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TMI Blog2025 (2) TMI 483X X X X Extracts X X X X X X X X Extracts X X X X ..... e this Court: ......................................................... 26 Points for Consideration: ................................................................. 37 Relevant constitutional provisions: .................................................. 38 Relevant Case Law on lotteries:........................................................ 44 B.R. Enterprises: .................................................................................... 44 Sunrise Associates: ................................................................................ 45 State of Karnataka: ............................................................................... 47 K. Arumugam: ........................................................................................ 47 Legal Framework: ............................................................................ 51 Agreements under consideration: ..................................................... 67 Paper Lotteries: ...................................................................................... 67 Online Computerised Agreement: ........................................................... 78 Agency: ............ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom time to time commencing from the year 2012, the factual backdrop of these cases shall be in accordance with the amendments made to the Act and shall be stated chronologically. History of this controversy: 3. The Parliament introduced service tax through the Finance Act, 1994 under Chapter V, which took effect on 01.07.1994. Later, through the Finance Act, 2003, the Finance Act,1994 was amended to include a new category of taxable services, namely "Business Auxiliary Service," under sub-section (19) of Section 65, effective from 01.07.2003. Pursuant to this amendment, the Service Tax Department issued notices to the respondents-assessees herein, under the amended Finance Act in 2007, requiring them to register under the said Act for payment of service tax. 3.1 Being aggrieved, the respondents-assessees herein approached the High Court in W.P. (C) No.19 of 2007, titled Martin Lottery Agencies Ltd. vs. Union of India, challenging the levy of service tax upon the sale of lottery tickets. Vide judgement dated 18.09.2007, the High Court allowed the writ petition filed by the respondents-assessees herein declaring that service tax was not payable on the activity undertaken by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 65 of the Finance Act, 1994, would expressly get excluded from the scope of the said provision. In the circumstances, service tax on the promotion or marketing or sale of lottery tickets which are actionable claims could not have been levied under the said subclause. 3.5 However, during the pendency of the above appeal, the Finance Act, 1994 again came to be amended with the deletion of the Explanation to Section 65(19)(ii) and the introduction of a new category of "taxable service" vide clause (zzzzn) to sub-section (105) of Section 65 vide the Finance Act, 2010 with effect from 01.07.2010. Clause (zzzzn) to sub-section (105) of Section 65 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 conducted through internet or other electronic networks;" 3.6 Challenging this amended clause (zzzzn) to sub-section (105) to Section 65 of the Finance Act, 1994, the assesses filed writ petitions before the High Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervice tax under Entry 97 - List I, this does not imply that it can impose such a tax on lotteries, as the power to levy taxes on this subject has been conferred on the State Legislature in List II. That the residuary powers of Parliament can only be exercised when no Entry in any of the Lists provide a legislative field. Hence, it is the exclusive legislative domain of the State Legislature to levy tax of any nature on lotteries by virtue of Entry 62 - List II. e. The High Court further held that when a distributor purchases goods at a commercial price, they are not acting as an agent for the manufacturer. f. The High Court observed that in the case at hand, the lottery tickets are sold as goods by the State Government to the assesses therein at a discounted price of 70 paise per ticket, compared to the MRP of Re.1. The predominant part of the transaction is a sale of goods. While considering the 30% discount offered to the respondents-assessees herein on the MRP, the High Court took note that offering such discounts is a normal trade practice in any sale and purchase transaction. If the seller sells the goods at the MRP to the ultimate consumer, intermediaries must receive a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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." 3.9 In view of the above conclusions, the petitions were allowed striking down clause (zzzzn) to sub-section (105) of Section 65 of Finance Act, 1994 as introduced vide Finance Act, 2010 as ultra vires the Constitution having been enacted in contravention to Entry 97 - List I to Seventh Schedule read with Article 248 of Constitution of India. Consequently, all actions of imposing service tax upon the respondents-assessees herein being distributors of lottery organized by State of Sikkim were set aside. Since the respondents-assessees herein had secured registration and had paid service tax under the impugned provision on their own, the judgment was to operate prospectively. 3.10 Being aggrieved by the judgement of the High Court of Sik ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts-assessees herein had intimated to the Revenue vide letter Ref. No.FGSIPL/SK/0024/ 12-13 dated 28.06.2012 stating that in view of the change in the legal position the respondentsassessees herein would not be paying service tax with effect from 01.07.2012. 