Lottery distributors don't need to pay service tax to Centre: Supreme Court

The Supreme Court on Tuesday held that lottery distributors are not required to pay service tax to the Central government. [Union of India v. Future Gaming Solutions].A Bench of Justices BV Nagarathna and N Kotiswar Singh stated,"...since there is no agency in the relationship, the respondents (lottery distributors) were not liable to pay service tax. However, the respondents will continue to pay the gambling tax levied by the state under Entry 62, List II of the Constitution.".The Court was hearing a batch of pleas filed against a judgment of the Sikkim High Court ruling that the Centre’s attempt to impose service tax on lottery operations was impermissible.The respondent lottery distributors, operating in Sikkim, argued that they had agreements with the State government in a way that reflects a buyer-seller relationship and not an agency. It was also pointed out that the distributors are mandated to pay a guaranteed minimum amount of ₹8 crore to the State government irrespective of the number of tickets sold.Since they bear the entire cost of marketing and advertising, and were not offering a service, the distributors were not liable to pay service tax under the Finance Act, it was argued.Further, the 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, the respondents contended..The Central government had argued that it was entitled to impose service tax since the activity which the assessees are carrying on was a business auxiliary service within the definition of Section 65(19) of the Finance Act, 1994.However, the Bench held that the High Court had not erred while holding that lottery comes within the expression "betting and gambling" which is part of Entry 62 of the State List of the Constitution, and only the State can impose service tax on such entities..It held that the expression “betting, gambling or lottery” in the Explanation to Section 66D(i) of the Finance Act 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". The said provision exempts the activities of betting, gambling or lottery from service tax."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," held the top court..Summing up the Centre's attempts to amend the Finance Act, the Court said,"...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...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.".Advocate Chandrashekara Bharathi appeared for the revenue authorities.Senior Advocate S Ganesh and Advocate AR Madhav Rao represented the lottery distributors..[Read Judgment]