By TIOL News Service

GANGTOK, MAR 28, 2017: THE petitioners assail the legality and validity of the amendments made in the FA, 1994 by the FA, 2016, whereunder the Section 65B was amended, as being ultra vires the Constitution of India; also seek a declaration that the transactions in buying and selling lottery tickets are not liable to Service tax under the provisions of the FA, 1994 as amended by the FA, 2016 and further seek quashing of Notification No.18/2016-ST, with prayer of incidental and consequential relief. They were also served an intimation regarding changes vide communication dated 10.06.2016, calling upon the petitioners to make payment of service tax; this letter too is challenged in the Writ Petitions.

An Agreement between the petitioners and the Government of Sikkim was arrived at enabling the petitioner firms to purchase lottery tickets in bulk from the Government and re-sell the same to the public at large, through authorized agents, stockists, resellers etc.

Certain amendments were made time and again in the Finance Act, 1994, which came to be challenged in several cases before theHigh Court and consistent decisions were rendered [ Sunrise Associates - 2006-TIOL-4O-SC-CT-LB , Future Gaming Solution Pvt. Ltd. - 2012-TIOL-1096-HC-SIKKIM-ST , Future Gaming Solution India Pvt. Ltd. - 2013-TIOL-904-HC-SIKKIM-ST and Future Gaming & Hotel Services Pvt. Ltd. 2015-TIOL-2398-HC-SIKKIM-ST ] holding that the Parliament lacks the competence to frame the law for imposing service tax on lottery dealers. The issue asto whether the lottery distributors, as the petitioners herein, are agents of the State Government, was also considered and decided in favour of the petitioners holding that they were the outright purchasers and not the agents of the State Government, when the State Government alone is competent to organize a paper lottery or online lottery or both under the provisions of the Lotteries (Regulation) Rules, 2010 and the Lotteries (Regulation) Act, 1998.

The Finance Act, 1994 was, therefore, again amended by the Finance Act, 2016.

The J.S (TRU) letter dated 29 February 2016 had explained the amendment proposed by the Finance Bill, 2016 thus –

Further amendments in Chapter V of the Finance Act, 1994:

A. Lottery: Section 4(c) of the Lotteries (Regulation) Act, 1998 provides that the State Government shall sell the tickets either itself or through distributors or selling agents. Thus, as per the provisions of the Lotteries (Regulation) Act, 1998, the transaction between the State Government and the distributors or selling agents is on principal to agent basis. Any contract contrary to the aforesaid legal provisions is ultra vires the provisions of Indian Contracts Act, 1872 and thus not legally enforceable. Explanation 2 in section 65B(44) is proposed to be amended to clarify that activity carried out by a lottery distributor or selling agents of the State Government under the provisions of the Lotteries (Regulation) Act, 1998 (17 of 1998), is leviable to service tax. (Clauses 145 of the Bill refers)

Be that as it may, after considering the elaborate submissions made by both sides replete with the plethora of the cited decisions and the extracts thereof, the High Court inter alia observed thus –

+ In the instant petitions, we are concerned with the amendments made in the Finance Act, 1994 by the Finance Act, 2016. The previous Division Benches in the cases (supra) have come to a conclusion that no service tax is imposable and leviable on lottery, but we are dealing with the service tax on related activities in distribution and sale of lottery tickets.

+ On gleaning through various amendments made from 2010 onwards, it is evident that the service tax was intended on promotion, marketing, organizing, selling of lottery or facilitating in organizing lottery of any kind, in any other manner. By the impugned amendment, a cosmetic change has been made in the Amendment Act, 2010, as initially the words "any person or any other person" was used.

+ In 2015, it was modified to the extent that any activity carried out, for a consideration, in relation to or for facilitation of, a transaction in money except an actionable claim excluding the activity carried out (a) 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. The lottery distributor or selling agent is a person appointed or authorized by a State for the purpose of some activities. By the impugned amendment the words "a person appointed or authorized by a State for the purpose of ... " were substituted by the words "by a lottery distributor or selling agent on behalf of the State Government, ... ". The substitution does not make substantial changes and the intention remains the same in pith and substance .

+ In the case on hand, Article 268A, which was incorporated by the Constitution (Eighty-eighth Amendment) Act of 2003, has recently been omitted by the Constitution (One Hundred and First Amendment) Act, 2016. Entry 92C was inserted by the same constitutional amendment, but admittedly never notified, and the same has also been omitted by the Constitution (One Hundred and First Amendment) Act, 2016. Thus, reliance can be placed on Entry 97 invoking competence to impose service tax.

+ It is deducible that the Union - Parliament is competent to impose service tax for the services rendered for consideration by a person. It is well settled principle as laid down in the cases (supra) that entries in the three lists are fields of legislation. Taxation is a distinct matter for the purpose of legislative competence and it must flow from the specific entry provided for levy and imposition of taxes. The relevant service tax leviable is not on the lottery as also submitted by the respondents, but on promotion, marketing, organizing, selling of lottery or facilitating in organizing lottery of any kind, in any other manner .

+ We are of the considered and conscience view that the Union-Parliament is conferred with the power and competence under Article 268A read with Entry 97, List I (Union List) to impose and levy service tax on other related activities, as aforestated. The impugned amendment brought in Finance Act, 2016 is not unconstitutional .

The High Court further observed that in view of the Division Bench decisions in Future Gaming Solutions Pvt. Ltd. - 2012-TIOL-1096-HC-SIKKIM-ST ; Future Gaming Solutions India Pvt. Ltd. - 2013-TIOL-904-HC-SIKKIM-ST and Future Gaming & Hotel Services Pvt. Ltd. - 2015-TIOL-2398-HC-SIKKIM-ST categorically holding that the Union-Parliament lacks competence to impose service tax and the concerned amendments were held as ultra vires to the Constitution of India, the Bench is hard put to take a contrary view. [ Raghubir Singh (Dead) by LRs. Etc. - 2002-TIOL-810-SC-MISC , Pradip Chandra Parija and others vs. Pramod Chandra Patnaik and others - 2002-TIOL-566-SC-MISC-CB , Chandra Prakash and Ors. Vs. State of U.P. and Anr. (2002) 4 SCC 234 relied upon. ]

It is also noted that the Union of India is competent to impose and levy service tax on the services rendered by a person, however, for want of proper mechanism service tax is not enforceable on respondents. [ National Mineral Development Corporation Ltd. vs. State of M.P. and Another (2004) 6 SCC 281 , Martin Lottery Agencies Limited - 2009-TIOL-60-SC-ST , Future Gaming Solutions Pvt. Ltd. - 2012-TIOL-1096-HC-SIKKIM-ST , 2013-TIOL-904-HC-SIKKIM-ST refers.]

The writ petitions were partly allowed by holding that the amendments carried out by the Finance Act, 2016, are not capable of being implemented for imposition and levy of the service tax on the services allegedly provided by the petitioners. The impugned letter dated 10.06.2016 issued by respondent, the Circular dated 29.02.2016 and Notification No. 18/2016-ST were quashed.

In passing : Also see Lottery in the Constituent Assembly .

(See 2017-TIOL-589-HC-SIKKIM-ST)