remunerated by being allowed to keep the excess over and above a stipulated price. But the making of such a profit by an agent would normally be improper. Conversely, there may be difficulty in deciding whether a person who has agreed to procure goods for another is acting as that other s agent or selling to him. Again, the first question is to ask whether he takes a profit on the resale which will make him a seller, or a commission, in which case he is likely to be an agent and indeed the making of any further profit would usually be improper. (XIII) The Hon ble Supreme Court in Alwaye Ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstance, in our opinion, clearly shows that in respect of the goods despatched under orders placed by the distributors, the distributors really acted as purchasers of the goods which they in turn sold to the customers and does not merely act as agents of the said company. In respect of the goods in question which were despatched through public carriers, although the invoices were prepared in the names of the consumers of the goods, and the goods were consigned to the destination through public carrier booked to self, as pointed out by the Tribunal, the bills were endorsed and handed over to the assessee. When considered in the light of the agreement, these circumstances clearly show that in respect of these transactions the property in the goods despatched passed to the distributor on the bills being endorsed and handed over to the distributors. (XIV) A similar view has been expressed by the Hon ble Supreme Court in Gordon Woodroffe Co. v. Shaik M.A. Majid Co. : AIR 1967 SC 181. 9. It is well-established that even an agent can become a purchaser when as agent pays the price to the principal on his own responsibility. In Ex parte White, in re Nevil, ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so-called agent who in turn sold them on their own responsibility to customers. The price charged by the manufacturers to the sole selling agents was the ruling market price and the sole selling agents were allowed a deduction of 10 per cent by way of commission on that price, the manufacturers had no concern at what rate the sole selling agents sold the goods to customers, it was clear from these facts that the sale by the selling agents to customers was a transaction in which the manufacturers were not interested and there was no privity of contract between the manufacturers and the ultimate purchasers. (XV) In furtherance of his submission on the above questions, Mr. A. R. Madhav Rao, Ld. Counsel appearing for the petitioner, has also produced a Model Agreement circulated by the Ministry of Home Affairs, Government of India, vide its letter dated 28.12.2011 to all the Chief Secretaries of States to be signed by the State Government and agent for running the lottery business including Online lottery. Referring to some of the conditions of this Agreement, it is stated that mutual arrangement between the State Government organising and conducting lottery business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Agreement thus cannot render much assistance to the petitioner. Mr. Rao, however, submits that the Agreement may not be construed to lay down any condition of contract between the State Government and the petitioner, nonetheless, it does indicate the intention of the Central Government in what manner the provisions of the regulatory law and the rules made thereunder have been understood and interpreted by the Central Government, the State Government as also the distributor appointed by the State. His submission is that all the lottery organizing States like Sikkim and Kerala have entered into similar kinds of agreements with their distributors wherein the relationship between the State Government organizing lottery and the distributors are that of a seller and buyer and not principal and agent. There is absolutely no dispute that from the nature of arrangement made between the State Government and the petitioner, who is termed as a distributor, it is evident that the State Government is selling its entire lot of lottery tickets published by it through the distributor (petitioner) for minimum guaranteed sale price with complete liberty to the distributor, the purchaser of the lotter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchase on the statutory terms, that is to say, if and when the specific acts or conduct on his part set out in the rule have occurred. For this reason, it is necessary to distinguish certain closely related forms of transaction where a different intention appears. (XVIII) The sum and substance of the above discussion is that once the transaction between two contracting parties involves only sale and purchase including on sale or return , the relationship is simply that of a seller and purchaser, it does not constitute any service. In Bharat Sanchar Nigam Ltd. Anr. v. Union of India Ors. : (2006) 3 SCC 1, it has been held as under: - 88. No one denies the legislative competence of the States to levy sales tax on sales provided that the necessary concomitants of a sale are present in the transaction and the sale is distinctly discernible in the transaction. This does not however allow the State to entrench upon the Union List and tax services by including the cost of such service in the value of the goods. Even in those composite contracts which are by legal fiction deemed to be divisible under Article 366 (29- A), the value of the goods involved in the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be correct. (XX) In Indian Railways C. T. Corpn. Ltd. v. Govt. of NCT of Delhi : 2010 (20) S.T.R. 437 (Del.), the question before Delhi High Court was whether the supplier of food and beverages to the Railways for consumption of passenger travelling therein includes the element of service