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TMI Blog2009 (5) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... nts are agents of the State of Sikkim. The State Government floated "schemes" whereby the total number of tickets therefor was prescribed. In terms of the said schemes, the respondent purchases all lottery tickets in bulk form on "all sold basis". It pays Rs.70 per ticket for the face value of Rs.100/-. In turn, it sells the ticket to its principal stockists on "outright" and "all sold basis": It makes a profit out of the margin out of the difference between the amounts received from the principal stockists and the amounts paid to the State Government. The principal stockists in turn sell the tickets to the sub-stockist and who in turn sell to the agents. The retailers purchase tickets from the agents and in turn sell the same to the ultimate participants of the draw. 4. Indisputably, the entire transaction is governed by the Lottery (Regulation) Act, 1998. It is neither in doubt nor in dispute that having regard to the circular letter issued by Commissioner (Service Tax), Ministry of Finance, CBEC dated 14.01.2007, the nature of transactions between the distributor and the State Government do not constitute a sale. However, it was concluded that the activities of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er sale, and is it for the purpose of marketing, which the true and core business activity of the writ petitioner? Is the business violability of the writ petitioner dependent only on the middleman succeeding in getting a market for the original goods, and is the margin of 30% sufficient to cover this type of business venture? These questions might merely be asked today but need not be answered today without hearing parties fully. I am of the opinion that on a balance of circumstances it appears that the essence of activity, properly so called, cannot but be promotion or marketing. Order and observations, however worded are without prejudice to the rights and contentions of the parties. There will be no interim order. Appearance of parties before the Department will take place and decisions might be given and even levy might be made. However, decisions given will ultimately abide by the result of the writ. Since both the parties are also solver, no interim order is called for. Returnable on 17.8.2007 when further orders might be prayed for by either party." The said writ petition was posted for hearing on 18.9.2007 and by reason of an order of the said date, the wr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd of fetter on the powers of the Parliament to impose service tax on the assessee who provide the service of promotion and marketing of lotteries. The aforementioned two entries empower the State Legislature to impose tax on betting and gambling and other luxuries. In the instant case, however, what is sought to be taxed under sub-clause (ii) of clause (19) of Section 65 of the Finance Act, 1994 is the services rendered by an assessee to its client in promoting and marketing of lotteries organized by the State Government and not anything else. (v) A transaction may involve two taxable events in its different aspects, as has been held by the Constitution Bench of this Court in Federation and Association of Hotels and Restaurants Association of India v. Union of India reported in [(1989) 3 SCC 634], in terms whereof whereas, on the one hand, service tax can be levied on the services provided by the respondent to the Government of Sikkim in promoting and marketing of lotteries; the State Government is also empowered to impose tax on the organization and conduct of lotteries in the State in exercise of its powers under Entries 34 and 62 of the List II of the Seventh Schedule read wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of service tax. It is levied on "taxable services" as defined in Section 65(105) thereof. Section 66 is the charging section and Section 68 provides for payment of service tax. Sub-clauses (i) and (ii) of Section 65(19) which are relevant for our purpose, read as under:- "Section 65(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" The term "business auxiliary service" was inserted in the Act by Finance Act, 2003 which came into force on 01.07.2003. The term "business auxiliary service" includes services as a commission agent, but does not include any information technology service or any activity that amounts to "manufacture" within the meaning of clause (f) of Section 2 of the Central Excise Act, 1944. Clause (zzb) of Section 65(105) of the Act defines "taxable service" to mean any service provided to a client, by a commercial concern in relation to business auxiliary service. "Goods" has been defined in Section 65(50), in the following terms: "Section 65(50) "goods" has the meaning ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds Act. It is evidently not. A Constitution Bench of this Court in Sunrise Associates (supra) held to be so. H. Anraj v. Government of Tamil Nadu reported in [(1986) 1 SCC 414] was overruled opining that sale of lottery tickets does not