4.2 In response to the above, the Revenue issued letter C. No.V(3)7/ST/FGSIPvtLtd/GTK/2009/295 dated 06.07.2012 stating that as per the Notification. No. 36/2012 ST dated 20.06.2012 read with Rule 6(7C) of the Finance Act, 1994 (as amended), the distributor or selling agents are liable to pay service tax at the rate specified for the taxable service of promoting, organizing or in any other manner assisting in arranging lottery. Being aggrieved by this communication dated 06.07.2012 and the Finance Act, 2012, the respondents-assessees herein approached the High Court by filing Writ Petition No.32 of 2012. The respondents-assessees herein assailed the Amendment Act of 2012 on the various grounds. 4.3 After hearing the rival parties, the High Court allowed the writ petition filed by respondents-assessees herein before the High Court vide order dated 24.09.2013 and set aside the amendments in 2012 made to the Finance Act, 1994. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of the Lotteries (Regulation) Act, 1998 (17 of 1998); xxx (44) "service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include- (a) an activity which constitutes merely,- xxx (iii) a transaction in money or actionable claim; xxx Explanation 2.-For the purposes of this clause, the expression "transaction in money or actionable claim" shall not include- xxx (ii) any activity carried out, for a consideration, in relation to, or for facilitation of, a transaction in money or actionable claim, including the activity carried out- (a) by a lottery distributor or selling agent in relation to promotion, marketing, organising, selling of lottery or facilitating in organising lottery of any kind, in any other manner; xxx Negative list of services. 66D. The negative list shall comprise of the following services, namely:- xxx (i) betting, gambling or lottery; Explanation.-For the purposes of this clause, the expression "betting, gambling or lottery" shall not include the activity specified in Explanation 2 to clause (44) of section 65. xxx Valuation of taxable services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is amendment to the Finance Act, 2016 was challenged before the High Court of Sikkim by the respondents24 assessees herein in Writ Petition No. 34 of 2016 and Writ Petition No.48 of 2016. 6.2 The High Court vide impugned order and judgement dated 23.03.2017 allowed the writ petitions and held that the amendments carried out by the Finance Act, 2016, are not capable of being implemented for imposition and levy of service tax on the services allegedly provided by the respondents-assessees herein. The salient findings of the High Court are as follows: a. The High Court held that taxation is a distinct matter for the purpose of legislative competence and it must flow from the specific Entry provided for levy and imposition of taxes. b. The relevant service tax leviable is on promotion, marketing, organizing, selling of lottery or facilitating in organizing lottery of any kind, in any other manner. The Union Parliament is conferred with the power and competence under Article 268A read with Entry 97 - List I (Union List) to impose and levy service tax on other related activities. Hence, the High Court noted that the impugned amendment brought in Finance Act, 2016 is not unconstituti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l argued that the use of terms such as "through" and "on behalf of" in the statute is conclusive evidence of the intended agency relationship, as these terms denote that the respondents-assessees herein are merely facilitating sales on behalf of the State, not as independent principals. b. The judgment in State of Haryana vs. Suman Enterprises, (1994) 4 SCC 217 held that a State-organized lottery requires the State to retain core control to protect public trust in the scheme. In that case, this Court stated four essential characteristics that distinguish a State-organized lottery: (i) tickets must bear the State's logo, be printed under the State's authority, and be sold directly by the State or its designated agents; (ii) the sale proceeds must be credited to the State's funds; (iii) draws must be conducted by the State; and (iv) unclaimed prize money must revert to the State. By retaining control over these aspects, the State ensures that the public's trust in the lottery's fairness and legitimacy is maintained. That these characteristics form the backbone of the Lotteries Act, and when combined with statutory language, they mandate an agency relationship between the respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computer terminals managed by the respondents-assessees herein. Learned counsel argued that this arrangement further underscored the agency relationship, as the respondents-assessees herein merely facilitated sales made by the State, with the State bearing the risk associated with prize payouts. It was emphasised that the respondentsassessees herein received a commission calculated as a percentage of total sales after deducting the State's revenue and prize distributions, which aligns with compensation typically earned by agents. g. Further, the respondents-assessees' argument before the High Court was that they occasionally incurred losses due to unsold tickets or fluctuating demand, thereby bearing risk and acting as principals. Learned counsel for the Revenue sought to rebut this contention by submitting that under the amended agreements, unsold tickets were returned to the State, with no financial obligation on the part of the respondents-assessees herein. In online lotteries, while the respondents-assessees herein may have to temporarily cover prize payouts under INR 10,000/- the risk ultimately remained with the State, which