Union of India &
Ors. Vs. M/S Martin Lottery Agencies Ltd.  INSC 906 (5 May 2009)
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
S.B. Sinha, J.
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.
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.
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
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 3 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.
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
"(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 4 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.
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.
17.8.2007 when further orders might be prayed for by either party."
5 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:
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."
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 6 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.
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 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 8 Seventh Schedule to the Constitution of India, but
on the services rendered in respect thereof.
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
(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 9 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.
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
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,- 10 (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
been defined in Section 65(50), in the following terms:
"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 :
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 11 which are agreed to be severed before sale or
under the contract of sale."
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 :
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.
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
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 12 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.
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
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 :
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
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
14 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
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.
gives rise to a question, i.e., Does the State in organizing lottery render any
service and, if so, to whom.
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. R.M.D. Chamarbaugwala [1957 SCR
874] and B.R. Enterprises v. State of U.P. & Ors. [(1999) 9 SCC 700].
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.
lottery by the State is tolerated being an economic activity on its part so as
to enable it to raise revenue. Rising 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 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."
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.
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 17 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 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
"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
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.
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 :
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 :
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
of casinos; booking agency activities in connection with theatrical productions
or other entertainment attractions, recreational fishing and other recreational
It also comes within
the purview of Section 4 classifying other community, social and personal
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.
in view the aforementioned backdrop, it has to be determined as to whether the
`explanation' is declaratory or clarificatory in nature.
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:
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 22 other words, the value is
the mark up between the buying and selling of lottery tickets."
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 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.
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.
are informed at the Bar that, in fact, States of Tamil Nadu and Karnataka have
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 :
Auxiliary Service :
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.
5.4.2 Lotteries 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.
5.4.3 To 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, requested to ensure
that service tax is collected on such services."
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.
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 26
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."
Commissioner of Wealth Tax, Punjab, J & K, Chandigarh, Patiala v. Yuvraj
Amrinder Singh and Ors. [(1985) 4 SCC 608]}
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."
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, 27 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
"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."
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
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,
28 "Such a
notification merely clarified the position and makes explicit what was
notifications have been issued to end the dispute between the parties."
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
Even if the statute
does contain a statement to the effect that the amendment is declaratory or 29
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
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.
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:
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
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 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"."
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 32 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".
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
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
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
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 34 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.
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/-.
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