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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 ..... x on the respondents assessees herein as 'business auxiliary service' under sub-section 19 of Section 65 of the said Act effective from 01.07.2003 and by way of the insertion of the Explanation to Section 65(19)(ii) of the Finance Act, 1994 culminated in the judgment of this Court in K. Arumugam [2024 (9) TMI 182 - SUPREME COURT]. In the said case, this Court held that the relationship between the Government of Sikkim and the assessees therein was not that of principal and agent but one of principal and principal. Therefore, up to the year 2010, the lis between the parties ended with the judgment in K. Arumugam. For the period from 01.07.2010 till 30.06.2012, amendment was made to Section 65(105) by insertion of clause (zzzzn) which defined promotion, marketing, organizing 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 as a "taxable service". The Sikkim High Court observed that the said clause essentially means the conducting of lotteries within the scope and ambit of betting and gambling as per Entry 62 - List II of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no consequence and bearing on the substantive provisions for the reasons 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 - 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. It is found 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. The amendment to the said definition would in no way detract from the substance of the relationship between the State Government and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Agreement: ........................................................... 78 Agency: ............................................................................................ 83 Case Law: ......................................................................................... 90 Agreements: ................................................................................... 105 Controversy between the Parties: ................................................... 113 Leave granted in SLP (C) No.18565 of 2014; SLP (C) No.30629 of 2014; SLP (C) No.14111 of 2015; SLP (C) No.19200 of 2017 and SLP (C) No.23945 of 2017. 2. This batch of cases assail various orders of the High Court of Sikkim passed in several writ petitions which were filed by the respondent-assesses. The appellant is the Union of India in all these cases except in SLP (C) No.19200 of 2017. For immediate reference, the following table which has been provided by learned counsel for the Union of India would indicate the details : Sl. No. Case No(s). Name of the Assessee(s) Impugned Judgment & Order Dated Amendment Year 1 C.A. NOS.4289- 4290/2013 1.Future Gaming Solutions Pvt. Ltd. Summit Online Trade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessees herein declaring that service tax was not payable on the activity undertaken by the respondentsassessees herein. 3.2 The aforesaid judgment came to be challenged before this Court in Civil Appeal No.3239 of 2009. During the pendency of the Civil Appeal, the Finance Act, 1994 was further amended with the introduction of an "Explanation" to Section 65(19)(ii) of the Finance Act, 1994. 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 conducted online, including lottery, lotto, bingo; [Explanation inserted vide Finance Act, 2008 w.e.f. 16th May, 2008]" 3.3 In Union of India vs. Martin Lottery Agencies Ltd, Civil Appeal 3239 of 2009 reported in (2009) 12 SCC 209, this Court delivered its judgment on 05.05.2009 holding that the High Court had rightly set aside the notices issued to the respondents asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (105) to Section 65 of the Finance Act, 1994, the assesses filed writ petitions before the High Court. Primarily, the High Court examined the relevant clauses of the agreements. 3.7 After hearing the rival contentions made by the respective parties, the High Court allowed the writ petitions i.e., W.P. (C) No. 36 of 2011 and W.P. (C). No. 26 of 2011 by way of common judgement and order dated 29.11.2012. The pertinent findings in the judgement dated 29.11.2012 have been culled out hereinunder: a. The High Court took note of the fact that lottery, per se, falls within the expression "betting and gambling", which is considered pernicious in nature. It receives legal validity only if it is run or authorised by the State Government, subject to the conditions laid down in Section 4 of the Lotteries (Regulation) Act, 1998 which is a Central enactment. The Court further observed that it is the State's privilege that can be partially delegated to another party, provided they adhere to the statutory conditions contained in the regulatory Act. b. Although no Entry in any of the Lists of the Seventh Schedule specifically provides for levying taxes on lotteries, the power to enact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale and purchase transaction. If the seller sells the goods at the MRP to the ultimate consumer, intermediaries must receive a discount to cover establishment costs, logistics, and some margin of profit. g. Upon perusal of various clauses in the agreement, the High Court observed that the State Government appoints stockists or distributors to sell the tickets to ultimate buyers, who purchase them at the MRP. These intermediaries must be provided discounts from the MRP to cover their expenses and ensure a profit margin. h. The High Court also held that the advertisement expenses incurred for promoting the State lottery are borne by the respondents-assessees herein to promote their own business, not as a service to the State Government. Clause (20) of the agreement further