EY Tax Alert. Executive summary

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1 20 April 2017 EY Tax Alert HC quashes levy of Service tax on services in relation to promotion or marketing of lottery in absence of machinery provisions Executive summary Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. This Tax Alert provides an update on the recent decision 1 of the Sikkim High Court (HC) dealing with the validity of the levy of service tax on promotion, marketing, organizing sales and distribution of lottery tickets post amendments made to Finance Act in Key observations of HC are as follows: - Union Parliament is conferred with the power and competence under Article 268A read with Entry 97, List 1 (Union list) to impose and levy service tax on other related activities. Service tax levy is not on lottery, as submitted by revenue, but on promotion, marketing, organising, selling of lottery or facilitating in organizing lottery. The service provided or to be provided should satisfy the definition of taxable services and there should be a receipt of consideration for the taxable service provided. In the instant case, the Government does not pay any consideration in any form for the activities to be performed by the petitioner. There is no computation mechanism to ascertain and compute tax on aforesaid services rendered by a person in relation lottery organized by State. HC concluded by holding that the Union Government is competent to impose and levy service tax on the service rendered. However, the amendments carried out by the Finance Act, 2016 are not capable of being implemented for imposition and levy of service tax. When consideration is unascertainable for the services rendered by a distributor or selling agent, the service tax is not imposable and liable to be set aside TIOL-589-HC-SIKKIM-ST

2 Background and facts The petitioner is engaged in the business of buying and selling of lottery tickets organized by the Government of Sikkim (GoS). An agreement was entered into with the GoS for purchase of lottery tickets in bulk and re-selling them to the public at large, through authorised agents, stockist, resellers etc. Department issued an intimation calling upon the petitioner to make payment of Service tax since he was engaged in the activities of marketing, promotion, organizing, selling and distribution of lottery tickets. Aggrieved by the said intimation, petitioner filed a writ petition before Sikkim HC, contending that the Central Government is not empowered to levy taxes on lotteries. Only state government is empowered to levy taxes on lotteries under Entry No. 34 and Entry no. 62 of List II of Seventh Schedule of Constitution of India. Thus, the issue before the HC was whether petitioner is liable to pay service tax on the activities of promotion, marketing, organizing, selling and distribution of lottery tickets. Further, in the similar matter of the appellant, Division Bench of this HC earlier held that Central Government is not empowered to levy service tax on lotteries. Legislative history In 2010, Section 65(105) (zzzzn) was amended to define taxable services as any service provided or to be provided to any person, by any other person, for promotion, marketing organising or in any other manner assisting in organising 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. In 2012, the Finance Act, 1994, had been amended to provide imposition of service tax on all the activities except those specified in the negative list. The relevant amendments has been made in Section 66D where betting, gambling or lottery included in the Negative list category. Clause 44 of Section 65B has defined service which means any activity carried out by a person for another for consideration, and includes a declared service but shall not include actionable claim. Further exclusion has been provided in explanation that said actionable claim shall not include the activity carried out 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. Notification no. 36/2012-ST dated 20 June 2012 and Rule 6(7C) w.e.f. 01 July 2012 has been prescribed in the Finance Act, Vide said rule the distributor or selling agent, shall have an option to pay service tax of promotion, marketing, organizing or in any other manner assisting in organizing lottery, have the option to pay an amount at the rate specified in prescribed table. In 2015, an explanation was inserted in the category of betting, gambling or lottery listed in Negative list which prescribes that betting, gambling or lottery shall not include the activity specified in Explanation 2 of Clause (44) of Section 65B. Changes had been made in section 65B clause 44 whereby an Explanation 2 has been inserted and specifies that transactions in money or actionable claim shall not include any activity carried out for a consideration in relation to or for facilitation of a transaction in money or actionable claim. Clause 31A had been inserted in Section 65B which specifies lottery distributor or selling agent means as a person appointed or authorised by State for the purposes of promoting, marketing,

