Full Judgment Text
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 3239 OF 2009
(Arising out of SLP (C) No. 6083 of 2008)
Union of India & Ors. … Appellants
Versus
M/s Martin Lottery Agencies Ltd. … Respondent
J U D G M E N T
S.B. Sinha, J.
1. Leave granted.
2. Whether sale, promotion and marketing of lottery tickets would be
exigible to ‘Service Tax’ within the meaning of the provisions of Section
65(105) of the Finance Act, 1994 (hereinafter called and referred to for the
sake of brevity as ‘the Act’) is the question involved in this appeal which
arises from a judgment and order dated 18.9.2007 passed by the High Court
of Sikkim in Writ Petition (C) No. 19 of 2007.
3. Respondents are agents of the State of Sikkim. The State Government
floated “schemes” whereby the total number of tickets therefor was
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prescribed. In terms of the said schemes, the respondent purchases all
lottery tickets in bulk form on “all sold basis”. It pays Rs.70 per ticket for
the face value of Rs.100/-. In turn, it sells the ticket to its principal stockists
on “outright” and “all sold basis”: It makes a profit out of the margin out of
the difference between the amounts received from the principal stockists and
the amounts paid to the State Government. The principal stockists in turn
sell the tickets to the sub-stockist and who in turn sell to the agents. The
retailers purchase tickets from the agents and in turn sell the same to the
ultimate participants of the draw.
4. Indisputably, the entire transaction is governed by the Lottery
(Regulation) Act, 1998. It is neither in doubt nor in dispute that having
regard to the circular letter issued by Commissioner (Service Tax), Ministry
of Finance, CBEC dated 14.01.2007, the nature of transactions between the
distributor and the State Government do not constitute a sale.
However, it was concluded that the activities of the distributor are that
of promotion or marketing of lottery tickets for their client (i.e. the State
Governments) and, thus, would be exigible to service tax under the heading
‘business auxiliary service’.
Pursuant to and/or in furtherance of the said opinion of the Board, the
Superintendent of Central Excise, Gangtok Range, Gangtok by a letter dated
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30.04.2007 directed the respondent to obtain registration and pay service tax
under the heading ‘business auxiliary service’ in terms of the provisions of
the said Act.
5. The legality and/or validity of the said notice was questioned before
the High Court of Sikkim by the respondent by way of a Writ Petition. By
an order dated 13.8.2007, the Chief Justice of the said High Court while
declining to grant an interim order made certain observations to the effect
that the activities undertaken by respondent cannot but be promotion or
marketing, in the following terms:
“(sic) can be sold in the market for that face value,
is itself a promotional or marketing service. The
contract between a principal producer and its large
distributor or promotional distributor can have a
lot of flexibility. It will all depend on the business
negotiations by the two parties, as to whether the
goods are being taken by the distributor as an
agent, and retained as such, or whether the goods
will be purchased outright by the distributor from
the manufacturer, at a reduced price, the distributor
thereafter taking all responsibility for the goods
purchased, in return for, or inconsideration of, the
reducing in the wholesale price of goods.
If, we repeat if, the writ petitioner is a
distributor or a selling agent, then there is no
problem, notwithstanding section 4(c) of the 1998
Act, of the writ petitioner reselling the lottery
tickets in the open market even upto the full face
value of Rs. 100/-, or for a lesser price but above
Rs.70/-, even though it bought the tickets itself for
Rs.70/-. Is this a promotion of the lottery
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marketing of lottery tickets produced or provided
by the State? If it is not, then what is the
difference between a person buying lottery tickets
of face value of Rs.100/- at Rs.100/- from the State
Government directly, and a person who is buying
it at a reduced price? Is the reduced price of
Rs.30/- in relation to goods, originally belonging
to the State Government, a reduction for the
purpose of marketing and further sale, and is it for
the purpose of marketing, which the true and core
business activity of the writ petitioner? Is the
business violability of the writ petitioner
dependent only on the middleman succeeding in
getting a market for the original goods, and is the
margin of 30% sufficient to cover this type of
business venture?
These questions might merely be asked
today but need not be answered today without
hearing parties fully.
I am of the opinion that on a balance of
circumstances it appears that the essence of
activity, properly so called, cannot but be
promotion or marketing.
Order and observations, however worded,
are without prejudice to the rights and contentions
of the parties. There will be no interim order.
Appearance of parties before the Department will
take place and decisions might be given and even
levy might be made. However, decisions given
will ultimately abide by the result of the writ.
Since both the parties are also solver, no interim
order is called for.
Returnable on 17.8.2007 when further
orders might be prayed for by either party.”
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The said writ petition was posted for hearing on 18.9.2007 and by
reason of an order of the said date, the writ petition was allowed, directing:
“Affidavits have not been called for although the
leaned Advocate General asked for time. Here the
learned Advocate General is appearing as Assistant
Solicitor General. Time to file affidavit was
refused by me since the issue is one of pure law.