stipulates that the petitioner therein is solely responsible for incurring all advertising expenses, including the publication of lottery results. i. In light of the above observations, the High Court held that in the case at hand the lottery is organised by the state government through its various stockists etc. but cannot be construed to be a service rendered to the State Government. Hence, the question of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Sikkim in Writ Petition (Civil) No. 36 of 2011 and other allied writ petitions dated 29.11.2012 allowing the writ petitions filed by the respondents-assessees herein and 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 of India being enacted in contravention of Article 248 of the Constitution of India read with Entry 97 - List I to the Seventh Schedule thereto and setting aside all consequential actions of the Revenue in imposing service tax upon the respondents-assessees herein (distributors of lottery organised by State of Sikkim), the Revenue has preferred the present Civil Appeal Nos.4289-4290 of 2013. 2012 Amendment: 4. During the pendency of the matter before this Court, the Finance Act, 1994, was amended once again by the Finance Act, 2012, whereby several provisions were introduced giving a new dimension to the meaning of 'taxable service' as services that would be taxable thereunder. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh 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. The relevant findings of the High Court are as follows: a. The High Court held that the lottery being an 'actionable claim' does not fall within the purview of the service tax laws as introduced by the new provisions of the Finance Act, 2012. b. The High Court found no change in the circumstance as regards the position found in the earlier issues set out above except that clause (zzzzn) of sub-section (105) of Section 65 of the Finance Act, 2010, and the replaced service tax law regime under the Finance Act, 2012, in the form of Section 65B and sub-sections thereunder, Sections 66B and 66D were already dealt with earlier. c. The High Court observed that even under sub-section (34) of Section 65B read with Sections 66B and 66D lottery stands excluded from the purview of service tax under the Finance Act, 2012 as being one in the 'negative list'; d. Further, the High Court held that activities comprising of promotions, organising, reselling or any other manner assisting in arranging of lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 for charging service tax: 67. (1) Subject to the provisions of this Chapter, service tax chargeable on any taxable service with reference to its value, then such 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; xxx Explanation.--For the purposes of this section,-- (a) "consideration" includes-- xxx (iii) any amount retained by the lottery distributor or selling agent from gross sale amount of lottery ticket in addition to the fee or commission, if any, or, as the case may be, the discount received, that is to say, the difference in the face value of lottery ticket and the price at which the distributor or selling agent gets such ticket." 5.1 The aforesaid amendments were challenged by the respondents-assessees herein before the High Court by filing W.P. (C) No. 39 of 2015 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 unconstitutional. However, the Court noted that the Division Benches of the High Court in W.P.(C) Nos.36 & 23 of 2011 (Future Gaming Solutions Pvt. Ltd. vs. Union of India); W.P.(C) No.32 of 2012 (Future Gaming Solutions India Pvt. Ltd. vs. Union of India) and W.P.(C) No.39 of 2015 (Future Gaming & Hotel Services Pvt. Ltd. vs. Union of India) have categorically held that the Union-Parliament lacks competence to impose service tax and the concerned amendments were held as ultra vires to the Constitution of India. This issue has attained finality and was pending for consideration at that time before this Court. c. There is no mechanism to ascertain and compute the service rendered by a person for promoting, marketing, selling or facilitating in organizing a lottery of any kind, in any manner, organized by such State in accordance with the provisions of the Lotteries (Regulation) Act, 1998. 6.3 Being aggrieved by the above-impugned judgement an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sures 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 respondentsassessees herein and the State, which cannot be unilaterally recharacterized as principal to principal. c. The State of Sikkim's monopoly over the lottery business in the region, as enacted under the Sikkim Lotteries (Prohibition on Running of and Sale of Single Digit and Private Lottery Tickets) Act, 1993, further supports the agency interpretation. Learned counsel cited Khoday Distilleries Ltd vs. State of Karnataka, (1995) 1 SCC 574 and argued that the State can either conduct the monopoly business itself or do so through agents but cannot delegate its core functions to independent entities without compromising the monopoly. The counsel argued that in lotteries, as in the sale of alcohol monopolized by the State, the organizing State cannot delegate its position as the primary seller and principal. d. As per clauses in the agreements between the State of Sikkim and the respondents-assessees herein, specifically focusing on c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 occasional operational costs borne by the respondents-assessees herein, such as those related to maintaining terminals or sub-agent commissions, were incidental to their role as agents and did not alter the fundamental agency relationship. h. Learned counsel for the Revenue thus concluded that both