controlled the final prize distribution. That oc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overnment has no privity of contract with the sub-distributors. Therefore, it was argued that the respondents-assessees herein are not operating on behalf of the State Government. d. That the respondents-assessees herein bear the entire cost of marketing and advertising without reimbursement from the State Government. Further, the respondents-assessees herein appoint stockists and sellers independently at its own risk. Hence, there is no notion of agency involved. e. Thus, service tax under the Finance Act, 1994 does not arise in the present case since no service is being provided by the respondents-assessees herein. It was argued that the respondents-assessees herein are involved in a purchase and resale arrangement. f. In K. Arumugam, this Court held that buying lottery tickets and reselling them does not amount to marketing services. g. Section 67 of the Finance Act requires service tax to be made applicable only when there is consideration for a specific service. In the present case, the margins earned by the respondents-assessees herein do not represent any commission or service. There is no service or consideration in the present case as the transaction is an outright ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Court of Sikkim would call for any interference in these appeals? b) If not, what order? At this stage, we state that we need not go into the question regarding the aspect theory/doctrine being made applicable to these cases. This is because we are dealing with the question whether service tax is liable to be paid by the respondent assessees. According to the appellant- Union of India they are liable to pay service tax as they are rendering a service to State of Sikkim as an agent. On the other hand, it is the case of the respondent assessees that they are not agents of the Government of Sikkim but their relationship is on principal to principal basis. If we hold that the relationship between the State of Sikkim is of principal agent then the respondents-assessees herein are liable to pay service tax as an agent. However, this does not detract from the respondent-assessees being liable to pay tax on gambling as the conduct of lotteries is nothing but a gambling activity as per Entry 62 - List II of the Seventh Schedule of the Constitution of India. Therefore, it is necessary for us to consider whether the respondents-assessees are engaged as agents by the principal- Governmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d such power is not included in either the Concurrent List or the State List. 11.3 The Finance Act, 1994 was enacted by the Parliament in terms of Article 248 of the Constitution of India read with Entry 97 - List I which reads as under: "97. Any other matter not enumerated in List II or List III including any tax not mentioned in either of those Lists." 11.4 It is also pertinent to mention that Entry 92-C - List I which deals with taxes on services was inserted by the Constitution (Eighty-eighth Amendment) Act, 2003, but was not notified and was omitted by the Constitution (One Hundred and First Amendment) Act, 2016 with effect from 16.09.2016. In the circumstances, we observe that the Finance Act, 1994 is relatable to Entry 97 - List I. Subsequently, vide the same Constitution (One Hundred and First Amendment) Act, 2016, Article 246A was inserted as a special provision with respect to goods and services tax. 11.5 For the sake of completion, it would also be relevant to refer to Entries 33 and 34 - List II. Entries 33 and 34 - List II are the regulatory Entries, which read as under: "33. Theaters and dramatic performances; cinemas subject to the provisions of entry 60 of L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... negative then it follows that Parliament has power to make laws with respect to that matter or tax. According to this Court, if a Central Act is challenged as being beyond the legislative competence of Parliament, it is enough to enquire if it is a law with respect to matters or taxes enumerated in List II. If it is not, no further question arises. Thus, the wide words of a substantive Article like Article 248 should be given full effect and they cannot be cut down by the wording in the Lists in Schedule VII merely because certain known taxes have not been included therein. Relevant Case Law on lotteries: B.R. Enterprises: 12. The nature and characters of lottery was deliberated upon in B.R. Enterprises vs. State of UP, (1999) 9 SCC 700 ("B.R. Enterprises"), wherein it was held that the lotteries are a form of gambling and in R.M.D. Chamarbaugwalla vs. Union of India, AIR 1957 SC 628, it was observed that gambling actives are in the very nature and essence res extra commercium. Even though lotteries were permitted under the regulating power of the State, they could not be given the status of trade and commerce "as understood in common parlance". Trade and commerce within the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Chandra Chakravarty [AIR 1935 Cal 756 : 40 CWN 102] ). In our opinion a sale of a lottery ticket also amounts to the transfer of an actionable claim. 