T This batch of cases challenges various High Court of Sikkim orders passed in writ petitions filed by the respondent-assessees. Except for one case (SLP (C) No. 19200 of 2017), ...
No Acts & Articles mentioned in this case
2025 INSC 181 1
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOS.4289 -4290 OF 2013
UNION OF INDIA & OTHERS …. APPELLANTS
VERSUS
FUTURE GAMING SOLUTIONS P VT. LTD.
& ANOTHER ETC. …. RESPONDENTS
WITH
CIVIL APPEAL NOS.9506-9507 OF 2013
CIVIL APPEAL NOS.2172 -2173 OF 2016
CIVIL APPEAL NO.16118 OF 2017
CIVIL APPEAL NO. OF 2025
(Arising out of SLP (C) No.18565 of 2014)
CIVIL APPEAL NO. OF 2025
(Arising out of SLP (C) No.30629 of 2014)
CIVIL APPEAL NO. OF 2025
(Arising out of SLP (C) No.14111 of 2015)
CIVIL APPEAL NO. OF 2025
(Arising out of SLP (C) No.19200 of 2017)
CIVIL APPEAL NO. OF 2025
(Arising out of SLP (C) No.23945 of 2017)
2
J U D G M E N T
NAGARATHNA, J.
I N D E X
History of this controversy: ................................................................ 5
2012 Amendment: ............................................................................ 15
2015 Amendment: ............................................................................ 20
2016 Amendment: ............................................................................ 23
Submissions before this Court: ......................................................... 26
Points for Consideration: ................................................................. 37
Relevant constitutional provisions: .................................................. 38
Relevant Case Law on lotteries:........................................................ 44
B.R. Enterprises: .................................................................................... 44
Sunrise Associates: ................................................................................ 45
State of Karnataka: ............................................................................... 47
K. Arumugam: ........................................................................................ 47
Legal Framework: ............................................................................ 51
Agreements under consideration: ..................................................... 67
Paper Lotteries: ...................................................................................... 67
Online Computerised Agreement: ........................................................... 78
Agency: ............................................................................................ 83
Case Law: ......................................................................................... 90
Agreements: ................................................................................... 105
Controversy between the Parties: ................................................... 113
3
Leave granted in SLP (C) No.18565 of 2014; SLP (C) No.30629
of 2014; SLP (C) No.14111 of 2015; SLP (C) No.19200 of 2017 and
SLP (C) No.23945 of 2017.
2. This batch of cases assail various orders of the High Court of
Sikkim passed in several writ petitions which were filed by the
respondent-assesses. The appellant is the Union of India in all these
cases except in SLP (C) No.19200 of 2017. For immediate reference,
the following table which has been provided by learned counsel for
the Union of India would indicate the details:
Sl.
No.
Case No(s). Name of the Assessee(s)
Impugned
Judgment
& Order
Dated
Amendment
Year
1 C.A. NOS.4289-
4290/2013
1. Future Gaming Solutions
Pvt. Ltd.
2. Summit Online Trade
Solutions Pvt. Ltd
29.11.2012 2010
2 C.A.NOS. 9506-
9507/2013
1. Summit Online Trade
Solutions Pvt. Ltd.
2. Future Gaming Solutions
India Pvt. Ltd.
10.05.2013 2010
3 SLP(C) No.
18565/2014
Future Gaming Solutions
India Pvt. Ltd.
24.09.2013 2012
4 SLP(C) No.
30629/2014
Summit Online Trade
Solutions Private Limited
13.05.2014 2012
5 SLP(C) No.
14111/2015
Tashi De Lek Gambling
Solutions Pvt. Ltd.
15.07.2014 2012
4
Sl.
No.
Case No(s). Name of the Assessee(s)
Impugned
Judgment
& Order
Dated
Amendment
Year
6 C.A. NOS.2172-
2173/2016
1. Future Gaming & Hotel
Services Pvt. Ltd.
2. Summit Online Trade
Solutions Pvt. Ltd.
14.10.2015 2015
7 SLP(C) No.
19200/2017
Future Gaming & Hotel
Services (P) Ltd.
23.03.2017 2016
8 SLP(C) No.
23945/2017
Summit Online Trade
Solutions (P) Ltd.
23.03.2017 2016
9 C.A. No.
16118/2017
Future Gaming & Hotel
Services (P) Ltd.
23.03.2017 2016
2.1 The petitioners before the High Court (respondents-assessees
herein) are companies incorporated as private limited companies
under the Companies Act, 1956. The respondents-assessees herein
are engaged in the business of the sale of paper and online lottery
tickets organised by the Government of Sikkim. They entered into
respective agreements with the State of Sikkim.
2.2 Since these cases assail the amendments made to the
provisions of the Finance Act, 1994 from time to time commencing
from the year 2012, the factual backdrop of these cases shall be in
accordance with the amendments made to the Act and shall be
stated chronologically.
5
History of this controversy:
3. The Parliament introduced service tax through the Finance
Act, 1994 under Chapter V, which took effect on 01.07.1994. Later,
through the Finance Act, 2003, the Finance Act,1994 was amended
to include a new category of taxable services, namely "Business
Auxiliary Service," under sub-section (19) of Section 65, effective
from 01.07.2003. Pursuant to this amendment, the Service Tax
Department issued notices to the respondents-assessees herein,
under the amended Finance Act in 2007, requiring them to register
under the said Act for payment of service tax.
3.1 Being aggrieved, the respondents-assessees herein
approached the High Court in W.P. (C) No.19 of 2007, titled
Martin Lottery Agencies Ltd. vs. Union of India, challenging the
levy of service tax upon the sale of lottery tickets. Vide judgement
dated 18.09.2007, the High Court allowed the writ petition filed by
the respondents-assessees herein declaring that service tax was
not payable on the activity undertaken by the respondents-
assessees herein.
6
3.2 The aforesaid judgment came to be challenged before this
Court in Civil Appeal No.3239 of 2009. During the pendency of
the Civil Appeal, the Finance Act, 1994 was further amended with
the introduction of an “Explanation” to Section 65(19)(ii) of the
Finance Act, 1994. The Explanation is reproduced hereunder: -
“Explanation.- 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; [Explanation inserted vide
Finance Act, 2008 w.e.f. 16th May, 2008]”
3.3 In Union of India vs. Martin Lottery Agencies Ltd, Civil
Appeal 3239 of 2009 reported in (2009) 12 SCC 209, this Court
delivered its judgment on 05.05.2009 holding that the High Court
had rightly set aside the notices issued to the respondents-
assessees herein. However, this Court held that the Explanation to
Section 65(19)(ii) of the Finance was a substantive law and declared
it to be prospective in operation. Regarding the validity of the
Explanation, the issue was left open.
7
3.4 The respondents-assessees herein, again, approached the
High Court by filing Writ Petition (C) No.36 of 2009 titled M/s.
Future Gaming Solutions Pvt. Ltd. v s. Union of India
challenging the validity of the Explanation to Section 65 (19)(ii) of
the Finance Act, 1994. The High Court dismissed the writ petitions
vide judgement dated 30.07.2010. Being aggrieved by this
dismissal, the respondents-assessees herein approached this
Court by filing a Special Leave Petition, being SLP (C) No.26771 of
2010. The same was converted as a Civil Appeal No.2782 of
2012.
Recently this Court (this very Bench) in Civil Appeal
Nos.2842-2848 of 2012 titled as K. Arumugam vs. UOI dated
08.08.2024 reported in 2024 SCC Online SC 2278 (“K.
Arumugam”) and batch including Civil Appeal No.2782 of 2012
allowed the appeals preferred by the respondents-assessees herein
and set aside the order passed by the High Court dated 30.07.2010
and held that lottery tickets being actionable claims and not being
goods within the meaning of sub-clause (i) of clause (19) of Section
65 of the Finance Act, 1994, would expressly get excluded from the
8
scope of the said provision. In the circumstances, service tax on
the promotion or marketing or sale of lottery tickets which are
actionable claims could not have been levied under the said sub-
clause.
3.5 However, during the pendency of the above appeal, the
Finance Act, 1994 again came to be amended with the deletion of
the Explanation to Section 65(19)(ii) and the introduction of a new
category of “taxable service” vide clause (zzzzn) to sub-section (105)
of Section 65 vide the Finance Act, 2010 with effect from
01.07.2010. Clause (zzzzn) to sub-section (105) of Section 65 reads
as under:
“(105) “taxable service” means any service provided or to
be provided,- … (zzzzn) to any person, by any other person,
for promotion, marketing, organising or in any other
manner assisting in organizing games of chance, including
lottery, Bingo or Lotto in whatever form or by whatever
name called, whether or not conducted through internet
or other electronic networks;”
3.6 Challenging this amended clause (zzzzn) to sub-section (105)
to Section 65 of the Finance Act, 1994, the assesses filed writ
petitions before the High Court. Primarily, the High Court
examined the relevant clauses of the agreements.
9
3.7 After hearing the rival contentions made by the respective
parties, the High Court allowed the writ petitions i.e., W.P. (C) No.
36 of 2011 and W.P. (C). No. 26 of 2011 by way of common
judgement and order dated 29.11.2012. The pertinent findings in
the judgement dated 29.11.2012 have been culled out
hereinunder:
a. The High Court took note of the fact that lottery, per se, falls
within the expression "betting and gambling" , which is
considered pernicious in nature. It receives legal validity only
if it is run or authorised by the State Government, subject to
the conditions laid down in Section 4 of the Lotteries
(Regulation) Act, 1998 which is a Central enactment. The
Court further observed that it is the State’s privilege that can
be partially delegated to another party, provided they adhere
to the statutory conditions contained in the regulatory Act.
b. Although no Entry in any of the Lists of the Seventh Schedule
specifically provides for levying taxes on lotteries, the power to
enact laws for taxing lotteries must be understood as inherent
10
within the expressions "betting and gambling," as lottery
activities fall within this category.
c. The High Court noted that betting and gambling itself is an
activity though the lottery ticket is a tangible thing that carries
with it the right to participate in the game of chance. Thus, all
activities right from the publishing of the lottery tickets to
participation in the game of chance, declaration of draw and
even distribution of prize to the winner fall within the purview
of the expression ‘betting and gambling’. Thus the power to levy
tax on the organisation, promotion and marketing of lottery
being an act of betting and gambling comes within the
exclusive domain of Entry 62 - List II of the Seventh Schedule
of the Constitution.
d. The High Court applied the test of the principle of pith and
substance and observed that the power to levy tax on lotteries,
which are considered games of chance and fall under "betting
and gambling" in Entry 62 - List II, lies exclusively with the
State Legislature. Consequently, Parliament's authority to
impose such a tax under its residuary power in Entry 97 - List
11
I, read with Article 248 of the Constitution, is excluded. The
High Court held that while Parliament is competent to levy
service tax under Entry 97 – List I, this does not imply that it
can impose such a tax on lotteries, as the power to levy taxes
on this subject has been conferred on the State Legislature in
List II. That the residuary powers of Parliament can only be
exercised when no Entry in any of the Lists provide a legislative
field. Hence, it is the exclusive legislative domain of the State
Legislature to levy tax of any nature on lotteries by virtue of
Entry 62 - List II.
e. The High Court further held that when a distributor purchases
goods at a commercial price, they are not acting as an agent
for the manufacturer.
f. The High Court observed that in the case at hand, the lottery
tickets are sold as goods by the State Government to the
assesses therein at a discounted price of 70 paise per ticket,
compared to the MRP of Re.1. The predominant part of the
transaction is a sale of goods. While considering the 30%
discount offered to the respondents-assessees herein on the
12
MRP, the High Court took note that offering such discounts is
a normal trade practice in any sale and purchase transaction.
If the seller sells the goods at the MRP to the ultimate
consumer, intermediaries must receive a discount to cover
establishment costs, logistics, and some margin of profit.
g. Upon perusal of various clauses in the agreement, the High
Court observed that the State Government appoints stockists
or distributors to sell the tickets to ultimate buyers, who
purchase them at the MRP. These intermediaries must be
provided discounts from the MRP to cover their expenses and
ensure a profit margin.
h. The High Court also held that the advertisement expenses
incurred for promoting the State lottery are borne by the
respondents-assessees herein to promote their own business,
not as a service to the State Government. Clause (20) of the
agreement further stipulates that the petitioner therein is
solely responsible for incurring all advertising expenses,
including the publication of lottery results.
13
i. In light of the above observations, the High Court held that in
the case at hand the lottery is organised by the state
government through its various stockists etc. but cannot be
construed to be a service rendered to the State Government.
Hence, the question of service tax does not arise.
3.8 The High Court ultimately concluded as under:
(i) “In the backdrop of discussion on Ground (A) we
have no hesitation to conclude that the activities of the
lottery distributors i.e. the petitioners herein do not
constitute a service and thus beyond the purview of
"taxable service" as statutorily defined under clause
(zzzzn) of sub-section 105 of Section 65 of the Finance
Act, 1994 as amended vide Finance Act, 2010.
(ii) The activity of promotion, marketing,
organizing or in any other manner assisting in
organising game of chance including lottery is an
activity included in the expression "betting and
gambling" as incorporated under Entry 34 and 62 of
List II to Seventh Schedule of Constitution of India.
(iii) The activity of promotion, marketing,
organizing or in any other manner assisting in
organizing game of chance including lottery being an
activity of "betting and gambling" under Entry 62, List
II to Seventh Schedule of Constitution of India, the
State Legislature alone is competent to levy any tax on
such activity under Entry 62.
(iv) The Parliament has the competence and
jurisdiction to levy taxes on any subject matter
14
including "service tax" under Entry 97, List I, read with
Article 248 of the Constitution of India except where
such powers are traceable to any of the entries in List
II and III to Seventh Schedule of Constitution of India.
(v) Power to tax the activity of "betting and
gambling" as explained above being within the
exclusive domain of State Legislature under Entry 62,
List II, the Parliament in exercise of its residuary
power under Entry 97, List I to Seventh Schedule of
Constitution of India lacks legislative competence to
impose any tax including "service tax" on such
activity.”
3.9 In view of the above conclusions, the petitions were allowed
striking down clause (zzzzn) to sub-section (105) of Section 65 of
Finance Act, 1994 as introduced vide Finance Act, 2010 as ultra
vires the Constitution having been enacted in contravention to
Entry 97 - List I to Seventh Schedule read with Article 248 of
Constitution of India. Consequently, all actions of imposing service
tax upon the respondents-assessees herein being distributors of
lottery organized by State of Sikkim were set aside. Since the
respondents-assessees herein had secured registration and had
paid service tax under the impugned provision on their own, the
judgment was to operate prospectively.
15
3.10 Being aggrieved by the judgement of the High Court of
Sikkim in Writ Petition (Civil) No. 36 of 2011 and other allied writ
petitions dated 29.11.2012 allowing the writ petitions filed by the
respondents-assessees herein and striking down clause (zzzzn) to
sub-section (105) of Section 65 of Finance Act, 1994 as introduced
vide Finance Act, 2010 as ultra vires the Constitution of India being
enacted in contravention of Article 248 of the Constitution of India
read with Entry 97 - List I to the Seventh Schedule thereto and
setting aside all consequential actions of the Revenue in imposing
service tax upon the respondents-assessees herein (distributors of
lottery organised by State of Sikkim), the Revenue has preferred
the present Civil Appeal Nos.4289-4290 of 2013.
2012 Amendment:
4. During the pendency of the matter before this Court, the
Finance Act, 1994, was amended once again by the Finance Act,
2012, whereby several provisions were introduced giving a new
dimension to the meaning of ‘taxable service’ as services that would
be taxable thereunder. The relevant provisions of the Finance Act,
16
1994, as amended, by the Finance Act, 2012, which is effective
from 01.07.2012 read 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 (4 of
1882);
xxx
(34) “negative list” means the services which are listed in
section 66D;
xxx
(44) “service” means any activity carried out by a person
for another for consideration, and includes a declared
service, but shall not include—
(a) an activity which constitutes merely,—
xxx
(iii) a transaction in money or actionable claim;
(51) “taxable service” means any service on which service
tax is leviable under section 66B;
Charge of service tax on and after Finance Act, 2012.