statutory requirements and the practical structure of the agreements compel the interpretation of the respondents assessees' role as agents of the State of Sikkim. He asserted that these agreements, along with judicial precedents and statutory provisions, leave no room for a principal-principal relationship. By mandating that the State remains the ultimate seller and by ensuring that risk and reward lie with the State, the Lotteries Act and the related legal framework firmly establish respondents-assessees' position as agents acting on behalf of the State. Accordingly, it was urged that service tax, calculated on the basis of services pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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 sale at a price lower than the maximum price of each lottery ticket. h. Lottery tickets constitute actionable claims and thus transactions involving actionable claims are exempted under Section 66D of the Finance Act, 1994. The argument of the Revenue that the lottery ticket is actionable only in the hands of the ultimate buyer is false and baseless. In response, it was submitted that the nature of tickets remains unchanged regardless of ownership, as established in Sunrise Associates vs. Government of NCT of Delhi, (2006) 5 SCC 603, ("Sunrise Associates"). i. That levy of service tax on lottery distributors infringes the State government's exclusive power to legislate on "betting and gambling" under Entry 62 - List II of the Constitution, Buttressing his submissions, learned senior counsel relied on Godfrey Philips India Limited vs. State of Uttar Pradesh, (2005) 2 SCC 515 emphasizing that Parliament cannot use a residuary ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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- Government of Sikkim or the relationship is one of principal to principal. Relevant constitutional provisions: 11. In order to better understand the controversy in these cases, it would be relevant to advert to the provisions of the Constitution as well as the provisions of the Finance Act, 1994 along with the amendments made which have sought to impose service tax on the respondents-assessees herein in these cases. 11.1 Article 246 of the Constitution of India pertains to the division of subjects between the Parliament and State Legislatures in the form of three lists in the Seventh Schedule of the Constitution, namely List I - Union List, List II - State List and List III - Concurrent List. It would be useful to extract Article 246 of the Constitution as under: "246. Subject-matter of laws made by Parliament and by the Legislatures of States. (1) Notwithstanding anything in clauses (2) and (3), Parliament has exclusive power to ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 List I; sports, entertainments and amusements. 34. Betting and gambling." 11.6 Entry 62 - List II (State List) as it stood then, dealt with taxes on luxuries including taxes on entertainment, amusement, betting and gambling, etc. The said Entry has subsequently been amended with effect from 16.09.2016. However, it is not necessary to extract the amended Entry as these appeals pertain to the period prior to 16.09.2016. Entry 62-List II is a taxation Entry. The unamended Entry 62-List II is extracted as under: "62. Taxes on luxuries, including taxes on entertainments, amusements, betting and gambling." 11.7 In Hoechst Pharmaceuticals Ltd. vs. State of Bihar, (1983) 4 SCC 45, it has been observed that taxation is a distinct matter for purposes of legislative competence. There is a distinction made between general subjects of legislation and taxation. The general subjects of legislation are dealt with in one group of entries and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 meaning of Articles 301 to 304. That there are three ingredients in the sale of lottery tickets, namely (i) price, (ii) chance, and (iii) consideration. That Entry 62 - List II refers to taxes on betting and gambling and lotteries whether conducted by private agencies or by the State are nothing but gambling. That even though the state may conduct lotteries, the element of chance remains, with no skill involved, while in a trade there is skill involved with no chance. Even if the State conduct lotteries, the element of chance remains, with no skill involved and even the organisation and conduct of the lotteries by the State Government are within the boundaries of gambling. That the only purpose of having stringent measures visà- vis lotteries being conducted by the State was to inculcate faith in the participants of such lottery being conducted fairly with no possibility of fraud or misappropriation and deceit and assure the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 ticket, he purchases for a prize, which is by chance and the consideration is the price of the ticket." State of Karnataka: 12.2 In State of Karnataka vs. State of Meghalaya, (2023) 4 SCC 416 ("State of Karnataka"), a two-Judge Bench of this Court of which one of us (Nagarathna, J.) was a member and who authored the judgment, observed in paragraphs 159 as under: "159. Hence under Entry 62 of List II, the specific power to tax an activity which is "betting and gambling" is reserved with the State Legislature and cannot be read within the scope and ambit of Entry 40 of List I which is inherently restricted in its scope." K. Arumugam: 12.3 The Union of India sought to levy service tax on the premise that the activity which the assessees were/are carrying on was a business auxiliary service within the definition of Section 65(19) of the Finance Act, 1994 and therefore, chargeable to service tax. The same was resisted by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 