involve sale of goods and that at the highest stage, transfer of it would amount to transfer of an actionable claim. In Yasha Oversees v. Commr. of Sales Tax & Ors. [(2008) 8 SCC 681], Sunrise Associates (supra) was distinguished, stating : "37. The decision in Sunrise makes two very significant points and to us it appears that the decision mainly turns on those two points. The first is with regard to the two different meanings of 'property', as highlighted in paragraph 35 of the judgment and the second is with regard to the distinction between interests in goods and a contract as highlighted in paragraph 43 of the judgment. In paragraph 35 of the decision the court explained that the word 'property' occurring both in the definitions of 'goods' and 'sale' carries different meanings. In the definition of 'goods' the word 'property' is used to mean the subject matter of ownership, that is to say, the thing itself. In the definition of 'sale' the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agree with the aforementioned submission. The law, as it stands today (although it is possible that this Court in future may take a different view), recognizes lottery to be gambling. Gambling is res extra commercium as has been held by this Court in The State of Bombay v. R.M.D. Chamarbaugwala [1957 SCR 874] and B.R. Enterprises v. State of U.P. & Ors. [(1999) 9 SCC 700]. 15. Contention of Mr. Salve is that where the State involves itself in an illegal activity, it cannot render a service as dealing in lottery is illegal being res extra commercium, no services can be rendered. We, as at present advised, do not intend to go into the said issue which is a complex one, in view of the fact that in this case we are primarily required to consider the effect of the explanation appended to clause (19) of Section 65 of the Act. It is also not otherwise necessary to be determined. We must, however, proceed to determine the said question keeping in view the aforementioned decisions of this Court that holding of lottery being gambling comes within the purview of the doctrine of res extra commercium. 16. Organizing lottery by the State is tolerated being an economic activity on its part so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apply to the European Countries where gambling and even sale of narcotic drugs subject to licensing provisions, if any, is permissible. The concept of res extra commercium may in future be required to be considered afresh having regard to its origin to Roman Law as also the concept thereof. Conceptually business may be carried out in respect of a property which is capable of being owned as contrasted to those which cannot be. Having regard to the changing concept of the right of property, which includes all types of properties capable of being owned including intellectual property, it is possible to hold that the restrictions which can be imposed in carrying on business in relation thereto must only be reasonable one within the meaning of Clause (6) of Article 19 of the Constitution of India. Right of property although no longer a fundamental right, but, indisputably is a human right. [See Vimlaben Ajitbhai Patel v. Vatslaben Ashokbhai Patel and Others (2008) 4 SCC 649 and KarnatakaState Financial Corporation v. N. Narasimahaiah (2008) 5 SCC 176]. We may notice that the doctrine of `franchise' or `exclusive privilege' has been mentioned in C.S.S Motor Service Tenkari and Ors v T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the NIC-1998, which was based on ISIC-1990 Rev.3." 20. Lotteries come within the purview of Group 924 class 924(9) and sub- class 924(9)(0) which is in the following terms : "Other recreational activities includes fairs and shows of a recreational nature; management and operation of lotteries (bulk and retail sale of lottery tickets are included under wholesale and retail sale respectively); gambling and betting activities; activities of casinos; booking agency activities in connection with theatrical productions or other entertainment attractions, recreational fishing and other recreational activities n.e.c." It also comes within the purview of Section 4 classifying other community, social and personal service activities. 21. If it is brought within the purview of the terms `entertainment' or `amusement' as provided for in Entries 34 and 62 of List II of the Seventh Schedule of the Constitution of India, it may come within the purview of service. It is, however, contended that what is being taxed is the services rendered in respect thereof. Services can be rendered in respect of activities of the State if they are permissible in terms of sub-clause (ii) of Clause (19) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the total face value of the tickets sold minus (a) the total cost of the tickets paid by the distributor to the State Government and (b) the prize money paid by the distributor. In other words, the value is the mark up between the buying and selling of lottery tickets." 