66B. 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.
Negative list of services. 66D.
The negative list shall comprise of the following services,
namely:—
xxx
17
(i) betting, gambling or lottery;
xxx”
4.1 On the introduction of the aforesaid amendments the
respondents-assessees herein had intimated to the Revenue vide
letter Ref. No.FGSIPL/SK/0024/ 12-13 dated 28.06.2012 stating
that in view of the change in the legal position the respondents-
assessees herein would not be paying service tax with effect from
01.07.2012.
4.2 In response to the above, the Revenue issued letter C.
No.V(3)7/ST/FGSIPvtLtd/GTK/2009/295 dated 06.07.2012
stating that as per the Notification. No. 36/2012 ST dated
20.06.2012 read with Rule 6(7C) of the Finance Act , 1994 (as
amended), the distributor or selling agents are liable to pay service
tax at the rate specified for the taxable service of promoting,
organizing or in any other manner assisting in arranging lottery.
Being aggrieved by this communication dated 06.07.2012 and the
Finance Act, 2012, the respondents-assessees herein approached
the High Court by filing Writ Petition No.32 of 2012. The
18
respondents-assessees herein assailed the Amendment Act of 2012
on the various grounds.
4.3 After hearing the rival parties, the High Court allowed the writ
petition filed by respondents-assessees herein before the High
Court vide order dated 24.09.2013 and set aside the amendments
in 2012 made to the Finance Act, 1994. The relevant findings of
the High Court are as follows:
a. The High Court held that the lottery being an ‘actionable claim’
does not fall within the purview of the service tax laws as
introduced by the new provisions of the Finance Act, 2012.
b. The High Court found no change in the circumstance as
regards the position found in the earlier issues set out above
except that clause (zzzzn) of sub-section (105) of Section 65 of
the Finance Act, 2010, and the replaced service tax law regime
under the Finance Act, 2012, in the form of Section 65B and
sub-sections thereunder, Sections 66B and 66D were already
dealt with earlier.
c. The High Court observed that even under sub-section (34) of
Section 65B read with Sections 66B and 66D lottery stands
19
excluded from the purview of service tax under the Finance
Act, 2012 as being one in the ‘negative list’;
d. Further, the High Court held that activities comprising of
promotions, organising, reselling or any other manner
assisting in arranging of lottery tickets of the State Lotteries do
not establish the relationship of a principal or an agent but
rather that of a buyer and a seller. This was in view of the
nature of the transaction consisting of bulk purchases of
lottery tickets by the respondents-assessees herein from the
State Government on full payment on a discounted price as a
natural business transaction and other related features like
there being no privity of contract between the State
Government and the stockists, agents, resellers under the
respondents-assessees herein.
Thereafter, following the order dated 24.09.2013, the High
Court passed orders dated 13.05.2014 and 15.07.2015.
4.4 Being aggrieved by the orders passed by the High Court dated
24.09.2013, 13.05.2014 and 15.07.2015 the Union preferred SLPs
20
before this Court being SLP (C) No.18565 of 2014, SLP (C)
No.30629 of 2014 and SLP (C) No.14111 of 2015, respectively.
2015 Amendment :
5. The Parliament again made amendments to the Finance Act,
1994 vide the Finance Act, 2015 The amendment is extracted as
below:
“65B. In this Chapter, unless the context otherwis e
requires,—
xxx
(31A) "lottery distributor or selling agent" means a person
appointed or authorised by a State for the purposes of
promoting, marketing, selling or facilitating in organising
lottery of any kind, in any manner, organised by such
State in accordance with the provisions of the Lotteries
(Regulation) Act, 1998 (17 of 1998);
xxx
(44) "service" means any activity carried out by a person
for another for consideration, and includes a declared
service, but shall not include— (a) an activity which
constitutes merely,—
xxx
(iii) a transaction in money or actionable claim;
xxx
21
Explanation 2.—For the purposes of this clause, the
expression "transaction in money or actionable claim"
shall not include—
xxx
(ii) 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—
(a) by a lottery distributor or selling agent in relation
to promotion, marketing, organising, selling of lottery
or facilitating in organising lottery of any kind, in any
other manner;
xxx
Negative list of services.
66D. The negative list shall comprise of the following
services, namely:—
xxx
(i) betting, gambling or lottery;
Explanation.—For the purposes of this clause, the
expression "betting, gambling or lottery" shall not include
the activity specified in Explanation 2 to clause (44) of
section 65.
xxx
Valuation of taxable services for charging service tax:
67. (1) Subject to the provisions of this Chapter, service
tax chargeable on any taxable service with reference to its
value, then such value shall,— (i) in a case where the
provision of service is for a consideration in money, be the
22
gross amount charged by the service provider for such
service provided or to be provided by him;
xxx
Explanation.—For the purposes of this section,— (a)
"consideration" includes—
xxx
(iii) any amount retained by the lottery distributor or
selling agent from gross sale amount of lottery ticket in
addition to the fee or commission, if any, or, as the case
may be, the discount received, that is to say, the difference
in the face value of lottery ticket and the price at which the
distributor or selling agent gets such ticket.”
5.1 The aforesaid amendments were challenged by the
respondents-assessees herein before the High Court by filing W.P.
(C) No. 39 of 2015 and W.P. (C) No. 40 of 2015. By the impugned
order and judgement dated 14.10.2015, the High Court allowed the
writ petitions filed by the respondents-assessees herein and held
as under:
a. The respondents-assessees herein, in buying and selling the
lottery tickets are not rendering any service to the State and
therefore, their activity does not fall within the meaning of
‘service’ as provided under clauses (31A) and (44) of Section
23
65B and, therefore, outside the purview of Explanation 2 to the
said Section;
b. In any case, since by the Explanation the scope of Section 66D
which is the main provision which is sought to be expanded, is
ultra vires the Finance Act, 1994, it is accordingly struck down;
5.2 Being aggrieved by this impugned order and judgment dated
14.10.2015, the Union of India approached this Court by filing Civil
Appeal Nos.2172-73 of 2016.
2016 Amendment:
6. In the meantime, the Parliament came out with an
amendment to the Finance Act, 2016 to the following effect:
“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.”
6.1 Again, this amendment to the Finance Act, 2016 was
challenged before the High Court of Sikkim by the respondents-
24
assessees herein in Writ Petition No. 34 of 2016 and Writ Petition
No.48 of 2016.
6.2 The High Court vide impugned order and judgement dated
23.03.2017 allowed the writ petitions and held that the
amendments carried out by the Finance Act, 2016, are not capable
of being implemented for imposition and levy of service tax on the
services allegedly provided by the respondents-assessees herein.
The salient findings of the High Court are as follows:
a. The High Court held that 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.
b. The relevant service tax leviable is on promotion, marketing,
organizing, selling of lottery or facilitating in organizing lottery
of any kind, in any other manner. 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. Hence, the High Court
noted that the impugned amendment brought in Finance Act,
2016 is not unconstitutional. However, the Court noted that
25
the Division Benches of the High Court in W.P.(C) Nos.36 &
23 of 2011 (Future Gaming Solutions Pvt. Ltd. vs. Union
of India); W.P.(C) No.32 of 2012 (Future Gaming Solutions
India Pvt. Ltd. vs. Union of India) and W.P.(C) No.39 of
2015 (Future Gaming & Hotel Services Pvt. Ltd. vs. Union
of India) have categorically held that the Union-Parliament
lacks competence to impose service tax and the concerned
amendments were held as ultra vires to the Constitution of
India. This issue has attained finality and was pending for
consideration at that time before this Court.
c. There is no mechanism to ascertain and compute the service
rendered by a person for promoting, marketing, selling or
facilitating in organizing a lottery of any kind, in any manner,
organized by such State in accordance with the provisions of
the Lotteries (Regulation) Act, 1998.
6.3 Being aggrieved by the above-impugned judgement and
order dated 23.03.2017, the Union of India has approached this
Court in SLP (C) No.23945 of 2017 and SLP (C) No. 16118 of 2017.
Being aggrieved by the specific findings in judgment dated
26
23.03.2017 wherein the High Court held that there was no
mechanism or methodology to ascertain and compute the services
rendered by the respondent-assessees, the respondent-assessee
has filed SLP (C) No.19200 of 2017.
Submissions before this Court:
7. Learned Counsel for the Revenue , Sri Chandrashekara
Bharathi made the following submissions:
a. The statutory framework governing lotteries, particularly the
Lotteries (Regulation) Act of 1998 (“Lotteries Act”, for short)
and related rules, mandate that the organizing State must be
the ultimate seller of lottery tickets to the public, inherently
establishing an agency relationship between the State of
Sikkim and the respondents-assessees herein in these cases.
Article 246(1) of the Indian Constitution empowers Parliament
to legislate on lotteries conducted by the government, which it
exercised by enacting the Lotteries Act. Section 4(c) of this Act
prescribes that the State government must sell tickets “either
itself or through distributors or selling agents.” Further, Rule
2(1)(c) of the Lotteries (Regulation) Rules, 2010 (“Lotteries
27
Rules”, for short) defines a “distributor or selling agent” as an
entity appointed by the organizing State to sell tickets on
behalf of the State. Learned counsel argued that the use of
terms such as “through” and “on behalf of” in the statute is
conclusive evidence of the intended agency relationship, as
these terms denote that the respondents-assessees herein are
merely facilitating sales on behalf of the State, not as
independent principals.
b. The judgment in State of Haryana vs. Suman Enterprises,
(1994) 4 SCC 217 held that a State-organized lottery requires
the State to retain core control to protect public trust in the
scheme. In that case, this Court stated four essential
characteristics that distinguish a State-organized lottery: (i)
tickets must bear the State’s logo, be printed under the State’s
authority, and be sold directly by the State or its designated
agents; (ii) the sale proceeds must be credited to the State’s
funds; (iii) draws must be conducted by the State ; and (iv)
unclaimed prize money must revert to the State. By retaining
control over these aspects, the State ensures that the public’s
28
trust in the lottery’s fairness and legitimacy is maintained.
That these characteristics form the backbone of the Lotteries
Act, and when combined with statutory language, they
mandate an agency relationship between the respondents-
assessees herein and the State, which cannot be unilaterally
recharacterized as principal to principal.
c. The State of Sikkim’s monopoly over the lottery business in the
region, as enacted under the Sikkim Lotteries (Prohibition on
Running of and Sale of Single Digit and Private Lottery Tickets)
Act, 1993, further supports the agency interpretation. Learned
counsel cited Khoday Distilleries Ltd v s. State of
Karnataka, (1995) 1 SCC 574 and argued that the State can
either conduct the monopoly business itself or do so through
agents but cannot delegate its core functions to independent
entities without compromising the monopoly. The counsel
argued that in lotteries, as in the sale of alcohol monopolized
by the State, the organizing State cannot delegate its position
as the primary seller and principal.
29
d. As per clauses in the agreements between the State of Sikkim
and the respondents-assessees herein, specifically focusing on
clauses that indicate a principal-agent relationship, two
critical “condition precedents” that help determine whether an
agency exists are, namely, (i) the capacity in which the sale is
conducted, i.e., whether the respondents-assessees herein are
selling the tickets as their own or on behalf of the State; and
(ii) the allocation of risk and reward, which lies with the
principal in an agency relationship.
e. Various versions of agreements between the State and the
respondents-assessees herein, notably those signed in 2004,
2008 and 2009 were referred to. Initially, under the 2004
agreement, the respondents-assessees herein purchased
lottery tickets on an “all sold” basis, meaning they bought all
tickets upfront and assumed the associated risk. However,
subsequent amendments, particularly in 2008 and 2009,
shifted this arrangement to an “actual sold” basis, where the
respondents-assessees herein took delivery of the tickets
without upfront payment, returning unsold tickets to the
30
State. Additionally, the State’s revenue became tied to the
actual sales made by the respondents-assessees herein rather
than a fixed sum, indicating that the State retained the risk
and reward from ticket sales, characteristic of a principal-
agent relationship.
f. For online lotteries, the agreements did not involve any
physical transfer of tickets to the respondents-assessees
herein. Instead, tickets were directly sold by the State to
customers through computer terminals managed by the
respondents-assessees herein. Learned counsel argued that
this arrangement further underscored the agency relationship,
as the respondents-assessees herein merely facilitated sales
made by the State, with the State bearing the risk associated
with prize payouts. It was emphasised that the respondents-
assessees herein received a commission calculated as a
percentage of total sales after deducting the State’s revenue
and prize distributions, which aligns with compensation
typically earned by agents.
31
g. Further, the respondents-assessees’ argument before the High
Court was that they occasionally incurred losses due to unsold
tickets or fluctuating demand, thereby bearing risk and acting
as principals. Learned counsel for the Revenue sought to rebut
this contention by submitting that under the amended
agreements, unsold tickets were returned to the State, with no
financial obligation on the part of the respondents-assessees
herein. In online lotteries, while the respondents-assessees
herein may have to temporarily cover prize payouts under INR
10,000/- the risk ultimately remained with the State, which
controlled the final prize distribution. That occasional
operational costs borne by the respondents-assessees herein,
such as those related to maintaining terminals or sub-agent
commissions, were incidental to their role as agents and did
not alter the fundamental agency relationship.
h. Learned counsel for the Revenue thus concluded that both
statutory requirements and the practical structure of the
agreements compel the interpretation of the respondents-
assessees’ role as agents of the State of Sikkim. He asserted
32
that these agreements, along with judicial precedents and
statutory provisions, leave no room for a principal-principal
relationship. By mandating that the State remains the ultimate
seller and by ensuring that risk and reward lie with the State,
the Lotteries Act and the related legal framework firmly
establish respondents-assessees’ position as agents acting on
behalf of the State. Accordingly, it was urged that service tax,
calculated on the basis of services provided, should apply to
the respondents-assessees herein as agents in line with the
legislative intent and legal precedent.
8. Per contra, Sri S Ganesh, learned senior counsel and Sri A.R.
Madhav Rao, learned counsel appearing for the respondents-
assessees broadly advanced the following submissions:
a. The respondents-assessees herein in these cases operated
independently on a principal-to-principal basis and the
agreement between the State and the respondents-assessees
herein is structured in a way that reflects a buyer-seller
relationship and not an agency.
33
b. The respondents-assessees herein are mandated to pay a
guaranteed minimum amount of Rs.8 crores to the State
Government irrespective of the number of tickets sold.
Additionally, the respondents-assessees herein have to furnish
a bank guarantee to secure payment. The State does not
indemnify the respondents-assessees herein, in case of any
loss. Therefore, indemnification being a hallmark of agency but
in the instant cases, the respondents-assessees herein are
bearing all the financial risk and the State Government does
not indemnify the respondents-assessees herein, then the
relationship between the parties has to be principal to
principal.
c. Once the respondents-assessees herein purchase tickets from
the State, it sells them onward at its discretion to sub-
contractors or stockists. The sale proceeds exclusively belong
to the respondents-assessees herein. The State government
has no privity of contract with the sub-distributors. Therefore,
it was argued that the respondents-assessees herein are not
operating on behalf of the State Government.
34
d. That the respondents-assessees herein bear the entire cost of
marketing and advertising without reimbursement from the
State Government. Further, the respondents-assessees herein
appoint stockists and sellers independently at its own risk.
Hence, there is no notion of agency involved.
e. Thus, service tax under the Finance Act, 1994 does not arise
in the present case since no service is being provided by the
respondents-assessees herein. It was argued that the
respondents-assessees herein are involved in a purchase and
resale arrangement.
f. In K. Arumugam, this Court held that buying lottery tickets
and reselling them does not amount to marketing services.
g. Section 67 of the Finance Act requires service tax to be made
applicable only when there is consideration for a specific
service. In the present case, the margins earned by the
respondents-assessees herein do not represent any
commission or service. There is no service or consideration in
the present case as the transaction is an outright sale at a price
lower than the maximum price of each lottery ticket.