lottery tickets to the divisional/regional stockists for a profit as their business activity. It was observed that the activity is not a promotion or a marketing service rendered by the assessees to the State within the meaning of sub-clause (ii) of clause (19) of Section 65 of the Finance Act, 1994. This is because, to reiterate, the States are not rendering a service but engaged in the activity of conducting lottery to earn additional revenue. Moreover, once the lottery tickets are sold by the Directorate of Lotteries - a Department of the State, there is transfer of the title in the lottery tickets to the vendees, who, as owners of the said lottery tickets, in turn sell them to stockists and others. Thus, there is no promotion of the business of the State as its agent. Thus, there is no 'principal--agent' relationship which would normally be the case in a relationship where a business auxiliary service is rendered. The relations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever 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 cheques, accounts and remittance, evaluation of prospective customer and public relation services II. PERIOD FROM 01.07.2010 TILL 30.06.2012 This period pertains to (i) Civil Appeal 4289-4290 of 2013 and (ii) Civil Appeal 9506-9507 of 2013. Provision Finance Act With Effect From Removal of Explanation to Section 65(19)(ii) 2010 01.07.2010 Insertion of Section 65(105)(zzzzn) 2010 01.07.2010 Insertion of Rule 7C Notification 49/2010 08.10.2010 1. Removal of Explanation to Section 65(19)(ii) through Section 76(A)(1) of the Finance Act, 2010 76(A): In Section 65, save as otherwise provided, with effect from such date as the Central Government may, by notification in the Official Gazette, appoint- (1) in clause (19), in sub-clause (ii), the Explanation shall be omitted 2. Insertion of Section 65(105)(zzzzn) through Section 76(A)(6)(l) of the Finance Act, 2010 Taxable Service means any service provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 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 provision of such service. (4) Subject to the provisions of sub-sections (1), (2) and (3), the value shall be determined in such manner as may be prescribed. Explanation.--For the purposes of this Section,-- "(a) "consideration" includes any amount that is payable for the taxable services provided or to be provided; 5. Insertion of Rule 7C to Service Tax Rules, 1994 by clause (2) of Notification 49/2010 dated 08.10.2010 (7C) The distributor or selling agent, liable to pay service tax for the taxable service of promotion, marketing, organising or in any other manner assisting in organising lottery, referred to in sub-clause (zzzzn) of clause (105) of Section 65 of the said Act (hereinafter referred to as the said sub-clause), shall have the option to pay an amount at the rate specified in column (2) of the Table given below, subject to the conditions specified in the corresponding entry in column (3) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 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' shall have the meaning assigned to it in clause (f) 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. PERIOD FROM 01.07.2012 TILL 31.05.2015 This period pertains to (i) SLP (C) No.18565 of 2014 (ii) SLP (C) No.30629 of 2014 and (iii) SLP (C) No.14111 of 2015 Provision Finance Act With Effect From Insertion of Section 65B(1) 2012 01.07.2012 Insertion of Section 65B(44) 2012 01.07.2012 Insertion of new Charging Section 66B 2012 01.07.2012 Insertion of Negative List Section 66D(i) 2012 01.07.2012 Section 66F 2012 01.07.2012 Cosmetic Amendment to Rule 7C Notification 36/2012 20.06.2012 1. Insertion of Section 65B(1) through Section 143(C) of the Finance Act, 2012 "actionabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rson 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 a tax (hereinafter referred to as the service tax) at the rate of twelve per cent, on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed. 4. Insertion of Negative List Section 66D through Section 143(F) of Finance Act, 2012 The negative list shall comprise of the following services, namely:- (a)…(h) (i) betting, gambling or lottery; 5. Cosmetic Amendment to Rule 7C vide Clause (7)(7) of Notification 36/2012 dated 20.06.2012 (7C) The distributor or selling agent, liable to pay service tax for the taxable service of promotion, marketing, organising or in any other manner assisting in organising lottery, shall have the option to pay an amount at the rate specified in column (2) of the Table given below, subject to the cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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' shall have the meaning assigned to it in clause (f) 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. PERIOD FROM 01.06.2015 TILL 31.03.2016 This period pertains to SLP (C) 18565 of 2014 Provision Finance Act With Effect From Insertion of Section 65B(31A) 2015 01.06.2015 Substitution of Explanation 2 to Section 65B(44) 2015 01.06.2015 Insertion of Explanation to Section 66D(i) 2015 01.06.2015 Substitution of Section 67 2015 01.06.2015 1. Insertion of Section 65B(31A) through Section 107(e) of the Finance Act, 2015 "lottery distributor or selling agent" means a person appointed or authorised by a State for the purposes of promoting, m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nclusive 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 provision of such service. (4) Subject to the provisions of sub-sections (1), (2) and (3), the value shall be determined in such manner as may be prescribed. Explanation.