24. A bare perusal of the said circular letter would clearly show that lottery tickets were considered to be goods. It is with that mindset, the circular was issued. However, it must have been realised that resale of lottery tickets by the distributor or by others is not permissible. Whether sub-clause (ii) of clause (19) of Section 65 had been applied in case of any other distributor or agent of such lottery tickets is not known. If the assertion of Mr. Salve that nobody had demanded tax under the second clause is correct, we do not know why the principle of `small repairs' by inserting an explanation was taken recourse to. The explanation, in our opinion, cannot be said to be a simple clarification as it introduces a new concept stating that organizing of the lottery is a form of entertainment. Introduction of such new concept itself would have a constitutional implication. In the year 2003, while amendin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 5.4.2 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. 5.4.3 To clarify as removal of doubts, an explanation is added under business auxiliary service stating that services provided in relation to promotion or marketing of games of chance organized, conducted or promoted by the client are covered under the existing definition of business auxiliary service. Amendment is only for removal of doubts and field formations are, therefore, requested to ensure that service tax is collected on such services." 27. The speech o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of such a penal provision. Such a provision has to be construed strictly and narrowly and not widely or with the object and intention of the legislature." 30. Mr. Parasaran has referred to Commissioner of Income Tax, Bombay & Ors. v. Podar Cement Pvt. Ltd. & Ors. [(1997) 5 SCC 482] to contend that clarificatory statute would be retrospective in nature. On legal principle, there may not be any quarrel with the said proposition. Therein, however, this court was considering a case where two interpretations of Section 22 of the Income-tax Act were possible. It was opined that if one interpretation is possible and the same is clear, the next thing to be considered would be what would be the effect of the amendment. Referring to Benion's Statutory Interpretation and G.P. Singh's Principles of Statutory Interpretation, it was held : "An amending Act may be purely clarificatory to clear a meaning of a provision of the principal Act which was already implicit. A clarificatory amendment of this nature will have retrospective effect and, therefore, if the principal Act was existing law when the Constitution came into force, the amending Act also will be part of the existing law." I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e statute but will proceed to analyse the nature of the amendment and then conclude whether it is in reality a clarificatory or declaratory provision or whether it is an amendment which is intended to change the law and which applies to future periods." 32. We are also not unmindful of the fact that the said decision has been overruled in Commissioner of Income Tax-I, Ahmedabad v. Gold Coin Health Foods Pvt. Ltd. [(2008) 11 SCALE 497]. A bare perusal of the said decision would, however, show that a Three Judge Bench of this Court noticed that the Act intended to make the position explicit which otherwise was implicit. The Bench went back to the provisions of the Original Act to hold that the clarification issued by the Parliament was in tune with the actual interpretation of the original provision. In that view of the matter, it was held : "As noted by this Court in Commissioner of Income Tax, Bombay & Ors. v. Podar Cement Pvt. Ltd. & Ors. [(1997) 5 SCC 482 = 2002-TIOL-445- SC-IT] the circumstances under which the amendment was brought in existence and the consequences of the amendment will have to be taken care of while deciding the issue as to whether the amendment was clarific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the relevant time. The mere fact that the assessments in question has(sic) somehow remained pending on April 1, 1979, cannot be cogent reason to make the Explanation applicable to the cases of the present assessees. This fortuitous circumstance cannot take away the vested rights of the assessees at hand"." 35. Reverting to the decision of a Kerala High Court in CIT v. S.R. Patton [(1992) 193 ITR 49 (Ker)] wherein Gujarat High Court's judgment was followed, this Court noticed that explanation was not held to be a declaratory one but thereby the scope of Section 9(1)(ii) of the Act was widened. The law in the aforementioned premise was laid down as under : "17. As was affirmed by this Court in Goslino Mario (supra), a cardinal principle of the tax law is that the law to be applied is that which is in force in the relevant assessment year unless otherwise provided expressly or by necessary implication. [See also: Reliance Jute and Industries. v. CIT [(1980) 1 SCC 139]. An Explanation to a statutory provision may fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section (See: Sonia Bhatia v. Sta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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