35
h. Lottery tickets constitute actionable claims and thus
transactions involving actionable claims are exempted under
Section 66D of the Finance Act, 1994. The argument of the
Revenue that the lottery ticket is actionable only in the hands
of the ultimate buyer is false and baseless. In response, it was
submitted that the nature of tickets remains unchanged
regardless of ownership, as established in Sunrise Associates
vs. Government of NCT of Delhi , (2006) 5 SCC 603,
(“Sunrise Associates”).
i. That levy of service tax on lottery distributors infringes the
State government’s exclusive power to legislate on “betting and
gambling” under Entry 62 - List II of the Constitution,
Buttressing his submissions, learned senior counsel relied on
Godfrey Philips India Limited vs. State of Uttar Pradesh,
(2005) 2 SCC 515 emphasizing that Parliament cannot use a
residuary entry under Entry 97 - List I to impose taxes on
subjects reserved for the States.
j. That aspects theory cannot be applied to the present case to
justify service tax. The sale of lottery tickets is a single
36
transaction and cannot be split artificially into a sale and a
service.
k. Taxing such transactions as services would create uncertainty
for other industries. If every resale of goods could be labelled
as a service, it would disrupt the established business
practices across sectors.
9. Learned counsel for Union of India addressed and rebutted
several contentions made by the respondents-assessees herein to
support their claim of operating as principals. One of the key
arguments by the respondents-assessees herein was that they were
in the “business” of buying and selling lottery tickets, and therefore
should be considered independent principals. Learned counsel
countered this by referring to Sunrise Associates, which held that
the purchase of a lottery ticket confers a conditional interest in the
prize money (an actionable claim) to the buyer. Since the
respondents-assessees herein do not possess any actionable claim
(as they cannot participate in the lottery), they cannot be classified
as true “buyers” of lottery tickets. Thus, they are limited to selling
tickets only as agents of the State.
37
Points for Consideration:
10. The following points would arise for our consideration:
a) Whether the impugned judgments of the High Court of
Sikkim would call for any interference in these appeals?
b) If not, what order?
At this stage, we state that we need not go into the question
regarding the aspect theory/doctrine being made applicable to
these cases. This is because we are dealing with the question
whether service tax is liable to be paid by the respondent -
assessees. According to the appellant- Union of India they are liable
to pay service tax as they are rendering a service to State of Sikkim
as an agent. On the other hand, it is the case of the respondent-
assessees that they are not agents of the Government of Sikkim
but their relationship is on principal to principal basis. If we hold
that the relationship between the State of Sikkim is of principal-
agent then the respondents-assessees herein are liable to pay
service tax as an agent. However, this does not detract from the
respondent-assessees being liable to pay tax on gambling as the
conduct of lotteries is nothing but a gambling activity as per Entry
38
62 – List II of the Seventh Schedule of the Constitution of India.
Therefore, it is necessary for us to consider whether the
respondents-assessees are engaged as agents by the principal-
Government of Sikkim or the relationship is one of principal to
principal.
Relevant constitutional provisions:
11. In order to better understand the controversy in these cases,
it would be relevant to advert to the provisions of the Constitution
as well as the provisions of the Finance Act, 1994 along with the
amendments made which have sought to impose service tax on the
respondents-assessees herein in these cases.
11.1 Article 246 of the Constitution of India pertains to the
division of subjects between the Parliament and State Legislatures
in the form of three lists in the Seventh Schedule of the
Constitution, namely List I – Union List, List II – State List and List
III – Concurrent List. It would be useful to extract Article 246 of the
Constitution as under:
39
“246. Subject-matter of laws made by Parliament and by
the Legislatures of States.
(1) Notwithstanding anything in clauses (2) and (3),
Parliament has exclusive power to make laws with respect
to any of the matters enumerated in List I in the Seventh
Schedule (in this Constitution referred to as the “Union
List”).
(2) Notwithstanding anything in clause (3), Parliament,
and, subject to clause (1), the Legislature of any State also,
have power to make laws with respect to any of the matters
enumerated in List III in the Seventh Schedule (in this
Constitution referred to as the “Concurrent List”).
(3) Subject to clauses (1) and (2), the Legislature of any
State has exclusive power to make laws for such State or
any part thereof with respect to any of the matters
enumerated in List II in the Seventh Schedule (in this
Constitution referred to as the “State List”).
(4) Parliament has power to make laws with respect to any
matter for any part of the territory of India not included in
a State notwithstanding that such matter is a matter
enumerated in the State List.”
11.2 Article 248 deals with Residuary power of Legislatures and
the same reads as under:
“248. Residuary powers of legislation.
(1) Subject to Article 246A, Parliament has exclusive
power to make any law with respect to any matter not
enumerated in the Concurrent List or State List.
(2) Such power shall include the power of making any law
imposing a tax not mentioned in either of those Lists.”
40
At this stage itself, it may be mentioned that the residuary
power is reserved to the Parliament to legislate on any subject
provided such power is not included in either the Concurrent List
or the State List.
11.3 The Finance Act, 1994 was enacted by the Parliament in
terms of Article 248 of the Constitution of India read with Entry 97
- List I which reads as under:
“97. Any other matter not enumerated in List II or List
III including any tax not mentioned in either of those
Lists.”
11.4 It is also pertinent to mention that Entry 92-C - List I which
deals with taxes on services was inserted by the Constitution
(Eighty-eighth Amendment) Act, 2003, but was not notified and
was omitted by the Constitution (One Hundred and First
Amendment) Act, 2016 with effect from 16.09.2016. In the
circumstances, we observe that the Finance Act, 1994 is relatable
to Entry 97 - List I. Subsequently, vide the same Constitution (One
Hundred and First Amendment) Act, 2016, Article 246A was
41
inserted as a special provision with respect to goods and services
tax.
11.5 For the sake of completion, it would also be relevant to refer
to Entries 33 and 34 - List II. Entries 33 and 34 - List II are the
regulatory Entries, which read as under:
“33. Theaters and dramatic performances; cinemas
subject to the provisions of entry 60 of List I; sports,
entertainments and amusements.
34. Betting and gambling.”
11.6 Entry 62 - List II (State List) as it stood then, dealt with
taxes on luxuries including taxes on entertainment, amusement,
betting and gambling, etc. The said Entry has subsequently been
amended with effect from 16.09.2016. However, it is not necessary
to extract the amended Entry as these appeals pertain to the period
prior to 16.09.2016. Entry 62-List II is a taxation Entry. The
unamended Entry 62-List II is extracted as under:
“62. Taxes on luxuries, including taxes on
entertainments, amusements, betting and gambling.”
11.7 In Hoechst Pharmaceuticals Ltd. vs. State of Bihar,
(1983) 4 SCC 45, it has been observed that taxation is a distinct
42
matter for purposes of legislative competence. There is a distinction
made between general subjects of legislation and taxation. The
general subjects of legislation are dealt with in one group of entries
and power of taxation in a separate group. The power to tax cannot
be deduced from a general legislative entry as an ancillary power.
11.8 In Union of India vs. HS Dhillon, AIR 1972 SC 1061, it
was observed that the function of Article 246(1), read with Entries
1-96 - List I, is to give positive power to Parliament to legislate in
respect of these entries. Object is not to debar Parliament from
legislating on a matter, even if other provisions of the Constitution
enable it to do so. Accordingly, it cannot be interpreted that the
words “any other matter” occurring in Entry 97 - List I, to mean a
topic mentioned by way of exclusion. These words really refer to
the matters contained in each of the Entries 1 to 96. The words
“any other matter” had to be used because Entry 97 - List I follows
Entries 1-96 - List I. It is true that the field of legislation is
demarcated by Entries 1-96 - List I, but demarcation does not
mean that if Entry 97 - List I confers additional powers, we should
refuse to give effect to it. At any rate, whatever doubt there may be
43
on the interpretation of Entry 97, List I is removed by the wide
terms of Article 248. It is framed in the widest possible terms. On
its terms the only question to be asked is: Is the matter sought to
be legislated or included in List II or in List III or is the tax sought
to be levied mentioned in List II or in List III: No question has to be
asked about List I. If the answer is in the negative then it follows
that Parliament has power to make laws with respect to that matter
or tax.
According to this Court, if a Central Act is challenged as being
beyond the legislative competence of Parliament, it is enough to
enquire if it is a law with respect to matters or taxes enumerated
in List II. If it is not, no further question arises.
Thus, the wide words of a substantive Article like Article 248
should be given full effect and they cannot be cut down by the
wording in the Lists in Schedule VII merely because certain known
taxes have not been included therein.
44
Relevant Case Law on lotteries:
B.R. Enterprises:
12. The nature and characters of lottery was deliberated upon in
B.R. Enterprises vs. State of UP, (1999) 9 SCC 700 (“B.R.
Enterprises”), wherein it was held that the lotteries are a form of
gambling and in R.M.D. Chamarbaugwalla vs. Union of India ,
AIR 1957 SC 628, it was observed that gambling actives are in the
very nature and essence res extra commercium. Even though
lotteries were permitted under the regulating power of the State,
they could not be given the status of trade and commerce “as
understood in common parlance”. Trade and commerce within the
meaning of Articles 301 to 304. That there are three ingredients in
the sale of lottery tickets, namely (i) price, (ii) chance, and (iii)
consideration. That Entry 62 – List II refers to taxes on betting and
gambling and lotteries whether conducted by private agencies or
by the State are nothing but gambling. That even though the state
may conduct lotteries, the element of chance remains, with no skill
involved, while in a trade there is skill involved with no chance.
Even if the State conduct lotteries, the element of chance remains,
45
with no skill involved and even the organisation and conduct of the
lotteries by the State Government are within the boundaries of
gambling. That the only purpose of having stringent measures vis-
à-vis lotteries being conducted by the State was to inculcate faith
in the participants of such lottery being conducted fairly with no
possibility of fraud or misappropriation and deceit and assure the
hopeful recipients of high prizes that all is fair and safe. That the
object was to assure the participants that the proceeds from the
sale of lottery tickets are credited to the public accounts of the
State and would not be in the hands of any individual group or
association and thus to bring about a transparency in the
organisation of the lottery by the State, subject to the regulation.
Even then, the activity of conduct of the lottery would remain in
the realm of gambling.
Sunrise Associates:
12.1 In the case of Sunrise Associates, the Constitution Bench
of this Court speaking through Ruma Pal, J., opined that lottery
tickets can be categorized as actionable claims. The relevant
paragraphs of the said judgment read as under:
46
“40. An actionable claim would include a right to recover
insurance money or a partner's right to sue for an account
of a dissolved partnership or the right to claim the benefit
of a contract not coupled with any liability (see Union of
India v. Sri Sarada Mills Ltd. [(1972) 2 SCC 877] , SCC at
p. 880). A claim for arrears of rent has also been held to be
an actionable claim (State of Bihar v. Maharajadhiraja Sir
Kameshwar Singh [(1952) 1 SCC 528 : 1952 SCR 889 : AIR
1952 SC 252] , SCR at p. 910). A right to the credit in a
provident fund account has also been held to be an
actionable claim (Official Trustee v. L. Chippendale [AIR
1944 Cal 335 : ILR (1943) 2 Cal 325] ; Bhupati Mohan Das
v. Phanindra Chandra Chakravarty [AIR 1935 Cal 756 : 40
CWN 102] ). In our opinion a sale of a lottery ticket also
amounts to the transfer of an actionable claim.
44. The question is, what is this right which the ticket
represents? There can be no doubt that on purchasing a
lottery ticket, the purchaser would have a claim to a
conditional interest in the prize money which is not in the
purchaser's possession. The right would fall squarely
within the definition of an actionable claim and would
therefore be excluded from the definition of “goods” under
the Sale of Goods Act and the sales tax statutes. This was
also accepted in H. Anraj [(1986) 1 SCC 414 : 1986 SCC
(Tax) 190] when the Court said that to the extent that the
sale of a lottery ticket involved a transfer of the right to
claim a prize depending on chance, it was an assignment
of an actionable claim. Significantly in B.R. Enterprises v.
State of U.P. [(1999) 9 SCC 700] construing H. Anraj
[(1986) 1 SCC 414 : 1986 SCC (Tax) 190] the Court said:
(SCC p. 746, para 52)
“52. So, we find three ingredients in the sale of
lottery tickets, namely, (i) prize, (ii) chance, and
(iii) consideration. So, when one purchases a
lottery ticket, he purchases for a prize, which is by
chance and the consideration is the price of the
ticket.”
47
State of Karnataka:
12.2 In State of Karnataka vs. State of Meghalaya, (2023) 4
SCC 416 (“State of Karnataka”), a two-Judge Bench of this
Court of which one of us (Nagarathna, J.) was a member and who
authored the judgment, observed in paragraphs 159 as under:
“159. Hence under Entry 62 of List II, the specific power
to tax an activity which is “betting and gambling” is
reserved with the State Legislature and cannot be read
within the scope and ambit of Entry 40 of List I which is
inherently restricted in its scope.”
K. Arumugam:
12.3 The Union of India sought to levy service tax on the premise
that the activity which the assessees were/are carrying on was a
business auxiliary service within the definition of Section 65(19) of
the Finance Act, 1994 and therefore, chargeable to service tax. The
same was resisted by the assessees by filing writ petitions before
the High Courts.
Both the High Courts of Sikkim as well as that of Kerala held
against the assessees and opined that service tax is leviable on
their activity under the nomenclature of business auxiliary service.
48
Hence appeals were filed before this Court. The following questions
arose for consideration:
“1. Whether the activity of the appellants – assessees
would attract service tax within the scope and ambit
of Section 65(19)(ii) read with Section 65(105)(zzb) of
the Finance Act, 1994? If not, what relief(s) the
appellants are entitled to?
2. What Order?”
In K. Arumugam, on a plain reading of the Explanation in light
of the activity actually carried on by the appellant(s)-assessee(s)
therein, it was clear that the outright purchase of lottery tickets
from the promoters of the State or Directorate of Lotteries, as the
case may be, was not a service in relation to promotion or
marketing of service provided by the client, i.e., the State,
conducting the lottery. The conduct of lottery is a revenue
generating activity by a State or any other entity in the field of
actionable claims. The client, i.e., the State was not engaging in an
activity of service while dealing with the business of lottery.
Explanation to sub-clause (ii) of clause (19) of Section 65 of the
Finance Act, 1994 could not bring within sub-clause (ii) activity by
assuming it was initially covered under sub-clause (i) thereof but
49
in fact was not, by virtue of the definition of goods under the very
same Act read with Section 2(7) of the Sale of Goods Act, 1930. It
was observed that the mere insertion of an explanation could not
make an activity a taxable service when it was not covered under
the main provision (which had to be read into the said sub-clause
by virtue of the legislative device of express incorporation). This is
because sale of lottery tickets is not a service in relation to
promotion or marketing of service provided by a client, i.e., the
State in the instant case. Conducting a lottery which is a game of
chance is ex facie a privilege and an activity conducted by the State
and not a service being rendered by the State. The said activity
would have a profit motive and is for the purpose of earning
additional revenue to the State exchequer. The activity is carried
out by sale of lottery tickets to persons, such as the assessees
herein, on an outright basis and once the lottery tickets are sold
and the amount collected, there is no further relationship between
the assessees herein and the State in respect of the lottery tickets
sold. The burden is on the assessees herein to further sell the
lottery tickets to the divisional/regional stockists for a profit as
50
their business activity. It was observed that the activity is not a
promotion or a marketing service rendered by the assessees to the
State within the meaning of sub-clause (ii) of clause (19) of Section
65 of the Finance Act, 1994. This is because, to reiterate, the States
are not rendering a service but engaged in the activity of
conducting lottery to earn additional revenue. Moreover, once the
lottery tickets are sold by the Directorate of L otteries - a
Department of the State, there is transfer of the title in the lottery
tickets to the vendees, 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
relationship between the State and the appellants is on a principal
to principal basis. Thus, there is no activity of promotion or
marketing of a service on behalf of the State. Neither is the State,
which conducts the lottery, rendering a service within the meaning
of the Finance Act, 1994.