This order is to be read as a sequel to the order
already passed by this Court on 13.8.2007. The
basic facts are set out there. The arguments this
time centered round whether lottery tickets are
goods or not. The statutory provisions which are
material in this regard are extracted in my earlier
order. On the authority of the Constitution Bench
of the Supreme Court which delivered its judgment
in the Sunrise Associates Case (2006) 5 SCC 603
lottery tickets have to be held to be actionable
claims. As such those would not be goods within
the meaning of the definition clause in the Sale of
Goods Act. If the lottery tickets are not goods, the
writ petitioners cannot be said to be rendering any
service in relation to the promotion of their
client’s goods, or marketing of their client’s goods,
or sale of their client’s goods.
The writ petition succeeds on this simple point.
The impugned notice dated 30.4.2007 (Annexure
P-3 of the writ petition) is accordingly quashed.
There will be no order as to costs.”
6. Mr. Mohan Parasaran, learned Additional Solicitor General of India
appearing for the appellant, would submit:
(i) The High Court committed a serious error in passing the impugned
judgment insofar as it failed to take into consideration that the notice
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had been issued in terms of sub-clause (ii) of Section 65(19) of the
Act and not sub-clause (i) thereof.
(ii) As United Nations-Central Product Classification (UN-CPC) Heading
96920 contains ‘gambling and betting’ services and covers
‘organization of lotteries’ and, thus, the activities of organizing
lotteries being internationally recognized, should be considered as a
service and, thus, the High Court committed a serious illegality in
relying upon the decision of this Court in Sunrise Associates vs. Govt.
of NCT of Delhi & Ors. reported in (2006) 5 SCC 603.
(iii) Explanation appended to Section 65 (19) being clarificatory and/or
declaratory in nature must be held to have a retrospective operation.
(iv) Entries 34 and 62 of List II of the Seventh Schedule of the
Constitution of India does not create any kind of fetter on the powers
of the Parliament to impose service tax on the assessee who provide
the service of promotion and marketing of lotteries. The
aforementioned two entries empower the State Legislature to impose
tax on betting and gambling and other luxuries. In the instant case,
however, what is sought to be taxed under sub-clause (ii) of clause
(19) of Section 65 of the Finance Act, 1994 is the services rendered by
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an assessee to its client in promoting and marketing of lotteries
organized by the State Government and not anything else.
(v) A transaction may involve two taxable events in its different aspects,
as has been held by the Constitution Bench of this Court in Federation
and Association of Hotels and Restaurants Association of India v.
Union of India reported in [(1989) 3 SCC 634], in terms whereof
whereas, on the one hand, service tax can be levied on the services
provided by the respondent to the Government of Sikkim in
promoting and marketing of lotteries; the State Government is also
empowered to impose tax on the organization and conduct of lotteries
in the State in exercise of its powers under Entries 34 and 62 of the
List II of the Seventh Schedule read with Articles 245 and 246 of the
Constitution of India, despite the fact that the same transaction creates
two taxable events, namely, the organization of the lotteries itself and
secondly the services rendered in the promotion and marketing of
lotteries.
(vi) In view of a recent decision of this Court in Gujarat Ambuja Cements
Ltd. v. Union of India reported in (2005) 4 SCC 241, tax was not
sought to be imposed on ‘betting’ or ‘gambling’ or ‘entertainments’ or
‘amusements’ as provided in the Entries 34 and 62 of List II of the
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Seventh Schedule to the Constitution of India, but on the services
rendered in respect thereof.
7. Mr. Harish N. Salve, learned Senior Counsel appearing on behalf of
the respondent, on the other hand, urged :
(i) Even UN-CPC or the classification provided for therein has no
bearing to an Act enacted by the Parliament of India. Whereas UN-
CPC regards lottery tickets as goods; the Indian laws do not. In any
event, lottery has been brought within the concept of ‘service’ treating
it to be goods, which is against the purport of the said term; having
been held by this Court in Sunrise Associates (Supra) as merely an
‘actionable claim’.
(ii) As conduct of lotteries has been held by this Court to be res-extra
commercium , no service can be said to be rendered by the State to the
society at large and, thus, the provisions of the Act will have no
application in the instant case.
(iii) In view of the decision of this Court in Sunrise Associates (supra),
lottery tickets being actionable claims and not goods, the relevant
clause attracted in this case would be sub-clause (i) of clause (19) of
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Section 65 and not sub-clause (ii) as gambling cannot be equated with
‘service’.
(iv) Respondent has merely been purchasing lottery tickets in bulk and re-
selling the same to the principal stockists; earning a margin of profit
from such transactions and, in that view of the matter, rendition of any
kind of service by the State to it does not arise.
(v) In any event, explanation appended to Section 65(19) having only a
prospective operation, service tax, if any, can be levied only with
effect from 16.5.2008 and not for a period prior thereto.
8. Before adverting to the rival contentions raised before us by the
learned counsel for the parties, we may notice the relevant provisions of the
Finance Act, 1994 (The Act).
Chapter V of the Act provides for levy of service tax. It is levied on
“taxable services” as defined in Section 65(105) thereof. Section 66 is the
charging section and Section 68 provides for payment of service tax.