and subject to levy of service tax. Considering this question, Delhi High Court observed as under: 4. The next question raised is with regard to the respondent s liability for service tax on collections for disposal of garbage. Even though there is no written agreement for the collections, the Tribunal, on facts, found that the charges represent value for the materials sold and not for any service rendered by the respondent. So much so, we do not find any ground to interfere with the Tribunal s order vacating the service tax demands from the respondent for the collections and from the parties referred above. We do not find any merit in the appeals filed by the Department. Consequently, the appeals are dismissed. (XXI) From the discussion and consideration of judgments noticed hereinabove, it clearly emerges that where the transaction is purely that of sale and purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d price is for the purposes of the petitioner and his stockists/sellers profit components and other expenditure that would be incurred for sale of the lottery tickets. According to Mr. Rao, the discounted price in any sale transaction is normal and common business practice between a seller and a purchaser. After the lottery tickets are printed by the State Government, the same are required to be delivered to the petitioner at the agreed destination in terms of clause 13 of the Agreement and thereafter, it is the sole responsibility of the petitioner to sell the lottery tickets through stockists, selling agents or retail sellers as may be deemed convenient and the State Government can neither interfere with nor have any control over the stockists and selling agents appointed by the petitioner. Thus the State Government receiving the minimum guaranteed price sits pretty safe without any liability for profit or loss as the case may be. It becomes the exclusive responsibility of the petitioner to sell the tickets and, even if the petitioner is unable to sell the entire lot and sale proceeds of the sold tickets are less than the minimum guaranteed price paid by it to the Government, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chem Limited and another v. Union of India and another reported in 1981 Excise Law Times, 348 and submitted that the mere use of the word Distributor would not lead to the conclusion that the agreement is not an agreement of agency. The Division Bench observed that the distributor in the commercial world is understood to be person who distributes goods of the manufacturer to the consumer and in so doing he acts for and on behalf of the manufacturer. The distributor normally is, therefore, an agent of the manufacturer for the purpose of reaching out the goods to the consumers. Shri Dalal relied upon this observation and claims that Voltas were merely acting as Agents of the petitioners for reaching out the tractors to the consumers. The submission is not correct, as the Division Bench has further observed in the judgment that in the case of the buyer who purchases goods on payment of a commercial price to the manufacturer and transaction in effect is a sale, such a buyer is different from the distributor earlier noticed, though even such a buyer is sometimes described as a distributor. The distributor in such a case is in fact a wholesale buyer and the property in the goods passes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty in favour of the buyer. The fact that the expenses in regard to the advertisements were to be shared by the petitioners and Voltas merely indicate that both the wholesale buyer and the petitioners were interested in having greater production and sale thereof and that condition, in my judgment, cannot be considered as relevant to reach the conclusion that the agreement was not at arms length. (XXIV) In Pioneer Tools and Appliances (P) Ltd. v. Union of India : 1989 (42) E.L.T. 384 (Bom.), it has been held as under:- 5. This judgment clearly demonstrates the fallacy of the reasoning adopted by the first respondent in the order passed in revision. Mr. R. L. Dalal, learned counsel for the respondents, however, laid emphasis upon the fact that Rallis India was described as the first petitioner s distributor. He referred me to the decision of the division bench of this court in Amar Dye-Chem Limited and another v. Union of India and another, 1981 E.L.T. 348. The court held that the distributor normally was an agent of the manufacturer for the purpose of distributing the goods to the consumers. He was not a buyer of the goods from the manufacturer on his own account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods he sold reparable throughout the country. The provision as to after sales service, therefore, benefitted not only the appellant; it was a provision of mutual benefit to the appellant and the dealer. (XXVI) Similarly, in Collector of Central Excise, Baroda v. Besta Cosmetics Ltd. reported as 2005 (183) E.L.T. 122 (SC), it has been held that the clause of advertisement being purely optional would not militate against the price which is at arm s length. The following observations are relevant: - 2. In addition, we may note that the relevant clause in the agreement between the assessee and its Marketing Agent relating to advertisements reads as follows (wherein the marketing agent is referred to as BHPL) : BHPL shall market the said product in the trade name or the trademark of BCL in respect of the said product. BHPL may, at its own free will, make it known generally that the products of BCL are marketed by them. BHPL for this matter, may adopt such ways and means and may incur such expenses on Advertising and Business promotion as it may deem fit and necessary. At the same time, BHPL should ensure that it does not infringe or in any way preju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asis. From the nature of the transactions, the Government and the petitioners deal as principal to principal. The tickets purchased are thereafter distributed through other agents, and sub-agents, according to them, on commission basis. They point out that after purchase of the tickets, it is not the Government s look out as to how and when they are divided or distributed, and there is no control over the affairs thereafter. Therefore, the principal contention of the petitioner is that there is only payment of the price of the tickets fixed as payable by the principal, and no commission or discount are paid to them by the Government. As such, it is the contention of the petitioners that Section 194G of the Act has no application, and hence the demand of tax, as coming through exhibit P-4 is unsustainable and without jurisdiction. 