44. The question is, what is this right which the ticket represents? There can be no doubt that on purchasing a lottery ticket, the purchaser would have a claim to a conditional interest in the prize money which is not in the purchaser's possession. The right would fall squarely within the definition of an actionable claim and would therefore be excluded from the definition of "goods" under the Sale of Goods Act and the sales tax statutes. This was also accepted in H. Anraj [(1986) 1 SCC 414 : 1986 SCC (Tax) 190] when the Court said that to the extent that the sale of a lottery ticket involved a transfer of the right to claim a prize depending on chance, it was an assignment of an actionable claim. Significantly in B.R. Enterprises v. State of U.P. [(1999) 9 SCC 700] construing H. Anraj [(1986) 1 SCC 414 : 1986 SCC (Tax) 190] the Court said: (SCC p. 746, para 52) "52. So, we find three ingredients in the sale of lottery tickets, namely, (i) prize, (ii) chance, and (iii) consideration. So, when one purchases a lottery ticke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f but in fact was not, by virtue of the definition of goods under the very same Act read with Section 2(7) of the Sale of Goods Act, 1930. It was observed that the mere insertion of an explanation could not make an activity a taxable service when it was not covered under the main provision (which had to be read into the said sub-clause 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. The said activity would have a profit motive and is for the purpose of earning additional revenue to the State exchequer. The activity is carried out by sale of lottery tickets to persons, such as the assessees herein, on an outright basis and once the lottery tickets are sold and the amount collected, there is no further relationship between the assessees herein and the State in respect of the lottery tickets sold. The burden is on the assessees herein to further sell the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... care service provided on behalf of the client; or iv) any incidental or auxiliary support service such as billing, collection or recovery of cheques, accounts and remittance, evaluation of prospective customer and public relation services 3. Section 65(19) after Explanation inserted to subclause (ii) through Section 90(3) of the Finance Act, 2008 '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; iii) any customer care service provided on behalf of the client; or iv) any incidental or auxiliary support service such as billing, collection or recovery of cheque ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. Section 67 containing the definition of 'consideration' from 01.04.2006 till 31.05.2015 (1) Subject to the provisions of this Chapter, service tax chargeable on any taxable service with reference to its value shall,-- (i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him; (ii) in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money, with the addition of service tax charged, is equivalent to the consideration; (iii) in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner. (2) Where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged. (3) The gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or aft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll not be withdrawn during the remaining part of that financial year. Explanation.- For the purpose of this sub-rule- (i) 'distributor or selling agent' shall have the meaning assigned to them in clause (c) of the rule 2 of the Lottery (Regulation) Rules, 2010 notified by the Government of India in the Ministry of Home Affairs published in the Gazette of India, Part-II, Section 3, sub-section (i) vide number G.S.R. 278(E) dated 1st April, 2010 and shall include distributor or selling agent authorised by the lottery organising State. (ii) 'draw' shall have the meaning assigned to it in clause (d) of the rule 2 of the Lottery (Regulation) Rules, 2010 notified by the Government of India in the Ministry of Home Affairs published in the Gazette of India, Part-II, Section 3, sub-section (i) vide number G.S.R. 278(E) dated 1st April, 2010. (iii) 'online lottery' shall have the meaning assigned to it in clause (e) of the rule 2 of the Lottery (Regulation) Rules, 2010 notified by the Government of India in the Ministry of Home Affairs published in the Gazette of India, Part-II, Section 3, sub-section (i) vide number G.S.R. 278(E) dated 1st April, 2010. (iv) 'organising state' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any person as a Chairperson or a Member or a Director in a body established by the Central Government or State Governments or local authority and who is not deemed as an employee before the commencement of this Section. Explanation IA- For the purposes of this clause, transaction in money shall not include any activity relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination to another form, currency or denomination for which a separate consideration is charged; Explanation 2.- For the purposes of this Chapter,- (a) an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons; (b) an establishment of a person in the taxable territory and any of his other establishment in a non-taxable territory shall be treated as establishments of distinct persons. Explanation 3.- A person carrying on a business through a branch or agency or representational office in any territory shall be treated as having an establishment in that territory; 3. Insertion of new Charging Section 66B through Section 143(F) of Finance Act, 2012 There shall be levied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch service and such option shall not be withdrawn during the remaining part of that financial year. Explanation.