Sub-clauses (i) and (ii) of Section 65(19) which are relevant for our
purpose, read as under:-
“ Section 65(19) “business auxiliary service”
means any service in relation to,-
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(i) promotion or marketing or sale of goods
produced or provided by or belonging to the client;
or
(ii) promotion or marketing of service provided
by the client; or”
The term “business auxiliary service” was inserted in the Act by
Finance Act, 2003 which came into force on 01.07.2003. The term
“business auxiliary service” includes services as a commission agent, but
does not include any information technology service or any activity that
amounts to “manufacture” within the meaning of clause (f) of Section 2 of
the Central Excise Act, 1944.
Clause (zzb) of Section 65(105) of the Act defines “taxable service”
to mean any service provided to a client, by a commercial concern in
relation to business auxiliary service.
“Goods” has been defined in Section 65(50), in the following terms:
“Section 65(50) “goods” has the meaning assigned
to it in clause (7) of section 2 of the Sale of Goods
Act, 1930.”
Section 2(7) of the Sale of Goods Act, 1930 defines “goods” to mean :
“Goods” means every kind of movable property
other than actionable claims and money; and
includes stock and shares, growing crops, grass,
and things attached to or forming part of the land
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which are agreed to be severed before sale or
under the contract of sale.”
9. After the Special Leave Petition was filed in this Court, the Parliament
by Finance Act, 2008 inserted an explanation in sub-clause (ii) of Section
65(19), which came into force on or about 16.5.2008 and reads as under :
“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;”
Section 65A which was inserted by Finance Act, 2003 provides for
classification of taxable services. Section 66 provides for the charge of
service tax.
10. The core question which arises for our consideration is as to whether
the explanation appended to sub-clause (ii) of Section 65(19) is clarificatory
or declaratory in nature so as to be construed having retrospective effect and
retroactive operation.
Sub-clause (i) of clause (19) of Section 65 of the Act refers to ‘goods’.
What would come within the purview of the definition of ‘goods’ must be
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construed having regard to the provisions of the Sale of Goods Act, 1930 in
view of its definition contained in Section 65(50) of the Act.
11. This takes us to another question as regards the source of power of the
State to conduct a business. Conduct of business by a State is permissible,
inter alia, in terms of Article 298 of the Constitution of India. If it is not
otherwise prohibited, the State in exercise of its executive power contained
in Article 162 of the Constitution of India may also have the power to
conduct a trade or business.
12. For invoking the provisions of Chapter V of the 1994 Act, the basic
question which is required to be posed and answered is as to whether the
lottery tickets are ‘goods’ within the meaning of Sale of Goods Act. It is
evidently not.
A Constitution Bench of this Court in Sunrise Associates (supra) held
to be so. H. Anraj v. Government of Tamil Nadu reported in [(1986) 1 SCC
414] was overruled opining that sale of lottery tickets does not involve sale
of goods and that at the highest stage, transfer of it would amount to transfer
of an actionable claim.
In Yasha Oversees v. Commr. of Sales Tax & Ors. [(2008) 8 SCC
681], Sunrise Associates (supra) was distinguished, stating :
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“37. The decision in Sunrise makes two very
significant points and to us it appears that the
decision mainly turns on those two points. The
first is with regard to the two different meanings of
'property', as highlighted in paragraph 35 of the
judgment and the second is with regard to the
distinction between interests in goods and a
contract as highlighted in paragraph 43 of the
judgment. In paragraph 35 of the decision the court
explained that the word 'property' occurring both in
the definitions of 'goods' and 'sale' carries different
meanings. In the definition of ' goods ' the word
'property' is used to mean the subject matter of
ownership, that is to say, the thing itself. In the
definition of 'sale' the same word is used to mean
the nature of interests in goods, that is, title or
ownership.
38. In paragraphs 42 and 43 of the decision, the
court examined the nature of a ticket and by giving
illustrations of a railway ticket, a ticket to see a
cinema or a pawnbroker's ticket pointed out that
the tickets were normally evidence of and in some
cases the contract between the buyer of the ticket
and its seller. Being a contract or evidence of a
contract, naturally a ticket can not be property
either as a thing (of value) in itself or title or
ownership to anything. It, therefore, followed that
the sale of lottery ticket did not involve transfer of
'property' either in the sense of the thing itself
(goods) or in the sense of title or ownership (sale).
39. On purchasing a lottery ticket one merely gets
a claim to a conditional interest in the prize money
that is not in the purchaser's possession and the
right would, therefore, squarely fall within the
definition of actionable claim. The Constitution
Bench decision in Sunrise further held that Anraj
wrongly split up the right accruing to the purchaser
of a lottery ticket. The right was one and
indivisible. But even assuming the right to
participate in the draw Page 2519 to be a separate
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right there would still be no sale of goods within
the meaning of sales tax laws because the draw
itself could not be any movable property and the
participation in the draw was only with the object
to win the prize. The transfer of the right would
thus be of a conditional beneficial interest in
movable property that is not in possession, in other
words, once again an actionable claim.”
