REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 3239 OF 2009

(Arising out of SLP (C) No. 6083 of 2008)

Union of India & Ors. … Appellants

Versus

M/s Martin Lottery Agencies Ltd. … Respondent

J U D G M E N T

S.B. Sinha, J.

1.Leave granted.

2.Whether sale, promotion and marketing of lottery tickets would be

exigible to ‘Service Tax’ within the meaning of the provisions of Section

65(105) of the Finance Act, 1994 (hereinafter called and referred to for the

sake of brevity as ‘the Act’) is the question involved in this appeal which

arises from a judgment and order dated 18.9.2007 passed by the High Court

of Sikkim in Writ Petition (C) No. 19 of 2007.

3.Respondents are agents of the State of Sikkim. The State Government

floated “schemes” whereby the total number of tickets therefor was

prescribed. In terms of the said schemes, the respondent purchases all

lottery tickets in bulk form on “all sold basis”. It pays Rs.70 per ticket for

the face value of Rs.100/-. In turn, it sells the ticket to its principal stockists

on “outright” and “all sold basis”: It makes a profit out of the margin out of

the difference between the amounts received from the principal stockists and

the amounts paid to the State Government. The principal stockists in turn

sell the tickets to the sub-stockist and who in turn sell to the agents. The

retailers purchase tickets from the agents and in turn sell the same to the

ultimate participants of the draw.

4.Indisputably, the entire transaction is governed by the Lottery

(Regulation) Act, 1998. It is neither in doubt nor in dispute that having

regard to the circular letter issued by Commissioner (Service Tax), Ministry

of Finance, CBEC dated 14.01.2007, the nature of transactions between the

distributor and the State Government do not constitute a sale.

However, it was concluded that the activities of the distributor are that

of promotion or marketing of lottery tickets for their client (i.e. the State

Governments) and, thus, would be exigible to service tax under the heading

‘business auxiliary service’.

Pursuant to and/or in furtherance of the said opinion of the Board, the

Superintendent of Central Excise, Gangtok Range, Gangtok by a letter dated

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30.04.2007 directed the respondent to obtain registration and pay service tax

under the heading ‘business auxiliary service’ in terms of the provisions of

the said Act.

5.The legality and/or validity of the said notice was questioned before

the High Court of Sikkim by the respondent by way of a Writ Petition. By

an order dated 13.8.2007, the Chief Justice of the said High Court while

declining to grant an interim order made certain observations to the effect

that the activities undertaken by respondent cannot but be promotion or

marketing, in the following terms:

“(sic) can be sold in the market for that face value,

is itself a promotional or marketing service. The

contract between a principal producer and its large

distributor or promotional distributor can have a

lot of flexibility. It will all depend on the business

negotiations by the two parties, as to whether the

goods are being taken by the distributor as an

agent, and retained as such, or whether the goods

will be purchased outright by the distributor from

the manufacturer, at a reduced price, the distributor

thereafter taking all responsibility for the goods

purchased, in return for, or inconsideration of, the

reducing in the wholesale price of goods.

If, we repeat if, the writ petitioner is a

distributor or a selling agent, then there is no

problem, notwithstanding section 4(c) of the 1998

Act, of the writ petitioner reselling the lottery

tickets in the open market even upto the full face

value of Rs. 100/-, or for a lesser price but above

Rs.70/-, even though it bought the tickets itself for

Rs.70/-. Is this a promotion of the lottery

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marketing of lottery tickets produced or provided

by the State? If it is not, then what is the

difference between a person buying lottery tickets

of face value of Rs.100/- at Rs.100/- from the State

Government directly, and a person who is buying

it at a reduced price? Is the reduced price of

Rs.30/- in relation to goods, originally belonging

to the State Government, a reduction for the

purpose of marketing and further sale, and is it for

the purpose of marketing, which the true and core

business activity of the writ petitioner? Is the

business violability of the writ petitioner

dependent only on the middleman succeeding in

getting a market for the original goods, and is the

margin of 30% sufficient to cover this type of

business venture?

These questions might merely be asked

today but need not be answered today without

hearing parties fully.

I am of the opinion that on a balance of

circumstances it appears that the essence of

activity, properly so called, cannot but be

promotion or marketing.

Order and observations, however worded,

are without prejudice to the rights and contentions

of the parties. There will be no interim order.

Appearance of parties before the Department will

take place and decisions might be given and even

levy might be made. However, decisions given

will ultimately abide by the result of the writ.

Since both the parties are also solver, no interim

order is called for.

Returnable on 17.8.2007 when further

orders might be prayed for by either party.”

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The said writ petition was posted for hearing on 18.9.2007 and by

reason of an order of the said date, the writ petition was allowed, directing:

“Affidavits have not been called for although the

leaned Advocate General asked for time. Here the

learned Advocate General is appearing as Assistant

Solicitor General. Time to file affidavit was

refused by me since the issue is one of pure law.

