Writ Petition (Civil) Nos. 34 and 48 of 2016. Case: Future Gaming & Hotel Services (P) Ltd. and Ors. Vs Union of India and Ors.. Sikkim High Court

Case NumberWrit Petition (Civil) Nos. 34 and 48 of 2016
CounselFor Appellant: A.R. Madhavrao, Pragya Awasthi, Laxmi Chakraborty and Manju Rai, Advocates and For Respondents: B.K. Gupta, Advocate
JudgesS.K. Agnihotri, C.J. and Meenakshi Madan Rai, J.
IssueConstitution of India - Articles 245, 246, 246(1), 246(3), 248, 254, 254(1), 254(2), 265, 268A, 276, 366; Finance Act, 1994 - Sections 65, 65B, 65B(44), 66, 66B, 66D, 67; Indian Contract Act, 1872 - Section 25(2); Rubber Act, 1947 - Section 12(2); Transfer of Property Act, 1882 - Section 3
Judgement DateMarch 23, 2017
CourtSikkim High Court

Judgment:

S.K. Agnihotri, C.J.

  1. Assailing the legality and validity of the amendments made in the Finance Act, 1994 (Service Tax) by the Finance Act, 2016, whereunder the Section 65B was amended, as being ultra vires the Constitution of India under Entry 34 and Entry 62 of List II of the Seventh Schedule of the Constitution of India; also seeking a declaration that the transactions in buying and selling lottery tickets are not liable to Service tax under the provisions of the Finance Act, 1994 as amended by the Finance Act, 2016 and further seeking for quashing of Notifications No. 18/2016-ST: dated 01.03.2016, these Writ Petitions are filed by the petitioners, with prayer of incidental and consequential relief.

  2. Both the Writ Petitions raise the one and the same questions of law arising from the identical cause of action and, as such, are being considered and disposed of by this common Judgment.

  3. The petitioners' firms, incorporated under the Companies Act, 1956, are engaged in business of buying and selling of lottery tickets organized by the Government of Sikkim. An Agreement between the petitioners and the Government of Sikkim was arrived at on 06.06.2016 and 09.11.2012 respectively, enabling the petitioners' 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. The validity of the said Agreements is five years. Certain amendments were made time and again in the Finance Act, 1994, which came to be challenged in several cases before this Court and consistent decisions were rendered holding that the Parliament lacks competence to frame the law for imposing service tax on lottery dealers. The issue as to 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. In the meantime, in the teeth of several decisions as discussed in the following paragraphs, the Parliament came out with an amendment by the Finance Act, 2016 to the following effects:-

    "The relevant provisions of the Finance Act, 1994 (as amended by Finance Act, 2016) state as under:"

    In Section 65B-

    (b) in clause (44), in Explanation, 2, in sub clause (ii), for item (a), the following item shall be substituted, namely-

    (a) by a lottery distributor or selling agent on behalf of the State Government, in relation to promotion, marketing, organizing, selling of lottery or facilitating in organizing lottery or any kind, in any other manner, in accordance with the provisions of the Lottery (Regulation) Act, 1998."

  4. In furtherance thereof, the petitioners were served an intimation regarding changes vide communication dated 10.06.2016, calling upon the petitioners to make payment of service tax. It is also sought to be questioned in the instant writ petitions.

  5. Mr. A.R. Madhavrao, learned Counsel appearing for the petitioners, would contend that there is no change in the legal position even after the amendments made vide the Finance (Amendment) Act, 2016, as laid down by this Court on several decisions. To garner support for his contention, he refers to and relies on a decision of the Supreme Court in Sunrise Associates v. Government of NCT Delhi (2006) 5 SCC 603 and decisions of this Court in Future Gaming Solution Pvt. Ltd. v. Union of India 2015 (37) STR 65 (Sikkim), Future Gaming Solution India Pvt. Ltd. v. Union of India 2014 (36) STR 733 (Sikkim) and Future Gaming & Hotel Services Pvt. Ltd. v. Union of India 2015 VAT Infoline 449 (Sikkim). It is then contended that the Agreements entered into between the petitioners and the State Government are valid Agreements in public policy, thus, is not violative and void merely because the consideration is inadequate in the teeth of Section 23(2) (sic. Sec. 25(2)) of the Indian Contract Act, 1872, as pleaded by the respondents, as the Agreements were executed in compliance and consonance with the Lotteries Regulation Act, Rules and Model Agreement. The invoices were raised by the State Government, which clearly made procurement of lottery tickets by the petitioners as outright complete sale. Learned Counsel would further contend that the amendment made by the Parliament for imposition of service tax is ultra vires as the lottery falls within the definition of 'betting and gambling' and, as such, the same falls in the State List of the Seventh Schedule, thus, seek a declaration that the amended provisions are ultra vires the Constitution and consequential notification be held as null and void and be quashed.