- For the purpose of this sub-rule- (i) 'distributor or selling agent' shall have the meaning assigned to them in clause (c) of the rule 2 of the Lottery (Regulation) Rules, 2010 notified by the Government of India in the Ministry of Home Affairs published in the Gazette of India, Part-II, Section 3, Sub-section (i) vide number G.S.R. 278(E) dated 1st April, 2010 and shall include distributor or selling agent authorised by the lottery organising State. (ii) 'draw' shall have the meaning assigned to it in clause (d) of the rule 2 of the Lottery (Regulation) Rules, 2010 notified by the Government of India in the Ministry of Home Affairs published in the Gazette of India, Part-II, Section 3, Sub-section (i) vide number G.S.R. 278(E) dated 1st April, 2010. (iii) 'online lottery' shall have the meaning assigned to it in clause (e) of the rule 2 of the Lottery (Regulation) Rules, 2010 notified by the Government of India in the Ministry of Home Affairs published in the Gazette of India, Part-II, Section 3, Sub-section (i) vide number G.S.R. 278(E) dated 1st April, 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontaining the definition of 'consideration' through Section 111 of the Finance Act, 2015 (1) Subject to the provisions of this Chapter, service tax chargeable on any taxable service with reference to its value shall,-- (i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him; (ii) in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money, with the addition of service tax charged, is equivalent to the consideration; (iii) in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner. (2) Where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged. (3) The gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espondent-assessees from time to time. The agreements are two-fold in nature. One set of agreements deal with paper lottery and another set of agreements deal with online computerised lotteries. The clauses relevant for the purpose of the present controversy, i.e., to ascertain whether the agreements are of agency or not are extracted as under: Paper Lotteries: (i) Agreement dated 06.10.2004 "AGREEMENT This Agreement is made this day the 6th October 2004 between the Governor of Sikkim through the Secretary to the Government of Sikkim in the Finance Department, (herein after referred to as the Government)... and M/s Martin Lottery Agencies Ltd. represented by its MANAGING DIRECTOR (hereinafter referred to as the Distributor)... xxx AND WHEREAS M/s. Martin Lottery Agencies Ltd., has been selected for appointment as Sole Distributor for the above Lottery Schemes by the Government of Sikkim. xxx Now it is hereby agreed between parties hereto as under: 1. That the Government shall appoint M/S Martin Lottery Agencies as Sole Distributor for marketing of lottery tickets on all sold basis. 2. The Government shall run a minimum 5 (five) weekly lottery schemes and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6th October, 2004. xxx And whereas M/s Future Gaming Solutions India Private Ltd., has been appointed as the exclusive Sole Purchaser for the above Lottery schemes by the Government of Sikkim. Now, therefore, in view of the above changes and amendments the parties are desirous of signing a fresh agreement to govern their respective rights and liabilities in suppression of the earlier agreement dated 06.10.2004 as under:- Now it is hereby agreed between parties hereto as under: 1. That the Government hereby appoints M/s Future Gaming Solutions India Pvt. Ltd. sole purchaser of conventional paper lottery tickets on actual sold basis. xxx 4. That in consideration of the appointment of the Second Party as sole purchaser of the conventional paper lottery of the Government for a maximum of 50 (fifty) weekly lottery schemes per day, the sole purchaser shall pay a sum of Rs.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 Rs.10 Crores (Rupees Ten Crores) per annum only from the second year of the extended period effective from 18th October, 2010 to 17th O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 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 the tickets may be changed under the following circumstances, namely:- (i) Change in the price structure of the lottery schemes, (ii) Change in the paper cost, printing charges and freight, and (iii) Market conditions. 15. That the full payment of the tickets resold by the sole purchaser shall be realized by the Government from the sole purchaser at wholesale rates as per clause 14 above. 16. That the sole purchaser shall produce the monthly return of sales tax, if any, paid to the respective state governments wherever the tickets are sold for information of the Government. xxx 20. That the Government shall immediatel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue and Expenditure Department, Government of Sikkim (hereinafter referred to as the 'Government') which expression shall unless excluded by or repugnant to the context means and includes its successors in office and assigns of the FIRST PART. AND M/s Future Gaming and Hotel Services Private Limited, a company having its registered office at 54, Mettupalayam Road, G.N. Mills Post, Coimbatore - 641029 Tamilnadu, and having its branch/sales office at kazi Road, Gangtok, Sikkim - 737101, represented by its Managing Director Mr. S. Martin, son of Mr. Santiago (hereinafter referred to as the 'Sole Purchaser / Distributor') which expression shall, unless excluded by or repugnant to the context means and includes its successors and assigns of the SECOND PART; xxx WHEREAS in pursuant to the Notice Inviting Tender dated November, 15, 2014, M/s Future Gaming and Hotel Services Private Limited has qualified in the technical bid and has quoted the highest assured amount of revenue per draw to the State for 08 (eight) Sikkim State Paper Lottery schemes. xxx 7. DEPOSITING OF SALE PROCEEDS OF THE TICKETS: 7.1 The Sole Purchaser/Distributor shall purchase the lottery ticke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n) between the Governor of Sikkim, through the Principal Secretary, Finance, Revenue and Expenditure Department, Government of Sikkim (hereinafter referred to as the 'Government') which expression shall unless excluded by or repugnant to the context means and includes its successors in office and assigns of the FIRST PART. AND M/s Future Gaming and Hotel Services Private Limited, a Private Limited company incorporated under Companies Act 1956, having its registered