REPORTABLE

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

J U D G M E N T

S.B. Sinha, J.

1. Leave granted.

2. Whether  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.

3. Respondents 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.    

4. Indisputably,  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 service’.   

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  

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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.  

5. The 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 terms:

“(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  

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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.  

Order  and  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.

Returnable  on  17.8.2007  when  further  orders might be prayed for by either party.”

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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:

“Affidavits have 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.”

6. Mr. 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  

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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.

(iii) Explanation 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  

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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  

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Seventh  Schedule  to  the  Constitution  of  India,  but  on  the  services  

rendered in respect thereof.

7. Mr. 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  

‘actionable claim’.

(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  

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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.

8. Before  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 (The Act).  

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,-

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(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 auxiliary service.   

“Goods” has been defined in Section 65(50), in the following terms:

“Section 65(50) “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 :

“Goods”  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  

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which  are  agreed  to  be  severed  before  sale  or  under the contract of sale.”

9. After 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 :

“Explanation—For  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.   

10. The 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  

retroactive operation.   

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  

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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.   

11. This 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 business.   

12. For 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 :

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“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 ownership (sale).

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  

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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 actionable claim.”

13. In  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.   

14. This gives rise to a question, i.e., Does the State in organizing lottery  

render any service and, if so, to whom.

The learned 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.  

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R.M.D. Chamarbaugwala [1957 SCR 874] and B.R. Enterprises v.  State of  

U.P. & Ors. [(1999) 9 SCC 700].

15. Contention 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.

16. Organizing lottery by the State is tolerated being an economic activity  

on its part so as to enable it to raise revenue.  Raising 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  

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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.”

17. While  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.   

18. Service 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  

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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  

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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 following terms:

“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 security.”

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.   

18

19. Lottery 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 :

“A  standardized  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 :

“Other  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  betting  activities;  

19

activities of casinos; booking agency activities in  connection  with  theatrical  productions  or  other  entertainment attractions,  recreational  fishing and  other recreational activities n.e.c.”

It  also  comes  within  the  purview  of  Section  4  classifying  other  

community, social and personal service activities.

21. If  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.

22. Keeping in view the aforementioned backdrop, it has to be determined  

as to whether the ‘explanation’ is declaratory or clarificatory in nature.   

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23. Clause 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:

“Decision : 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  

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other words, the value is the mark up between the  buying and selling of lottery tickets.”

24. A  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  

22

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.  

25. In 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.   

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26. We are informed at the Bar that, in fact, States of Tamil Nadu and  

Karnataka have barred lottery.   

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 :

“5.4 Business Auxiliary Service :

5.4.1 Services  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,  

24

requested to ensure that service tax is collected on  such services.”

27. The 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.

28. There  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  

25

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.”

{See also Commissioner of Wealth Tax, Punjab, J & K, Chandigarh, Patiala  

v. Yuvraj Amrinder Singh and Ors. [(1985) 4 SCC 608]}

29. It 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.”

30. Mr. 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,  

26

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  

held :

“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.”

It  furthermore  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 a situation.

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, held:

27

“Such a notification merely clarified the position  and  makes  explicit  what  was  implicit.  Clarificatory notifications have been issued to end  the dispute between the parties.”

31. The  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  clarificatory.  

Even if the statute does contain a statement to the  effect  that  the  amendment  is  declaratory  or  

28

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 periods.”

32. We 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.

29

33. We 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:

“Explanation.—For  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 India.   

34. The 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  

30

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”.”

35. Reverting 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  

31

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".

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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 retrospectively.”

(Emphasis supplied)

36. It 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 retrospective effect.   

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 retrospective effect.

37. In 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  

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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.   

38. For 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/-.

……………………………….J. [S.B. Sinha]

..…………………………..…J.  [Cyriac Joseph]

New Delhi; May 5, 2009

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