In a very recent decision in Union of India Vs. Martin Lottery Agencies Ltd. (2009-VIL-01-SC-ST), the Supreme Court had occasion to deal with some fundamental principles relating to taxation of services.
The issue before the Supreme Court was whether the sale, promotion and marketing of lottery tickets would be exigible to service tax under the relevant provisions of the Finance Act, 1994. The respondents in this case were agents of the state of Sikkim which had floated lottery schemes. Accordingly, the respondents were able to purchase lottery tickets in bulk at a discount to their face value and, in turn, resell these tickets to principal stockists at a different price and thus make a profit out of the difference between the amounts received from the principal stockists and those paid to the state government. The department issued a letter to the respondents requiring them to pay service tax under the category of ‘business auxiliary service’. This letter was impugned before the Sikkim High Court by way of a writ petition and the High Court upheld the writ petition on the ground that since lottery tickets were not goods but were actionable claims, the petitioners could not be said to be rendering any servicein relation to promotion of the client's goods or of marketing or sale of such goods. It hence came to the conclusion that the definition of business auxiliary service was not attracted. It was this order of the Sikkim High Court which was the matter of the appeal in the Supreme Court.
In order to appreciate the subject matter under reference, it is appropriate to extract the definition of business auxiliary service in the service tax law as follows: “Business auxiliary service” means any service in relation to:
(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;
This definition as per Section 65 (19) of the Finance Act, 1994 came into effect from July 2003. Subsequently, an explanation was added to sub clause (ii) of Section 65(19) in May 2008 as follows:-
Explanation — For the removal of doubts, it is hereby declared that for the purpose 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, organised, conducted or promoted by the client, in whatever form or by whatever name called, whether or not conducted online, including lottery, lotto, bingo;”
While it was this explanation which was the subject matter of the decision, certain fundamental aspects of taxation of services were taken into consideration as well.
At the outset, the court examined past decisions on the matter and came to the conclusion that a lottery ticket could not be property, either as a thing of value in itself or of title or ownership to anything. It therefore came to the conclusion that on purchasing lottery tickets, a person merely obtained a claim to a conditional interest in prize money that was not in his possession and hence lottery tickets could only be construed as actionable claims and not goods.
Having held so, the Court then asked the question as to whether the state, in organising a lottery, rendered any services to anybody. The Central government argued that this was indeed the case, as a service was undoubtedly rendered to the general public since revenues were generated as a result of the activity of sale of lottery tickets. The Supreme Court did not agree and held that raising of revenues by the State by itself cannot amount to a rendition of service. The Court considered the dictionary meaning of the word ‘service’, which has not been defined in the Finance Act 1994, as follows:
“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.”
It held that services provided in respect of the matters envisaged under Section 65(19) of the Act must be construed strictly. Before a tax was found to be leviable, it must come within the domain of legitimate business and/or trade. The Court also considered the United Nations — Central Product Classification (UN — CPC), which contained the description of gambling and betting services and covered the activities of organising lotteries. It also considered whether organising a lottery could fall within the terms 'entertainment' and 'amusement', as provided in Entries 34 and 62 of List II of the Seventh Schedule to the Constitution, so as to be construed as a service. The Court took note of the fact while the activities of the respondents could amount to a service, in terms of advertisement and promotion of lotteries and other marketing related activities, the definition of ‘business auxiliary service’ required that such promotion and marketing activities should be with regard to the services provided by the cients, in this case the State of Sikkim.
Thus, lotteries themselves had to be construed to be services, if the taxable heading of 'business auxiliary service' were to be attracted. The Supreme Court then held that the rendition of service for the purpose of imposition of service tax was imperative. It must be a part of the economic activity. Economic activity had three characteristics; a tax on production; a tax on sales and a tax on services. The concept of the Value Added Tax comes from the generic expression so as to include taxes on services as well.
The court considered all of these principles but was unable to come to a definitive conclusion as to whether organising lotteries would amount to a rendition of service. Since it was unable to do so, it limited itself to thereafter considering the legal implications of the explanation to sub clause (ii) to Section 65 (19). It came to the conclusion in that regard that this explanation, which stated that service in relation to promotion or marketing of services provided by the client would include a service provided in relation to promotion or marketing of lottery, could only be prospective in nature, since it was not at all apparent or clear in law that a lottery was a service and it was only because the explanation held it to be so that the service tax, if at all, would apply to services in relation to promotion or marketing thereto.
The court thereafter came to the conclusion, after an extensive discussion on whether the explanation was a clarificatory or declaratory one in nature, that the explanation had undoubtedly introduced a substantive law. If a substantive law was thus introduced, it could only have prospective effect. It thus held that subject to the constitutionality of the explanation, as to whether it could simply deem the organisation of a lottery to be a service, the service tax in regard to services, in relation to such organisation of lotteries under the relevant heading of business auxiliary services, was only effective from May 2008, when the explanation took effect.
This interesting case is similar to the recent one of the Delhi High Court on renting of immovable property in that the question of whether something can simply be held to be a service, without the requirement of addressing the issue of whether or not the activity in question fell within the dictionary meaning of 'service', was the subject matter of both the above cases. In this present case of course, the Supreme Court has not concluded whether organising a lottery is a service and whether the government can simply deem it to be a service whereas the Delhi High Court had held that renting of property was not a service. It will be interesting to see how these issues are dealt with by the Supreme Court in any future case.
The author is Leader, Indirect Tax Practice, PricewaterhouseCoopers
pwctls.nd@in.pwc.com