office at 54, Mettupalayam Road, G.N. Mills Post, Coimbatore - 641029, and having its branch/sales office at, Samdrupling Building, Kazi Road, Gangtok, Sikkim - 737101, represented by its Managing Director Shri S. Martin, son of Shri Santiyago (hereinafter referred to as the 'Sole Purchaser / Distributor')... xxx AND WHEREAS the Government and the Sole Purchaser/Distributor (hereinafter referred to as Distributor) decided to enter into an Agreement: xxx 1. DEFINITIONS: In the Agreement unless the context otherwise requires: xxx 1.4 This Agreement will be in line with the Model Agreement circulated by the Ministry of Home Affairs, Government of India vide their letter No. V- 17013/1/2010-CSR-1 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or for marketing/selling of Lotteries on behalf of the State (including the sale and distribution of tickets either itself or through us distributors or stockist/substockist). xxx "Sub-agent/Retailer" means a person appointed by the Marketing Agent above or by any other person(s) duly authorised the Marketing Agent, to operate the lottery terminals and with whom the Marketing Agent (or any other person duly authorized by the agent as detailed above) has entered into a bilateral agreement to operate the lottery terminals or sell tickets. xxx 10. CONSIDERATION In consideration of the arrangement as agreed and contained in this deed of Agreement between the Government and the Marketing Agent, the Marketing Agent has agreed as under: a. Minimum guaranteed revenue to the government of Sikkim will be 1% of the turnover up to Rs. 1000 crores or Rs. 10 crores p.a. whichever is higher. b. On additional turnover over and above Rs.1000/- crores the Marketing Agent will pay 0.50% of the additional turnover to the state government. xxx 12. REALISATION OF SALE PROCEEDS The Marketing Agent shall deposit the Sale Proceeds (except prizes payable up to Rs.5000/-) with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Karnataka w.e.f. 1" April, 2007 and requested the Government to review the minimum assured revenue vide their applications dated 25th September, 2007 and dated 16th January, 2008. "10. CONSIDERATION:- In consideration of the arrangement as agreed and contained in this deed of Agreement between the Government and the Marketing Agent, the Marketing Agent has agreed as under: Minimum guaranteed revenue to the Govt. of Sikkim will be 1% of the turnover up to Rs. 1000 Crores or Rs. 10 crores p.a. whichever is higher. On additional turnover over and above Rs.1000 crores the Marketing Agent will pay 0.25% of the additional turnover to the State Government." The other terms and conditions of the aforesaid agreement shall remain unchanged." Agency : 15. Before proceeding to answer the contentions advanced at the Bar on the nature of relationship between the Government of Sikkim and the respondents-assessees herein, it would be useful to refer to the concept of agency. This is because if the relationship is in the nature of an agency (on the premise that the latter are rendering service to the State Government on the basis of the agreements entered into between the part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s behalf so as to affect his legal relations with third parties and the other of whom similarly manifests assent so as to act or so acts pursuant to the manifestation. Thus, the one on whose behalf the act or acts have to be done is called the principal and the other who is to act is called the agent. Any person other than the principal and the agent may be referred to as the third party. The authority of the agent to act on behalf of the principal constitutes a power to affect the principal's legal relations with third parties. Such authority could be called actual authority or apparent authority. Thus, the essence of agency is that a person acts on the principal's behalf. Therefore, the term agency is used to connote an authority or capacity in one person to create legal relations between a person occupying the position of principal and third parties. Usually, the legal relations so created will be contractual in nature. Conversely, the mere fact that a person does something in order to benefit another and the latter is relying on the former to do so or may have requested or even contracted for performance of the action, does not make the former the agent of the latter. The centr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supplier's agent to sell the goods, or an agent on a del credere commission, i.e., an agent who guarantees to the principal that the buyer will duly pay the price. 15.6 To determine the nature of the transaction, the whole agreement must be looked into as "the test is ultimately one of substance rather than form". However, 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 a "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. Also, 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. It is, however, evidence towards a sale that the recipient is entitled to sell at whatever price the recipient thinks fit, accounting to the supplier only for a predetermined sum, and this interpretation is given further support, if the recipient is free ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rthermore, since the agent is not the owner of the goods, if any loss is suffered by the agent then he is to be indemnified by the principal. It was further observed that while interpreting the terms of the agreement, the Court has to look to the substance rather than the form of it. Thus, the mere formal description of a person as an "agent" or "buyer" is not conclusive, unless the context shows that the parties clearly intended to treat a buyer as a buyer and not as an agent. 