This order is to be read as a sequel to the order

already passed by this Court on 13.8.2007. The

basic facts are set out there. The arguments this

time centered round whether lottery tickets are

goods or not. The statutory provisions which are

material in this regard are extracted in my earlier

order. On the authority of the Constitution Bench

of the Supreme Court which delivered its judgment

in the Sunrise Associates Case (2006) 5 SCC 603

lottery tickets have to be held to be actionable

claims. As such those would not be goods within

the meaning of the definition clause in the Sale of

Goods Act. If the lottery tickets are not goods, the

writ petitioners cannot be said to be rendering any

service in relation to the promotion of their

client’s goods, or marketing of their client’s goods,

or sale of their client’s goods.

The writ petition succeeds on this simple point.

The impugned notice dated 30.4.2007 (Annexure

P-3 of the writ petition) is accordingly quashed.

There will be no order as to costs.”

6.Mr. Mohan Parasaran, learned Additional Solicitor General of India

appearing for the appellant, would submit:

(i)The High Court committed a serious error in passing the impugned

judgment insofar as it failed to take into consideration that the notice

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had been issued in terms of sub-clause (ii) of Section 65(19) of the

Act and not sub-clause (i) thereof.

(ii)As United Nations-Central Product Classification (UN-CPC) Heading

96920 contains ‘gambling and betting’ services and covers

‘organization of lotteries’ and, thus, the activities of organizing

lotteries being internationally recognized, should be considered as a

service and, thus, the High Court committed a serious illegality in

relying upon the decision of this Court in Sunrise Associates vs. Govt.

of NCT of Delhi & Ors. reported in (2006) 5 SCC 603.

(iii)Explanation appended to Section 65 (19) being clarificatory and/or

declaratory in nature must be held to have a retrospective operation.

(iv)Entries 34 and 62 of List II of the Seventh Schedule of the

Constitution of India does not create any kind of fetter on the powers

of the Parliament to impose service tax on the assessee who provide

the service of promotion and marketing of lotteries. The

aforementioned two entries empower the State Legislature to impose

tax on betting and gambling and other luxuries. In the instant case,

however, what is sought to be taxed under sub-clause (ii) of clause

(19) of Section 65 of the Finance Act, 1994 is the services rendered by

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an assessee to its client in promoting and marketing of lotteries

organized by the State Government and not anything else.

(v) A transaction may involve two taxable events in its different aspects,

as has been held by the Constitution Bench of this Court in Federation

and Association of Hotels and Restaurants Association of India v.

Union of India reported in [(1989) 3 SCC 634], in terms whereof

whereas, on the one hand, service tax can be levied on the services

provided by the respondent to the Government of Sikkim in

promoting and marketing of lotteries; the State Government is also

empowered to impose tax on the organization and conduct of lotteries

in the State in exercise of its powers under Entries 34 and 62 of the

List II of the Seventh Schedule read with Articles 245 and 246 of the

Constitution of India, despite the fact that the same transaction creates

two taxable events, namely, the organization of the lotteries itself and

secondly the services rendered in the promotion and marketing of

lotteries.

(vi)In view of a recent decision of this Court in Gujarat Ambuja Cements

Ltd. v. Union of India reported in (2005) 4 SCC 241, tax was not

sought to be imposed on ‘betting’ or ‘gambling’ or ‘entertainments’ or

‘amusements’ as provided in the Entries 34 and 62 of List II of the

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Seventh Schedule to the Constitution of India, but on the services

rendered in respect thereof.

7.Mr. Harish N. Salve, learned Senior Counsel appearing on behalf of

the respondent, on the other hand, urged :

(i)Even UN-CPC or the classification provided for therein has no

bearing to an Act enacted by the Parliament of India. Whereas UN-

CPC regards lottery tickets as goods; the Indian laws do not. In any

event, lottery has been brought within the concept of ‘service’ treating

it to be goods, which is against the purport of the said term; having

been held by this Court in Sunrise Associates (Supra) as merely an

‘actionable claim’.

(ii)As conduct of lotteries has been held by this Court to be res-extra

commercium, no service can be said to be rendered by the State to the

society at large and, thus, the provisions of the Act will have no

application in the instant case.

(iii)In view of the decision of this Court in Sunrise Associates (supra),

lottery tickets being actionable claims and not goods, the relevant

clause attracted in this case would be sub-clause (i) of clause (19) of

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Section 65 and not sub-clause (ii) as gambling cannot be equated with

‘service’.

(iv)Respondent has merely been purchasing lottery tickets in bulk and re-

selling the same to the principal stockists; earning a margin of profit

from such transactions and, in that view of the matter, rendition of any

kind of service by the State to it does not arise.

(v)In any event, explanation appended to Section 65(19) having only a

prospective operation, service tax, if any, can be levied only with

effect from 16.5.2008 and not for a period prior thereto.

8.Before adverting to the rival contentions raised before us by the

learned counsel for the parties, we may notice the relevant provisions of the

Finance Act, 1994 (The Act).

Chapter V of the Act provides for levy of service tax. It is levied on

“taxable services” as defined in Section 65(105) thereof. Section 66 is the

charging section and Section 68 provides for payment of service tax.