3 selling or facilitating in organising lottery. Further amendments were made in explanation in Section 67 of Finance Act, 1994, to define consideration which states that any amount retained by the lottery distributor or selling agent from gross sale amount of lottery ticket in addition to the fee or commission, the difference in the face value of lottery ticket and the price at which the distributor or selling agent gets such ticket. In 2016, the Finance Act, 1994 was further amended for specific exclusion inserted in Explanation 2 of Clause 44 of Section 65B which specifies that the transaction in money or actionable claim shall not include 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 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 organising lottery. Petitioner Contentions The petitioner contended that the agreement entered into with GoS is in compliance and consonance with the Lotteries Regulations Act, 1998, Rules and Model agreement. Further the receipt of consideration for providing taxable service is one of the essential ingredients to establish that any service is a taxable service. In the instant case, the Government does not pay any consideration in any form for activities to be performed by the petitioner for promotion of the sale by advertisement etc. In fact, the invoices were raised by the State Government, which clearly made procurement of lottery tickets by the appellant as outright complete sale. The amendments made by the Parliament for imposition of service tax (5) SCC TIOL-1096-HC-SIKKIM-ST is ultra vires as the lottery falls within the definition of betting and gambling and as such the same falls in the State list of Seventh Schedule. Therefore, said provisions are ultra vires to the constitution and consequential notification is null and void. Petitioner relied on judicial precedents listed in the following cases:- Sunrise Associates vs. Government of NCT Delhi 2 Future Gaming solutions Pvt. Ltd vs Union of India 3 Future Gaming Solutions India Pvt. Ltd. vs Union of India 4 Future Gaming and Hotels Services Pvt. Ltd. vs. Union of India 5 Respondent contentions Revenue argued that the Service tax is not imposed on lottery but on the services rendered by the distributors or selling agents for marketing, promoting and organizing lottery. Explanation 2 to definition of service as per Section 65B (44) contemplates imposition of service tax on such activities or services carried out by lottery distributor or selling agent. As per Rule 6(7C) of the Service Tax Rules, 1994, the distributor or his selling agents are liable to pay service tax for the taxable service of promoting, marketing, organizing or assisting any organizing lottery. Under the provisions of the Lotteries (Regulation) Act, 1998, the transaction between the State Government and the petitioner, is on the principal to agent basis. Any other contrary contract may be hit by the provisions of the Indian Contract Act, The central government is competent and empowered under Article 268A to levy service tax on sale of lottery for the services rendered in organizing lottery (36) STR 733 (Sikkim) VAT Infoline 449 (Sikkim)

4 under the residual entry no. 97 of Union list (List 1). Further, the validity of levy of service tax on services has been upheld by the Supreme Court 6. The conduct of lottery itself is known as service" in the international context and classifiable under the heading No of UN-CPC classification. High Court Ruling Article 268A of the Constitution of India inserted by the Constitution (88 th Amendment) Act, 2003 provides for levy of service tax by Union of India. However, the same was later on omitted by the Constitution (101 st Amendment) Act, Finance Act, 2012 provides for imposition of Service tax on all the activities except those specified in the negative list under Section 66D. The negative list comprise of betting, gambling or lottery 7. Lottery being in the negative list was exempted from payment of service tax. HC contemplates the constitutional validity of Section 65(105) (zzzzn) of the Finance Act, 1994, as inserted by Finance Act, 2010, where the related services in the sales of lottery tickets emanates under the ambit of service tax. A division bench of Sikkim High Court in the matter of Future Gaming Solutions (supra) 8 held that service tax is not payable on the transaction of sales and purchases which does not involve any component of service. However, in a transaction of sales and service, service tax is leviable on the service element, if the same is capable of segregation of the element of service. Government does not pay consideration in any form for the activities to be performed by the petitioner for promotion, advertisement etc. To the contrary, the petitioner is paying the minimum guaranteed sum towards the full sale consideration to the Government and thus the entire claim of the respondents that the petitioner is providing taxable service is not true. The Division Bench of HC in the matter of Future Gaming Solutions India Pvt. Ltd. Vs UOI 9 held that activity of the petitioner comprising of promotions, organising, reselling or any other manner assisting in arranging of lottery tickets of the state Lotteries does not establish the relationship of a principal or an agent but rather that of a buyer and a seller and, on principal to principal basis in view of the nature of the transaction consisting of bulk purchases of lottery tickets by the petitioner from the state government on full payment on a discounted price as a natural business transaction and, other related relates like there being no privity of contract between the state government and the stockist, agents, resellers under the petitioners HC held that it is evident that the service tax was intended to be levied by the legislature on promotion, marketing, organizing, selling of lottery or facilitating in organizing lottery of any kind, in any other manner. HC also admitted that vide Constitution (101 st amendment) Act, 2016, Article 268A has been omitted. Also Entry 92C which was inserted by Constitution (88 th amendment) Act of 2003 never notified. However, Article 268C confers power and competence on the Union-Parliament to levy service tax on the service providers for consideration. HC relied in the case of T.N. Kalyana Mandapam Assn. and Others (supra) and All India Federation of Tax Practitioners 10, where the Supreme Court held that service tax was made by the Parliament under the residuary powers itemised under Entry 97 of (3) SCC 634 Federation and Association of Hotels and Restaurants Association of India vs Union of India 7 Section 66D(i) (105) of Finance Act, TIOL-1096-HC-SIKKIM-ST TIOL-904-HC-SIKKIM-ST (5) SCC 632

