SUPREME COURT OF INDIA Union of India v. Martin Lottery Agencies Ltd. S.B. SINHA AND CYRIAC JOSEPH, JJ. CIVIL APPEAL NO. 3239 OF 2009 MAY 5, 2009
Section 65 of the Finance Act, 1994 - Business auxiliary service - Period prior to 16-5-2008 - Whether by inserting Explanation appended to clause (19) of section 65, a new concept of imposition of tax has been brought in and, therefore, it should not be construed to have a retrospective operation on premise that it is clarificatory or declaratory in nature - Held, yes - Assessee, an agent of a State Government, purchased lottery tickets from State Government - It made profit by selling said tickets to principal stockists - Through CBEC Circular letter dated 14-1-2007, it was clarified that such activities are of promotion or marketing of lottery tickets for clients (i.e., State Governments) - On basis of above opinion, impugned notice dated 30-4-2007 was issued to assessee to obtain registration and pay service tax under heading ‘Business auxiliary service’ - However, in Finance Act, 2008, an Explanation in sub-clause (ii) of section 65(19) was inserted, which came into force on 16-5-2008, declaring that ‘service in relation to promotion or marketing or service provided by client’ includes service in relation to marketing or promotion of lottery - Whether, in view of Explanation appended to sub-clause (ii) of section 65(19), service tax, if any, would be payable only with effect from May 2008 and not with retrospective effect and, therefore, notice issued to assessee was to be set aside - Held, yes [Paras 27 and 36] Interpretation of Statutes : Doctrine of res extra commercium and Doctrine of franchise Circulars & Notifications : Circular letter issued by Commissioner (ST), Ministry of Finance, CBEC dated 14-1-2007 FACTS The assessee was an agent of the State Government which floated ‘schemes’, whereby the total number of tickets therefor was prescribed. In terms of the said scheme, the assessee purchased all lottery tickets in bulk form on ‘all sold basis’. In turn, it sold the lottery tickets to its principal stockists on ‘outright’ and ‘all sold basis’ and made 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. However, the circular letter issued by the Commissioner (ST), Ministry of Finance, CBEC dated 14-1-2007 had concluded that such activities of the distributors are those of promotion or marketing of lottery tickets for their client (i.e., the State Government) 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 issued a notice on 30-4-2007 directing the assessee to obtain registration and pay service tax under the heading ‘Business auxiliary service’. The assessee filed writ petition challenging the legality and/or validity of the said notice. The High Court held that lottery tickets being action claims and not goods, the assessee could not be said to be rendering any service in relation to the promotion of its client’s goods or marketing of its clients goods or sale of its client’s goods and, accordingly, quashed the impugned notice. On appeal to the Supreme Court: HELD After the special leave petition was filed in the Apex Court, the Parliament by the Finance Act, 2008 inserted an Explanation in sub-clause (ii) of section 65(19), which came into force on or about 16-5-2008 declaring that “service in relation to promotion or marketing or service provided by client” includes service in relation to marketing or promotion of lottery. [Para 9] The core question which arose for consideration was 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. Section 65(19)(i) refers to ‘goods’. What would come within the purview of the definition of ‘goods’ must be construed having regard to the provisions of the Sale of Goods Act, 1930 in view of its definition contained in section 65(50). [Para 10] This takes 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. If it is not otherwise prohibited, the State in exercise of its executive power contained in article 162 of the Constitution may also have the power to conduct a trade or business. [Para 11] 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 1930 Act. It is evidently not so. [Para 12] 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, 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 clause (19) of section 65. [Para 16] 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, thereby it does not render any service to the society. Service tax purports to impose tax on services on two grounds (i) service provided to a consumer