13. In the aforementioned backdrop, it is necessary to consider the
submissions of the learned Additional Solicitor General that clauses (1), (2),
(8), (10), (16), (18), (25), (29), (36), (39) and (40) of the agreement entered
into by and between the State and respondent shows that it is not a case
involving simpliciter sale of goods but in effect and substance respondent
was rendering service in relation to promotion or marketing of service
provided by the State.
14. This gives rise to a question, i.e., Does the State in organizing lottery
render any service and, if so, to whom.
The learned Additional Solicitor General submits that service is being
rendered to the general public as revenue is generated therefrom. We fail to
persuade ourselves to agree with the aforementioned submission. The law,
as it stands today (although it is possible that this Court in future may take a
different view), recognizes lottery to be gambling. Gambling is res extra
commercium as has been held by this Court in The State of Bombay v.
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R.M.D. Chamarbaugwala [1957 SCR 874] and B.R. Enterprises v. State of
U.P. & Ors. [(1999) 9 SCC 700].
15. Contention of Mr. Salve is that where the State involves itself in an
illegal activity, it cannot render a service as dealing in lottery is illegal being
res extra commercium , no services can be rendered. We, as at present
advised, do not intend to go into the said issue which is a complex one, in
view of the fact that in this case we are primarily required to consider the
effect of the explanation appended to clause (19) of Section 65 of the Act. It
is also not otherwise necessary to be determined.
We must, however, proceed to determine the said question keeping in
view the aforementioned decisions of this Court that holding of lottery being
gambling comes within the purview of the doctrine of res extra
commercium .
16. Organizing lottery by the State is tolerated being an economic activity
on its part so as to enable it to raise revenue. Raising of revenue by the
State, in our opinion, by itself cannot amount to rendition of any service. It
may be true that for the purpose of invoking the provisions of taxing statute,
the morality aspect may not be of much consequence but such a question
assumes significance for the purpose of ascertaining as to whether the same
amounts to rendition of service within the meaning of the aforementioned
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sub-clause. The word ‘service’ has not been defined in the Act. Its
dictionary or etymological meaning may or may not be appropriate. We
would, however, notice its dictionary meaning :
“Work done or duty performed for another or
others; a serving; as, professional services, repair
service, a life devoted to public service.
An activity carried on to provide people with the
use of something, as electric power, water,
transportation, mail delivery, telephones, etc.
Anything useful, as maintenance, supplies,
installation, repairs, etc., provided by a dealer or
manufacturer for people who have bought things
from him.”
17. While the State raises its revenue by controlling dealing in liquor
and/or by transferring its privilege to manufacture, distribute, sale etc., as
envisaged under Entry 8 of List II of the Seventh Schedule of the
Constitution of India, thereby it does not render any service to the society.
Service tax purports to impose tax on services on two grounds (1) service
provided to a consumer and (2) service provided to a service provider.
18. Service provided in respect of the matters envisaged under clause (19)
of Section 65 of the Act must be construed strictly. Before a tax is found to
be leviable, it must come within the domain of legitimate business and/or
trade. The doctrine of res extra Commercium was invoked in the United
States of America where keeping in view the nature of right conferred on its
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citizens and the concept of imposition of reasonable restrictions thereon
being absent, it was held that gambling should be frowned upon being
opposed to constitutional jurisprudence. While borrowing the said principle
in the Indian context, however, it must be borne in mind that Constitution of
India envisages reasonable restrictions in respect of almost all the
fundamental rights of the citizens. No citizen has an absolute fundamental
right. Whereas the same principle may apply in Australia but it may not
apply to the European Countries where gambling and even sale of narcotic
drugs subject to licensing provisions, if any, is permissible.
The concept of res extra commercium may in future be required to be
considered afresh having regard to its origin to Roman Law as also the
concept thereof. Conceptually business may be carried out in respect of a
property which is capable of being owned as contrasted to those which
cannot be. Having regard to the changing concept of the right of property,
which includes all types of properties capable of being owned including
intellectual property, it is possible to hold that the restrictions which can be
imposed in carrying on business in relation thereto must only be reasonable
one within the meaning of Clause (6) of Article 19 of the Constitution of
India. Right of property although no longer a fundamental right, but,
indisputably is a human right. [See Vimlaben Ajitbhai Patel v. Vatslaben
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Ashokbhai Patel and Others (2008) 4 SCC 649 and Karnataka State
Financial Corporation v. N. Narasimahaiah (2008) 5 SCC 176].
We may notice that the doctrine of ‘franchise’ or ‘exclusive privilege’
has been mentioned in C.S.S Motor Service Tenkari and Ors v The State of
Madras represented by the Secretary to the Government of Madras, Home
Department and Anr. [AIR 1953 Mad 279]. Therein the connotation of the
word “franchise” was noticed from California v. Central Pacific R. Co.
[(1888) 32 Law Ed 150] in the following terms:
“What is a franchise? Under the English Law,
Blackstone defines it as ‘a royal privilege, or
branch of the King’s prerogative subsisting in the
hands of a subject.’ A franchise is a right, privilege
or power, of public concern, which ought not to be
exercised by private individuals at their mere will
and pleasure but should be reserved for public
control and administration either by the
Government directly or by public agents acting
under such conditions and regulations as the
Government may impose as the public interest and
for the public security.”
