Sale of lottery tickets not to fall under service tax net: Supreme Court

New Delhi: The Supreme Court has ruled that the sale of lottery tickets would not be covered under the service tax as it is an actionable claim and not “goods”.

A bench of Justices B V Nagarathna and N Kotiswar Singh said 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 rendered by it.

"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 bench said.

In its August 27 judgment, the court allowed an appeal by K Arumugam and others, who were carrying on the business of buying and selling of lottery tickets.

The matter related to the constitutionality of the explanation added to Section 65 (19) (ii) of the Finance Act, 1994, which was omitted with effect from July 1, 2010. However, these cases pertain to the period prior to July 1, 2010.

It set aside the Kerala and Sikkim High Courts' judgments which held that the appellants were 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 court also directed if any representations are made seeking refund of the amounts paid, it should be considered expeditiously by the concerned departments of the respondents

In the case, the bench said, "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".

Referring to the Constitution bench judgment in case of 'Sunrise Associates Vs Govt of NCT of Delhi' (2006), the bench said the High Courts have also lost sight of the fact that the sale of lottery tickets by the State is a privileged activity by itself and not rendering of a service for which the assessees are rendering promotion or marketing service.

The court also said mere insertion of an explanation to sub-clause (ii) of Clause 19 of Section 65 of the Finance Act, 1994 cannot make an activity a taxable service when it is not covered under the main provision (which has to be read into the said subclause by virtue of the legislative device of express incorporation).

"This is because the 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," it said.

The court also said the High Courts have lost sight of the definition of ‘goods’ in clause (50) of Section 65 of the Act while interpreting the expression “lottery".