Sub-clauses (i) and (ii) of Section 65(19) which are relevant for our

purpose, read as under:-

“Section 65(19) “business auxiliary service”

means any service in relation to,-

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(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”

The term “business auxiliary service” was inserted in the Act by

Finance Act, 2003 which came into force on 01.07.2003. The term

“business auxiliary service” includes services as a commission agent, but

does not include any information technology service or any activity that

amounts to “manufacture” within the meaning of clause (f) of Section 2 of

the Central Excise Act, 1944.

Clause (zzb) of Section 65(105) of the Act defines “taxable service”

to mean any service provided to a client, by a commercial concern in

relation to business auxiliary service.

“Goods” has been defined in Section 65(50), in the following terms:

“Section 65(50) “goods” has the meaning assigned

to it in clause (7) of section 2 of the Sale of Goods

Act, 1930.”

Section 2(7) of the Sale of Goods Act, 1930 defines “goods” to mean :

“Goods” means every kind of movable property

other than actionable claims and money; and

includes stock and shares, growing crops, grass,

and things attached to or forming part of the land

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which are agreed to be severed before sale or

under the contract of sale.”

9.After the Special Leave Petition was filed in this Court, the Parliament

by Finance Act, 2008 inserted an explanation in sub-clause (ii) of Section

65(19), which came into force on or about 16.5.2008 and reads as under :

“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;”

Section 65A which was inserted by Finance Act, 2003 provides for

classification of taxable services. Section 66 provides for the charge of

service tax.

10.The core question which arises for our consideration is as to whether

the explanation appended to sub-clause (ii) of Section 65(19) is clarificatory

or declaratory in nature so as to be construed having retrospective effect and

retroactive operation.

Sub-clause (i) of clause (19) of Section 65 of the Act refers to ‘goods’.

What would come within the purview of the definition of ‘goods’ must be

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construed having regard to the provisions of the Sale of Goods Act, 1930 in

view of its definition contained in Section 65(50) of the Act.

11.This takes us to another question as regards the source of power of the

State to conduct a business. Conduct of business by a State is permissible,

inter alia, in terms of Article 298 of the Constitution of India. If it is not

otherwise prohibited, the State in exercise of its executive power contained

in Article 162 of the Constitution of India may also have the power to

conduct a trade or business.

12.For invoking the provisions of Chapter V of the 1994 Act, the basic

question which is required to be posed and answered is as to whether the

lottery tickets are ‘goods’ within the meaning of Sale of Goods Act. It is

evidently not.

A Constitution Bench of this Court in Sunrise Associates (supra) held

to be so. H. Anraj v. Government of Tamil Nadu reported in [(1986) 1 SCC

414] was overruled opining that sale of lottery tickets does not involve sale

of goods and that at the highest stage, transfer of it would amount to transfer

of an actionable claim.

In Yasha Oversees v. Commr. of Sales Tax & Ors. [(2008) 8 SCC

681], Sunrise Associates (supra) was distinguished, stating :

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“37. The decision in Sunrise makes two very

significant points and to us it appears that the

decision mainly turns on those two points. The

first is with regard to the two different meanings of

'property', as highlighted in paragraph 35 of the

judgment and the second is with regard to the

distinction between interests in goods and a

contract as highlighted in paragraph 43 of the

judgment. In paragraph 35 of the decision the court

explained that the word 'property' occurring both in

the definitions of 'goods' and 'sale' carries different

meanings. In the definition of 'goods' the word

'property' is used to mean the subject matter of

ownership, that is to say, the thing itself. In the

definition of 'sale' the same word is used to mean

the nature of interests in goods, that is, title or

ownership.

38. In paragraphs 42 and 43 of the decision, the

court examined the nature of a ticket and by giving

illustrations of a railway ticket, a ticket to see a

cinema or a pawnbroker's ticket pointed out that

the tickets were normally evidence of and in some

cases the contract between the buyer of the ticket

and its seller. Being a contract or evidence of a

contract, naturally a ticket can not be property

either as a thing (of value) in itself or title or

ownership to anything. It, therefore, followed that

the sale of lottery ticket did not involve transfer of

'property' either in the sense of the thing itself

(goods) or in the sense of title or ownership (sale).

39. On purchasing a lottery ticket one merely gets

a claim to a conditional interest in the prize money

that is not in the purchaser's possession and the

right would, therefore, squarely fall within the

definition of actionable claim. The Constitution

Bench decision in Sunrise further held that Anraj

wrongly split up the right accruing to the purchaser

of a lottery ticket. The right was one and

indivisible. But even assuming the right to

participate in the draw Page 2519 to be a separate

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right there would still be no sale of goods within

the meaning of sales tax laws because the draw

itself could not be any movable property and the

participation in the draw was only with the object

to win the prize. The transfer of the right would

thus be of a conditional beneficial interest in

movable property that is not in possession, in other

words, once again an actionable claim.”

13.In the aforementioned backdrop, it is necessary to consider the

submissions of the learned Additional Solicitor General that clauses (1), (2),

(8), (10), (16), (18), (25), (29), (36), (39) and (40) of the agreement entered

into by and between the State and respondent shows that it is not a case

involving simpliciter sale of goods but in effect and substance respondent

was rendering service in relation to promotion or marketing of service

provided by the State.