16.1.2 It was further observed on an examination of the terms of the contract therein that Hispeedol (petroleum product) had been sold to the appellant therein and not held by it merely as an agent of the Caltex Company. Therefore, the agreement therein contained some elements of agency but having regard to the fact that the appellant therein was consuming the Hispeedol or petrol for its own purpose, it was acting as an owner of the goods and if it consumed the same for its own purposes, it was not doing so as agent but as owner which it was fully entitled to do. Therefore, it would not constitute a sale so as to be exigible to sales tax. 16.2 Reference could also be made to Sri Tirumala Venkateswara Timbe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trade discount. The appellants therein charged to the dealers the price of the mopeds sold to them less the amount of Rs.110 Rs.145 and Rs.165 as commission in respect of different varieties of mopeds. These amounts allowed to the dealers were clearly 'trade discount' liable to be deducted from the price charged to the dealers for the purpose of arriving at the excisable value of the mopeds. 16.4 In Alwaye Agencies vs. Deputy Commissioner of Agricultural Income Tax and Sales Tax, (AIR 1988 SC 1250), the assessee-firm was appointed as distributor by the Travancore Cochin Chemicals Ltd. (Company) to effect the sale of certain chemical manufactured by the said company in the area covered by the Kerala State under an agreement entered into on 11.02.1967. This Court examined whether under the agreement, the assessee firm was an agent of the said company, or whether under the agreement the assessee firm was really a purchaser of the goods which were booked by it. In the Agreement, the stipulation was that the distributor had the right of the sale of the product within the stipulated area. Bulk supplies were effected in wagon load or lorry-load by the said company direct to the customer, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . That after purchase of the tickets, it was not for the Government to look out as to how they were distributed and there was no control over the affairs thereafter. That there was only payment of the price of the ticket fixed as payable by the principal, and no commission or discount was paid to them by the Government. That Section 194G of the Income Tax Act, which imposes liability on the person responsible for paying to any person who is or has been stocking, distributing, purchasing or selling lottery tickets, any income by way of commission, remuneration, on such tickets in all amounts exceeding Rs.1000, to deduct income tax thereon at the rate of 10%, had no application. Hence, the demand of tax was without jurisdiction. The Kerala High Court considered the question whether the amount received as commission or discount or any incentive or as a margin is income or earning which was taxable at the hand of the assessee concerned, coming under the purview of Section 194G of the Income Tax Act. It was observed that if the face value of the lottery ticket was Re. 1, the petitioner therein would receive it at Rs. 0.72 paise and could sell at any price and it was not the State's busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers passed to the stamp vendor when the Treasury Officer delivered stamp papers on payment of price less discount. Clause (b) of sub-rule (2) of Rule 24 of Gujarat Stamps Supply and Sales Rules, 1987 indicated that the discount which the licensed vendor had obtained from the Government was on purchase of the stamp papers. Consequently, it was held that the discount made available to the stamp vendors under the provisions of the aforesaid 1987 Rules did not fall within the expression "commission" or "brokerage" under Section 194H of the Income Tax Act, 1961. 16.8 In Bharti Cellular Limited (Now Bharti Airtel Limited) vs. Assistant Commissioner of Income Tax, (2024) 8 SCC 608, the assessees therein were cellular mobile service providers and the issue related to the liability to deduct tax at source under Section 194-H of the Income Tax Act, 1961 on the amount which, as per the Revenue, was a commission payable to an agent by the assessees under the franchise/distributorship agreement between the assessees and the franchisees/distributors. Though the matter was under the provisions of the Income Tax Act and Section 194- H of the said Act which imposes the obligation to deduct tax at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stance of the relationship between the parties, notwithstanding the nomenclature given by the parties to the relationship, is of primary importance. 16.8.2 In this case, three distinct relationships were considered which are different from the relationship of an agency. The first is the difference between an agent and a servant which is not relevant for this case. Next, the difference between a principal-agent and principal-principal relationship was considered with reference to Bhopal Sugar Industries Ltd. It was observed that an agent, after taking delivery of the property, does not sell it as his own property but sells the same as the property of the principal and under his instructions and directions. Therefore, if the agent is not the owner of the goods and if any loss is suffered by the agent, he is to be indemnified by the principal. This is unlike a contract of sale where title to the property passes on to the buyer on delivery of the goods for a price paid or promised. The buyer then becomes the owner of the property and the seller has no vestige of title left in the property. Third is the case of independent contractor, wherein if the party is concerned about acting for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the lottery tickets. The sole purchaser had to provide in favour of the Government of Sikkim with a bank guarantee of Rs.10 crores (Rupees Ten Crores) as a security