and (ii) service provided to a service provider. [Para 17] Service provided in respect of the matters envisaged under clause (19) of section 65 must be construed strictly. Before a tax is found to be leviable, it must come within the domain of legitimate business and/or trade. [Para 18] If lottery 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, it may come within the purview of service. It was, however, contended by the revenue that what was being taxed was 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 and the State itself has been rendering services and not otherwise. In terms of the agreement, the assessee not only distributed the lottery tickets printed by the State but also distributed prizes worth less than Rs. 5,000. It issued an advertisement. It had 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 it was not sure as to how service element of the entire transaction was to be ascertained. [Para 21] Keeping in view the aforementioned backdrop, it had to be determined as to whether the ‘Explanation’ appended to section 65(19)(ii) is declaratory or clarificatory in nature. [Para 22] Clause (19) was inserted in section 65 in the year 2003. The notice dated 30-4-2007 showed that, according to the authorities, sub-clause (i) was attracted and not sub-clause (ii) of the said provision. [Para 23] A bare perusal of the circular letter dated 17-1-2007 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. The Explanation 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 the 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 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 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’. It does not 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 sub-clause (ii) had never been in contemplation of the taxing authorities. [Para 24] 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 should not be construed to have a retrospective operation on the premise that it is clarificatory or declaratory in nature. [Para 27] 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. If two views are not possible, resort to clarification and/or declaration may not be permissible. [Para 31] 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 revenue had, 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, the service tax, if any, would be payable only with effect from May, 2008 and not with retrospective effect. [Para 36] In a case of instant nature, the Court must be satisfied that the Parliament did not intend to introduce a substantive change in the law. 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. It would be suffice to hold that the Explanation is not clarificatory or declaratory in nature. [Para 37] Hence, it was held that that the High Court judgment albeit for different reasons warranted no interference. The appeal was to be dismissed. [Para 38] CASE REVIEW Decision of the Sikkim High Court in Martin Lottery Agency Ltd. v. Union of India  14 STT 242 affirmed (para 38) Virtual Soft Systems Ltd. v. CIT  159 Taxman 155 (SC) [para 31] followed; Keshavlal Jethalal Shah v. Mohanlal Bhagwandas  3 SCR 623 (para 30) distinguished. CASES REFERRED TO Sunrise Associates v. Government of NCT of Delhi  4 STT 105 (SC) (para 6), Federation & Association of Hotels & Restaurants Association of India v. Union of India  3 SCC 634 (para 6), Gujarat Ambuja Cements Ltd. v. Union of India  1 STT 41 (SC) (para 6), H. Anraj v. Government of Tamil Nadu  1 SCC 414 (para 12), Yasha Oversees v. CST  8 SCC 681 (para 12), State of Bombay v. R.M.D. Chamarbaugwala 1957 SCR 874 (para 14), B.R. Enterprises v. State of UP  9 SCC 700 (para 14), Vimlaben Ajitbhai Patel v. Vatslaben Ashokbhai Patel  4 SCC 649 (para 18), Karnataka State Financial Corpn. v. N. Narasimahaiah  5 SCC 176 (para 18), C.S.S. Motor Service Tenkari v. State of Madras AIR 1953 Mad. 279 (para 18), K.P. Varghese v. ITO  131 ITR 597/7 Taxman 13 (para 28), CWT v. Yuvraj Amrinder Singh  156 ITR 525/23 Taxman 25 (SC) (para 28), Virtual Soft Systems Ltd. v. CIT  159 Taxman 155 (SC) (para 29), CIT v. Podar Cement (P.) Ltd.  92 Taxman 541 (SC) (para 30), Keshavlal Jethalal Shah v. Mohanlal Bhagwandas  3 SCR 623 (para 30), WPIL Ltd. v. CCE  3 SCL 73 (para 30), CIT v. Gold Coin Health Food (P.) Ltd.  172 Taxman 386 (SC) (para 32), SEDCO Forex International Drill Inc. v. CIT  149 Taxman 352 (SC) (para 33), CIT v. S.G. Pgnatale  124 ITR 391/4 Taxman 79 (Guj.) (para 34) and CIT v. S.R. Patton  193 ITR 49/65 Taxman 472 (Ker.) (para 35).