14.This gives rise to a question, i.e., Does the State in organizing lottery

render any service and, if so, to whom.

The learned Additional Solicitor General submits that service is being

rendered to the general public as revenue is generated therefrom. We fail to

persuade ourselves to agree with the aforementioned submission. The law,

as it stands today (although it is possible that this Court in future may take a

different view), recognizes lottery to be gambling. Gambling is res extra

commercium as has been held by this Court in The State of Bombay v.

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R.M.D. Chamarbaugwala [1957 SCR 874] and B.R. Enterprises v. State of

U.P. & Ors. [(1999) 9 SCC 700].

15.Contention of Mr. Salve is that where the State involves itself in an

illegal activity, it cannot render a service as dealing in lottery is illegal being

res extra commercium, no services can be rendered. We, as at present

advised, do not intend to go into the said issue which is a complex one, in

view of the fact that in this case we are primarily required to consider the

effect of the explanation appended to clause (19) of Section 65 of the Act. It

is also not otherwise necessary to be determined.

We must, however, proceed to determine the said question keeping in

view the aforementioned decisions of this Court that holding of lottery being

gambling comes within the purview of the doctrine of res extra

commercium.

16.Organizing lottery by the State is tolerated being an economic activity

on its part so as to enable it to raise revenue. Raising of revenue by the

State, in our opinion, by itself cannot amount to rendition of any service. It

may be true that for the purpose of invoking the provisions of taxing statute,

the morality aspect may not be of much consequence but such a question

assumes significance for the purpose of ascertaining as to whether the same

amounts to rendition of service within the meaning of the aforementioned

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sub-clause. The word ‘service’ has not been defined in the Act. Its

dictionary or etymological meaning may or may not be appropriate. We

would, however, notice its dictionary meaning :

“Work done or duty performed for another or

others; a serving; as, professional services, repair

service, a life devoted to public service.

An activity carried on to provide people with the

use of something, as electric power, water,

transportation, mail delivery, telephones, etc.

Anything useful, as maintenance, supplies,

installation, repairs, etc., provided by a dealer or

manufacturer for people who have bought things

from him.”

17.While the State raises its revenue by controlling dealing in liquor

and/or by transferring its privilege to manufacture, distribute, sale etc., as

envisaged under Entry 8 of List II of the Seventh Schedule of the

Constitution of India, thereby it does not render any service to the society.

Service tax purports to impose tax on services on two grounds (1) service

provided to a consumer and (2) service provided to a service provider.

18.Service provided in respect of the matters envisaged under clause (19)

of Section 65 of the Act must be construed strictly. Before a tax is found to

be leviable, it must come within the domain of legitimate business and/or

trade. The doctrine of res extra Commercium was invoked in the United

States of America where keeping in view the nature of right conferred on its

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citizens and the concept of imposition of reasonable restrictions thereon

being absent, it was held that gambling should be frowned upon being

opposed to constitutional jurisprudence. While borrowing the said principle

in the Indian context, however, it must be borne in mind that Constitution of

India envisages reasonable restrictions in respect of almost all the

fundamental rights of the citizens. No citizen has an absolute fundamental

right. Whereas the same principle may apply in Australia but it may not

apply to the European Countries where gambling and even sale of narcotic

drugs subject to licensing provisions, if any, is permissible.

The concept of res extra commercium may in future be required to be

considered afresh having regard to its origin to Roman Law as also the

concept thereof. Conceptually business may be carried out in respect of a

property which is capable of being owned as contrasted to those which

cannot be. Having regard to the changing concept of the right of property,

which includes all types of properties capable of being owned including

intellectual property, it is possible to hold that the restrictions which can be

imposed in carrying on business in relation thereto must only be reasonable

one within the meaning of Clause (6) of Article 19 of the Constitution of

India. Right of property although no longer a fundamental right, but,

indisputably is a human right. [See Vimlaben Ajitbhai Patel v. Vatslaben

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Ashokbhai Patel and Others (2008) 4 SCC 649 and Karnataka State

Financial Corporation v. N. Narasimahaiah (2008) 5 SCC 176].

We may notice that the doctrine of ‘franchise’ or ‘exclusive privilege’

has been mentioned in C.S.S Motor Service Tenkari and Ors v The State of

Madras represented by the Secretary to the Government of Madras, Home

Department and Anr. [AIR 1953 Mad 279]. Therein the connotation of the

word “franchise” was noticed from California v. Central Pacific R. Co.

[(1888) 32 Law Ed 150] in the following terms:

“What is a franchise? Under the English Law,

Blackstone defines it as ‘a royal privilege, or

branch of the King’s prerogative subsisting in the

hands of a subject.’ A franchise is a right, privilege

or power, of public concern, which ought not to be

exercised by private individuals at their mere will

and pleasure but should be reserved for public

control and administration either by the

Government directly or by public agents acting

under such conditions and regulations as the

Government may impose as the public interest and

for the public security.”