The doctrine of franchise, thus, would require a thorough relook in
view of the change in its concept, as we are governed by the Constitution of
India. But this is not the case where we have an occasion to do so.
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19. Lottery has been brought within the purview of National Industrial
Classification to which we may now advert to. A foreword to the Industrial
Classification, relevant for our purpose, reads as under :
“A standardized system of classification of
economic activities is essential for meaningful
collection of data relating to such activities. This
not only ensures comparability of the data
collected within the country from various sources
by different agencies but also with the rest of the
world. In India, the National Industrial
Classification (NIC) is the standard classification
followed for classifying economic activities. The
NIC is prepared to suit the Indian conditions and
follows the principles and procedures laid down in
the United Nations’ International Standard
Industrial Classification (ISIC). It is a constant
endeavour of the Ministry of Statistics and
Programme Implementation, charged as it is with
the responsibility for setting standards for
collection, compilation and dissemination of
statistical data in India, to establish classification
systems as well as updating existing ones. This is
necessary to keep pace with the changes in the
organization and structure of industries besides
accounting for emerging economic activities. The
NIC-2004 is the revised version of the earlier
classification standard issued in 1998 called the
NIC-1998, which was based on ISIC-1990 Rev.3.”
20. Lotteries come within the purview of Group 924 class 924(9) and sub-
class 924(9)(0) which is in the following terms :
“Other recreational activities includes fairs and
shows of a recreational nature; management and
operation of lotteries (bulk and retail sale of lottery
tickets are included under wholesale and retail sale
respectively); gambling and betting activities;
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activities of casinos; booking agency activities in
connection with theatrical productions or other
entertainment attractions, recreational fishing and
other recreational activities n.e.c.”
It also comes within the purview of Section 4 classifying other
community, social and personal service activities.
21. If it is brought within the purview of the terms ‘entertainment’ or
‘amusement’ as provided for in Entries 34 and 62 of List II of the Seventh
Schedule of the Constitution of India, it may come within the purview of
service. It is, however, contended that what is being taxed is the services
rendered in respect thereof. Services can be rendered in respect of activities
of the State if they are permissible in terms of sub-clause (ii) of Clause (19)
of Section 65 of the Act and the State itself has been rendering services and
not otherwise. While we say so, we are not unmindful of the fact that in
terms of the agreement, the respondent not only distributes the lottery tickets
printed by the State but also distributes prizes worth less than Rs.5,000/-. It
issues an advertisement. It has a right to be consulted in respect of design of
a lottery ticket. It may also have a say in the matter of arranging for the
lottery. But we are not sure as to how service element of the entire
transaction is to be ascertained.
22. Keeping in view the aforementioned backdrop, it has to be determined
as to whether the ‘explanation’ is declaratory or clarificatory in nature.
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23. Clause 19 was inserted in Section 65 of the Act in the year 2003. The
notice dated 30.4.2007 shows that according to the authorities clause (i) was
attracted and not clause (ii) of the said provision. The Board issued a
clarification on 17.1.2007 which is in the following terms:
“Decision : Commissioner (ST) explained the issue
of service tax liability on promotion, marketing,
distribution of paper lottery. Under the contractual
arrangement, the State Government print lottery
tickets and deliver them to distributor. The
distributor is free to publicize for promotion,
marketing of the lottery tickets received and
distribute the same through sub-distributors. The
State Governments do not receive back the unsold
lottery tickets and the prizes, if any, on such
unsold tickets could be collected by the distributor.
The draws are held by the State Governments.
Board noted that the Lotteries (Regulation)
Act, 1998, governs the activity of organizing,
conducting or promoting a lottery. As per sub-
section (c) of Section 4, ‘ the State Government
shall sell the tickets either itself or through
distributors or selling agent’ . This provision thus
forbids resale of tickets that have been sold by the
State Government. Accordingly, the nature of
transaction between the State Government and
distributor is not in the nature of sales. The
activities of the distributor are that of promotion or
marketing of lottery tickets for their clients i.e. the
State Governments. Hence, Board decided that the
services of distributor fall under the ‘business
auxiliary service’ and, therefore, be chargeable to
service tax. The value of taxable service shall be
taken into account as the total face value of the
tickets sold minus (a) the total cost of the tickets
paid by the distributor to the State Government and
(b) the prize money paid by the distributor. In
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other words, the value is the mark up between the
buying and selling of lottery tickets.”
24. A bare perusal of the said circular letter would clearly show that
lottery tickets were considered to be goods. It is with that mindset, the
circular was issued. However, it must have been realised that resale of
lottery tickets by the distributor or by others is not permissible. Whether
sub-clause (ii) of clause (19) of Section 65 had been applied in case of any
other distributor or agent of such lottery tickets is not known. If the
assertion of Mr. Salve that nobody had demanded tax under the second
clause is correct, we do not know why the principle of ‘small repairs’ by
inserting an explanation was taken recourse to. The explanation, in our
opinion, cannot be said to be a simple clarification as it introduces a new
concept stating that organizing of the lottery is a form of entertainment.