51
Legal Framework:
13. For ease of reference, the provisions relating to imposition of
service tax on the sale of lotteries in five different periods namely,
from 01.07.2003 to 30.06.2010, from 01.07.2010 to 30.06.2012,
from 01.07.2012 to 31.05.2015, from 01.06.2015 to 31.03.2016
and from 01.04.2016 to 30.06.2017 are encapsulated under the
respective headings:
“I. PERIOD FROM 01.07.2003 TILL 30.06.2010
No matter is pending in relation to this period as they
have been disposed off by this Court in K. Arumugam v.
Union of India & Others (2022 SCC Online SC 2278)
Provision Finance Act With Effect
From
65(105(zzb) 2003 01.07.2003
65(19) 2003 01.07.2003
Explanation
inserted to
Section
65(19)(ii)
2008 16.05.2008
1. Section 65(105)(zzb)
Taxable Service means any service provided to a client, by
a commercial concern in relation to business auxiliary
service
2. Section 65(19)
‘Business Auxiliary Service’ means any service in relation
to
52
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;
or
iii) any customer care service provided on behalf of the
client; or
iv) any incidental or auxiliary support service such as
billing, collection or recovery of cheques, accounts and
remittance, evaluation of prospective customer and public
relation services
3. Section 65(19) after Explanation inserted to sub -
clause (ii) through Section 90(3) of the Finance Act,
2008
‘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;
or
Explanation- 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;
iii) any customer care service provided on behalf of the
client; or
iv) any incidental or auxiliary support service such as
billing, collection or recovery of cheques, accounts and
53
remittance, evaluation of prospective customer and public
relation services
II. PERIOD FROM 01.07.2010 TILL 30.06.2012
This period pertains to (i) Civil Appeal 4289-4290 of
2013 and (ii) Civil Appeal 9506-9507 of 2013.
Provision Finance Act With
Effect
From
Removal of
Explanation to
Section 65(19)(ii)
2010 01.07.2010
Insertion of
Section
65(105)(zzzzn)
2010 01.07.2010
Insertion of Rule
7C
Notification
49/2010
08.10.2010
1. Removal of Explanation to Section 65(19)(ii) through
Section 76(A)(1) of the Finance Act, 2010
76(A): In Section 65, save as otherwise provided, with effect
from such date as the Central Government may, by
notification in the Official Gazette, appoint-
(1) in clause (19), in sub-clause (ii), the Explanation shall
be omitted
2. Insertion of Section 65(105)(zzzzn) through Section
76(A)(6)(l) of the Finance Act, 2010
Taxable Service means any service provided to any person,
by any other person, for promotion, marketing, organizing
or in any other manner assisting in organizing games of
chance, including lottery, Bingo or Lotto in whatever form
or by whatever name called, whether or not conducted
through internet or other electronic networks;
54
3. Section 66 as it existed during the period
01.07.2010 to 30.06.2012
There shall be levied a tax (hereinafter referred to as the
service tax) at the rate of twelve per cent of the value of
taxable services referred to in sub-clauses (a), (d), (e), (f),
(g), (h), (i), (j), (k), (1), (m), (n), (o), (p), (q), (r), (s), (t), (u), (v),
(w), (x), (y), (z), (za), (zb), (zc), (zh), (zi), (zj), (zk), (zl), (zm),
(zn), (zo), (zq), (zr), (zs), (zt), (zu), (zv), (zw), (zx), (zy), (zz),
(zza), (zzb), (zzc), (zzd), (zze), (zzf), (zzg), (zzh), (zzi), (zzk),
(zzl), (zzm), (zzn), (zzo), (zzp), (zzq), (zzr), (zzs), (zzt), (zzu),
(zzv), (zzw), (zzx), (zzy), (zzz), (zzza), (zzzb), (zzzc), (zzzd),
(zzze), (zzzf), (zzzg), (zzzh), (zzzi), (zzzj), (zzzk), (zzzl), (zzzm),
(zzzn), (zzzo), (zzzp), (zzza), (zzzr), (zzzs), (zzzt), (zzzu), (zzzv),
(zzzw), (zzzx), (zzzy), (zzzz), (zzzza), (zzzzb), (zzzzc), (zzzzd),
(zzzze), (zzzzf), (zzzzg), (zzzzh), (zzzzi), (zzzzj), (zzzzk), (zzzzl),
(zzzzm), (zzzzn), (zzzzo), (zzzzp), (zzzzq), (zzzzr), (zzzzs),
(zzzzt), (zzzzu), (zzzzv) and (zzzzw)] of clause (105) of Section
65 and collected in such manner as may be prescribed.
4. Section 67 containing the definition of
‘consideration’ from 01.04.2006 till 31.05.2015
(1) Subject to the provisions of this Chapter, service tax
chargeable on any taxable service with reference to its
value shall,--
(i) in a case where the provision of service is for a
consideration in money, be the gross amount charged by
the service provider for such service provided or to be
provided by him;
(ii) in a case where the provision of service is for a
consideration not wholly or partly consisting of money, be
such amount in money, with the addition of service tax
charged, is equivalent to the consideration;
(iii) in a case where the provision of service is for a
consideration which is not ascertainable, be the amount
as may be determined in the prescribed manner.
55
(2) Where the gross amount charged by a service provider,
for the service provided or to be provided is inclusive of
service tax payable, the value of such taxable service shall
be such amount as, with the addition of tax payable, is
equal to the gross amount charged.
(3) The gross amount charged for the taxable service shall
include any amount received towards the taxable service
before, during or after provision of such service.
(4) Subject to the provisions of sub-sections (1), (2) and (3),
the value shall be determined in such manner as may be
prescribed.
Explanation.--For the purposes of this Section,--
"(a) "consideration" includes any amount that is payable
for the taxable services provided or to be provided;
5. Insertion of Rule 7C to Service Tax Rules, 1994 by
clause (2) of Notification 49/2010 dated 08.10.2010
(7C) The distributor or selling agent, liable to pay service
tax for the taxable service of promotion, marketing,
organising or in any other manner assisting in organising
lottery, referred to in sub-clause (zzzzn) of clause (105) of
Section 65 of the said Act (hereinafter referred to as the
said sub-clause), shall have the option to pay an amount
at the rate specified in column (2) of the Table given below,
subject to the conditions specified in the corresponding
entry in column (3) of the said Table, instead of paying
service tax at the rate specified in Section 66 of Chapter V
of the said Act:
56
S.No Rate Condition
(1) (2) (3)
1. Rs. 6000/- on every
Rs. 10 Lakh (or part
of the Rs. 10 Lakh)
of aggregate face
value of lottery
tickets printed by
the organizing State
for a draw
If the lottery or
lottery scheme
is one where
the guaranteed
prize payout is
more than 80%
2. Rs. 9000/- on every
Rs. 10 Lakh (or part
of Rs. 10 Lakh) of
aggregate face value
of lottery tickets
printed by the
organizing State for
a draw
If the lottery or
lottery scheme
is one where
the guaranteed
prize payout is
less than 80%
Provided that in case of online lottery, the aggregate face
value of lottery tickets for the purpose of this sub-rule shall
be taken as the aggregate value of tickets sold, and service
tax shall be calculated in the manner specified in the said
Table.
Provided further that the distributor or selling agent shall
exercise such option within a period of one month of the
beginning of each financial year and such option shall not
be withdrawn during the remaining part of the financial
year.
Provided also that the distributor or selling agent shall
exercise such option for financial year 2010-11, within a
period of one month of the publication of this sub-rule in
the Official Gazette or, in the case of new service provider,
within one month of providing of service under the said
sub-clause and such option shall not be withdrawn during
the remaining part of that financial year.
57
Explanation.- For the purpose of this sub-rule-
(i) ‘distributor or selling agent’ shall have the meaning
assigned to them in clause (c) of the rule 2 of the Lottery
(Regulation) Rules, 2010 notified by the Government of
India in the Ministry of Home Affairs published in the
Gazette of India, Part-II, Section 3, sub-section (i) vide
number G.S.R. 278(E) dated 1st April, 2010 and shall
include distributor or selling agent authorised by the
lottery organising State.
(ii) ‘draw’ shall have the meaning assigned to it in clause
(d) of the rule 2 of the Lottery (Regulation) Rules, 2010
notified by the Government of India in the Ministry of
Home Affairs published in the Gazette of India, Part-II,
Section 3, sub-section (i) vide number G.S.R. 278(E) dated
1st April, 2010.
(iii) ‘online lottery’ shall have the meaning assigned to it in
clause (e) of the rule 2 of the Lottery (Regulation) Rules,
2010 notified by the Government of India in the Ministry
of Home Affairs published in the Gazette of India, Part-II,
Section 3, sub-section (i) vide number G.S.R. 278(E) dated
1st April, 2010.
(iv) ‘organising state’ shall have the meaning assigned to it
in clause (f) of the rule 2 of the Lottery (Regulation) Rules,
2010 notified by the Government of India in the Ministry
of Home Affairs published in the Gazette of India, Part-II,
Section 3, sub-section (i) vide number G.S.R. 278(E) dated
1st April, 2010.
III. PERIOD FROM 01.07.2012 TILL 31.05.2015
This period pertains to (i) SLP (C) No.18565 of 2014
(ii) SLP (C) No.30629 of 2014 and (iii) SLP (C) No.14111
of 2015
58
Provision Finance
Act
With
Effect
From
Insertion of Section
65B(1)
2012 01.07.2012
Insertion of Section
65B(44)
2012 01.07.2012
Insertion of new
Charging Section 66B
2012 01.07.2012
Insertion of Negative
List Section 66D(i)
2012 01.07.2012
Section 66F 2012 01.07.2012
Cosmetic
Amendment to Rule
7C
Notification
36/2012
20.06.2012
1. Insertion of Section 65B(1) through Section 143(C)
of the Finance Act, 2012
“actionable claim” shall have the same meaning assigned
to it in section 3 of the Transfer of Property Act, 1882 (4 of
1882)
2. Insertion of Section 65B(44) through Section 143(C)
of the Finance Act, 2012
“service” means any activity carried out by a person for
another for consideration, and includes a declared service,
but shall not include:
(a) an activity which constitutes merely.-
(i) a transfer of title in goods or immovable property, by
way of sale, gift or in any other manner; or
(ia) such transfer, delivery or supply of any goods which is
deemed to be a sale within the meaning of clause (29A) of
Article 366 of the Constitution; or
(ii) a transaction in money or actionable claim
59
(b) a provision of service by an employee to the employer
in the course of or in relation to his employment;
(c) fees taken in any Court or tribunal established under
any law for the time being in force.
Explanation 1.— For the removal of doubts, it is hereby
declared that nothing contained in this clause shall apply
to,—
(A) the functions performed by the Members of Parliament,
Members of State Legislature, Members of Panchayats,
Members of Municipalities and Members of other local
authorities who receive any consideration in performing
the functions of that office as such member; or
(B) the duties performed by any person who holds any post
in pursuance of the provisions of the Constitution in that
capacity; or
(C) the duties performed by any person as a Chairperson
or a Member or a Director in a body established by the
Central Government or State Governments or local
authority and who is not deemed as an employee before
the commencement of this Section.
Explanation IA- For the purposes of this clause,
transaction in money shall not include any activity
relating to the use of money or its conversion by cash or
by any other mode, from one form, currency or
denomination to another form, currency or denomination
for which a separate consideration is charged;
Explanation 2.— For the purposes of this Chapter,—
(a) an unincorporated association or a body of persons, as
the case may be, and a member thereof shall be treated
as distinct persons;
(b) an establishment of a person in the taxable territory
and any of his other establishment in a non -taxable
60
territory shall be treated as establishments of distinct
persons.
Explanation 3.— A person carrying on a business through
a branch or agency or representational office in any
territory shall be treated as having an establishment in
that territory;
3. Insertion of new Charging Section 66B through
Section 143(F) of Finance Act, 2012
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.
4. Insertion of Negative List Section 66D through
Section 143(F) of Finance Act, 2012
The negative list shall comprise of the following services,
namely:-
(a)…(h)
(i) betting, gambling or lottery;
5. Cosmetic Amendment to Rule 7C vide Clause (7)(7)
of Notification 36/2012 dated 20.06.2012
(7C) The distributor or selling agent, liable to pay service
tax for the taxable service of promotion, marketing,
organising or in any other manner assisting in organising
lottery, shall have the option to pay an amount at the rate
specified in column (2) of the Table given below, subject to
the conditions specified in the corresponding entry in
column (3) of the said Table, instead of paying service tax
at the rate specified in section 66B of Chapter V of the
said Act:
61
S.No Rate Condition
(1) (2) (3)
1. Rs. 6000/- on every
Rs. 10 Lakh (or part
of the Rs. 10 Lakh)
of aggregate face
value of lottery
tickets printed by
the organizing State
for a draw
If the lottery or
lottery scheme is
one where the
guaranteed prize
payout is more
than 80%
2. Rs. 9000/- on every
Rs. 10 Lakh (or part
of Rs. 10 Lakh) of
aggregate face value
of lottery tickets
printed by the
organizing State for
a draw
If the lottery or
lottery scheme is
one where the
guaranteed prize
payout is less
than 80%
Provided that in case of online lottery, the aggregate face
value of lottery tickets for the purpose of this sub-rule shall
be taken as the aggregate value of tickets sold, and service
tax shall be calculated in the manner specified in the said
Table.
Provided further that the distributor or selling agent shall
exercise such option within a period of one month of the
beginning of each financial year and such option shall not
be withdrawn during the remaining part of the financial
year.
Provided also that the distributor or selling agent shall
exercise such option for financial year 2010-11, within a
period of one month of the publication of this sub-rule in
the Official Gazette or, in the case of new service provider,
within one month of providing of such service and such
option shall not be withdrawn during the remaining part
of that financial year.
62
Explanation.- For the purpose of this sub-rule-
(i) ‘distributor or selling agent’ shall have the meaning
assigned to them in clause (c) of the rule 2 of the Lottery
(Regulation) Rules, 2010 notified by the Government of
India in the Ministry of Home Affairs published in the
Gazette of India, Part-II, Section 3, Sub-section (i) vide
number G.S.R. 278(E) dated 1st April, 2010 and shall
include distributor or selling agent authorised by the
lottery organising State.
(ii) ‘draw’ shall have the meaning assigned to it in clause
(d) of the rule 2 of the Lottery (Regulation) Rules, 2010
notified by the Government of India in the Ministry of
Home Affairs published in the Gazette of India, Part-II,
Section 3, Sub-section (i) vide number G.S.R. 278(E) dated
1st April, 2010.
(iii) ‘online lottery’ shall have the meaning assigned to it in
clause (e) of the rule 2 of the Lottery (Regulation) Rules,
2010 notified by the Government of India in the Ministry
of Home Affairs published in the Gazette of India, Part-II,
Section 3, Sub-section (i) vide number G.S.R. 278(E) dated
1st April, 2010.
(iv) ‘organising state’ shall have the meaning assigned to it
in clause (f) of the rule 2 of the Lottery (Regulation) Rules,
2010 notified by the Government of India in the Ministry
of Home Affairs published in the Gazette of India, Part-II,
Section 3, Sub-section (i) vide number G.S.R. 278(E) dated
1st April, 2010.