The doctrine of franchise, thus, would require a thorough relook in

view of the change in its concept, as we are governed by the Constitution of

India. But this is not the case where we have an occasion to do so.

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19.Lottery has been brought within the purview of National Industrial

Classification to which we may now advert to. A foreword to the Industrial

Classification, relevant for our purpose, reads as under :

“A standardized system of classification of

economic activities is essential for meaningful

collection of data relating to such activities. This

not only ensures comparability of the data

collected within the country from various sources

by different agencies but also with the rest of the

world. In India, the National Industrial

Classification (NIC) is the standard classification

followed for classifying economic activities. The

NIC is prepared to suit the Indian conditions and

follows the principles and procedures laid down in

the United Nations’ International Standard

Industrial Classification (ISIC). It is a constant

endeavour of the Ministry of Statistics and

Programme Implementation, charged as it is with

the responsibility for setting standards for

collection, compilation and dissemination of

statistical data in India, to establish classification

systems as well as updating existing ones. This is

necessary to keep pace with the changes in the

organization and structure of industries besides

accounting for emerging economic activities. The

NIC-2004 is the revised version of the earlier

classification standard issued in 1998 called the

NIC-1998, which was based on ISIC-1990 Rev.3.”

20.Lotteries come within the purview of Group 924 class 924(9) and sub-

class 924(9)(0) which is in the following terms :

“Other recreational activities includes fairs and

shows of a recreational nature; management and

operation of lotteries (bulk and retail sale of lottery

tickets are included under wholesale and retail sale

respectively); gambling and betting activities;

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activities of casinos; booking agency activities in

connection with theatrical productions or other

entertainment attractions, recreational fishing and

other recreational activities n.e.c.”

It also comes within the purview of Section 4 classifying other

community, social and personal service activities.

21.If it is brought within the purview of the terms ‘entertainment’ or

‘amusement’ as provided for in Entries 34 and 62 of List II of the Seventh

Schedule of the Constitution of India, it may come within the purview of

service. It is, however, contended that what is being taxed is the services

rendered in respect thereof. Services can be rendered in respect of activities

of the State if they are permissible in terms of sub-clause (ii) of Clause (19)

of Section 65 of the Act and the State itself has been rendering services and

not otherwise. While we say so, we are not unmindful of the fact that in

terms of the agreement, the respondent not only distributes the lottery tickets

printed by the State but also distributes prizes worth less than Rs.5,000/-. It

issues an advertisement. It has a right to be consulted in respect of design of

a lottery ticket. It may also have a say in the matter of arranging for the

lottery. But we are not sure as to how service element of the entire

transaction is to be ascertained.

22.Keeping in view the aforementioned backdrop, it has to be determined

as to whether the ‘explanation’ is declaratory or clarificatory in nature.

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23.Clause 19 was inserted in Section 65 of the Act in the year 2003. The

notice dated 30.4.2007 shows that according to the authorities clause (i) was

attracted and not clause (ii) of the said provision. The Board issued a

clarification on 17.1.2007 which is in the following terms:

“Decision : Commissioner (ST) explained the issue

of service tax liability on promotion, marketing,

distribution of paper lottery. Under the contractual

arrangement, the State Government print lottery

tickets and deliver them to distributor. The

distributor is free to publicize for promotion,

marketing of the lottery tickets received and

distribute the same through sub-distributors. The

State Governments do not receive back the unsold

lottery tickets and the prizes, if any, on such

unsold tickets could be collected by the distributor.

The draws are held by the State Governments.

Board noted that the Lotteries (Regulation)

Act, 1998, governs the activity of organizing,

conducting or promoting a lottery. As per sub-

section (c) of Section 4, ‘the State Government

shall sell the tickets either itself or through

distributors or selling agent’. This provision thus

forbids resale of tickets that have been sold by the

State Government. Accordingly, the nature of

transaction between the State Government and

distributor is not in the nature of sales. The

activities of the distributor are that of promotion or

marketing of lottery tickets for their clients i.e. the

State Governments. Hence, Board decided that the

services of distributor fall under the ‘business

auxiliary service’ and, therefore, be chargeable to

service tax. The value of taxable service shall be

taken into account as the total face value of the

tickets sold minus (a) the total cost of the tickets

paid by the distributor to the State Government and

(b) the prize money paid by the distributor. In

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other words, the value is the mark up between the

buying and selling of lottery tickets.”

24.A bare perusal of the said circular letter would clearly show that

lottery tickets were considered to be goods. It is with that mindset, the

circular was issued. However, it must have been realised that resale of

lottery tickets by the distributor or by others is not permissible. Whether

sub-clause (ii) of clause (19) of Section 65 had been applied in case of any

other distributor or agent of such lottery tickets is not known. If the

assertion of Mr. Salve that nobody had demanded tax under the second

clause is correct, we do not know why the principle of ‘small repairs’ by

inserting an explanation was taken recourse to. The explanation, in our

opinion, cannot be said to be a simple clarification as it introduces a new

concept stating that organizing of the lottery is a form of entertainment.