Introduction of such new concept itself would have a constitutional
implication. In the year 2003, while amending the provisions of 1994 Act,
the Constitution was also amended and Article 268A and Entry 92C in List I
were inserted. The courts are in future required to determine whether a
service tax within the meaning of Entry 92C would cover sale of lottery or it
would come within the purview of residuary entry containing Entry 97 List
I. If it is held to be a taxing provision within the purview of Entry 97, the
same will have a bearing on the States. The Explanation so read appears to
be a charging provision. It states about taxing need. It can be termed to be a
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sui generis tax. If it is a different kind of tax, the same may be held to be
running contrary to the ordinary concept of service tax. It may, thus, be held
to be a stand alone clause. A constitutional question may have to be raised
and answered as to whether the taxing power can be segregated. If by
reason of the said explanation, the taxing net has been widened, it cannot be
held to be retrospective in operation.
No doubt, the explanation begins with the words ‘for removal of
doubts’. Does it mean that it is conclusive in nature? In law, it is not. It is
not a case where by reason of a judgment of a court, the law was found to be
vague or ambiguous. There is also nothing to show that it was found to be
vague or ambiguous by the executive. In fact, the Board circular shows that
invocation of clause (ii) had never been in contemplation of the taxing
authorities.
25. In fact, rendition of service for the purpose of imposition of service
tax is imperative in character. It must be a part of economic activity.
Whereas the economic activity has three characteristics – tax on production;
tax on sales and tax on service. The concept of the Value Added Tax comes
from the generic expression so as to include not only taxes on sales but also
taxes on service as service has become segment of the economic activity.
24
26. We are informed at the Bar that, in fact, States of Tamil Nadu and
Karnataka have barred lottery.
We have been taken through the budget speech of the Hon’ble
Minister of Finance for 2008-2009, the relevant portion whereof is as under :
“ 5.4 Business Auxiliary Service :
5.4.1 Services provided in relation to promotion
or marketing of service provided by the client is
leviable to service tax under business auxiliary
service. Organization and selling of lotteries are
globally treated as supply of service. Lotteries
(Regulation) Act, 1998 enables State Governments
to organize, conduct or promote lotteries. Lottery
tickets are printed by the State Governments and
are sold through agents or distributors. Tickets are
delivered by the State Government to the
distributors at a discounted price as compared to
the face value of the tickets. Services provided by
the distributors or agents in relation to promotion
or marketing of lottery tickets are leviable to
service tax under the existing business auxiliary
service.
5.4.2 Lotteries fall under the category of games of
chance. Games of chance are known under
various names like lottery, lotto, bingo etc. and are
also conducted through internet or other electronic
networks.
5.4.3 To clarify as removal of doubts, an
explanation is added under business auxiliary
service stating that services provided in relation to
promotion or marketing of games of chance
organized, conducted or promoted by the client are
covered under the existing definition of business
auxiliary service. Amendment is only for removal
of doubts and field formations are, therefore,
25
requested to ensure that service tax is collected on
such services.”
27. The speech of the Hon’ble the Finance Minister would have been
relevant for the purpose of opining as to whether the court independently
would have arrived at a conclusion that organizing lottery would amount to
rendition of service but not otherwise. As it is not possible for us to arrive at
the said conclusion, we have no other option but to hold that by inserting the
explanation appended to clause (19) of Section 65 of the Act, a new concept
of imposition of tax has been brought in. The Parliament may be entitled to
do so. It would be entitled to raise a legal fiction, but when a new type of
tax is introduced or a new concept of tax is introduced so as to widen the net,
it, in our opinion, should not be construed to have a retrospective operation
on the premise that it is clarificatory or declaratory in nature.
28. There cannot be any doubt whatsoever that speech of the Hon’ble
Finance Minister in the House of the Parliament may be taken to be a valid
tool for interpretation of a statute. It was so held in K.P. Varghese v.
Commissioner of Income-tax, Ernakulam & Anr. [(1981) 4 SCC 173 at
184], in the following terms :
“Now it is true that the speeches made by the
Members of the Legislature on the floor of the
House when a Bill for enacting a statutory
provision is being debated are inadmissible for the
purpose of interpreting the statutory provision but
26
the speech made by the Mover of the Bill
explaining the reason for the introduction of the
Bill can certainly be referred to for the purpose of
ascertaining the mischief sought to be remedied by
the legislation and the object and purpose for
which the legislation is enacted. This is in accord
with the recent trend in juristic thought not only in
western countries but also in India that
interpretation of a statute being an exercise in the
ascertainment of meaning, everything which is
logically relevant should be admissible.”
{See also Commissioner of Wealth Tax, Punjab, J & K, Chandigarh, Patiala
v. Yuvraj Amrinder Singh and Ors. [(1985) 4 SCC 608]}
29. It is, however, also well settled that the statute must be interpreted
keeping in view the words used in it. We must notice that in Virtual Soft
Systems Ltd. v. Commissioner of Income Tax, Delhi-I [(2007) 9 SCC 665],
a Bench of this Court has held :
“ 24. Section 271 of the Act is a penal provision
and there are well-established principles for the
interpretation of such a penal provision. Such a
provision has to be construed strictly and narrowly
and not widely or with the object and intention of
the legislature.”