63
IV. PERIOD FROM 01.06.2015 TILL 31.03.2016
This period pertains to SLP (C) 18565 of 2014
Provision Finance Act With Effect
From
Insertion of
Section
65B(31A)
2015 01.06.2015
Substitution of
Explanation 2
to Section
65B(44)
2015 01.06.2015
Insertion of
Explanation to
Section 66D(i)
2015 01.06.2015
Substitution of
Section 67
2015 01.06.2015
1. Insertion of Section 65B(31A) through Section
107(e) of the Finance Act, 2015
"lottery distributor or selling agent" means a person
appointed or authorised by a State for the purposes of
promoting, marketing, selling or facilitating in organising
lottery of any kind, in any manner, organised by such
State in accordance with the provisions of the Lotteries
(Regulation) Act, 1998 (17 of 1998)
2. Substitution of Explanation 2 to Section 65B(44)
through Section 107(g) of the Finance Act, 2015
'For the purposes of this clause, the expression
"transaction in money or actionable claim" shall not
include—
(i) any activity relating to use of money or its conversion
by cash or by any other mode, from one form, currency or
denomination, to another form, currency or denomination
for which a separate consideration is charged;
64
(ii) 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--
(a) by a lottery distributor or selling agent in relation to
promotion, marketing, organising, selling of lottery or
facilitating in organising lottery of any kind, in any other
manner;
(b) by a foreman of chit fund for conducting or organising
a chit in any manner.';
3. Insertion of Explanation to Section 66D(i) through
Section 109 of the Finance Act, 2015
66D(i): Betting, Gambling or Lottery
'Explanation.-For the purposes of this clause, the
expression "betting, gambling or lottery" shall not include
the activity specified in Explanation 2 to clause (44) of
section 65B;';
4. Substitution of Clause (a) of Explanation to Section
67 containing the definition of ‘consideration’ through
Section 111 of the Finance Act, 2015
(1) Subject to the provisions of this Chapter, service tax
chargeable on any taxable service with reference to its
value shall,--
(i) in a case where the provision of service is for a
consideration in money, be the gross amount charged by
the service provider for such service provided or to be
provided by him;
(ii) in a case where the provision of service is for a
consideration not wholly or partly consisting of money, be
such amount in money, with the addition of service tax
charged, is equivalent to the consideration;
65
(iii) in a case where the provision of service is for a
consideration which is not ascertainable, be the amount
as may be determined in the prescribed manner.
(2) Where the gross amount charged by a service provider,
for the service provided or to be provided is inclusive of
service tax payable, the value of such taxable service shall
be such amount as, with the addition of tax payable, is
equal to the gross amount charged.
(3) The gross amount charged for the taxable service shall
include any amount received towards the taxable service
before, during or after provision of such service.
(4) Subject to the provisions of sub-sections (1), (2) and (3),
the value shall be determined in such manner as may be
prescribed.
Explanation.--For the purposes of this section,--
'(a) "consideration" includes-
(i) any amount that is payable for the taxable services
provided or to be provided;
(ii) any reimbursable expenditure or cost incurred by the
service provider and charged, in the course of providing or
agreeing to provide a taxable service, except in such
circumstances, and subject to such conditions, as may be
prescribed;
(iii) any amount retained by the lottery distributor or
selling agent from gross sale amount of lottery ticket in
addition to the fee or commission, if any, or, as the case
may be, the discount received, that is to say, the difference
in the face value of lottery ticket and the price at which
the distributor or selling agent gets such ticket.'.
66
V. PERIOD FROM 01.04.2016 TILL 30.06.2017
This period pertains to (i) SLP (C) No.19200 of 2017
(ii) SLP (C) No.23945 of 2017 and (iii) SLP (C) No.16118
of 2017
Provision Finance
Act
With
Effect
From
Cosmetic Amendment
to Explanation 2 to
Section 65B(44)
2016 01.04.2016
1. Cosmetic Amendment to Clause (ii)(a) of Explanation
2 to Section 65B(44)
'For the purposes of this clause, the expression
"transaction in money or actionable claim" shall not
include—
(i) any activity relating to use of money or its conversion
by cash or by any other mode, from one form, currency or
denomination, to another form, currency or denomination
for which a separate consideration is charged;
(ii) 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--
(a) by a lottery distributor or selling agent on behalf of the
State Government in relation to promotion, marketing,
organising, selling of lottery or facilitating in organising
lottery of any kind, in any other manner in accordance
with the provisions of the Lotteries (Regulation) Act, 1998
(17 of 1998);
(b) by a foreman of chit fund for conducting or organising
a chit in any manner.';”
67
Agreements under consideration:
14. Learned counsel for the respective parties have drawn our
attention to certain agreements entered into between the
Government of Sikkim and respondent -assessees from time to
time. The agreements are two-fold in nature. One set of agreements
deal with paper lottery and another set of agreements deal with
online computerised lotteries. The clauses relevant for the purpose
of the present controversy, i.e., to ascertain whether the
agreements are of agency or not are extracted as under:
Paper Lotteries:
(i) Agreement dated 06.10.2004
“AGREEMENT
This Agreement is made this day the 6
th October 2004
between the Governor of Sikkim through the Secretary to
the Government of Sikkim in the Finance Department,
(herein after referred to as the Government)… and M/s
Martin Lottery Agencies Ltd. represented by its
MANAGING DIRECTOR (hereinafter r eferred to as the
Distributor)…
xxx
AND WHEREAS M/s. Martin Lottery Agencies Ltd., has
been selected for appointment as Sole Distributor for the
above Lottery Schemes by the Government of Sikkim.
xxx
68
Now it is hereby agreed between parties hereto as under:
1. That the Government shall appoint M/S Martin
Lottery Agencies as Sole Distributor for marketing of
lottery tickets on all sold basis.
2. The Government shall run a minimum 5 (five)
weekly lottery schemes and 6(six) bumper draws per
year for an annual revenue of Rs.5.50 crores per
annum.
3. That the agreement shall remain in force for a period
of 5 (five) years from 18.10.2004 to the 17.10.2009
(both days inclusive). The period of the agreement
may, however, be extended for such further period
and upon such terms and conditions as may be at
the relevant time, be mutually agreed upon.
xxx
10. That the Government shall deliver the tickets to the
Distributor at the destination as may be agreed
upon.
11. That the Government shall sell and the Distributor
shall buy the full lot of tickets for which the
wholesale price of tickets shall be determined
consisting of total prize amount as per schemes,
actual cost of paper and printing, draw expenses,
Government commission.
However, the prices may change under the following
circumstances:
i. Change in prize structure of lottery
schemes.
ii. Change in paper and printing cost/freight
charges.
iii. Market conditions.
69
12. That the full payment of tickets printed shall be
realized on delivery of tickets at wholesale rates as
per clause 11 above.
xxx
25. The Government shall deliver the tickets to the
Distributor against full payment for which proper
invoice shall be raised indicating amount of
wholesale rate and adjustment of prizes upto
Rs.5000/- (Rupees five thousand) to be disbursed
by the Distributor for each lottery draw.
26. The Distributor shall pay sales tax or any other kind
of taxes imposed by the other State Governments on
sale of lottery tickets.
xxx”
(ii) Agreement dated 10.08.2009
“AGREEMENT
This Agreement is made on this the 10
th day of August
2009, between the Governor of Sikkim, through the
Additional Chief Secretary, Finance, Revenue &
Expenditure Department, Government of Sikkim
(hereinafter referred to as the ‘Government’) ….
AND
M/s Future Gaming Solutions India Pvt. Ltd. (formerly
M/s Martin Lottery Agencies Ltd.)… represented by its
Managing Director Mr. Martin, Son of Mr. Santiago
(hereinafter referred to as the ‘Sole Purchaser’)…
WHEREAS in pursuant of an open tender called by the
Government. The second Party was appointed as the
purchaser for sale of conventional weekly paper (3 digit
and above) lottery and bumper lottery with denomination
70
of rupee one and above organised by the Government for a
period of five years vide an agreement dated 6
th October,
2004.
xxx
And whereas M/s Future Gaming Solutions India Private
Ltd., has been appointed as the exclusive Sole Purchaser
for the above Lottery schemes by the Government of
Sikkim.
Now, therefore, in view of the above changes and
amendments the parties are desirous of signing a fresh
agreement to govern their respective rights and liabilities
in suppression of the earlier agreement dated 06.10.2004
as under:-
Now it is hereby agreed between parties hereto as under:
1. That the Government hereby appoints M/s Future
Gaming Solutions India Pvt. Ltd. sole purchaser of
conventional paper lottery tickets on actual sold basis.
xxx
4. That in consideration of the appointment of the
Second Party as sole purchaser of the conventional
paper lottery of the Government for a maximum of 50
(fifty) weekly lottery schemes per day, the sole
purchaser shall pay a sum of Rs.8 crores (Rupees
Eight Crores) per annum to the Government for the 1
st
year of the extended period i.e. w.e.f. 18
th October,
2009 to 17
th October, 2010 and a sum of Rs.10 Crores
(Rupees Ten Crores) per annum only from the second
year of the extended period effective from 18
th October,
2010 to 17
th October, 2014. If the sole purchaser
proposes to increase the number of scheme above 50
(Fifty) they shall pay to the Government as the state
share such the sum of money as may be worked out
on the basis of such additional schemes as and as may
be mutually agreed upon between the parties.
71
Provided that if the sole purchaser could not
purchase such additional schemes for one complete
year (12 months) and discontinues the additional
schemes before completion of one year they shall be
liable to pay the Government share proportionate to
the period of actual scheme only.
5. (a) That the sole purchaser shall provide the
Government with a bank guarantee of Rs.10.00 crores
(Rupees Ten Crores) as security deposit in favour of
the Government of Sikkim. Finance, Revenue &
Expenditure Department of a Nationalized Bank /
Scheduled Bank one week before coming into force of
this agreement;
(b) The Bank Guarantee shall be valid for the duration
of the agreement and six months thereafter and shall
be liable to be invoked by the Government for failure
to deposit the sale proceeds of the tickets of Sikkim
State lotteries taken delivery by the sole purchaser
and any other charges due and payable by the sole
purchaser or for breach of any of the terms and
conditions of this agreement.
Provided that the Bank Guarantee shall not be
invoked without giving 30 (thirty) days notice in
writing directing the sole purchaser to pay the amount
due under this agreement to the Government of
Sikkim.
(c) Upon failure on the part of the sole purchaser to
pay the amount demanded under the notice within 30
(thirty) days of receipt of the notice, the Government
shall have the right to invoke the Bank Guarantee to
the extent of the amount demanded and not p aid.
Provided that the shortfall, if any, in the amount of the
Bank Guarantee required under this agreement shall
be made good by the sole purchaser and shall be
72
furnished to the Government of Sikkim within a period
of 45 (forty five) days from the date of signing of this
agreement or at least a day before the commencement
of the draws of the lottery, whichever is earlier.
xxx
13. That the Government shall deliver the tickets to the
sole purchaser at the destination as may be agreed upon.
14. That the Government shall deliver to and the sole
purchaser shall take delivery from the Government whole
of the lottery tickets printed for a draw of a particular
scheme with a clear understanding that if the sole
purchaser is not able to sell the whole tickets, he shall
return the unsold tickets to the Government within 15
(fifteen) days from the date of draw, which shall then be
destroyed after verification. The whole sale price of tickets
sold shall be determined by the Government on the basis
of the prize amount, cost of paper, cost of printing, draw
expenses, transportation charges and the Government
share of revenue as fixed under Clause 4:
Provided that the prices of the tickets may be changed
under the following circumstances, namely:-
(i) Change in the price structure of the lottery
schemes,
(ii) Change in the paper cost, printing charges and
freight, and
(iii) Market conditions.
15. That the full payment of the tickets resold by the
sole purchaser shall be realized by the Government from
the sole purchaser at wholesale rates as per clause 14
above.
16. That the sole purchaser shall produce the monthly
return of sales tax, if any, paid to the respective state
73
governments wherever the tickets are sold for information
of the Government.
xxx
20. That the Government shall immediately after each
draw supply to the sole purchaser a copy of the result of
the draw duty authenticated by the Director who shall
immediately thereafter make arrangements to publicize
the result of each draw.
Provided that the sole purchaser is at liberty, on his
own cost and expenses to take up any kind of publicity of
Sikkim state lotteries including telecast of result on any
Satellite T.V. Channel every day, provided the publicity
shall in no way undermine the prestige of the Government.
No claim for cost on these accounts will be entertained by
the Government.
xxx
23. The sole purchaser may appoint stockists, selling
agents or sellers for further resale in different parts of the
country on his own terms and at his own risk and
responsibility.
xxx
25. The sale proceeds/cost of the tickets as may be
determined by the Government from time to time may be
deposited with the Government as per the directives of the
Director, Sikkim State lotteries.
26. The sole purchaser shall pay the full amount for the
tickets actually sold by the sole purchaser upon receipt of
the invoice from the Government which shall be raised
indicating the amount of wholesale rate and adjustment of
prizes up to Rs.5000/- (Rupees five thousand) to be
disbursed by the sole purchaser for each lottery draw on
the lottery tickets actually sold by the sole purchaser.
74
27. The sole purchaser shall pay State tax or any other
kind of taxes imposed by the other State Governments on
sale of lottery tickets.
xxx
30. The sole purchaser shall be entitled to appoint
stockists, selling agents or sellers in the discharge of any
obligations hereunder or as a result of this agreement.
However, the Government shall have no responsibility or
liability towards such stockists, selling agents or sellers
and shall have no privity of contract with them. Any
dispute whether as result of non-payment or otherwise,
shall not discharge the Sole purchaser’s obligation towards
the State Government under this Agreement.
31. All unclaimed prizes shall be the property of the
Government and full accounts of unclaimed prizes shall be
rendered by the sole purchaser for prizes up to Rs.5000/-
(Rupees five thousand).”
(iii) Agreement dated 24.01.2015
“AGREEMENT
This Agreement is made on this the 24
th day of January,
2015 between the Governor of Sikkim, through the
Principal Secretary, Finance, Revenue and Expenditure
Department, Government of Sikkim (hereinafter referred to
as the ‘Government’) which expression shall unless
excluded by or repugnant to the context means and
includes its successors in office and assigns of the FIRST
PART.
AND
M/s Future Gaming and Hotel Services Private Limited, a
company having its registered office at 54, Mettupalayam
Road, G.N. Mills Post, Coimbatore – 641029 Tamilnadu,
75
and having its branch/sales office at kazi Road, Gangtok,
Sikkim – 737101, represented by its Managing Director
Mr. S. Martin, son of Mr. Santiago (hereinafter referred to
as the ‘Sole Purchaser / Distributor’) which expression
shall, unless excluded by or repugnant to the context
means and includes its successors and assigns of the
SECOND PART ;
xxx
WHEREAS in pursuant to the Notice Inviting Tender dated
November, 15, 2014, M/s Future Gaming and Hotel
Services Private Limited has qualified in the technical bid
and has quoted the highest assured amount of revenue per
draw to the State for 08 (eight) Sikkim State Paper Lottery
schemes.
xxx
7. DEPOSITING OF SALE PROCEEDS OF THE
TICKETS:
7.1 The Sole Purchaser/Distributor shall purchase the
lottery tickets from the Government for further
sales, and payments shall be made by the sole
Purchaser/Distributor to the Government for such
tickets as per the invoice raised by the Government.
7.2 The sale proceeds of the sale of lottery tickets shall
be credited by the Sole Purchaser/Distributor into
the Treasury or Public Ledger Account or
Consolidated Fund of the State of Sikkim or Public
Account or Fund as per the invoice raised by the
State Government on the Sole
Purchaser/Distributor, as prescribed by the State
Government.
7.3 The Sole Purchaser/Distributor shall deposit sale
proceeds as prescribed, ensuring Guaranteed
Revenue as per clause (10) of this Agreement.
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7.4 In the event, the Sole Purchaser/Distributor fails to
comply with the above conditions, the Government
reserves the right to refuse any further sale of lottery
tickets to the Sole Purchaser/Distributor, and to
suitably encash the bank guarantee executed by the
Sole Purchaser/Distributor.
xxx
10. MINIMUM GUARANTEED REVENUE:
With regard to the provisions of this Agreement, the Sole
Purchaser/Distributor has agreed to deposit the Minimum
Guaranteed Revenue to the Government as under:-
10.1 Minimum guaranteed revenue of the Government of
State of Sikkim shall be Rs.15,00,12,800/- Rupees
(Fifteen Crores Twelve Thousand and Eight Hundred
Only) upto a turnover of Rs. 9,000 Crores Rupees
(Nine Thousand Crores) per annum.