Introduction of such new concept itself would have a constitutional

implication. In the year 2003, while amending the provisions of 1994 Act,

the Constitution was also amended and Article 268A and Entry 92C in List I

were inserted. The courts are in future required to determine whether a

service tax within the meaning of Entry 92C would cover sale of lottery or it

would come within the purview of residuary entry containing Entry 97 List

I. If it is held to be a taxing provision within the purview of Entry 97, the

same will have a bearing on the States. The Explanation so read appears to

be a charging provision. It states about taxing need. It can be termed to be a

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sui generis tax. If it is a different kind of tax, the same may be held to be

running contrary to the ordinary concept of service tax. It may, thus, be held

to be a stand alone clause. A constitutional question may have to be raised

and answered as to whether the taxing power can be segregated. If by

reason of the said explanation, the taxing net has been widened, it cannot be

held to be retrospective in operation.

No doubt, the explanation begins with the words ‘for removal of

doubts’. Does it mean that it is conclusive in nature? In law, it is not. It is

not a case where by reason of a judgment of a court, the law was found to be

vague or ambiguous. There is also nothing to show that it was found to be

vague or ambiguous by the executive. In fact, the Board circular shows that

invocation of clause (ii) had never been in contemplation of the taxing

authorities.

25.In fact, rendition of service for the purpose of imposition of service

tax is imperative in character. It must be a part of economic activity.

Whereas the economic activity has three characteristics – tax on production;

tax on sales and tax on service. The concept of the Value Added Tax comes

from the generic expression so as to include not only taxes on sales but also

taxes on service as service has become segment of the economic activity.

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26.We are informed at the Bar that, in fact, States of Tamil Nadu and

Karnataka have barred lottery.

We have been taken through the budget speech of the Hon’ble

Minister of Finance for 2008-2009, the relevant portion whereof is as under :

“5.4Business Auxiliary Service :

5.4.1Services provided in relation to promotion

or marketing of service provided by the client is

leviable to service tax under business auxiliary

service. Organization and selling of lotteries are

globally treated as supply of service. Lotteries

(Regulation) Act, 1998 enables State Governments

to organize, conduct or promote lotteries. Lottery

tickets are printed by the State Governments and

are sold through agents or distributors. Tickets are

delivered by the State Government to the

distributors at a discounted price as compared to

the face value of the tickets. Services provided by

the distributors or agents in relation to promotion

or marketing of lottery tickets are leviable to

service tax under the existing business auxiliary

service.

5.4.2Lotteries fall under the category of games of

chance. Games of chance are known under

various names like lottery, lotto, bingo etc. and are

also conducted through internet or other electronic

networks.

5.4.3To clarify as removal of doubts, an

explanation is added under business auxiliary

service stating that services provided in relation to

promotion or marketing of games of chance

organized, conducted or promoted by the client are

covered under the existing definition of business

auxiliary service. Amendment is only for removal

of doubts and field formations are, therefore,

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requested to ensure that service tax is collected on

such services.”

27.The speech of the Hon’ble the Finance Minister would have been

relevant for the purpose of opining as to whether the court independently

would have arrived at a conclusion that organizing lottery would amount to

rendition of service but not otherwise. As it is not possible for us to arrive at

the said conclusion, we have no other option but to hold that by inserting the

explanation appended to clause (19) of Section 65 of the Act, a new concept

of imposition of tax has been brought in. The Parliament may be entitled to

do so. It would be entitled to raise a legal fiction, but when a new type of

tax is introduced or a new concept of tax is introduced so as to widen the net,

it, in our opinion, should not be construed to have a retrospective operation

on the premise that it is clarificatory or declaratory in nature.

28.There cannot be any doubt whatsoever that speech of the Hon’ble

Finance Minister in the House of the Parliament may be taken to be a valid

tool for interpretation of a statute. It was so held in K.P. Varghese v.

Commissioner of Income-tax, Ernakulam & Anr. [(1981) 4 SCC 173 at

184], in the following terms :

“Now it is true that the speeches made by the

Members of the Legislature on the floor of the

House when a Bill for enacting a statutory

provision is being debated are inadmissible for the

purpose of interpreting the statutory provision but

25

the speech made by the Mover of the Bill

explaining the reason for the introduction of the

Bill can certainly be referred to for the purpose of

ascertaining the mischief sought to be remedied by

the legislation and the object and purpose for

which the legislation is enacted. This is in accord

with the recent trend in juristic thought not only in

western countries but also in India that

interpretation of a statute being an exercise in the

ascertainment of meaning, everything which is

logically relevant should be admissible.”

{See also Commissioner of Wealth Tax, Punjab, J & K, Chandigarh, Patiala

v. Yuvraj Amrinder Singh and Ors. [(1985) 4 SCC 608]}

29.It is, however, also well settled that the statute must be interpreted

keeping in view the words used in it. We must notice that in Virtual Soft

Systems Ltd. v. Commissioner of Income Tax, Delhi-I [(2007) 9 SCC 665],

a Bench of this Court has held :

“24. Section 271 of the Act is a penal provision

and there are well-established principles for the

interpretation of such a penal provision. Such a

provision has to be construed strictly and narrowly

and not widely or with the object and intention of

the legislature.”