30. Mr. Parasaran has referred to Commissioner of Income Tax, Bombay
& Ors. v. Podar Cement Pvt. Ltd. & Ors. [(1997) 5 SCC 482] to contend that
clarificatory statute would be retrospective in nature. On legal principle,
there may not be any quarrel with the said proposition. Therein, however,
27
this court was considering a case where two interpretations of Section 22 of
the Income-tax Act were possible. It was opined that if one interpretation is
possible and the same is clear, the next thing to be considered would be what
would be the effect of the amendment. Referring to Benion’s Statutory
Interpretation and G.P. Singh’s Principles of Statutory Interpretation, it was
held :
“An amending Act may be purely clarificatory to
clear a meaning of a provision of the principal Act
which was already implicit. A clarificatory
amendment of this nature will have retrospective
effect and, therefore, if the principal Act was
existing law when the Constitution came into
force, the amending Act also will be part of the
existing law.”
It furthermore noticed the decision of the Constitution Bench in
Keshavlal Jethalal Shah v. Mohanlal Bhagwandas and Anr. [(1968) 3 SCR
623], wherein it was opined that an Explanatory Act is generally made to
supply an obvious omission or to clear up doubts as to the meaning of
previous Act. We are herein not concerned with such a situation.
In W.P.I.L. Ltd., Ghaziabad v. Commissioner of Central Excise,
Meerut, U.P. [(2005) 3 SCC 73], whereupon again Mr. Parasaran placed
strong reliance, this Court, while dealing with an exemption notification
which is a piece of subordinate legislation, held:
28
“Such a notification merely clarified the position
and makes explicit what was implicit.
Clarificatory notifications have been issued to end
the dispute between the parties.”
31. The question as to whether a Subordinate Legislation or a
Parliamentary Statute would be held to be clarificatory or declaratory or not
would indisputably depend upon the nature thereof as also the object it seeks
to achieve. What we intend to say is that if two views are not possible,
resort to clarification and/or declaration may not be permissible. This aspect
of the matter has been considered by this Court in Virtual Soft Systems Ltd.
v. Commissioner of Income Tax, Delhi-I [(2007) 9 SCC 665], holding :
“It may be noted that the amendment made to
Section 271 by the Finance Act, 2002 only stated
that the amended provision would come into force
with effect from 1.4.2003. The statute nowhere
stated that the said amendment was either
clarificatory or declaratory. On the contrary, the
statue stated that the said amendment would come
into effect on 1.4.2003 and therefore, would apply
to only to future periods and not to any period
prior to 1.4.2003 or to any assessment year prior to
assessment year 2004-2005. It is the well settled
legal position that an amendment can be
considered to be declaratory and clarificatory only
if the statue itself expressly and unequivocally
states that it is a declaratory and clarificatory
provision. If there is no such clear statement in the
statute itself, the amendment will not be
considered to be merely declaratory or
clarificatory.
Even if the statute does contain a statement to the
effect that the amendment is declaratory or
29
clarificatory, that is not the end of the matter. The
Court will not regard itself as being bound by the
said statement made in the statute but will proceed
to analyse the nature of the amendment and then
conclude whether it is in reality a clarificatory or
declaratory provision or whether it is an
amendment which is intended to change the law
and which applies to future periods.”
32. We are also not unmindful of the fact that the said decision has been
overruled in Commissioner of Income Tax-I, Ahmedabad v. Gold Coin
Health Foods Pvt. Ltd. [(2008) 11 SCALE 497]. A bare perusal of the said
decision would, however, show that a Three Judge Bench of this Court
noticed that the Act intended to make the position explicit which otherwise
was implicit. The Bench went back to the provisions of the Original Act to
hold that the clarification issued by the Parliament was in tune with the
actual interpretation of the original provision. In that view of the matter, it
was held :
“As noted by this Court in Commissioner of
Income Tax, Bombay & Ors. v. Podar Cement Pvt.
Ltd. & Ors. [(1997) 5 SCC 482 = 2002-TIOL-445-
SC-IT] the circumstances under which the
amendment was brought in existence and the
consequences of the amendment will have to be
taken care of while deciding the issue as to
whether the amendment was clarificatory or
substantive in nature and, whether it will have
retrospective effect or it was not so.
30
33. We may also notice that in that judgment itself a distinction has been
made with a clarificatory provision and a substantive provision to opine that
Explanation 4 was clarificatory in nature and not a substantive provision.
To the same effect is the decision of this Court in SEDCO Forex
International Drill. Inc. & Ors. v. Commissioner of Income, Tax, Dehradun
& Anr. [(2005) 12 SCC 717]. The explanation which was in question was
added by Finance Act, 1983 with effect from 1979 was to the following
effect:
“ Explanation.— For the removal of doubts, it is
hereby declared that income of the nature referred
to in this clause payable for service rendered in
India shall be regarded as income earned in India.”