7. Before exhibit P-4, the deduction of ten per cent, was not being made, and the petitioners submit that thereafter the tax deduction has commenced. The submission of Mr. K. R. Prasad, senior counsel, appearing on instructions, for the petitioners, could be summarized as following: The provisions for collection and recover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xist in real life, for this court to accept the case of the Department that by the factum of purchase he had already made a profit. 23. Therefore, the demand of tax is to be shown as one on the income of the person concerned. There is neither payment of cash or by cheque, and the Government never credits any income to the account of the persons like the petitioners. When the deduction is contemplated at the time of payment to the person concerned and when it is shown that there is no payment to the agent at the time of purchase of the ticket, the section automatically becomes inapplicable. If any prize or remuneration is payable by the Government, to any person, deduction at source as envisaged under the section, may arise. But when no payment is made in view of the mandate of the section, no deduction is envisaged. That the ticket is given on a discount of 28 per cent., can by no imagination be pressed into service for an interpretation that, none the less, ten per cent, of 28 paise is deductible as tax. Perhaps the intention might have been to bring the agents within the tax net, but the section as it stands, according to me, is not authority for tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor were incentives and discounts and not commissions. We find no infirmity in the findings of the Commissioner (Appeals) and also ITAT. (XXIX) It is the common case of the parties that the service tax has been levied vide Finance Act, 1994 as amended in 2010 by introducing organization, promotion of lottery etc. as a taxable service. Section 66 prescribes 12% as the rate of service tax of the value of the taxable service whereas Section 67 deals with valuation of taxable services for charging service tax. The relevant extract of both the sections are reproduced hereunder: - 66. Charge of service tax There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent of the value of taxable services referred to in sub-clauses .. (zzzzn) . of clause (105) of section 65 and collected in such manner as may be prescribed. 67. Valuation of taxable services for charging service tax.- (1) Subject to the provisions of this Chapter, where service tax is chargeable on any taxable service with refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or part of ₹ 10 Lakh) of aggregate face value of lottery tickets printed by the organizing State for a draw If the lottery or lottery scheme is one where the guaranteed prize payout is less than 80% Provided that in case of online lottery, the aggregate face value of lottery tickets for the purpose of this sub-rule shall be taken as the aggregate value of tickets sold, and service tax shall be calculated in the manner specified in the said Table. Provided further that the distributor or selling agent shall exercise such option within a period of one month of the beginning of each financial year and such option shall not be withdrawn during the remaining part of the financial year. Provided also that the distributor or selling agent shall exercise such option for financial year 2010-11, within a period of one month of the publication of this sub-rule in the Official Gazette or, in the case of new service provider, within one month of providing of such service and such option shall not be withdrawn during the remaining part of that financial year. The petitioners case falls in Sl. No. 2, the prize money being less than 80%. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aranteed sum towards the full sale consideration to the Government and thus the entire claim of the respondents that the petitioner is providing taxable service is belied by its own circular and understanding of the nature of the petitioner s activity. GROUND (B) (I) This ground comprises of different limbs, i.e. (i) whether the conduct of lottery is an Act of Betting and Gambling envisaged under entries 34 and 62 of List II to Schedule 7; (ii) whether it is within the exclusive domain of State legislature to impose taxes on organising lotteries being an act of Betting and Gambling ; (iii) whether the Parliament has the competence to enact law in exercise of its residuary legislative power under entry 97 of List I to Schedule 7 dehors the entries 34 and 62 of List II; (iv) whether the State legislature and Parliament both can simultaneously impose taxes on the conduct of lottery by the State Government under entry 62 of List II and entry 97 of List I to Schedule 7, if so, under what circumstances; and (v) whether such circumstances exist in the case in hand? (II) We would like to deal with each limb of Ground-B separately. (i) whether the conduct