MARCH 15, 2015

By Sonal Singh & Raghavan Ramabadran

IT is commonplace for the government to bring in amendments in the legislation so as to cover loop holes exposed by judicial precedents. The amendments proposed in the definition of 'service' provided in Section 65B (44) and the negative list of services provided in Section 66D of the Finance Act, 1994 ("Act"), vide clauses 105(g) and clause 107 of the Finance Bill, 2015, are examples of instances where the legislation is amended to overcome certain judicial pronouncements.

Presently, the definition of 'service' provided under Section 65B(44) of the Act excludes an activity which constitutes merely a transaction in money or actionable claim . Therefore, by virtue of this exclusion from the definition of service, any transaction that amounts to transaction in money or actionable claim would be out of the service tax net. The scope of this exclusion has been considered by High Courts in the context of chit business in the case of Delhi Chit Fund Association vs. Union of India - 2013-TIOL-331-HC-DEL-ST and lottery tickets in the case of Future Gaming Solutions India Pvt. Ltd. vs. Union of India - 2013-TIOL-904-HC-SIKKIM-ST. In the present article we will briefly discuss the decisions in these two cases and the corresponding amendments proposed in the Finance Bill, 2015 which intend to overcome the said decisions. In the Delhi Chit Fund Association case the issue before the Delhi High Court was whether the provision of services in relation to conducting a chit business is a taxable service for the purposes of section 65B(44) of the Act or not. The High Court held that, in a chit business, the subscription is tendered in any one of the forms of money as defined in Section 65B(33) of the Act. It would, therefore, be 'transaction in money'. After noting that an activity which constitutes merely a 'transaction in money' is excluded from the definition of 'service' under Section 65B(44) the court held that a mere transaction in money cannot be considered as a service under main part of the definition of 'service' as there in no consideration and therefore, there can be no question of excluding what is not a service vide the exclusionary part of the definition. Thus it is logical to conclude that, what is sought to be excluded is any service rendered in connection with a transaction in money or actionable claim . Therefore, no service tax can be levied on commission received by the foreman or any other person conducting the chit business as the same is not covered under Section 65B(44) of the Act. The Special Leave Petition filed by the Department against the High Court order has been dismissed by the Supreme Court vide an order dated 7th January, 2014 - 2014-TIOL-23-SC-ST. In order to plug the revenue loss on account of the above decision of the Delhi High Court, the Finance Bill, 2015 proposes to substitute Explanation 2 to Section 65B(44). As per proposed Explanation 2(ii)(b), the expression 'transaction in money or actionable claim' shall 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 by a foreman of chit fund for conducting or organizing a chit in any manner'. Thus, the following inference can be drawn from the proposed explanation:

a) what is excluded from the definition of service is only a transaction in money and not any activity in relation to, or for facilitation of a transaction in money or actionable claim and

b) activity carried out by a foreman of chit fund for conducting or organizing a chit in any manner is not excluded from the definition of service and hence is taxable.

As discussed above, the other instance where the scope of the exclusion of transaction in money or actionable claim from the ambit of the service definition was examined was in the case of Future Gaming Solutions India Pvt. Ltd . In the said case, the issue before the Sikkim High Court was whether the activity of promoting, organising or assisting in arranging the sale of lottery tickets of the Government is a taxable service under the Act or not. The court noted the decision of the Supreme Court in the case of Sunrise Associates vs. Govt. of NCT of Delhi and Others - 2006-TIOL-4O-SC-CT-LB, wherein lotteries have been held to be actionable claims and held that from a combined reading of the ratio laid down in Sunrise Associates and Section 65B(44) of the Act it is clear that lottery is excluded from the definition of service. The Court further held that Section 66D, which enumerates those activities which are in the negative list, under clause (i) specifically mentions 'betting, gambling or lottery' and therefore, lottery stands excluded from the purview of service tax under the Act. In order to overcome the decision of the Sikkim High Court in the above case, the Finance Bill, 2015 proposes to substitute the Explanation 2 to Section 65B(44) and insert an Explanation to clause (i) of Section 66D of the Act. As per the proposed Explanation 2(ii)(a) to Section 65B(44), the expression 'transaction in money or actionable claim' shall 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 by a lottery distributor or selling agent in relation to promotion, marketing, organizing, selling of lottery or facilitating in organizing lottery of any kind, in any other manner'. Further, an explanation has been added to Section 66D(i) stating that the expression 'betting, gambling and lottery' shall not include the activity specified in Explanation 2 to Section 65B(44). Thus, by virtue of the proposed amendment, the activity carried out by a lottery distributor or selling agent in relation to promotion, marketing, organizing, selling of lottery or facilitating in organizing lottery of any kind, in any other manner shall be out of the ambit of 'transaction in money or actionable claim' as well as the negative list of services. Thus, the decision of the Sikkim High Court in the above mentioned case of Future Gaming Solutions India Pvt. Ltd. stands overruled to that extent. It shall also be noted that, the amendment in Section 65B (44) of the Act will be effective from the date of enactment of the Finance Bill, 2015. Here the question that arises is whether the Department can seek to apply the amendment retrospectively by taking a stand that no substantive law has been introduced by the amendment and the same is only clarificatory in nature. The doubt specifically arises because of the TRU Letter dated 28th February, 2015 which states that, the intention of the legislature has been to levy service tax on the services provided by chit fund foreman and distributor or selling agent of lottery and now an explanation is being inserted to specifically state the intention of the legislature.Such a view will not be correct for the reason that the Supreme Court in the case of Union of India and Ors. vs. Martin Lottery Agencies Ltd - 2009-TIOL-60-SC-ST, while dealing with an explanation that read as " 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", held that the explanation lays down a substantive law and will have prospective application. Thus even in a case where the explanation was worded in such a way, the Supreme Court has held that the Explanation is not clarificatory or declaratory but is in the nature of a substantive law that will have only prospective application.

[The authors are associated with Lakshmi kumaran & Sridharan and the views expressed are personal]