Similar expression is to be found in the instant case. However, in
SEDCO the question which arose for consideration was interpretation of the
words ‘off period’. While considering the question as to whether salary for
the off period was taxable as arising out of services rendered in India, this
Court noticed that there was a reasonable nexus between salary earned for
the off period and the services rendered in India.
34. The Gujarat High Court in CIT v. S.G. Pgnatal [(1980) 124 ITR 392
(Guj)] held that words ‘earned in India’ occurring in clause (ii) must be
interpreted as “arising or accruing in India” and not “from service rendered
31
in India”. Opining that the High Court proceeded on an incorrect
hypothesis, it was held :
“The High Court did not refer to the 1999
Explanation in upholding the inclusion of salary
for the field break periods in the assessable income
of the employees of the appellant. However the
respondents have urged the point before us.
In our view the 1999 Explanation could not apply
to assessment years for the simple reason that it
had not come into effect then. Prior to introducing
the 1999 Explanation, the decision in CIT v. S.G.
Pgnatale (supra) was followed in 1989 by a
Division Bench of the Gauhati High Court in
Commissioner of Income Tax v. Goslino Mario
reported in [(2002) 10 SCC 165]. It found that the
1983 Explanation had been given effect from
1.4.1979 whereas the year in question in that case
was 1976-77 and said :
“. . . it is settled law that assessment has to
be made with reference to the law which is
in existence at the relevant time. The mere
fact that the assessments in question has(sic)
somehow remained pending on April 1,
1979, cannot be cogent reason to make the
Explanation applicable to the cases of the
present assessees. This fortuitous
circumstance cannot take away the vested
rights of the assessees at hand”.”
35. Reverting to the decision of a Kerala High Court in CIT v. S.R. Patton
[(1992) 193 ITR 49 (Ker)] wherein Gujarat High Court’s judgment was
followed, this Court noticed that explanation was not held to be a
32
declaratory one but thereby the scope of Section 9(1)(ii) of the Act was
widened. The law in the aforementioned premise was laid down as under :
“17. As was affirmed by this Court in Goslino
Mario (supra), a cardinal principle of the tax law
is that the law to be applied is that which is in
force in the relevant assessment year unless
otherwise provided expressly or by necessary
implication. [See also: Reliance Jute and
Industries. v. CIT [(1980) 1 SCC 139]. An
Explanation to a statutory provision may fulfil the
purpose of clearing up an ambiguity in the main
provision or an Explanation can add to and widen
the scope of the main section (See: Sonia Bhatia v.
State of U.P. [(1981) 2 SCC 585 at 598]. If it is in
its nature clarificatory then the Explanation must
be read into the main provision with effect from
the time that the main provision came into force
(See: Shyam Sunder v. Ram Kumar [(2001) 8 SCC
24 (para 44)]; Brij Mohan Laxman Das v.
CIT[(1997) 1 SCC 352 at 354], CIT v. Podar
Cement [(1997) 5 SCC 482 at 506]. But if it
changes the law it is not presumed to be
retrospective irrespective of the fact that the phrase
used are 'it is declared' or 'for the removal of
doubts'.
18. There was and is no ambiguity in the main
provision of Section 9(1)(ii) . It includes salaries in
the total income of an assessee if the assessee has
earned it in India. The word "earned" had been
judicially defined in S.G. Pgnatale (supra) by the
High Court of Gujarat, in our view, correctly, to
mean as income "arising or accruing in India". The
amendment to the section by way of an
Explanation in 1983 effected a change in the scope
of that judicial definition so as to include with
effect from 1979, "income payable for service
rendered in India".
33
19. When the Explanation seeks to give an
artificial meaning 'earned in India' and bring about
a change effectively in the existing law and in
addition is stated to come into force with effect
from a future date, there is no principle of
interpretation which would justify reading the
Explanation as operating retrospectively.”
(Emphasis supplied)
36. It is, therefore, evident that by reason of an explanation, a substantive
law may also be introduced. If a substantive law is introduced, it will have
no retrospective effect.
The notice issued to the assessee by the appellant has, thus, rightly
been held to be liable to be set aside. Subject to the constitutionality of the
Act, in view of the explanation appended to this, we are of the opinion that
the service tax, if any, would be payable only with effect from May, 2008
and not with retrospective effect.
37. In a case of this nature, the Court must be satisfied that the Parliament
did not intend to introduce a substantive change in the law. As stated
hereinbefore, for the aforementioned purpose, the expressions like ‘for the
removal of doubts’ are not conclusive. The said expressions appear to have
been used under assumption that organizing games of chance would be
rendition of service. We are herein not concerned as to whether it was
constitutionally permissible for the Parliament to do so as we are not called
34
upon to determine the said question but for our purpose, it would be suffice
to hold that the explanation is not clarificatory or declaratory in nature.
38. For the views we have taken, we have no other option but to hold that
the High Court judgment albeit for different reasons warrants no
interference. This appeal is dismissed with costs. Counsel fee assessed at
Rs.1,00,000/-.
……………………………….J.
[S.B. Sinha]
..…………………………..…J.
[Cyriac Joseph]
New Delhi;
May 5, 2009