of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd how State lotteries cleanses this character. As we have already recorded, the difference between gambling and trade is that gambling inherently contains a chance with no skill, while trade contains skill with no chance. What makes lottery pernicious is its gambling nature. Can it be said that in the State organised lotteries this element of gambling is excluded? There could possibly be no two opinions that even in the State lotteries the same element of chance remains with no skill. It remains within the boundaries of gambling. The stringent measures and the conditions imposed under the State lotteries are only to inculcate faith in the participant of such lottery, that it is being conducted fairly with no possibility of fraud, misappropriation or deceit and assure the hopeful recipients of high prizes that all is fair and safe. That assurance if from stage one to the last with full transparency. No doubt, holding of the State lotteries for public revenue has been authorised, legalized and once this having been done it is expected from the State to take such measure to see that people at large, faithfully and hopefully participate in larger number for the greater yield of its re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tate as a field of legislation for which the Union legislature can enact a law. Entry 34 has much wider field and it may include many other activities apart from the lotteries for which the State legislature may enact a law. However, under entry 40 the Parliament is competent to enact law only in respect to lotteries as a species of betting and gambling. Lottery thus is a common subject matter for which both the Union Parliament and State Legislature can enact laws and fall in their respective legislative competence under Article 246 of the Constitution of India. The laws to be enacted under both these entries, however, could only be regulatory in nature and nothing beyond that. Where any field of legislation is available to both the Parliament and the legislature of a State and both the legislative bodies enact laws having competence to do so, in the event of conflict the State law to the extent of repugnancy shall be void if such law is enacted pursuant to any entry under List III (Concurrent List). However, the situation where the Parliament enacts a law on the subject matter under any one of the entries in List I and the State legislature also enacts a law touching the same sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essions betting and gambling . The first question for consideration would be whether the power to impose tax on lotteries is same thing as to impose tax on betting and gambling . Though no entry in any of the Lists to Seventh Schedule specifically provides for levy of taxes on lotteries, the power to enact law for imposition of tax on lotteries have to be construed as inherent in the expressions betting and gambling , lottery being one of such activity. (g) Entry 97 of List I authorizes the Parliament to enact a law including imposition of taxes in respect of any other matter not enumerated in List II or List III. Article 248, which is the source of power, confers exclusive jurisdiction upon the Parliament to make any law in respect of any matter not enumerated in State List or Concurrent List and under Sub-clause (2). Such power also includes power to make law for imposition of tax not mentioned in either of those Lists, i.e. Lists II and III respectively. (h) The scope of legislative competence of the Parliament to make laws under entry 97 of List I came up for consideration before a Constitution Bench of the Hon ble Supreme Court in Union of India v. Shri Harbhajan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms of the relevant articles, namely, Article 246, Article 248 and Entry 97, List I, show that any matter, including tax, which has not been allotted exclusively to the State Legislatures under List II or concurrently with Parliament under List III, falls within List I, including Entry 97 of that list read with Article 248. . 21. It seems to us that the function of Article 246(1), read with Entries 1-96, List I, is to give positive power to Parliament to legislate in respect of these entries. Object is not to debar Parliament from legislating on a matter, even if other provisions of the Constitution enable it to do so. Accordingly we do not interpret the words any other matter occurring in Entry 97, List I, to mean a topic mentioned by way of exclusion. These words really refer to the matters contained in each of the Entries 1 to 96. The words any other matter had to be used because Entry 97, List I follows Entries 1-96, List I. It is true that the field of legislation is demarcated by Entries 1-96, List I, but demarcation does not mean that if Entry 97, List I confers, additional powers, we should refuse to give effect to it. At any rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions in the context of the content of Entry 97 as that entry speaks about matters other than those enumerated before in List I and those enumerated in the other Lists. Notwithstanding the fact that the residuary power has been vested in the Central Legislature under Article 248 and its consequence translated in Entry 97 in List I, there can be no gainsaying that the idea was to assign such residuary power over matters which at the time of framing three Lists could not be thought of or contemplated. This is clear from the fact as pointed out by counsel, that the Lists contain as many as 209 matters which are couched in careful and elaborate words with inclusive and excluding language in the case of some, which has made the Constitution, to use the words of Gwyer, C.J., in In re the C. P. and Berar Act No. XIV of 1938 (supra), unique among federal constitutions