10.2 On an additional turnover over and above Rs.9,000
Crores Rupees (Nine Thousand Crores) per annum,
the Sole Purchaser/Distributor shall pay 0.25% of
the additional turnover to the Government of the
State of Sikkim.
10.3 The Sole Purchaser/Distributor shall be required to
submit monthly turnover statements of the proceeds
and sales of lottery/schemes to the Government of
the State of Sikkim by the 15
th of the succeeding
month.
xxx
15.7 The sole Purchaser/Distributor shall fully indemnify
and hold harmless and defend Government and its
officers against any financial and legal liabilities on
account of violation of the relevant laws and rules in
force in country, and all such claims that are solely
77
attributable to the Sole Purchaser/Distributor, in
relation to the sale of lottery tickets during the terms
of this Agreement.”
(iv) Agreement dated 06.06.2016
“AGREEMENT
This Agreement is made on this the 06
th day of June, 2016
(Two thousand and sixteen) between the Governor of
Sikkim, through the Principal Secretary, Finance, Revenue
and Expenditure Department, Government of Sikkim
(hereinafter referred to as the ‘Government’) which
expression shall unless excluded by or repugnant to the
context means and includes its successors in office and
assigns of the FIRST PART.
AND
M/s Future Gaming and Hotel Services Private Limited, a
Private Limited company incorporated under Companies
Act 1956, having its registered office at 54, Mettupalayam
Road, G.N. Mills Post, Coimbatore – 641029, and having
its branch/sales office at, Samdrupling Building, Kazi
Road, Gangtok, Sikkim – 737101, represented by its
Managing Director Shri S. Martin, son of Shri Santiyago
(hereinafter referred to as the ‘Sole Purchaser /
Distributor’)…
xxx
AND WHEREAS the Government and the Sole
Purchaser/Distributor (hereinafter referred to as
Distributor) decided to enter into an Agreement:
xxx
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1. DEFINITIONS:
In the Agreement unless the context otherwise requires:
xxx
1.4 This Agreement will be in line with the Model
Agreement circulated by the Ministry of Home
Affairs, Government of India vide their letter No. V-
17013/1/2010-CSR-1 dated 28
th December, 2011
as already specified in the Invitation for Expression
of Interest; and the Model Agreement may be
referred for purposes of interpretations of this
Agreement.
xxx
4.7 All the unsold tickets, if any, at the time of draw,
with the Distributor shall be returned by the
Distributor to the Director of Lotteries, Government
of Sikkim or the Government authorized
officials/person.
4.8 The Distributor shall submit the statement of sold
tickets for each draw of different schemes to the
Director of Lotteries, Government of Sikkim within
09 (Nine) days from the date of draw(s). The State
Government will keep a record of the tickets issued
to the Distributor.”
Online Computerised Agreement:
At this stage, we extract the relevant clauses of the agreement
dated 09.05.2005 and the supplementary agreement dated
25.04.2008 between the State of Sikkim and assessee-M/s Sugal
79
and Damani Enterprises Pvt. Ltd. for sale of online computerized
network lottery, as under:
“AGREEMENT
This Agreement made at Gangtok, this the 9
th day of May
2005, between the Governor of Skim, through the Principal
Secretary to the Government of Sikkim in the Finance
Department, revenue and expenditure……
AND
M/S Sugal & Damani Partnership firm having its Head
office at 6/35W.E.A, Karol Bagh, NEW DELHI-110005…
represented by its partner…
Whereas the Government with an objective to
generate/raise revenue/funds for the State of Sikkim has
decided to appoint additional Marketing agent for
Computerized Network Lottery by selling lottery tickets to
a variety of users through a process of On -Line
Computerized Lottery System, which will also provide a
venue for healthy entertainment and the Government
intends to utilize the funds generated from the sale of the
said Computerized Network Lottery tickets for good causes
for health, education, infrastructure development and
anti-poverty programs, and other developmental activities
etc;
And Whereas the Government has received offer from M/S
Sugal & Damani for appointment as Marketing Agent for
the said Computerized Network Lottery.
xxx
“Agent” means the Sole Distributor and any person acting
on behalf of the Sole Distributor as a stockists, sub-
stockists, distributor or seller of any Lottery forming part
of the Lottery Business.
80
“Agency" means the appointment by the State of the Sole
Distributor for marketing/selling of Lotteries on behalf of
the State (including the sale and distribution of tickets
either itself or through us distributors or stockist/sub-
stockist).
xxx
“Sub-agent/Retailer" means a person appointed by the
Marketing Agent above or by any other person(s) duly
authorised the Marketing Agent, to operate the lottery
terminals and with whom the Marketing Agent (or any
other person duly authorized by the agent as detailed
above) has entered into a bilateral agreement to operate
the lottery terminals or sell tickets.
xxx
10. CONSIDERATION
In consideration of the arrangement as agreed and
contained in this deed of Agreement between the
Government and the Marketing Agent, the Marketing
Agent has agreed as under:
a. Minimum guaranteed revenue to the government of
Sikkim will be 1% of the turnover up to Rs. 1000
crores or Rs. 10 crores p.a. whichever is higher.
b. On additional turnover over and above Rs.1000/ -
crores the Marketing Agent will pay 0.50% of the
additional turnover to the state government.
xxx
12. REALISATION OF SALE PROCEEDS
The Marketing Agent shall deposit the Sale Proceeds
(except prizes payable up to Rs.5000/ -) with the
Government on a monthly basis, along with account
81
statement of such sale proceeds supported by
record/document.
xxx
16. CONDUCTING OF STATE ON -LINE COMPUTERIZED
NETWORK LOTTERY
a) The State On-line Computerizes Network Lottery
shall be organised, conducted or promoted by the
Government through the Marketing Agent.
b) On-line computerized Network Lottery tickets
shall be made available to the public through
various retailers/sub-agents appointed by the
Marketing Agent who will enter into bilateral
agreements with these retailer/sub-agents. The
date and time of the draw shall be indicated on
the tickets themselves.
xxx
23. RELATIONSHIP BETWEEN MARKETING AGENT
AND THE STATE GOVERNMENT
The relationship between the Marketing Agent and the
Government will be one of Principal and Agent as defined
in the Indian Contracts Act, 1872 as amended.
xxx
28. BANK GUARANTEE
(a) The Marketing Agent shall execute in favour of the
Government a Bank Guarantee Rs. 1.5 Crores (rupees one
crores fifty lakhs) for the performance of the agreement.
The Bank Guarantee shall be executed as Security Deposit
of a Nationalised Bank in favour of the Principal Secretary
to the Government of Sikkim, Finance, Revenue and
expenditure Department.
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SUPPLEMENTARY AGREEMENT
This supplementary agreement is made on this the
25
th day of April, 2008 between the Governor of Sikkim,
through the Additional Chief Secretary to the Government
of Sikkim, Finance, Revenue and Expenditure
Department…
AND
M/s. Sugal and Damani Enterprises Pvt. Ltd., a Joint
Stock Company registered under the Companies Act,
1956,… represented by ….
Whereas Marketing Agent vide agreement dated 9th
May, 2005 (hereinafter referred to as the said agreement)
had agreed to conduct Sikkim State Online Lottery and
among other terms and conditions, vide clause 10 of the
said agreement the Marketing Agent had agreed to pay a
sum of Rs.10 crores (Rupees ten crore) per annum as
Minimum Assured Revenue @ Rs.1% of the turnover up to
Rs.1000 crore and on additional turnover over and above
Rs.1000 crore @ Rs.0.50% of the turnover to the
Government;
And whereas the Marketing Agent submitted that the
sale of Online Lottery has reduced due to imposition of
Lottery Tax in Maharashtra State by the Government of
Maharashtra and banning of all types of lottery in
Karnataka State by the Government of Karnataka w.e.f. 1"
April, 2007 and requested the Government to review the
minimum assured revenue vide their applications dated
25
th September, 2007 and dated 16
th January, 2008.
“10. CONSIDERATION: -
In consideration of the arrangement as agreed
and contained in this deed of Agreement between the
83
Government and the Marketing Agent, the Marketing
Agent has agreed as under:
Minimum guaranteed revenue to the Govt. of
Sikkim will be 1% of the turnover up to Rs. 1000
Crores or Rs. 10 crores p.a. whichever is higher.
On additional turnover over and above Rs.1000
crores the Marketing Agent will pay 0.25% of the
additional turnover to the State Government."
The other terms and conditions of the aforesaid
agreement shall remain unchanged.”
Agency:
15. Before proceeding to answer the contentions advanced at the
Bar on the nature of relationship between the Government of
Sikkim and the respondents-assessees herein, it would be useful
to refer to the concept of agency. This is because if the relationship
is in the nature of an agency (on the premise that the latter are
rendering service to the State Government on the basis of the
agreements entered into between the parties), then service tax is
liable to be paid by the respondents-assessees herein under the
Finance Act, 1994.
15.1 The relevant provisions of the Indian Contract Act, 1872
read as under:
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“182.“Agent” and “principal” defined.— An “agent”
is a person employed to do any act for another, or to
represent another in dealings with third person. The
person for whom such act is done, or who is so
represented, is called the “principal”.
183. Who may employ agent. — Any person who is of
the age of majority according to the law to which he is
subject, and who is of sound mind, may employ an
agent.
184. Who may be an agent. — As between the
principal and third person any person may become an
agent, but no person who is not of the age of majority
and of sound mind can become an agent, so as to be
responsible to his principal according to the provisions
in that behalf herein contained.
185. Consideration not necessary. — No
consideration is necessary to create an agency.
186. Agent’s authority may be expressed or
implied.— The authority of an agent may be expressed
or implied.
187. Definitions of express and implied
authority.— An authority is said to be express when
it is given by words spoken or written. An authority is
said to be implied when it is to be inferred from the
circumstances of the case; and things spoken or
written, or the ordinary course of dealing, may be
accounted circumstances of the case.
188. Extent of agent’s authority.— An agent, having
an authority to do an act, has authority to do every
lawful thing which is necessary in order to do such act.
85
An agent having an authority to carry on a
business, has authority to do every lawful thing
necessary for the purpose, or usually done in the
course, of conducting such business.
xxx
191. “Sub-agent” defined.— A “sub-agent” is a
person employed by, and acting under the control of,
the original agent in the business of the agency.
xxx
222. Agent to be indemnified against consequences
of lawful acts.— The employer of an agent is bound to
indemnify him against the consequences of all lawful
acts done by such agent in exercise of the authority
conferred upon him.”
15.2 According to Bowstead and Reynolds on Agency, 23
rd
Edition, agency is the fiduciary relationship which exists between
two persons, one of whom expressly or impliedly manifests assent
that the other should act on his behalf so as to affect his legal
relations with third parties and the other of whom similarly
manifests assent so as to act or so acts pursuant to the
manifestation. Thus, the one on whose behalf the act or acts have
to be done is called the principal and the other who is to act is
called the agent. Any person other than the principal and the agent
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may be referred to as the third party. The authority of the agent to
act on behalf of the principal constitutes a power to affect the
principal’s legal relations with third parties. Such authority could
be called actual authority or apparent authority. Thus, the essence
of agency is that a person acts on the principal’s behalf. Therefore,
the term agency is used to connote an authority or capacity in one
person to create legal relations between a person occupying the
position of principal and third parties. Usually, the legal relations
so created will be contractual in nature. Conversely, the mere fact
that a person does something in order to benefit another and the
latter is relying on the former to do so or may have requested or
even contracted for performance of the action, does not make the
former the agent of the latter. The centrality to agency is the
conferral of authority to alter legal relations; as such in common
law, being an agent is not a status but a description of a person,
while and only so long as the person is exercising such authority.
Thus, where one person (the principal), requests or authorises the
other (agent), to act on his behalf and the other agrees to do so, the
law recognises that such agent has power to affect the principal’s
87
legal position by acts which, though performed by the agent, are to
be treated in certain respects as if they were acts of the principal.
It is common to regard control by the principal as a defining
characteristic of agency. Thus, agency is termed as acting on behalf
of the principal and subject to principal’s control.
15.3 An agency has to be distinguished from other relationships
such as an agent and trustee; agent and bailee; agent and
employee; agent and independent contractor; agent and seller;
agent and buyer; agent and borrower; agent and person supplying
services.
15.4 Suppliers of the goods of a manufacturer, whether on a
retail or wholesale basis, who have some form of concession as a
regular stockist, distributor or franchisee, are often described as
agent, selling agent, main agent, etc. for the manufacturer of goods
which they supply. However, nowadays the distributor actually
buys from the manufacturer and resells it to his own customers.
In such cases, the term ‘agent’ is used in a complimentary sense
only, i.e., not to transact any business on behalf of the principal,
except as regards purchase of the goods from the principal. Such
88
a relationship is quite different from an agency. The distinction
between an agent and the buyer for resale normally turns on
whether the person concerned acts personally to make such profit
as can be made, or is remunerated by pre-arranged commission. A
supplier who fixes the resale price is likely to be a buyer for resale.
If a party takes a profit on the resale, it will make him a seller. On
the other hand, if a commission is paid on the resale, then, he is
likely to be an agent.
15.5 In Benjamin’s Sale of Goods, Eleventh Edition, Sweet &
Maxwell, it has been stated that sale has to be distinguished from
a contract of agency. When goods are delivered to another for sale
to a third party, the recipient may be an outright buyer, or may
take the goods on sale or return, or may merely be the supplier’s
agent to sell the goods, or an agent on a del credere commission,
i.e., an agent who guarantees to the principal that the buyer will
duly pay the price.
15.6 To determine the nature of the transaction, the whole
agreement must be looked into as “the test is ultimately one of
substance rather than form”. However, there are certain indicators.
89
It is not conclusive that the consignee should be described in the
contract as an “agent” or even “sole agent”, or conversely that the
transaction should be called a “sale”, although the way in which
the parties label the transaction will, typically, play a significant
part in the court’s determination of the issue. Also, certain
stipulations may be consistent with both sale (and especially sale
or return) and agency, and, therefore, cannot be taken as indicative
of either; for instance, the transfer to the consignee of the property
in goods shipped upon the acceptance of drafts. It is, however,
evidence towards a sale that the recipient is entitled to sell at
whatever price the recipient thinks fit, accounting to the supplier
only for a predetermined sum, and this interpretation is given
further support, if the recipient is free to alter or improve the goods.
Where the consignee pays wholesale prices for the goods, he is
likely to be acting as a principal in the sale. If the consignee sells
(whether for cash or on credit) to a retail purchaser, this
immediately gives rise to a debt to the supplier for the listed price,
the transaction becomes quite inconsistent with agency, including
90
del credere agency, and would be consistent only with sale or
return.
Case Law:
16. Learned counsel for the respective parties relied upon the
following cases in support of their submissions:
16.1 In Bhopal Sugar Industries Ltd. vs. STO, (1977) 3 SCC
147, (“Bhopal Sugar Industries Ltd.”) the question was whether
the contract was one of agency or sale. This Court held that the
question will have to be determined having regard to the terms and
recitals of the agreement, the intention of the parties as may be
spelt out from the terms of the document and the surrounding
circumstances and having regard to the course of dealings between
the parties. While interpreting the terms of the agreement, the
Court has to look to the substance rather than the form of it. The
mere fact that the word “agent” or “agency” is used or the words
“buyer” and “seller” are used to describe the status of the parties
concerned is not sufficient to lead to the irresistible inference that
the parties did in fact intend that the said status would be
conferred. In this case, the point for consideration was whether at
91
the time when the appellant was consuming high speed diesel oil
and petrol for its own purposes, was it doing so as the owner of
these articles or merely as an agent under an agreement with
Caltex Company. If the relationship was of an agent, then the usage
of those articles or properties by the appellant therein would
amount to a sale so as to be exigible to sales tax. On the other
hand, if the diesel or petrol was used by the appellant therein as
an owner of those articles, then sales tax would have been paid by
the appellant therein when property had passed on to it and were
received by the appellant therein.
