Sale Of Lottery Tickets By State Is A Privileged Activity And Not Rendering Of Service: Supreme Court

The Supreme Court observed that the sale of lottery tickets by the State is a privileged activity by itself and not rendering of a service.

The Court observed thus in civil appeals filed by the assessees against the judgments of the Sikkim and Kerala High Court.

The two-Judge Bench comprising Justice B.V. Nagarathna and Justice N. Kotiswar Singh enunciated, “The High Courts have lost sight of the definition of ‘goods’ in clause (50) of Section 65 of the Act while interpreting the expression “lottery”. As already noted, the definition of ‘goods’ in clause (7) of Section 2 of Sale of Goods Act, 1930, that is expressly incorporated in clause (50) of Section 65 of the Act, which expressly excludes actionable claims. This Court has by the Constitution Bench in Sunrise Associates opined that lottery tickets are actionable claims. The High Courts have also lost sight of the fact that the sale of lottery tickets by the State is a privileged activity by itself and not rendering of a service for which the assessees are rendering promotion or marketing service.”

Senior Advocate S. Ganesh and Advocate A.R. Madhav Rao represented the appellants while Senior Advocate Arijit Prasad represented the respondents.

Facts of the Case -

The appellant was registered with the Directorate of State Lotteries in Thiruvananthapuram and had purchased Kerala State Lotteries from the District Lottery Offices and other States’ lotteries in bulk from registered promoters at a discounted rate. The appellant contended that this purchase was made on an outright sale basis, meaning, they bought all tickets in bulk with no return policy and subsequently sold them to retailers on an outright sale basis. A profit was made from the difference between the amount received from retailers and the amount paid to the State Government or registered promoters. The sale of lotteries in Kerala was regulated by the Kerala State Lotteries and Online Lotteries (Regulation) Rules, 2003 framed under Section 12(3) of the Lotteries Regulation Act, 1998 and the Kerala Tax on Paper Lotteries Act, 2005.

The appellant was directed by the Superintendent of Central Excise to obtain registration and pay service tax under the heading 'business auxiliary service' in terms of the provisions of the Finance Act, 1994. Subsequently, the appellants were served notices by the Assistant Commissioner of Central Excise demanding details of their lottery purchase since the year 2003. In some instances, searches were conducted and items, including hard discs, were seized. Resultantly, the appellant approached the High Court challenging the constitutionality of the Explanation added to Section 65 (19) (ii) of the Finance Act, 1994 and all consequential steps taken in pursuance thereto. However, the High Court dismissed the petitions and therefore, the appeals were preferred before the Apex Court.

The Supreme Court in view of the above facts noted, “… once the lottery tickets are sold by the Directorate of Lotteries—a Department of the State, there is transfer of the title of the lottery tickets to the appellants, 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 Court added that the relationship between the State and the appellants is on a principal-to-principal basis and thus, there is no activity of promotion or marketing of a service on behalf of the State. It said that neither is the State, which conducts the lottery, rendering a service within the meaning of the Finance Act, 1994.

“The Explanation, therefore, cannot over-ride the main text of the provision as the Explanation which was sought to remove doubts is in fact contrary to the main provision which defines business auxiliary service and also contrary to the judgment of this Court in Sunrise Associates and having regard to clause (50) of Section 65 of the Finance Act, 1994”, it elucidated.

Furthermore, the Court observed that the service tax could not have been levied on the promotion or marketing of sale of goods or service provided by the client, on the premise that it was a ‘business auxiliary service’

Accordingly, the Apex Court allowed the appeals and set aside the impugned judgments.

Cause Title- K. Arumugam v. Union of India & Others Etc. (Neutral Citation: 2024 INSC 630)

Appearance:

Appellants: Senior Advocates S. Ganesh, George Poonthottam, Advocate A.R. Madhav Rao, AORs B. Krishna Prasad, Gautam Narayan, Rohini Musa, M. P. Vinod, Chirag M. Shroff, Raj Bahadur Yadav, Mukesh Kumar Maroria, Advocates Asmita Singh, Anirudh Anand, Tushar Nair, Mukunda Rao, Nipun Katyal, Atul Shankar Vinod, Dileep Pillai, Kannan Gopal Vinod, and Dhananjay Kataria.

Respondents: Senior Advocate Arijit Prasad, AORs Arjun Garg, Aakash Nandolia, Arvind Kumar Sharma, Raj Bahadur Yadav, Usha Nandini V, Biju P Raman, Asmita Singh, Mukesh Kumar Maroria, B Krishna Prasad, Raghvendra Kumar, Sameer Abhyankar, C K Sasi, Advocates Aakash Nandolia, Sagun Srivastava, Kriti Gupta, Arvind Kumar Sharma, Raj Bahadur Yadav, Usha Nandini V, Biju P Raman, John Thomas Arakal, Gautam Narayan, Asmita Singh, Anirudh Anand, Tushar Nair, Vikramjit Banerji, Arijit Prasad, Nisha Bagchi, Mukesh Kumar Maroria, Shubhendu Anand, Meru Sagar Samantaray, Annirudh Sharma II, G S Makker, Mukunda Rao Angara, B Krishna Prasad, Raghvendra Kumar, Anand Kumar Dubey, Nishant Verma, Simanta Kumar, Maneesh Pathak, Harsha Sharma, Devvrat Singh, Jainendra Kumar, Varun Singh, Sameer Abhyankar, Kushagra Aman, Aakash Thakur, Rahul Kumar, Ayushi Bansal, C K Sasi, Meena K Poulose, and Anupriya.

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