The main legal point established in the judgment is that the service rendered by distributors in relation to lottery could be subject to tax under Section 65(105)(zzb) read with the Explanation to Section 65(19)(ii) of the Act, upholding the constitutional validity of the explanation.

C.N. Ramachandran Nair, J.

1. In all the 30 cases the question raised is one and the same i.e. whether the explanation introduced to Section 65(19)(ii) read with Section 65(105)(zzb) of the Finance Act 1994 providing for levy of tax on service rendered in relation to lotteries promoted or marketed by the clients is unconstitutional as claimed by the petitioners. All the petitioners are distributors or agents of lotteries organized by various State Governments or their authorised agencies engaged in sale of lottery tickets in Kerala. The tickets sold are of lotteries organized or authorised by States of Kerala, Sikkim and also Bhutan Government. The petitioners have approached this Court challenging notices issued demanding details and documents pertaining to the charges received for the service rendered in relation to lotteries, which is obviously for levy of service tax under the head “Business Auxiliary Service” covered by Section 65(19) of Finance Act, 1994.

2. We have heard Shri. A.R. Madhav Rao and Shri. George Poonthottam learned counsel appearing for the petitioners and various Standing Counsel for the Department appearing for the respondents. Even though learned Standing Counsel for the respondents submitted that the Additional Solicitor General from Delhi wants to argue the matter for the respondents, we requested them to argue the case because one outside counsel for the petitioners came and started arguments yesterday itself. Further on hearing the petitioners counsel, we are not convinced on the merits of the case in favour of the petitioners. So much so, we requested learned Standing Counsel to argue whatever they want to, and accordingly they made their submissions.

3. Before examining the constitutional validity of the Explanation to Section 65(19)(ii) introduced by Finance Act, 2008 with effect from 16/05/2008, we have to refer to the back ground of the case. A circular was issued by the Central Board of Direct Taxes on 14/01/2007 stating that service rendered in relation to lotteries could be brought to service tax under the head “business auxiliary service” falling under Section 65(9) of the Act. Sikkim being a major centre of lottery business, the Superintendent of Central Excise, Gangtok Range issued follow up notice for levy and collection of service tax in relation to lottery. This was questioned by the distributors in Sikkim which led to the judgment of the Sikkim High Court declaring that service rendered in relation to lottery cannot be assessed to service tax under “Business Auxiliary Service”. The Department filed appeal against the judgment of the Sikkim High Court before the Supreme Court and during pendency of the appeal before the Supreme Court amendment was made to Section 65(19)(ii) of the Act inserting explanation to the said provision, which is extracted hereunder.

“65. In this Chapter, unless the context otherwise requires,-

Xxx xxx

(19) “business auxiliary service” means any service in relation to-

(ii) promotion or marketing of service provided by the client; or

Xxx xxx (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;)”

Subsequent to the incorporation of the above explanation to Section 65(19), the Honourable Supreme Court vide judgment in Union of India v. Martin Lottery Agencies Ltd reported in 2009 (12) SCC 209 upheld the decision of the Sikkim High Court. Even though the amendment was brought to the notice of the Supreme Court, it’s validity not being the subject matter of the appeal pending before it, the Honourable Supreme Court did not consider it. However, the Supreme Court observed that