Service Tax on Lottery Sales: Supreme Court Strikes Down Kerala and Sikkim High Court Rulings

The Supreme Court of India, in the case of K. Arumugam vs. Union of India & Others, has ruled that service tax cannot be levied on the sale of lottery tickets under the Finance Act, 1994. The judgment sets aside the Kerala and Sikkim High Court rulings, reinforcing that lottery tickets are actionable claims and not “goods” under the Sale of Goods Act, 1930. The Court also held that business auxiliary services do not cover the sale of lottery tickets.

The ruling is a major relief for lottery distributors who were burdened with service tax demands by the Central Government. It ensures that States conducting lotteries cannot be treated as service providers under the Finance Act, 1994.

Background of the Case

The dispute arose when lottery distributors, including K. Arumugam and Tashi Delek Gaming Solutions Pvt. Ltd., were asked to pay service tax under the category of “business auxiliary services.” The appellants had challenged the legality of the demand, contending that lottery sales do not constitute a service but rather an outright sale of actionable claims.

The appellants had approached the High Courts of Kerala and Sikkim, but their petitions were dismissed. They then moved the Supreme Court, which has now ruled in their favor.

Legal Issues Considered

The Supreme Court examined two key legal questions:

Whether the sale of lottery tickets qualifies as a “business auxiliary service” under the Finance Act, 1994.
Whether the Explanation added to Section 65(19)(ii) of the Finance Act, 1994, by the Finance Act, 2008, was constitutionally valid.

Arguments by the Appellants

The appellants, represented by Senior Counsel S. Ganesh, argued:

Lottery tickets are not goods but “actionable claims” and cannot be taxed under the Finance Act.
They engaged in outright purchase and sale of lottery tickets, not in the provision of services.
The Central Government misinterpreted “business auxiliary service” to bring lottery sales under the service tax net.
The Sunrise Associates judgment (2006) had already settled that lotteries are actionable claims and not goods.

Arguments by the Respondents (Union of India)

The Central Government, represented by Senior Counsel Arijit Prasad, argued:

Lottery distributors provided marketing and promotion services to State governments.
The insertion of an Explanation to Section 65(19)(ii) in 2008 clarified that service tax applied to “promotion of games of chance,” including lotteries.
The tax was valid as per the legislative power of the Union under Entry 97, List I of the Constitution.

Supreme Court’s Observations

1. Lottery Tickets Are Not Goods

The Court reiterated its Constitution Bench ruling in Sunrise Associates vs. Govt. of NCT of Delhi (2006), holding that lottery tickets are actionable claims and not goods.

“Since lottery tickets are actionable claims, they do not fall under the definition of ‘goods’ in the Sale of Goods Act, 1930. Hence, they cannot be taxed as part of business auxiliary services.”

2. Service Tax Cannot Be Levied on Sale Transactions

The Court ruled that outright sale transactions do not constitute “services.”

“Lottery distributors purchase tickets from the State government on a principal-to-principal basis. They do not provide any service to the State but merely engage in business transactions.”

3. Explanation to Section 65(19)(ii) Was Invalid

The Court struck down the Explanation inserted in 2008 that sought to expand “business auxiliary services” to include lottery sales.

“An Explanation cannot override the main provision. The Explanation added to Section 65(19)(ii) sought to impose service tax on transactions that were already excluded from taxation under Sunrise Associates.”

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Final Judgment

The Supreme Court ruled:

The appeals are allowed.
The judgments of the Kerala and Sikkim High Courts are set aside.
Service tax cannot be levied on lottery sales.
If any service tax has been collected, refund applications must be processed expeditiously.

Implications of the Judgment

The ruling has far-reaching consequences for the lottery industry and taxation laws:

Lottery Distributors Get Relief: They will no longer have to pay service tax on their business operations.
Strengthens Precedents: Reaffirms that lottery sales are not “services” under the Finance Act.
Limits Scope of Service Tax: Ensures that indirect taxes are applied only where explicitly provided by law.
Refunds for Lottery Operators: Those who have paid service tax can seek refunds from tax authorities.

The Supreme Court’s decision in K. Arumugam vs. Union of India & Others is a landmark ruling that upholds the legal principles of taxation and protects businesses from unjustified levies.

Petitioner Name: K. Arumugam.
Respondent Name: Union of India & Others.
Judgment By: Justice B.V. Nagarathna, Justice Nongmeikapam Kotiswar Singh.
Place Of Incident: Kerala & Sikkim.
Judgment Date: 07-08-2024.

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