in the length and detail of its legislative Lists . In the layout of such elaborately worded matters in the Lists and in the context of Article 246(1), the residuary power contained in Article 248 and Entry 97, List I must be construed as meaning power in respect of matters not enumerated in any of the three Lis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ). The relevant quotes are reproduced hereunder: - 106. The judicial opinion of binding authority flowing from several pronouncements of this Court has settled these principles : (i) in interpreting a taxing statute, equitable considerations are entirely out of place. Taxing statutes cannot be interpreted on any presumption or assumption. A taxing statute has to be interpreted in the light of what is clearly expressed; it cannot imply anything which is not expressed; it cannot import provisions in the statute so as to supply any deficiency; (ii) before taxing any person it must be shown that he falls within the ambit of the charging section by clear words used in the section; and (iii) if the words are ambiguous and open to two interpretations, the benefit of interpretation is given to the subject. There is nothing unjust in the taxpayer escaping if the letter of the law fails to catch him on account of the legislature s failure to express itself clearly. (See Justice G. P. Singh, ibid., pp. 638-39.) 107. Power to tax is not an incidental power. According to Seervai, although legislative power includes all incidental and subsidiary power, the power to impose a tax i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale of lottery tickets conducted by other State in State of Maharashtra so as to make selling of lottery tickets by the other States uneconomical, unviable and thereby creating monopoly in the lottery tickets of the lotteries conducted by the State of Maharashtra. 10. It was then contended before us that though there is specific power vested in the State legislature under Entry 62 of List II of the Seventh Schedule, because of Entry 40 in List I of the Seventh Schedule of the Constitution of India, the Parliament will have legislative competence to levy tax under Article 248 and Entry 97 in List I of the Seventh Schedule of the Constitution of India. In our opinion, this submission has also no force, because power to tax is not an incidental power and under the residuary power the Parliament will be entitled to impose tax only if that power is not specifically vested in the State legislature by any entry in List II of the Seventh Schedule. .. (Emphasis supplied) (m) In Godfrey Philips India Ltd. v. State of U.P. : (2005) 2 SCC 515, the Hon ble Supreme Court upholding the legislative power of State under entry 62 of List II, held as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lists and the taxation entries therein, that Entry 62 List II does not permit the States to levy tax on articles of luxury. 73. Having rejected the second premise contended for by Mr. Salve, the next question is whether the language of Entry 62 List II would resolve the issue. The juxtaposition of the different taxes within Entry 62 itself is in our view of particular significance. The entry speaks of taxes on luxuries including taxes on entertainments, amusements, betting and gambling . The word including must be given some meaning. In ordinary parlance it indicates that what follows the word including comprises or is contained in or is a part of the whole of the work preceding. The nature of the included items would not only partake of the character of the whole, but may be construed as clarificatory of the whole. 74. It has also been held that the word includes may in certain contexts be a word of limitation (South Gujarat Roofing Tiles Manufacturers Assn. v. State of Gujarat). In the context of Entry 62 of List II this would not mean that the word luxuries would be restricted to entertainments, amusements, betting and gambling but would only emphasise the attribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er: 21. The concept of a tax on luxuries in Entry 62, List II cannot be limited merely to tax things tangible and corporeal in their aspect as luxuries . It is true that while frugal or simple food and medicine may be classified as necessities; articles such as jewellery, perfume, intoxicating liquor, tobacco, etc., could be called articles of luxury. But the legislative entry cannot be exhausted by these cases, illustrative of the concept. The entry encompasses all the manifestations or emanations, the notion of luxuries can fairly and reasonably (sic) can be said to comprehend the element of extravagance or indulgence that differentiates luxury from necessity cannot be confined to goods and articles. There can be elements of extravagance or indulgence in the quality of services and activities. (p) In State of Bombay vs. R.M.D. Chamarbaugwala and another : AIR 1957 SC 699, tax was levied under entry 62 on the promoters of the lotteries. The question that fell for consideration was whether tax on promoters of lotteries, who do not gamble is tax on betting and gambling under entry 62 List II. Rejecting the challenge and upholding the validity of the levy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y on the person spending on entertainment but also on the act of a person entertaining, or the subject of entertainment. It is well settled by this Court that such tax may be levied on the person offering or providing entertainment or the person enjoying it. The respondents are admittedly engaged in the business of receiving broadcast signals and then instantaneously sending or transmitting such visual or audio-visual signals by coaxial cable, to subscribers homes through their various franchisees. It has been made possible for the individual subscribers to choose the desired channels on