--For the purposes of this section,-- '(a) "consideration" includes- (i) any amount that is payable for the taxable services provided or to be provided; (ii) any reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service, except in such circumstances, and subject to such conditions, as may be prescribed; (iii) any amount retained by the lottery distributor or selling agent from gross sale amount of lottery ticket in addition to the fee or commission, if any, or, as the case may be, the discount received, that is to say, the difference in the face value of lottery ticket and the price at which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 6(six) bumper draws per year for an annual revenue of Rs.5.50 crores per annum. 3. That the agreement shall remain in force for a period of 5 (five) years from 18.10.2004 to the 17.10.2009 (both days inclusive). The period of the agreement may, however, be extended for such further period and upon such terms and conditions as may be at the relevant time, be mutually agreed upon. xxx 10. That the Government shall deliver the tickets to the Distributor at the destination as may be agreed upon. 11. That the Government shall sell and the Distributor shall buy the full lot of tickets for which the wholesale price of tickets shall be determined consisting of total prize amount as per schemes, actual cost of paper and printing, draw expenses, Government commission. However, the prices may change under the following circumstances: i. Change ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 October, 2014. If the sole purchaser proposes to increase the number of scheme above 50 (Fifty) they shall pay to the Government as the state share such the sum of money as may be worked out on the basis of such additional schemes as and as may be mutually agreed upon between the parties. Provided that if the sole purchaser could not purchase such additional schemes for one complete year (12 months) and discontinues the additional schemes before completion of one year they shall be liable to pay the Government share proportionate to the period of actual scheme only. 5. (a) That the sole purchaser shall provide the Government with a bank guarantee of Rs.10.00 crores (Rupees Ten Crores) as security deposit in favour of the Government of Sikkim. Finance, Revenue & Expenditure Department of a Nationalized Bank / Scheduled Bank one week ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chaser 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 immediately after each draw supply to the sole purchaser a copy of the result of the draw duty authenticated by the Director who shall immediately thereafter make arrangements to publicize the result of each draw. Provided that the sole purchaser is at liberty, on his own cost and expenses to take up any kind of publicity of Sikkim state lotteries including telecast of result on any Satellite T.V. Channel every day, provided the publicity shall in no way undermine the prestige of the Government. No claim for cost on these accounts will be entertained by the Government. xxx 23. The sole purchaser may appoint stockists, selling agents or sellers for further resale in different parts of the country on his own terms and at his own risk and responsibility. xxx 25. The sale proceeds/cost of the tickets as may be determined by the Governm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 tickets from the Government for further sales, and payments shall be made by the sole Purchaser/Distributor to the Government for such tickets as per the invoice raised by the Government. 7.2 The sale proceeds of the sale of lottery tickets shall be credited by the Sole Purchaser/Distributor into the Treasury or Public Ledger Account or Consolidated Fund of the State of Sikkim or Public Account or Fund as per the invoice raised by the State Government on the Sole Purchaser/Distributor, as prescribed by the State Government. 7.3 The Sole Purchaser/Distributor shall deposit sale proceeds as prescribed, ensuring Guaranteed Revenue as per clause (10) of this Agreement. 7.4 In the event, the Sole Purchaser/Distributor fails to comply with the above conditions, the Government reserves the right to refuse any further sale of lottery ticket ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ser/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 dated 28th December, 2011 as already specified in the Invitation for Expression of Interest; and the Model Agreement may be referred for purposes of interpretations of this Agreement. xxx 4.7 All the unsold tickets, if any, at the time of draw, with the Distributor shall be returned by the Distributor to the Director of Lotteries, Government of Sikkim or the Government authorized officials/person. 4.8 The Distributor shall submit the statement of sold tickets for each draw of different schemes to the Director of Lotteries, Government of Sikkim within 09 (Nine) days from the date of draw(s). The State Government will keep a record of the tickets issued to the Distributor." Online Computerised Agreement: At this stage, we extract the relevant clauses of the agreement dated 09.05.2005 and the supplementary agreement dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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 the Government on a monthly basis, along with account statement of such sale proceeds supported by record/document. xxx 16. CONDUCTING OF STATE ON-LINE COMPUTERIZED NETWORK LOTTERY a) The State On-line Computerizes Network Lottery shall be organised, conducted or promoted by the Government through the Marketing Agent. b) On-line computerized Network Lottery tickets shall be made available to the public through various retailers/sub-agents appointed by the Marketing Agent who will enter into bilateral agreements with these retailer/sub-agents. The date and time of the draw shall be indicated on the tickets themselves. xxx 23. RELATIONSHIP BETWEEN MARKETING AGENT AND THE STATE GOVERNMENT The relationship between the Marketing Agent and the Government will be one of Principal and Agent as de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 parties), then service tax is liable to be paid by the respondents-assessees herein under the Finance Act, 1994. 