deposit, which was to deliver the tickets to the sole purchaser at the destination as may be agreed upon. 17.1.1 Clauses (14) to (16) are significant in this agreement. Clause (14) stated that the Government of Sikkim 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 was not able to sell the whole tickets, he shall return the unsold tickets to the Government within 15 days from the date of draw, which would then be destroyed after verification. This was to avoid any possible misuse of the lottery tickets leading to questioning of a draw of lottery in a particular scheme. That the wholesale prices of the tickets sold was to 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) extracted above. That the prices of the tick ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vate Limited has described the said assessee as a sole purchaser/distributor/ promoter. Clause (7) of the said agreement states that the sole purchaser/distributor shall purchase the lottery tickets from the Sikkim Government for further sales, and payments shall be made by the sole purchaser or distributor to the Government for such tickets as per the invoice raised by the Government. The sale proceeds for sale of lottery tickets had to be credited by the sole purchaser or distributor into the treasury etc. of the State of Sikkim as per the invoice raised by the State Government on the sole purchaser or distributor. The sole purchaser or distributor had to deposit the sale proceeds ensuring Guaranteed Revenue. Clause (10) of the agreement spoke of Minimum Guaranteed Revenue which was Rs.15,00,12,800/- up to a turnover of Rs.9000 crores per annum and on an additional turnover over and above Rs.9000 crores per annum, the sole purchaser or distributor had to pay 0.25 per cent of the additional turnover to the Government of Sikkim. For that purpose, the sole purchaser or distributor has to submit monthly turnover of the proceeds of the sale of lottery/schemes to the Government of Sikk ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at similarity in the clauses of the agreement and hence, agreement concerning sale of online lottery tickets also is one between principal and principal and not between principal and agent. 17.5 Recently, this Court in K. Arumugam observed that conducting a lottery which is a game of chance, is an activity conducted by the State and not a service being rendered by the State which would enable the engaging of an agent such as respondents-assessees herein for the purpose of rendering of such a service. That the assessees who buy the lottery tickets on outright sale basis have the burden of selecting them through stockists for a profit as their business activity. The differential in the price paid to the State for the lottery tickets that are made available to the assessee to sell and the sale price is the profit of the assessee. Thus, there is no promotion of the business of the State which conducts lotteries as an agent. Consequently, there is no principalagent relationship, rather it is one of principal to principal. The conclusions in K. Arumugam are apposite to these cases also. Controversy between the Parties : 18. The parliamentary amendments made to the Finance Act, 1994, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, the High Court set-aside the demands for payment of service tax made by the Central Government. 18.3 At the same time, the Finance Act, 2012, by an amendment of Finance Act, 1994, introduced the Negative List under Section 66D which comprised of various services on which no service tax could be levied or collected. The List included the activity of betting, gambling or lottery. Hence, no service tax on the conduct of the lottery could be levied by the Central Government. However, in 2015, another amendment was made to the Finance Act, 1994 by substituting Explanation 2 in clause (44) of Section 65B, wherein the expression "transaction in money or actionable claim" was defined to not include, inter alia, any activity carried out, for a consideration, in relation to, or for facilitation of, a transaction in money or actionable claim including the activity carried out, inter alia, by a lottery distributor or selling agent in relation to promotion, marketing, organizing, selling of lottery or facilitating in organizing of lottery of any kind in any other manner. The expression "lottery distributor or selling agent" was defined by inserting clause (31A) to Section 65B to mean a per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asons that we have stated above. This is because the distributor buys at wholesale price from the State Government and sells it at a higher price to the retailer. 18.6 Thereafter, the amendment made to clause [ii(a)] of the Explanation 2 to Section 65B(44) in the year 2016 that the expression "transaction in money or actionable claim" would not include any activity carried out, for a consideration, in relation to, or for facilitation of, a transaction in money or actionable claim, including the activity carried out, inter alia, by a lottery distributor or selling agent on behalf of the State Government, in relation to promotion, marketing, etc. in accordance with the provisions of the Lotteries (Regulation) Act, 1998 is only an innocuous amendment which is only cosmetic in nature. 18.7 In the circumstances, we find that at each stage, the amendments made to the Finance Act, 1994, in order to impose service tax on the sole distributor/purchaser of the lottery tickets (respondents-assessees herein) have been unsuccessful. We have reasoned that the amendment to the said definition would in no way detract from the substance of the relationship between the State Government and the sol ..... X X X X Extracts X X X X X X X X Extracts X X X X
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