The Supreme Court on Thursday held that service tax cannot be levied on the sale of lottery tickets as they are in the nature of actionable claim and are not goods.

Setting aside the judgments of the high courts of Kerala and Sikkim that held contrary to its decision, a bench led by Justice BV Nagarathna said that the HCs had lost sight of its earlier judgments that lottery is an actionable claim and no service tax is attracted.

The appeals by the companies, including Future Gaming Hotel Services and Summit Online Trade Solutions, pertain to May 2008 to June 2010.

“No doubt the explanation was omitted with effect from Jul 1, 2010, however these cases pertain to the period prior to July 1, 2010. Therefore, either under the sub-clause (i) of section 65(19) (of Finance Act, 1994) or under the explanation after it was introduced with effect from May 16, 2008 and until it was omitted, the service tax could not have been levied on the promotion of marketing of sales of goods of on the premise that it was a business auxiliary service,” the judges said.

It further asked the concerned departments to expeditiously refund the service tax collected from the companies who were engaged in the business of sale of paper and online lottery tickets.

The SC in its oral order said that the HCs had lost sight of the definition of goods in Section 65(50) of Finance Act, 1994, while interpreting the expression lottery. “As already noted, the definition of goods in Section 2(7) of Sale of Goods Act, which is expressly incorporated in Section 65(50) of Finance Act, expressly excludes actionable claims and this court has by the Constitution Bench in Sunrise (Associates) case opined that lottery tickets are actionable claims,” the court.

Justice Nagarathna further said that taxes on services is not notified and, therefore, is not on the statue book. Thus, the Finance Act 1994 is relatable to Seventh schedule of the Constitutuion.

With effect from July 1, 2010, a separate entry, zzzzn was inserted in the Finance Act, 1994 to bring the promotion, marketing etc of lottery etc into tax net. Prior to this, an attempt was made to levy service tax on sale of lottery tickets by inserting an explanation in Section 65(19)(ii) of the Finance Act, 1994, in the definition of Business Auxiliary Service. This explanation, which was scrapped in 2010.

A Batch of companies and individuals had moved the top court challenging the validity of the above explanation which made service tax applicable to them.

They argued that tax cannot be imposed by a Parliamentary Law on lottery tickets in view of List II of Seventh Schedule of the Constitution of India under Entry 34 of which the subject-matter of “betting and gambling” and the subject-matter of “taxes on betting and gambling” under Entry 62, fall within the sole competence of the state legislature and, therefore, the levy of service tax is ultra vires the Constitution of India.

Source: The Economic Times