16.1.1 In this context, this Court observed that a contract of
agency differs essentially from a contract of sale inasmuch as an
agent, after taking delivery of the property, does not sell it as his
own property but sells the same as the property of the principal
and under his instructions and directions. Furthermore, since the
agent is not the owner of the goods, if any loss is suffered by the
agent then he is to be indemnified by the principal. It was further
observed that while interpreting the terms of the agreement, the
Court has to look to the substance rather than the form of it. Thus,
92
the mere formal description of a person as an “agent” or “buyer” is
not conclusive, unless the context shows that the parties clearly
intended to treat a buyer as a buyer and not as an agent.
16.1.2 It was further observed on an examination of the terms
of the contract therein that Hispeedol (petroleum product) had
been sold to the appellant therein and not held by it merely as an
agent of the Caltex Company. Therefore, the agreement therein
contained some elements of agency but having regard to the fact
that the appellant therein was consuming the Hispeedol or petrol
for its own purpose, it was acting as an owner of the goods and if
it consumed the same for its own purposes, it was not doing so as
agent but as owner which it was fully entitled to do. Therefore, it
would not constitute a sale so as to be exigible to sales tax.
16.2 Reference could also be made to Sri Tirumala
Venkateswara Timber and Bamboo Firm vs. Commercial Tax
Officer, Rajahmundry, AIR 1968 SC 784, wherein this Court
observed that there is a distinction between a contract of sale and
a contract of agency by which the agent is authorised to sell or buy
on behalf of the principal. The essence of a contract of sale is the
93
transfer of title to the goods for a price paid or promised to be paid.
The transferee in such a case is liable to the transferor as a debtor
for the price to be paid and not as an agent for the proceeds of the
sale. The essence of agency to sell is the delivery of the goods to a
person who is to sell them, not as his own property but as the
property of the principal who continues to be the owner of the
goods, and will therefore be liable to account for the sale proceeds.
That in certain trades the word “agent” is often used without any
reference to the law of principal and agent. But the true
relationship of the parties in such a case has to be gathered from
the nature of the contract, its terms and conditions, and the
terminology used by the parties is not decisive of the said
relationship.
16.3 In Moped India Ltd. vs. Assistant Collector of Central
Excise, Nellore, (1986) 1 SCC 125, one of the questions was
whether the commission allowed in respect of different varieties of
mopeds to the dealers could be regarded as a trade discount or not.
The contention was that the commission allowed to the dealers was
a trade discount and was, therefore, liable to be deducted in
94
determining the excisable value of the mopeds. In the agreement,
the amount was referred to as “commission” but the label given by
the parties could not be determinative because it was for the Court
to decide whether the amount was a “trade discount” or not,
whatever be the name given to it. Having regard to the terms of the
agreement, this Court held that it was on a principal to principal
basis. That under the agreement, mopeds were sold by the
appellants therein to the dealers and the dealers did not act as
agents of the appellants for the purpose of effecting sales on behalf
of the appellants therein. Having regard to various clauses of the
agreement considered in the said case, it was held that the
relationship between the appellants and the dealers therein was on
a principal to principal basis and therefore, the amount allowed to
the dealers in respect of different varieties of mopeds was a trade
discount. The appellants therein charged to the dealers the price
of the mopeds sold to them less the amount of Rs.110, Rs.145 and
Rs.165 as commission in respect of different varieties of mopeds.
These amounts allowed to the dealers were clearly ‘trade discount’
95
liable to be deducted from the price charged to the dealers for the
purpose of arriving at the excisable value of the mopeds.
16.4 In Alwaye Agencies vs. Deputy Commissioner of
Agricultural Income Tax and Sales Tax, (AIR 1988 SC 1250),
the assessee-firm was appointed as distributor by the Travancore
Cochin Chemicals Ltd. (Company) to effect the sale of certain
chemical manufactured by the said company in the area covered
by the Kerala State under an agreement entered into on
11.02.1967. This Court examined whether under the agreement,
the assessee firm was an agent of the said company, or whether
under the agreement the assessee firm was really a purchaser of
the goods which were booked by it. In the Agreement , the
stipulation was that the distributor had the right of the sale of the
product within the stipulated area. Bulk supplies were effected in
wagon load or lorry-load by the said company direct to the
customer, but only provided that the distributor arranged the
payment as per the agreement and also took the responsibility to
bear entirely the resultant effects and risk from the said direct
dispatches. Though the company had fixed the price at which the
96
goods were to be sold to the customers, it did not lead to the
conclusion that the distributor was merely an agent. Under the
agreement, what the distributor received was described as a
“rebate” and not a “commission” as one would normally accept in
the agreement of agency. Significantly, the supplies were made to
the distributor against payment either immediate or deferred as
provided in the agreement, and even when the goods were destined
directly to the customer, it was the distributor who had to
guarantee to arrange the payment. That where there was some time
lag between the sending of the goods and the payment, the goods
were to be insured at the cost of the assessee therein. This Court
observed that this circumstance clearly showed that in respect of
the goods dispatched under orders placed by the distributors, the
latter really acted as purchasers of the goods which they in turn
sold to the customers and did not merely act as agents of the said
company. That in respect of these transaction s, the goods
dispatched passed to the distributor on the bills being endorsed
and handed over to the distributors. Consequently, the appeal was
dismissed.
97
16.5 This Court considered the nature of the agreement being one
of sale or one of sole selling agency in the case of Snow White
Industrial Corporation vs. Collector of Central Excise, (1989)
3 SCC 351. One of the clauses of the agreement was that unsold
stocks lying with the seller (Gillanders) had to be returned to the
appellants therein at the time of termination of contract by either
of the parties. In the aforesaid context, it was held that the
agreement was for a sole selling agency and not as an outright sale.
16.6 In M.S. Hameed vs. Director of State Lotteries, (2001)
249 ITR 186 (Ker), the facts were that the petitioner therein
received in bulk quantities of lottery tickets from the State
Government. They were given a discount which was on a slab
system, such as for the purchase of 50,001 and above tickets, there
was a 28% discount. The petitioners contended that the tickets
purchased were thereafter distributed to other agents and sub-
agents on commission basis. That after purchase of the tickets, it
was not for the Government to look out as to how they were
distributed and there was no control over the affairs thereafter.
That there was only payment of the price of the ticket fixed as
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payable by the principal, and no commission or discount was paid
to them by the Government. That Section 194G of the Income Tax
Act, which imposes liability on the person responsible for paying to
any person who is or has been stocking, distributing, purchasing
or selling lottery tickets, any income by way of commission,
remuneration, on such tickets in all amounts exceeding Rs.1000,
to deduct income tax thereon at the rate of 10% , had no
application. Hence, the demand of tax was without jurisdiction.
The Kerala High Court considered the question whether the
amount received as commission or discount or any incentive or as
a margin is income or earning which was taxable at the hand of the
assessee concerned, coming under the purview of Section 194G of
the Income Tax Act. It was observed that if the face value of the
lottery ticket was Re. 1, the petitioner therein would receive it at
Rs. 0.72 paise and could sell at any price and it was not the State’s
business to enquire into the matter at all. It was observed that the
deduction under Section 194G was on any person responsible for
paying to any person any income by way of commission, etc. who
purchased or sold or stocked lottery tickets, in this case, the State
99
Government. The deduction was to be made at the time of credit of
such income to the account of the payee or at the time of payment
of such income. The Kerala High Court observed that when the
deduction is contemplated at the time of the payment to the person
concerned but it is shown that there was no payment to the agent
at the time of purchase of the ticket, the section automatically
becomes inapplicable. That the ticket is given on a discount of 28%,
can by no imagination be pressed into service for an interpretation
that, nonetheless, 10% of 28 paise is deductible as tax. Thus, it
was held that Section 194G was not applicable. The Kerala High
Court held that since the lottery tickets were sold at a discounted
price, the purchasers were sought to be taxed as agents which
could not be the case as there was no transaction under an agency
and the petitioner therein were not liable to be covered under
Section 194G of the Income Tax Act.
16.7 Ahmedabad Stamp Vendors Association vs. Union of
India, (2002) 257 ITR 202 (Guj), raised a question with regard to
whether, the petitioners therein being stamp vendors were agents
of the State Government who were being paid commission or
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brokerage or whether the sale of stamp papers by the Government
to the licensed vendors was on principal to principal basis involving
a contract of sale. Reference was made to Bhopal Sugar
Industries Ltd. and also to the meanings of the expressions
“commission” and “discount”. The licensed vendors have to pay for
the price of the stamp paperless the discount at the rates provided
varying from 0.5% to 4%. It was not that the stamp vendor collected
the stamp papers from the Government , sold them to the retail
customers and then deposited the sale proceeds with the
Government less the discount. The liability of the stamp vendor to
pay the price less the discount was not dependent upon or
contingent to sale of stamp papers by the licensed vendor. The
licensed vendor was not entitled to get any compensation or refund
of the price if the stamp papers were lost or destroyed. The crucial
question was whether the ownership in the stamp papers passed
to the stamp vendor when the Treasury Officer delivered stamp
papers on payment of price less discount. Clause (b) of sub-rule (2)
of Rule 24 of Gujarat Stamps Supply and Sales Rules, 1987
indicated that the discount which the licensed vendor had obtained
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from the Government was on purchase of the stamp papers.
Consequently, it was held that the discount made available to the
stamp vendors under the provisions of the aforesaid 1987 Rules
did not fall within the expression “commission” or “brokerage”
under Section 194H of the Income Tax Act, 1961.
16.8 In Bharti Cellular Limited (Now Bharti Airtel Limited)
vs. Assistant Commissioner of Income Tax, (2024) 8 SCC 608,
the assessees therein were cellular mobile service providers and
the issue related to the liability to deduct tax at source under
Section 194-H of the Income Tax Act, 1961 on the amount which,
as per the Revenue, was a commission payable to an agent by the
assessees under the franchise/distributorship agreement between
the assessees and the franchisees/distributors. Though the matter
was under the provisions of the Income Tax Act and Section 194-
H of the said Act which imposes the obligation to deduct tax at
source by any person responsible for paying at the time of credit or
at the time of payment, whichever is earlier, to a resident, any
income by way of commission or brokerage, nevertheless, the law
of agency was considered. This was specially in the context of the
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expression “acting on behalf of another person”. Referring to
Section 182 of the Contract Act which defines “agent” and
“principal”, it was observed that agency is a triangular relationship
between the principal, agent and the third party. In order to
understand the relationship, one has to examine the inter se
relationship between the principal and the third party and the
agent and the third party. In this regard, it was observed that
certain factors or aspects must be taken into consideration while
examining whether a legal relationship of a principal and agent
exists, as under:
(a) “The essential characteristic of an agent is the legal
power vested with the agent to alter his principal's
legal relationship with a third party and the principal's
co-relative liability to have his relations altered.
(b) As the agent acts on behalf of the principal, one of the
prime elements of the relationship is the exercise of a
degree of control by the principal over the conduct of
the activities of the agent. This degree of control is less
than the control exercised by the master on the
servant, and is different from the rights and
obligations in case of principal to principal and
independent contractor relationship.
(c) The task entrusted by the principal to the agent
should result in a fiduciary relationship. The fiduciary
relationship is the manifestation of consent by one
person to another to act on his or her behalf and
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subject to his or her control, and the reciprocal
consent by the other to do so.
(d) As the business done by the agent is on the principal's
account, the agent is liable to render accounts thereof
to the principal. An agent is entitled to remuneration
from the principal for the work he performs for the
principal.”
16.8.1 It was further observed that three other relevant aspects
or considerations should be noted. First, is the difference between
“power” and “authority”. The second consideration is that the
primary task of an agent is to enter into contracts on behalf of his
principal, or to dispose of his principal's property. The third
consideration is that the substance of the relationship between the
parties, notwithstanding the nomenclature given by the parties to
the relationship, is of primary importance.
16.8.2 In this case, three distinct relationships were considered
which are different from the relationship of an agency. The first is
the difference between an agent and a servant which is not relevant
for this case. Next, the difference between a principal-agent and
principal-principal relationship was considered with reference to
Bhopal Sugar Industries Ltd. It was observed that an agent, after
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taking delivery of the property, does not sell it as his own property
but sells the same as the property of the principal and under his
instructions and directions. Therefore, if the agent is not the owner
of the goods and if any loss is suffered by the agent, he is to be
indemnified by the principal. This is unlike a contract of sale where
title to the property passes on to the buyer on delivery of the goods
for a price paid or promised. The buyer then becomes the owner of
the property and the seller has no vestige of title left in the property.
Third is the case of independent contractor, wherein if the party is
concerned about acting for himself and making the maximum
profit possible, he is usually regarded as a buyer or an independent
contractor and not as an agent of the principal. This would be true
even when certain terms and conditions have been fixed relating to
the manner in which the seller conducts his business.
16.8.3 Distinguishing the relationship of a principal with
independent contractor from that of an agency, it was observed
that an independent contractor is free from control on the part of
his employer, and is only subject to the terms of his contract. On
the other hand, an agent is not completely free from control, and
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the relationship to the extent of tasks entrusted by the principal to
the agent is fiduciary. Sometimes an independent contractor looks
like an agent from the point of view of the control exercisable over
him, but on an overview of the entire relationship, it may not be an
agency. It was further observed that the distinction is that
independent contractors work for themselves even when they are
employed for the purpose of creating contractual relations with the
third persons. It was further observed that the term “agent” should
be restricted to one who has the power of affecting the legal position
of his principal by the making of contracts, or the disposition of the
principal's property; viz. an independent contractor who
may, incidentally, also affect the legal position of his principal in
other ways.
Agreements:
17. The relevant Clauses of the agreements which were adverted
to before this Court have been extracted above.
17.1 In the agreement dated 10.08.2009, the respondent -
assessee (M/s Future Gaming Solutions Pvt. Ltd.) is referred to as
an exclusive sole purchaser of the conventional weekly paper
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lottery and bumper lottery with denomination of rupee one
organised by the Government of Sikkim on actual sold basis. In
consideration of the appointment of the respondent-assessee
herein as sole purchaser, a sum of Rs.8 crores (Rupees Eight
Crores) per annum had to be paid by the respondent-assessee
herein to the Government for the first year of the extended period
effective from 18.10.2009 to 17.10.2010 and a sum of Rs.10 crores
(Rupees Ten Crores) per annum for the second year of the extended
period effective from 18.10.2010 to 17.10.2014. This was the
minimum payment that had to be made by the sole purchaser to
the Government of Sikkim for parting with the lottery tickets. The
sole purchaser had to provide in favour of the Government of
Sikkim with a bank guarantee of Rs.10 crores (Rupees Ten Crores)
as a security deposit, which was to deliver the tickets to the sole
purchaser at the destination as may be agreed upon.
17.1.1 Clauses (14) to (16) are significant in this agreement.
Clause (14) stated that the Government of Sikkim shall deliver to
and the sole purchaser shall take delivery from the Government
whole of the lottery tickets printed for a draw of a particular scheme
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with a clear understanding that if the sole purchaser was not able
to sell the whole tickets, he shall return the unsold tickets to the
Government within 15 days from the date of draw, which would
then be destroyed after verification. This was to avoid any possible
misuse of the lottery tickets leading to questioning of a draw of
lottery in a particular scheme. That the wholesale prices of the
tickets sold was to be determined by the Government on the basis
of the prize amount, cost of paper, cost of printing, draw expenses,
transportation charges and the Government share of revenue as
fixed under clause (4) extracted above. That the prices of the tickets
could be changed under certain circumstances. Also, the State
Government could realise the full payment of the tickets resold
from the sole purchaser at wholesale rates as per clause (14)
referred to above. The wholesale rate of the tickets sold by the State
Government to the sole purchaser had to be paid after actually
selling the same. That, for information of the Government, the sole
purchaser had to produce monthly return of sales tax, if any, paid
to the respective State Governments wherever the tickets are sold.