their individual TV sets because of cable television technology of the respondents and of sending the visual or audio-viisual signals to subcable operators, and instantly retransmitting such signals to individual subscribers for entertaining them through their franchisees. The respondents act is, no doubt, an act of offering entertainment to the subscribers and/or viewers. The respondent is very much directly and closely involved in the act of offering or providing entertainment to subscribers who are on his record. For the fact of offering or providing entertainment to the subscribers and/or vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and publisher of the lotteries, the distributor, i.e. the petitioner, selling agent and the ultimate purchaser of the lottery ticket who participates in the game of chance, are all players in the activity of the betting and gambling. Thus tax envisaged under entry 62 on betting and gambling is tax on the activity as held by the Constitution Bench in State of Bombay vs. R.M.D. Chamarbaugwala s case (supra). The betting and gambling itself is an activity though the lottery ticket is a tangible thing which carries with its right to participate in the game of chance. Thus all activities right from the publishing of the lottery tickets till participation in the game of chance, declaration of draw and even distribution of prize to the winner fall within the purview of expression betting and gambling . Thus power to levy tax on organization, promotion and marketing of lottery being an act of betting and gambling comes within the exclusive domain of entry 62 of List II. (t) It is also settled legal position that where the entries under different Lists empower the respective legislatures to enact law on any subject matter and the question arises regarding the legislative competence of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld public revenue. Most broadly, the term embraces all governmental impositions on the person, property, privileges, occupations, and enjoyment of the people, and includes duties, imposts, and excises. Although a tax is often thought of as being pecuniary in nature, it is not necessarily payable in money. (w) Article 366 of the Constitution of India defines various expressions used in the Constitution. Taxation and Tax being one of such expressions defined under clause (28) thereof. The relevant extract reads as under:- 366. Definitions. In this Constitution, unless the context otherwise requires, the following expressions have the meanings hereby respectively assigned to them, that is to say (28) taxation includes the imposition of any tax or impost, whether general or local or special, and tax shall be construed accordingly; (x) This definition is of widest possible amplitude and encompasses within its field any kind of tax that could be visualized or conceptualized. In D. G. Gose and Co. Pvt. Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wer flowing from entry 97 List I read with Article 248 of the Constitution should not be construed to mean that the Parliament has no jurisdiction whatsoever to levy service tax in respect of any of the subject matter. The legislative competence of the Parliament to impose service tax has to be conceded by virtue of entry 97 List I read with Article 248 of the Constitution as held by Hon ble Supreme Court in various judgments noticed by us hereinbefore and later part of this judgment. However, such legislative power is prohibited in respect to any subject matter where the power to impose or levy tax has been conferred upon the State Legislature in List II (State List) or the Provincial Legislature and the Parliament under List III (Concurrent List). It is also pertinent to say that Parliament would also be deprived of the residuary power in respect to any subject matter falling even in the List I where such power is traceable to any of the entries contained therein i.e. entries 1 to 96. In our view the residuary powers of the Parliament would come into play only where none of the entries in any of the Lists provide for a legislative field. As held by the Hon ble Apex Court in State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lottery tickets under Section 67 of the Finance Act, 1994 as amended by Finance Act, 2010. It is further argued that the measure of tax cannot be questioned by the petitioner that too in writ proceedings and that it is for the competent adjudicating authority to decide the issue. It is contended that the petitioner has directly approached this Court without having approached the competent adjudicating authority in this regard. Under such circumstances, the petitioner should be directed to approach the competent adjudicating authority for seeking adjudication regarding levy of service tax on the service rendered by it. He has placed reliance upon the judgment of the Apex Court reported as Association of Leasing Financial Service Companies v. Union of India : (2011) 2 SCC 352. (ab) In the above case the controversy before the Hon ble Supreme Court was with regard to levy of service tax on the transaction of equipment leasing and hire purchases undertaken by non-banking financial companies. The plea of the writ petitioners who challenged the vires of the levy was that the transaction of equipment leasing and hire purchase and financing has been constitutionally defined as sale an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 60. In fact, the Government has given exemption from payment of service tax to financial leasing services including equipment leasing and hire purchase on that portion of taxable value comprising of 90% of the amount representing as interest i.e. the difference between the instalment paid towards repayment of the lease amount and the principal amount in such instalments paid (see Notification