30.Mr. Parasaran has referred to Commissioner of Income Tax, Bombay

& Ors. v. Podar Cement Pvt. Ltd. & Ors. [(1997) 5 SCC 482] to contend that

clarificatory statute would be retrospective in nature. On legal principle,

there may not be any quarrel with the said proposition. Therein, however,

26

this court was considering a case where two interpretations of Section 22 of

the Income-tax Act were possible. It was opined that if one interpretation is

possible and the same is clear, the next thing to be considered would be what

would be the effect of the amendment. Referring to Benion’s Statutory

Interpretation and G.P. Singh’s Principles of Statutory Interpretation, it was

held :

“An amending Act may be purely clarificatory to

clear a meaning of a provision of the principal Act

which was already implicit. A clarificatory

amendment of this nature will have retrospective

effect and, therefore, if the principal Act was

existing law when the Constitution came into

force, the amending Act also will be part of the

existing law.”

It furthermore noticed the decision of the Constitution Bench in

Keshavlal Jethalal Shah v. Mohanlal Bhagwandas and Anr. [(1968) 3 SCR

623], wherein it was opined that an Explanatory Act is generally made to

supply an obvious omission or to clear up doubts as to the meaning of

previous Act. We are herein not concerned with such a situation.

In W.P.I.L. Ltd., Ghaziabad v. Commissioner of Central Excise,

Meerut, U.P. [(2005) 3 SCC 73], whereupon again Mr. Parasaran placed

strong reliance, this Court, while dealing with an exemption notification

which is a piece of subordinate legislation, held:

27

“Such a notification merely clarified the position

and makes explicit what was implicit.

Clarificatory notifications have been issued to end

the dispute between the parties.”

31.The question as to whether a Subordinate Legislation or a

Parliamentary Statute would be held to be clarificatory or declaratory or not

would indisputably depend upon the nature thereof as also the object it seeks

to achieve. What we intend to say is that if two views are not possible,

resort to clarification and/or declaration may not be permissible. This aspect

of the matter has been considered by this Court in Virtual Soft Systems Ltd.

v. Commissioner of Income Tax, Delhi-I [(2007) 9 SCC 665], holding :

“It may be noted that the amendment made to

Section 271 by the Finance Act, 2002 only stated

that the amended provision would come into force

with effect from 1.4.2003. The statute nowhere

stated that the said amendment was either

clarificatory or declaratory. On the contrary, the

statue stated that the said amendment would come

into effect on 1.4.2003 and therefore, would apply

to only to future periods and not to any period

prior to 1.4.2003 or to any assessment year prior to

assessment year 2004-2005. It is the well settled

legal position that an amendment can be

considered to be declaratory and clarificatory only

if the statue itself expressly and unequivocally

states that it is a declaratory and clarificatory

provision. If there is no such clear statement in the

statute itself, the amendment will not be

considered to be merely declaratory or

clarificatory.

Even if the statute does contain a statement to the

effect that the amendment is declaratory or

28

clarificatory, that is not the end of the matter. The

Court will not regard itself as being bound by the

said statement made in the statute but will proceed

to analyse the nature of the amendment and then

conclude whether it is in reality a clarificatory or

declaratory provision or whether it is an

amendment which is intended to change the law

and which applies to future periods.”

32.We are also not unmindful of the fact that the said decision has been

overruled in Commissioner of Income Tax-I, Ahmedabad v. Gold Coin

Health Foods Pvt. Ltd. [(2008) 11 SCALE 497]. A bare perusal of the said

decision would, however, show that a Three Judge Bench of this Court

noticed that the Act intended to make the position explicit which otherwise

was implicit. The Bench went back to the provisions of the Original Act to

hold that the clarification issued by the Parliament was in tune with the

actual interpretation of the original provision. In that view of the matter, it

was held :

“As noted by this Court in Commissioner of

Income Tax, Bombay & Ors. v. Podar Cement Pvt.

Ltd. & Ors. [(1997) 5 SCC 482 = 2002-TIOL-445-

SC-IT] the circumstances under which the

amendment was brought in existence and the

consequences of the amendment will have to be

taken care of while deciding the issue as to

whether the amendment was clarificatory or

substantive in nature and, whether it will have

retrospective effect or it was not so.

29

33.We may also notice that in that judgment itself a distinction has been

made with a clarificatory provision and a substantive provision to opine that

Explanation 4 was clarificatory in nature and not a substantive provision.

To the same effect is the decision of this Court in SEDCO Forex

International Drill. Inc. & Ors. v. Commissioner of Income, Tax, Dehradun

& Anr. [(2005) 12 SCC 717]. The explanation which was in question was

added by Finance Act, 1983 with effect from 1979 was to the following

effect:

“Explanation.—For the removal of doubts, it is

hereby declared that income of the nature referred

to in this clause payable for service rendered in

India shall be regarded as income earned in India.”