5 Article 268A of list 1 of Seventh Schedule of the Constitution of India. petitioner for promotion of the sale by advertisement etc. According to the HC, it is well settled principles as laid down in the cases (supra) that entries in the three lists are fields of legislations. 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. HC held that the relevant service tax leviable is not on lottery, as submitted by revenue, but on promotion, marketing, organizing, selling of lottery or facilitating in organizing lottery of any kind. HC further observed that the Union Parliament is conferred with the power and competence under Article 268A read with Entry 97, List 1(Union list) to impose and levy service tax on other related activities, as mentioned. The amendments brought in Finance Act, 2016 is not unconstitutional. HC further held that, in the absence of proper computation mechanism service tax is not enforceable. In the matter of National Mineral Development Corporation Ltd vs. State of M.P. and Another 11, the Supreme Court concluded that the computation provision is meant to supplement the charging provision. For computation provision the charging provision alone would not work. The computing provision cannot be treated as mere surplusage or of no significance. Again, in Future Gaming Solutions India Pvt. Ltd. Vs. Government of Sikkim 13 it is found that there is no mechanism to ascertain and compute the service rendered by a person for promoting, marketing, selling or facilitating in organizing lottery of any kind, in any manner, organised by such State in accordance with the provisions of the Lotteries (Regulations) Act, HC observed that there is no payment of any consideration for incidental activities like advertisement etc. and there is no denial of the fact that there is any methodology to distinguish the consideration paid for the said services. When consideration is unascertainable for the services rendered by a distributor or selling agent, the service tax is not imposable and liable to be set aside. Finally, HC held that Union Government is competent to impose and levy service tax on the services rendered. However the amendments carried out by the Finance Act, 2016 are not capable to being implemented for imposition and levy of the service tax. Consequently, HC quashed the impugned letter issued by Superintendent, Circular dated 29 February 2016 and Notification No. 18/2016-ST dated 14 May The aspect of computation mechanism has been examined in the matter of Future gaming Solutions Pvt ltd. vs. Government of Sikkim 12 and held that to levy service tax, the services provided or to be provided satisfies the definition of taxable service and there should be receipt of consideration for the taxable service provided. In the instant case, the Government does not pay any consideration in any form for the activities to be performed by the (6) SCC TIOL-1096-HC-SIKKIM-ST TIOL-904-HC-SIKKIM-ST

6 Comments This is yet another ruling striking down levy of tax in absence of machinery provisions after the Delhi HC in one of the recent ruling had set aside the provision imposing service tax in the context of construction service. The HC decision may have significant impact on transactions undertaken post amendment in 2016, seeking to impose service tax on facilitation, promotion and marketing activity in relation to lottery. Since the HC has upheld the legislative competence to levy service tax, but for the computation mechanism, the reaction of the revenue and the verdict of the apex court, on the matter being further litigated, might be crucial. In the meanwhile, the binding nature of the Sikkim HC ruling might need to be analysed in the light of various jurisprudence.

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