  6. In oppugnation, Mr. B.K. Gupta, learned Counsel appearing for the respondents 1, 2 and 3, would submit that the service tax is not imposed on lottery but on the services rendered by the distributors or selling agents for marketing, promoting and organizing lottery since the lottery is not exigible to Service tax as the lottery is conducted by the State of Sikkim and the State of Sikkim is not liable to pay any service tax. The Supreme Court held in Sunrise Associates (supra) that lottery ticket is an actionable claim and, as such, it is included in the negative list and there is no imposition and levy of service tax on lottery. Mr. Gupta would further contend that the definition of "service" as per clause (44) in Section 65B, in Explanation 2 in sub-clause (ii) provides for services rendered by a lottery distributor or selling agent on behalf of the State Government in relation to promotion, marketing, organizing, selling of lottery or facilitating in organizing of lottery of any kind or in any manner, in accordance with the provisions of the Lotteries (Regulation) Act, 1998 and, as such, the services provided by the petitioners herein fall within the ambit of service tax. Further, it is contended that under the provisions of the Lotteries (Regulation) Act, 1998, the transaction between the State Government and the petitioners herein, is on the principal to agent basis. Any other contrary contract may be hit by the provisions of the Indian Contract Act, 1872. Learned Counsel would further reiterate that pursuant to Rule 7C of the Service Tax Rules, 1994, the distributors or his selling agents are liable to pay service tax for the taxable service of promoting, marketing, organizing or assisting any organizing lottery. The service tax was imposed not for the purpose of earning revenue but in the larger interest of society. It is not disputed by learned Counsel that Entry No. 92-C incorporated by the Constitution (88th Amendment) Act, 2004, in the Union List of the Seventh Schedule has not yet been brought into force. However, the Parliament is competent to levy service tax on sale of lottery for the services rendered in organizing lottery under the residual Entry No. 97 of Union List (List I). The validity of levy of service tax on services has been upheld by the Supreme Court in Federation and Association of Hotels and Restaurants Association of India v. Union of India (1989) 3 SCC 634. It is further stated that Explanation 2 of Section 65B(44) contemplates imposition of service tax on any activity carried out by a lottery distributor or a selling agent on behalf of the State Government. Mr. Gupta would further urge that under provisions of Section 268A, which has been inserted later on, the Parliament is competent to impose service tax. Learned Counsel would also submit that the conduct of lottery itself is known as 'service' in the international context and classifiable under the Heading No. 96920 of the UN-CPC classification.

  7. We have heard the learned counsel appearing for the parties, perused the pleadings and examined the documents appended thereto.

  8. Article 268A of the Constitution of India, providing for levy of service tax by Union and collected and appropriated by the Union and the States, was inserted by the Constitution (Eighty-eight Amendment) Act, 2003. However, the same was later on omitted by the Constitution (One Hundred and First Amendment) Act, 2016. Accordingly, Entry 92C in List I-Union List of the Seventh Schedule of the Constitution for legislation to levy service tax was inserted by the same Eighty-eighth Amendment. However, the same was never notified. In the meantime, along with the omission of Article 268A, Entry 92C was also omitted by the Constitution (One Hundred and First Amendment) Act, 2016.

  9. Finance Act, 2012 provides for imposition of service tax on all the activities except those specified in the negative list or otherwise, etc. The relevant clause reads as under:

    "65B: In this Chapter, unless the context otherwise requires,-

    (1) 'actionable claim' shall have the meaning assigned to it in section 3 of the Transfer of Property Act, 1882;

    ....

    (34) 'negative list' means the services which are listed in section 66D;

    ....

    (44) 'service' means any activity carried on by a person for another for consideration, and includes a declared service but shall not include-

    (a) any activity which constitutes merely-

    ....

    (iii) a transaction in money or actionable claim

    (51) 'taxable service' means any service on which service tax is leviable under section 66B;

    66B. Charge of service tax

    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.

    66D. Negative list of services

    The negative list shall comprise of the following services, namely:-

    ....

    (i) betting, gambling or lottery;

    ...."

    Lottery being in...

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