Similar expression is to be found in the instant case. However, in

SEDCO the question which arose for consideration was interpretation of the

words ‘off period’. While considering the question as to whether salary for

the off period was taxable as arising out of services rendered in India, this

Court noticed that there was a reasonable nexus between salary earned for

the off period and the services rendered in India.

34.The Gujarat High Court in CIT v. S.G. Pgnatal [(1980) 124 ITR 392

(Guj)] held that words ‘earned in India’ occurring in clause (ii) must be

interpreted as “arising or accruing in India” and not “from service rendered

30

in India”. Opining that the High Court proceeded on an incorrect

hypothesis, it was held :

“The High Court did not refer to the 1999

Explanation in upholding the inclusion of salary

for the field break periods in the assessable income

of the employees of the appellant. However the

respondents have urged the point before us.

In our view the 1999 Explanation could not apply

to assessment years for the simple reason that it

had not come into effect then. Prior to introducing

the 1999 Explanation, the decision in CIT v. S.G.

Pgnatale (supra) was followed in 1989 by a

Division Bench of the Gauhati High Court in

Commissioner of Income Tax v. Goslino Mario

reported in [(2002) 10 SCC 165]. It found that the

1983 Explanation had been given effect from

1.4.1979 whereas the year in question in that case

was 1976-77 and said :

“. . . it is settled law that assessment has to

be made with reference to the law which is

in existence at the relevant time. The mere

fact that the assessments in question has(sic)

somehow remained pending on April 1,

1979, cannot be cogent reason to make the

Explanation applicable to the cases of the

present assessees. This fortuitous

circumstance cannot take away the vested

rights of the assessees at hand”.”

35.Reverting to the decision of a Kerala High Court in CIT v. S.R. Patton

[(1992) 193 ITR 49 (Ker)] wherein Gujarat High Court’s judgment was

followed, this Court noticed that explanation was not held to be a

31

declaratory one but thereby the scope of Section 9(1)(ii) of the Act was

widened. The law in the aforementioned premise was laid down as under :

“17. As was affirmed by this Court in Goslino

Mario (supra), a cardinal principle of the tax law

is that the law to be applied is that which is in

force in the relevant assessment year unless

otherwise provided expressly or by necessary

implication. [See also: Reliance Jute and

Industries. v. CIT [(1980) 1 SCC 139]. An

Explanation to a statutory provision may fulfil the

purpose of clearing up an ambiguity in the main

provision or an Explanation can add to and widen

the scope of the main section (See: Sonia Bhatia v.

State of U.P. [(1981) 2 SCC 585 at 598]. If it is in

its nature clarificatory then the Explanation must

be read into the main provision with effect from

the time that the main provision came into force

(See: Shyam Sunder v. Ram Kumar [(2001) 8 SCC

24 (para 44)]; Brij Mohan Laxman Das v.

CIT[(1997) 1 SCC 352 at 354], CIT v. Podar

Cement [(1997) 5 SCC 482 at 506]. But if it

changes the law it is not presumed to be

retrospective irrespective of the fact that the phrase

used are 'it is declared' or 'for the removal of

doubts'.

18. There was and is no ambiguity in the main

provision of Section 9(1)(ii). It includes salaries in

the total income of an assessee if the assessee has

earned it in India. The word "earned" had been

judicially defined in S.G. Pgnatale (supra) by the

High Court of Gujarat, in our view, correctly, to

mean as income "arising or accruing in India". The

amendment to the section by way of an

Explanation in 1983 effected a change in the scope

of that judicial definition so as to include with

effect from 1979, "income payable for service

rendered in India".

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19. When the Explanation seeks to give an

artificial meaning 'earned in India' and bring about

a change effectively in the existing law and in

addition is stated to come into force with effect

from a future date, there is no principle of

interpretation which would justify reading the

Explanation as operating retrospectively.”

(Emphasis supplied)

36.It is, therefore, evident that by reason of an explanation, a substantive

law may also be introduced. If a substantive law is introduced, it will have

no retrospective effect.

The notice issued to the assessee by the appellant has, thus, rightly

been held to be liable to be set aside. Subject to the constitutionality of the

Act, in view of the explanation appended to this, we are of the opinion that

the service tax, if any, would be payable only with effect from May, 2008

and not with retrospective effect.

37.In a case of this nature, the Court must be satisfied that the Parliament

did not intend to introduce a substantive change in the law. As stated

hereinbefore, for the aforementioned purpose, the expressions like ‘for the

removal of doubts’ are not conclusive. The said expressions appear to have

been used under assumption that organizing games of chance would be

rendition of service. We are herein not concerned as to whether it was

constitutionally permissible for the Parliament to do so as we are not called

33

upon to determine the said question but for our purpose, it would be suffice

to hold that the explanation is not clarificatory or declaratory in nature.

38.For the views we have taken, we have no other option but to hold that

the High Court judgment albeit for different reasons warrants no

interference. This appeal is dismissed with costs. Counsel fee assessed at

Rs.1,00,000/-.

……………………………….J.

[S.B. Sinha]

..…………………………..…J.

[Cyriac Joseph]

New Delhi;

May 5, 2009

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