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17.1.2 That the sole purchaser could at his own cost and
expenses give publicity to Sikkim State lotteries through various
media platforms, both print and electronic, without seeking any
reimbursement from the State Government. Further, the sole
purchaser could appoint stockists, selling agents or sellers for
further resale in different parts of the country on his own terms
and at his own risk and responsibility. That this did not entail any
privity of contract between the State Government and such entities.
As a result, the sole purchaser’s obligation towards the State
Government was not discharged despite appointment of stockists,
selling agents or other sellers. Unclaimed prize was the property of
the State Government and the full accounts of unclaimed prizes
had to be rendered by the sole purchaser for prizes up to
Rs.5,000/- (Rupees Five Thousand). The sole purchaser had to
maintain proper books of accounts and get the same audited and
the State Government had the right to inspect the books of
accounts maintained by the sole purchaser, if deemed necessary.
17.1.3 Having regard to the aforesaid terms and conditions of
this agreement including the nomenclature used to describe the
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respondent-assessee herein, it clearly emerges that the
respondent-assessee was not an agent of the State Government but
purchased the lottery tickets at his own risk for the purpose of
selling it through stockists, etc. The unsold lottery tickets had to
be returned to the State Government in order to avoid misuse of
the same and in order to ascertain the number of tickets sold. The
prices of tickets were determined as wholesale prices which were
as per clause (14) and paid by the respondent-assessee herein to
the State Government in terms of clause (4).
17.2 Agreement dated 24.01.2015 between the State of Sikkim
and M/s. Future Gaming and Hotel Services Private Limited has
described the said assessee as a sole purchaser/distributor/
promoter. Clause (7) of the said agreement states that the sole
purchaser/distributor shall purchase the lottery tickets from the
Sikkim Government for further sales, and payments shall be made
by the sole purchaser or distributor to the Government for such
tickets as per the invoice raised by the Government. The sale
proceeds for sale of lottery tickets had to be credited by the sole
purchaser or distributor into the treasury etc. of the State of
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Sikkim as per the invoice raised by the State Government on the
sole purchaser or distributor. The sole purchaser or distributor had
to deposit the sale proceeds ensuring Guaranteed Revenue. Clause
(10) of the agreement spoke of Minimum Guaranteed Revenue
which was Rs.15,00,12,800/- up to a turnover of Rs.9000 crores
per annum and on an additional turnover over and above Rs.9000
crores per annum, the sole purchaser or distributor had to pay
0.25 per cent of the additional turnover to the Government of
Sikkim. For that purpose, the sole purchaser or distributor has to
submit monthly turnover of the proceeds of the sale of
lottery/schemes to the Government of Sikkim by 15
th of the
succeeding month. The annual financial and systems’ audit of the
various lottery schemes had to be conducted by the Government to
ensure that the Act and the Rules are not violated. Also, the sole
purchaser or distributor had to get its accounts audited internally
and have reconciliation of the records from time to time. The sole
purchaser or distributor had the responsibility to indemnify the
State Government against all claims in relation to the sale of lottery
tickets during the term of the agreement.
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17.3 The agreement dated 06.06.2016 between the State of
Sikkim and M/s Future Gaming and Hotel Services Private Limited
also describes the assessee as a sole purchaser/ distributor. This
agreement was stated to be in consonance with the model
agreement circulated by the Ministry of Home Affairs, Government
of India by letter dated 28.12.2011. Under the said Agreement, all
unsold tickets, if any, at the time of draw with the sole purchaser
or distributor had to be returned to the Director of Lotteries,
Government of Sikkim or the authorized officer. Also, a statement
of sold tickets for each draw of different schemes had to be
submitted by the Distributor to the Director of Lotteries within nine
days from the date of draw. Under this agreement also, the
distributor on its own terms and on its own risk and responsibility
had to appoint Area Distributors/Stockists to sell the lottery tickets
of the Government of Sikkim in discharge of its obligation under
the Agreement. This agreement also had the guaranteed revenue
clause under which the distributor had to deposit the guaranteed
revenue to the Government as per their bid rate quoted in the
tender.
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17.4 We have perused the agreements between the Government
of Sikkim and the respondent-assessee with regard to online
computerised lottery. The clauses of the said agreement are similar
in substance to the clauses of the agreement with regard to paper
lotteries which have been discussed above. Merely because the
online agreement uses the expression “marketing agent”, it would
not imply that respondent-assessee is an agent within the meaning
of the expression under the provisions of the Contract Act dealing
with agency. Hence, on a consideration of the agreements for the
sale of online lottery tickets in juxtaposition with the agreement for
the sale of paper lotteries, we find that there is a great similarity in
the clauses of the agreement and hence, agreement concerning sale
of online lottery tickets also is one between principal and principal
and not between principal and agent.
17.5 Recently, this Court in K. Arumugam observed that
conducting a lottery which is a game of chance, is an activity
conducted by the State and not a service being rendered by the
State which would enable the engaging of an agent such as
respondents-assessees herein for the purpose of rendering of such
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a service. That the assessees who buy the lottery tickets on outright
sale basis have the burden of selecting them through stockists for
a profit as their business activity. The differential in the price paid
to the State for the lottery tickets that are made available to the
assessee to sell and the sale price is the profit of the assessee.
Thus, there is no promotion of the business of the State which
conducts lotteries as an agent. Consequently, there is no principal-
agent relationship, rather it is one of principal to principal. The
conclusions in K. Arumugam are apposite to these cases also.
Controversy between the Parties:
18. The parliamentary amendments made to the Finance Act,
1994, for the purpose of imposing service tax on the respondents-
assessees herein as ‘business auxiliary service’ under sub-section
19 of Section 65 of the said Act effective from 01.07.2003 and by
way of the insertion of the Explanation to Section 65(19)(ii) of the
Finance Act, 1994 culminated in the judgment of this Court in K.
Arumugam. In the said case, this Court held that the relationship
between the Government of Sikkim and the assessees therein was
not that of principal and agent but one of principal and principal.
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Therefore, up to the year 2010, the lis between the parties ended
with the judgment in K. Arumugam.
18.1 For the period from 01.07.2010 till 30.06.2012, amendment
was made to Section 65(105) by insertion of clause (zzzzn) which
defined promotion, marketing, organizing or in any other manner
assisting in organizing games of chance, including lottery, bingo or
lotto in whatever form or by whatever name called, whether or not
conducted through internet or other electronic networks as a
“taxable service”. The Sikkim High Court observed that the said
clause essentially means the conducting of lotteries within the
scope and ambit of betting and gambling as per Entry 62 - List II
of the Seventh Schedule of the Constitution and therefore, on the
very same activity of betting and gambling, service tax cannot be
levied.
18.2 The High Court further held that when a sole
purchaser/distributor/promoter purchases the lottery tickets from
the State Government for the purpose of onward sales through
stockists etc., it was not acting as an agent of the State Government
but in its own right as a principal. Thus, the relationship between
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the State Government and the sole distributor was one between a
principal and principal and not one between principal and agent.
That various clauses of the Agreement indicated that the sole
distributor was acting in its own right on purchase of the lottery
tickets for onward sales, having regard to the Lotteries Act which
is a Central Government legislation and bearing in mind the faith
of the general public/customers in the lottery schemes conducted
by the Government of Sikkim. It was only for the above purposes
that various clauses of the agreement s ought to enhance
transparency in the lottery business, which was a part of the
revenue earning endeavours of the State of Sikkim through various
lottery schemes. In the circumstances, the High Court set-aside
the demands for payment of service tax made by the Central
Government.
18.3 At the same time, the Finance Act, 2012, by an amendment
of Finance Act, 1994, introduced the Negative List under Section
66D which comprised of various services on which no service tax
could be levied or collected. The List included the activity of
betting, gambling or lottery. Hence, no service tax on the conduct
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of the lottery could be levied by the Central Government. However,
in 2015, another amendment was made to the Finance Act , 1994
by substituting Explanation 2 in clause (44) of Section 65B ,
wherein the expression “transaction in money or actionable claim”
was defined to not include, inter alia, 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, inter
alia, by a lottery distributor or selling agent in relation to
promotion, marketing, organizing, selling of lottery or facilitating in
organizing of lottery of any kind in any other manner. The
expression “lottery distributor or selling agent” was defined by
inserting clause (31A) to Section 65B to mean a person appointed
or authorized by a State for the purposes of promoting, marketing,
selling or facilitating in organizing lottery of any kind, in any
manner, organized by such State in accordance with the provisions
of the Lotteries (Regulation) Act, 1998. Since “betting, gambling or
lottery” was included in the Negative List, an Explanation was
inserted to Section 66D(i) to say that the said expression “betting,
gambling or lottery” shall not include the activity specified in
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Explanation 2 to clause (44) of Section 65B. Thus, the intent of
the Parliament was that any transaction in an actionable claim
(lottery being an actionable claim) would not include an activity
carried out for the distribution of lottery by the distributor. In other
words, such activity of the distributor would not amount to the
activity of betting, gambling or lottery.
18.4 We do not think that such a meaning could be attributed to
the activity of the distributor involved in the selling of lottery or
facilitating or organizing of lottery in any manner. The expression
“betting, gambling or lottery” in the Explanation to Section 66D(i)
has to be given its true intent and meaning as conducting a lottery
is nothing but an activity coming within the scope of betting and
gambling. This is by the application of the principle of noscitur a
sociis where the expression “lottery” takes its meaning from
“betting and gambling”. Although a lottery ticket is nothing but an
actionable claim, the conduct of a lottery scheme is nothing but a
betting and gambling activity. Therefore, it is only Entry 62 – List
II which enables the imposition of tax by the State Government.
The activity of betting and gambling which includes conducting of
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a lottery is regulated under Entry 34 – List II, with Entry 62 – List
II being the taxation entry.
18.5 By way of Finance Act, 2015, clause (a) of the Explanation
to Section 67 containing the definition “consideration” was
amended to include, inter alia, any amount retained by the lottery
distributor or selling agent from gross sale of lottery tickets in
addition to the fee or commission, if any, or, as the case may be,
the discount received, i.e., the difference in the face value of the
lottery ticket and the price at which the distributor or selling agent
gets that ticket. The said amendment would have no consequence
and bearing on the substantive provisions for the reasons that we
have stated above. This is because the distributor buys at
wholesale price from the State Government and sells it at a higher
price to the retailer.
18.6 Thereafter, the amendment made to clause [ii(a)] of the
Explanation 2 to Section 65B(44) in the year 2016 that the
expression “transaction in money or actionable claim” would not
include any activity carried out, for a consideration, in relation to,
or for facilitation of, a transaction in money or actionable claim,
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including the activity carried out, inter alia, by a lottery distributor
or selling agent on behalf of the State Government, in relation to
promotion, marketing, etc. in accordance with the provisions of the
Lotteries (Regulation) Act, 1998 is only an innocuous amendment
which is only cosmetic in nature.
18.7 In the circumstances, we find that at each stage, the
amendments made to the Finance Act , 1994, in order to impose
service tax on the sole distributor/purchaser of the lottery tickets
(respondents-assessees herein) have been unsuccessful. We have
reasoned that the amendment to the said definition would in no
way detract from the substance of the relationship between the
State Government and the sole distributor or purchaser of the
lottery tickets which is one of principal to principal and not of
principal-agent. There being no agency and no service rendered by
the respondents-assessees herein as an agent to the Government
of Sikkim, service tax is not leviable on the transactions between
the purchaser of the lottery tickets (respondents-assessees herein)
and the Government of Sikkim.
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19. The detailed analysis of the relevant provisions of the Finance
Act, 1994, and amendments made thereto in light of the clauses of
the Agreements highlighted during the course of submissions as
well as the judgments of this Court, would not persuade us to take
a different view from what the Sikkim High Court has taken.
20. In view of the aforesaid discussion, we find no merit in the
appeals filed by the Union of India and others. Hence these appeals
are dismissed. The appeal filed by the assessee is disposed
accordingly.
Parties to bear their own costs.
..……………………..……………………….J.
(B.V. NAGARATHNA)
..…..………………………………………….J.
(NONGMEIKAPAM KOTISWAR SINGH)
New Delhi;
February 11, 2025.
The Supreme Court of India recently delivered a landmark judgment concerning the applicability of Service Tax on Lottery Distributors and the nature of their contractual arrangements, specifically addressing whether they operate under a Lottery Agency Agreements or a principal-to-principal basis. This significant ruling, available on CaseOn, provides crucial clarity for the lottery industry and tax authorities alike, putting an end to a long-standing legal battle.
The dispute traces back to 2003 when the Finance Act, 1994, was amended to include 'Business Auxiliary Service' under service tax. This led the Service Tax Department to issue notices to lottery distributors, demanding service tax payments. The High Court initially sided with the distributors, ruling that service tax was not applicable to lottery ticket sales. This decision was upheld by the Supreme Court in Union of India vs. Martin Lottery Agencies Ltd. (2009), which also clarified that a subsequent 'Explanation' introduced in 2008 was prospective in nature, leaving its validity open.
A further challenge to this Explanation in M/s. Future Gaming Solutions Pvt. Ltd. vs. Union of India (2009) was initially dismissed by the High Court but later overturned by the Supreme Court in K. Arumugam vs. UOI (2024). In this pivotal judgment, the Supreme Court declared that lottery tickets are actionable claims, not 'goods,' and thus service tax on their promotion or marketing could not be levied under the then-existing provisions.
The Parliament, however, continued to amend the Finance Act with the intent to levy service tax on these activities:
The central question before the Supreme Court was whether the High Court of Sikkim’s judgments, which consistently struck down amendments seeking to impose service tax on lottery distributors, required interference. This hinged on determining the nature of the relationship between the State Government and the lottery distributors: was it a principal-agent relationship (making service tax leviable) or a principal-to-principal relationship (making it a sale of goods, not a taxable service)?
The Court relied on several foundational legal principles and statutory provisions:
The Supreme Court meticulously analyzed the various agreements between the State of Sikkim and the lottery distributors for both paper and online lotteries. Crucially, the agreements consistently referred to the respondents-assessees as 'Sole Purchaser,' 'Distributor,' or 'Promoter.' Several clauses pointed towards a principal-to-principal relationship:
The Court reiterated its stance from K. Arumugam that conducting a lottery is a State activity to generate revenue, not a service being rendered by the State. Therefore, the distributors could not be agents for such a 'service.' The numerous legislative amendments by Parliament attempting to impose service tax were found to be unsuccessful because they tried to recharacterize a transaction that was, in substance, a sale of actionable claims and an activity falling under the State's exclusive taxing power (Entry 62, List II).
Moreover, the Court emphasized that merely using terms like 'marketing agent' in online lottery agreements did not override the fundamental substance of the relationship, which remained principal-to-principal. The distributors were not exercising legal power to alter the State's legal relationship with third parties; rather, they were buying and reselling tickets for their own business profit, bearing their own risks.
CaseOn.in offers 2-minute audio briefs that help legal professionals quickly grasp the intricate details of such rulings, allowing for efficient analysis of the various Finance Act amendments and their implications on the principal-agent relationship in lottery transactions.
The Supreme Court found no merit in the appeals filed by the Union of India. It firmly upheld the High Court of Sikkim's consistent position that the relationship between the State Government and lottery distributors is on a principal-to-principal basis, not a principal-agent relationship. Consequently, the various amendments to the Finance Act, 1994, aiming to levy service tax on these activities were unsuccessful. The Court concluded that there is no agency, no service rendered by the distributors to the State Government, and thus no service tax is leviable on these transactions. The conduct of lotteries, being a betting and gambling activity, falls under the exclusive legislative domain of the State Legislature (Entry 62, List II of the Seventh Schedule).
This judgment is essential reading for legal professionals and students for several reasons:
All information provided in this article is for informational purposes only and does not constitute legal advice. While efforts have been made to ensure accuracy, readers should consult with a qualified legal professional for advice pertaining to their specific circumstances.
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