A) ABSTRACT / HEADNOTE

The Supreme Court in K. Arumugam v. Union of India & Others Etc. addressed whether the activity of purchasing and reselling lottery tickets qualifies as a taxable service under the Finance Act, 1994. The Court examined the interpretation of Section 65(19)(ii) read with Section 65(105)(zzb) of the Act, emphasizing whether lottery tickets, as “actionable claims,” could fall under the category of “goods” or “services.” The Court ruled in favor of the appellants, holding that lottery tickets, being actionable claims, do not qualify as goods under the Sale of Goods Act, 1930 and are thus not subject to service tax as contemplated in the Finance Act. The decision reversed judgments of the Kerala and Sikkim High Courts, providing consequential reliefs to the appellants.

Keywords: Lottery tickets, Actionable claims, Service tax, Business auxiliary service, Finance Act, 1994.

B) CASE DETAILS

i) Judgment Cause Title:
K. Arumugam v. Union of India & Others Etc.

ii) Case Number:
Civil Appeal Nos. 2842-2848 of 2012

iii) Judgment Date:
08 August 2024

iv) Court:
Supreme Court of India

v) Quorum:
Justices B.V. Nagarathna and Nongmeikapam Kotiswar Singh

vi) Author:
Justice B.V. Nagarathna

vii) Citation:
[2024] 8 S.C.R. 830 : 2024 INSC 630

viii) Legal Provisions Involved:

• Section 65(19)(ii) and Section 65(105)(zzb), Finance Act, 1994
• Section 2(7), Sale of Goods Act, 1930
• Article 246, 248, and 265, Constitution of India

ix) Judgments Overruled by the Case (if any):
Not specifically overruled; distinctions drawn from Sunrise Associates v. Govt. of NCT of Delhi, (2006) 5 SCC 603.

x) Case is Related to Law Subjects:
Taxation Law, Commercial Law, and Constitutional Law.

C) INTRODUCTION AND BACKGROUND OF JUDGMENT

The appellants, registered lottery agents, were directed by tax authorities to pay service tax on their activities under the category of “business auxiliary service” as per the Finance Act, 1994. This directive stemmed from the insertion of an Explanation in 2008 that sought to include lottery operations within the ambit of service tax.

The appellants contested this, asserting that lottery tickets are actionable claims and not goods or services, thus exempt from service tax. This argument drew heavily on the decision in Sunrise Associates, where the Court classified lottery tickets as actionable claims.

The High Courts of Kerala and Sikkim dismissed the appellants’ petitions. The appeals before the Supreme Court challenged these judgments.

D) FACTS OF THE CASE

1. The appellants purchased lottery tickets in bulk from the State or registered promoters at a discounted rate and sold them outright to retailers for profit.
2. The activity was conducted under the Kerala State Lotteries and Online Lotteries (Regulation) Rules, 2003.
3. The Central Excise authorities sought service tax registration from the appellants, treating their activities as “business auxiliary services.”
4. The appellants resisted, arguing that their transactions constituted outright sales without any agency relationship with the State

E) LEGAL ISSUES RAISED

i) Whether the sale of lottery tickets constitutes a taxable service under the Finance Act, 1994?

ii) Whether the Explanation to Section 65(19)(ii) introduced in 2008 is consistent with the statutory framework and constitutional principles?

F) PETITIONER/APPELLANT’S ARGUMENTS

1. Classification of Lottery Tickets:
   The appellants argued that lottery tickets are actionable claims and thus excluded from the definition of goods under Section 2(7) of the Sale of Goods Act, 1930. Consequently, the Finance Act provisions on services do not apply to such transactions.

2. Inapplicability of Service Tax:
   The appellants asserted that their activities did not constitute marketing or promotion of the State’s services but were outright sales on a principal-to-principal basis.

3. Violation of Constitutional Principles:
   The Explanation inserted in 2008 violated the principles of legislative consistency and the mandate under Article 265 of the Constitution of India, which prohibits taxation without authority of law.

G) RESPONDENT’S ARGUMENTS

1. Nature of Activities:
   The Union of India contended that the appellants provided auxiliary services, including marketing and promotional activities, for the State’s lottery schemes, as evidenced by agreements and operational frameworks.

2. Revenue Implications:
   The State argued that the appellants’ role extended beyond mere sales, creating taxable services under the definition of business auxiliary services.

3. Support of Legislative Amendments:
   The Explanation introduced in 2008 clarified that services related to the marketing of lotteries fell within the ambit of taxable services under the Finance Act, 1994.

H) JUDGEMENT

a. Ratio Decidendi:
Lottery tickets, being actionable claims, cannot be classified as goods or taxable services under the Finance Act, 1994. The Explanation introduced in 2008 was inconsistent with the parent provision and contrary to judicial precedents.

b. Obiter Dicta (if any):
The State’s activity of conducting lotteries is inherently sovereign and revenue-generating, not service-oriented, and does not create a principal-agent relationship with lottery agents.

c. Guidelines (if any):
The Court clarified that:

• Actionable claims are exempt from the scope of taxable goods or services.
• Legislative explanations must align with the parent provision and established jurisprudence.
• Tax authorities cannot impose service tax retrospectively where statutory exclusions exist.

I) CONCLUSION & COMMENTS

This judgment reinforces the principle that actionable claims are not subject to taxation under the guise of auxiliary services. The decision is pivotal in delineating the limits of service tax and maintaining the sanctity of constitutional principles on taxation.

J) REFERENCES

a. Important Cases Referred:

1. Sunrise Associates v. Govt. of NCT of Delhi, (2006) 5 SCC 603
2. H. Anraj v. Govt. of Tamil Nadu, (1986) 1 SCC 414

b. Important Statutes Referred:

1. Finance Act, 1994
2. Sale of Goods Act, 1930
3. Lotteries Regulation Act, 1998
4. Kerala State Lotteries and Online Lotteries (Regulation) Rules, 2003