No. 4/2006 Service Tax dated 1-3-2006). In other words, service tax is leviable only on 10% of the interest portion. (See also Circular F. No. B.11/1/2001-TRU dated 9-7-2001 in which it has been clarified that service tax, in the case of financial leasing including equipment leasing and hire purchase, will be leviable only on the lease management fees/processing fees/documentation charges recovered at the time of entering into the agreement and on the finance/interest charges recovered in equated monthly instalments and not on the principal amount.) Merely because for valuation purposes inter alia finance/interest charges are taken into account and merely because service tax is imposed on financial services with reference to hiring/interest charges, the impugned tax does not ceas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been held that the tax had been levied on 60% of the gross receipts. It was further held that predominantly the activity of the mandap-keepers was rendering various kinds of services. Applying the aspect doctrine, the Hon ble Supreme Court held as under: - 58. A tax on services rendered by mandap-keepers and outdoor caterers is in pith and substance, a tax on services and not a tax on sale of goods or on hirepurchase activities. Section 65 clause (41) sub-clause (p) of the Finance Act, 1994, defines taxable service (which is the subject-matter of levy of service tax) as any service provided to a customer by a mandap-keeper in relation to the use of a mandap in any manner including the facilities provided to [a customer] in relation to such use and also the services, if any, rendered as a caterer . The nature and character of this service tax is evident from the fact that the transaction between a mandap keeper and his customer is definitely not in the nature of a sale or hire-purchase of goods. It is essentially that of providing a service. In fact, as pointed out earlier, the manner of service provided assumes predominance over the providing of food in such sit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Entry 60. However, as stated above, Entry 60 is not a general entry. It cannot be read to include every activity undertaken by a chartered accountant/cost accountant/architect for consideration. Service tax is a tax on each activity undertaken by a chartered accountant/cost accountant or an architect. The cost accountant/chartered accountant/architect charges his client for advice or for auditing of accounts. Similarly, a cost accountant charges his client for advice as well as doing the work of costing. For each transaction or contract, the chartered accountant/cost accountant renders profession based services. The activity undertaken by the chartered accountant or the cost accountant or an architect has two aspects. From the point of view of the chartered accountant/cost accountant it is an activity undertaken by him based on his performance and skill. But from the point of view of his client, the chartered accountant/cost accountant is his service provider. It is a tax on services . The activity undertaken by the chartered accountant or cost accountant is similar to saleable or marketable commodities produced by the assessee and cleared by the assessee for home consumpti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he service provider was rendering of service and levy of service tax on 60% of the gross value was upheld. Similarly in Assn. of Leasing Financial Service Companies case levy of service tax on 10% of the gross contract value was upheld being a tax on component of service. (ak) In the present case, undisputedly the lottery ticket is sold as a good by the State Government to the petitioners at the discounted value of 70 paise per ticket as against its gross value/ MRP of Re.1/-. The predominant part of the transaction is sale of goods. While considering the discount of 30% to the petitioners on the MRP, we have held that the discount is a normal trade practice in any transaction of sale and purchase. If the seller sells the goods at the MRP to its ultimate consumer, no intermediary will sell the goods unless he gets a discount to meet the expenditure for establishment, logistics and some component of profit. The State Government is unable to sell the tickets to the ultimate buyers and for that purpose the petitioners are appointed as stockists or distributors on payment of full sale consideration on discounted price. Further the sale by the petitioners to their stockists, sellin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... except where such powers are traceable to any of the entries in List II and III to Seventh Schedule of Constitution of India. (v) Power to tax the activity of betting and gambling as explained above being within the exclusive domain of State Legislature under Entry 62, List II, the Parliament in exercise of its residuary power under Entry 97, List I to Seventh Schedule of Constitution of India lacks legislative competence to impose any tax including service tax on such activity. 19. In view of the above conclusions, we allow these petitions, strike down the clause (zzzzn) to sub-section 105 of Section 65 of Finance Act, 1994 as introduced vide Finance Act, 2010 as ultra vires to Constitution of India having been enacted in contravention to Entry 97, List I to Seventh Schedule read with Article 248 of Constitution of India. 20. We also set aside all the consequential actions of respondents imposing service tax upon the petitioners being distributors of lottery organized by State of Sikkim. 21. Since the petitioners secured registration and paid service tax under the impugned provision on their own, this judgment shall operate prospectively. 22. In the facts and ci ..... X X X X Extracts X X X X X X X X Extracts X X X X
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