15.1 The relevant provisions of the Indian Contract Act, 1872 read as under: "182. "Agent" and "principal" defined.-- An "agent" is a person employed to do any act for another, or to represent another in dealings with third person. The person for whom such act is done, or who is so represented, is called the "principal". 183. Who may employ agent.-- Any person who is of the age of majority according to the law to which he is subject, and who is of sound mind, may employ an agent. 184. Who may be an agent.-- As between the principal and third person any person may become an agent, but no person who is not of the age of majority and of sound mind can become an agent, so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elations 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 centrality to agency is the conferral of authority to alter legal relations; as such in common law, being an agent is not a status but a description of a person, while and only so long as the person is exercising such authority. Thus, where one person (the principal), requests or authorises the other (agent), to act on his behalf and the other agrees to do so, the law recognises that such agent has power to affect the principal's legal position by acts which, though performed by the agent, are to be treated in certain respects as if they were acts of the principal. It is common to regard control by the principal as a defining characteristic of agency. Thus, agency is termed as acting on behalf of the principal and subject to principal's control. 15.3 An agency has to be distingu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to alter or improve the goods. Where the consignee pays wholesale prices for the goods, he is likely to be acting as a principal in the sale. If the consignee sells (whether for cash or on credit) to a retail purchaser, this immediately gives rise to a debt to the supplier for the listed price, the transaction becomes quite inconsistent with agency, including del credere agency, and would be consistent only with sale or return. Case Law : 16. Learned counsel for the respective parties relied upon the following cases in support of their submissions: 16.1 In Bhopal Sugar Industries Ltd. vs. STO, (1977) 3 SCC 147, ("Bhopal Sugar Industries Ltd.") the question was whether the contract was one of agency or sale. This Court held that the question will have to be determined hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gard 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 Timber and Bamboo Firm vs. Commercial Tax Officer, Rajahmundry, AIR 1968 SC 784, wherein this Court observed that there is a distinction between a contract of sale and a contract of agency by which the agent is authorised to sell or buy on behalf of the principal. The essence of a contract of sale is the transfer of title to the goods for a price paid or promised to be paid. The transferee in such a case is liable to the transferor as a debtor for the price to be paid and not as an agent for the proceeds of the sale. The essence of agency to sell is the delivery of the goods to a person who is to sell them, not as his own property but as the property of the principal who continues to be the owner of the goods, and will therefore be liable to account for the sale proceeds. That in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther 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, but only provided that the distributor arranged the payment as per the agreement and also took the responsibility to bear entirely the resultant effects and risk from the said direct dispatches. Though the company had fixed the price at which the goods were to be sold to the customers, it did not lead to the conclusion that the distributor was merely an agent. Under the agreement, what the distributor received was described as a "rebate" and not a "commission" as one would normally accept in the agreement of agency. Significantly, the supplies were made to the distributor against payment either immediate or deferred as provided in the agreement, and even when the goods were destined directly to the customer, it was the distributor who had to guarantee to arrange the payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether 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 business to enquire into the matter at all. It was observed that the deduction under Section 194G was on any person responsible for paying to any person any income by way of commission, etc. who purchased or sold or stocked lottery tickets, in this case, the State Government. The deduction was to be made at the time of credit of such income to the account of the payee or at the time of payment of such income. The Kerala High Court observed that when the deduction is contemplated at the time of the payment to the person concerned but it is shown that there was no payment to the agent at the time of purchase of the ticket, the section automatically becomes inapplicable. That the ticket is given on a discount of 28%, can by no imagination be pressed into service for an interpretati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 source by any person responsible for paying at the time of credit or at the time of payment, whichever is earlier, to a resident, any income by way of commission or brokerage, nevertheless, the law of agency was considered. This was specially in the context of the expression "acting on behalf of another person". Referring to Section 182 of the Contract Act which defines "agent" and "principal", it was observed that agency is a triangular relationship between the principal, agent and the third party. In order to understand the relationship, one has to examine the inter se relationship between the principal and the third party and the agent and the third party. In this regard, it was observed that certain factors or aspects must be taken into consideration while examining whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 himself and making the maximum profit possible, he is usually regarded as a buyer or an independent contractor and not as an agent of the principal. This would be true even when certain terms and conditions have been fixed relating to the manner in which the seller conducts his business. 16.8.3 Distinguishing the relationship of a principal with independent contractor from that of an agency, it was observed that an independent contractor is free from control on the part of his employer, and is only subject to the terms of his contract. On the other hand, an agent is not completely free from control, and the relationship to the extent of tasks entrusted by the principal to the agent is fiduciary. Sometimes an independent contractor looks like an agent from the point of view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 tickets could be changed under certain circumstances. Also, the State Government could realise the full payment of the tickets resold from the sole purchaser at wholesale rates as per clause (14) referred to above. The wholesale rate of the tickets sold by the State Government to the sole purchaser had to be paid after actually selling the same. That, for information of the Government, the sole purchaser had to produce monthly return of sales tax, if any, paid to the respective State Governments wherever the tickets are sold. 17.1.2 That the sole purchaser could at his own cost and expenses give publicity to Sikkim State lotteries through various media platforms, both print and electronic, without seeking any reimbursement from the State Government. Further, the sole purchaser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Sikkim by 15th of the succeeding month. The annual financial and systems' audit of the various lottery schemes had to be conducted by the Government to ensure that the Act and the Rules are not violated. Also, the sole purchaser or distributor had to get its accounts audited internally and have reconciliation of the records from time to time. The sole purchaser or distributor had the responsibility to indemnify the State Government against all claims in relation to the sale of lottery tickets during the term of the agreement. 17.3 The agreement dated 06.06.2016 between the State of Sikkim and M/s Future Gaming and Hotel Services Private Limited also describes the assessee as a sole purchaser/ distributor. This agreement was stated to be in consonance with the model agreement ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, for the purpose of imposing service tax on the respondentsassessees herein as 'business auxiliary service' under sub-section 19 of Section 65 of the said Act effective from 01.07.2003 and by way of the insertion of the Explanation to Section 65(19)(ii) of the Finance Act, 1994 culminated in the judgment of this Court in K. Arumugam. In the said case, this Court held that the relationship between the Government of Sikkim and the assessees therein was not that of principal and agent but one of principal and principal. Therefore, up to the year 2010, the lis between the parties ended with the judgment in K. Arumugam. 18.1 For the period from 01.07.2010 till 30.06.2012, amendment was made to Section 65(105) by insertion of clause (zzzzn) which defined promotion, marketing, orga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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 person appointed or authorized by a State for the purposes of promoting, marketing, selling or facilitating in organizing lottery of any kind, in any manner, organized by such State in accordance with the provisions of the Lotteries (Regulation) Act, 1998. Since "betting, gambling or lottery" was included in the Negative List, an Explanation was inserted to Section 66D(i) to say that the said expression "betting, gambling or lottery" shall not include the activity specified in Explanation 2 to clause (44) of Section 65B. Thus, the intent of the Parliament was that any transaction in an actionable claim (lottery being an actionable claim) would not include an activity carried out for the distribution of lottery by the distributor. In other words, such activity of the distributor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sole distributor or purchaser of the lottery tickets which is one of principal to principal and not of principal-agent. There being no agency and no service rendered by the respondents-assessees herein as an agent to the Government of Sikkim, service tax is not leviable on the transactions between the purchaser of the lottery tickets (respondents-assessees herein) and the Government of Sikkim. 19. The detailed analysis of the relevant provisions of the Finance Act, 1994, and amendments made thereto in light of the clauses of the Agreements highlighted during the course of submissions as well as the judgments of this Court, would not persuade us to take a different view from what the Sikkim High Court has taken. 20. In view of the aforesaid discussion, we find no merit in the ..... 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