Union of India & Others v. Future Gaming Solutions Pvt. Ltd. & Another Etc.

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(iii) Agreement dated 24.01.2015

“AGREEMENT This Agreement is made on this the 24th day of January, 2015 between the Governor of Sikkim, through the Principal Secretary, Finance, Revenue and Expenditure Department, Government of Sikkim (hereinafter referred to as the ‘Government’) which expression shall unless excluded by or repugnant to the context means and includes its successors in office and assigns of the FIRST PART. AND M/s Future Gaming and Hotel Services Private Limited, a company having its registered office at 54, Mettupalayam Road, G.N. Mills Post, Coimbatore – 641029 Tamilnadu, and having its branch/sales office at kazi Road, Gangtok, Sikkim – 737101, represented by its Managing Director Mr. S. Martin, son of Mr. Santiago (hereinafter referred to as the ‘Sole Purchaser / Distributor’) which expression shall, unless excluded by or repugnant to the context means and includes its successors and assigns of the SECOND PART; xxx WHEREAS in pursuant to the Notice Inviting Tender dated November, 15, 2014, M/s Future Gaming and Hotel Services Private Limited has qualified in the technical bid and has quoted the highest assured amount of revenue per draw to the State for 08 (eight) Sikkim State Paper Lottery schemes. xxx

7. DEPOSITING OF SALE PROCEEDS OF THE TICKETS: 7.1 The Sole Purchaser/Distributor shall purchase the lottery tickets from the Government for further sales, and payments shall be made by the sole Purchaser/ Distributor to the Government for such tickets as per the invoice raised by the Government.

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7.2 The sale proceeds of the sale of lottery tickets shall be credited by the Sole Purchaser/Distributor into the Treasury or Public Ledger Account or Consolidated Fund of the State of Sikkim or Public Account or Fund as per the invoice raised by the State Government on the Sole Purchaser/Distributor, as prescribed by the State Government. 7.3 The Sole Purchaser/Distributor shall deposit sale proceeds as prescribed, ensuring Guaranteed Revenue as per clause (10) of this Agreement. 7.4 In the event, the Sole Purchaser/Distributor fails to comply with the above conditions, the Government reserves the right to refuse any further sale of lottery tickets to the Sole Purchaser/Distributor, and to suitably encash the bank guarantee executed by the Sole Purchaser/Distributor. xxx

10. MINIMUM GUARANTEED REVENUE: With regard to the provisions of this Agreement, the Sole Purchaser/Distributor has agreed to deposit the Minimum Guaranteed Revenue to the Government as under:- 10.1 Minimum guaranteed revenue of the Government of State of Sikkim shall be Rs.15,00,12,800/- Rupees (Fifteen Crores Twelve Thousand and Eight Hundred Only) upto a turnover of Rs. 9,000 Crores Rupees (Nine Thousand Crores) per annum. 10.2 On an additional turnover over and above Rs.9,000 Crores Rupees (Nine Thousand Crores) per annum, the Sole Purchaser/Distributor shall pay 0.25% of the additional turnover to the Government of the State of Sikkim. 10.3 The Sole Purchaser/Distributor shall be required to submit monthly turnover statements of the proceeds and sales of lottery/schemes to the Government of the State of Sikkim by the 15th of the succeeding month. xxx

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15.7 The sole Purchaser/Distributor shall fully indemnify and hold harmless and defend Government and its officers against any financial and legal liabilities on account of violation of the relevant laws and rules in force in country, and all such claims that are solely attributable to the Sole Purchaser/Distributor, in relation to the sale of lottery tickets during the terms of this Agreement.”

(iv) Agreement dated 06.06.2016 “AGREEMENT This Agreement is made on this the 06th day of June, 2016 (Two thousand and sixteen) between the Governor of Sikkim, through the Principal Secretary, Finance, Revenue and Expenditure Department, Government of Sikkim (hereinafter referred to as the ‘Government’) which expression shall unless excluded by or repugnant to the context means and includes its successors in office and assigns of the FIRST PART. AND M/s Future Gaming and Hotel Services Private Limited, a Private Limited company incorporated under Companies Act 1956, having its registered office at 54, Mettupalayam Road, G.N. Mills Post, Coimbatore – 641029, and having its branch/sales office at, Samdrupling Building, Kazi Road, Gangtok, Sikkim – 737101, represented by its Managing Director Shri S. Martin, son of Shri Santiyago (hereinafter referred to as the ‘Sole Purchaser / Distributor’)… xxx AND WHEREAS the Government and the Sole Purchaser/ Distributor (hereinafter referred to as Distributor) decided to enter into an Agreement: xxx

1. DEFINITIONS: In the Agreement unless the context otherwise requires: xxx

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1.4 This Agreement will be in line with the Model Agreement circulated by the Ministry of Home Affairs, Government of India vide their letter No. V-17013/1/2010-CSR-1 dated 28th December, 2011 as already specified in the Invitation for Expression of Interest; and the Model Agreement may be referred for purposes of interpretations of this Agreement. xxx 4.7 All the unsold tickets, if any, at the time of draw, with the Distributor shall be returned by the Distributor to the Director of Lotteries, Government of Sikkim or the Government authorized officials/person. 4.8 The Distributor shall submit the statement of sold tickets for each draw of different schemes to the Director of Lotteries, Government of Sikkim within 09 (Nine) days from the date of draw(s). The State Government will keep a record of the tickets issued to the Distributor.”

Online Computerised Agreement: At this stage, we extract the relevant clauses of the agreement dated 09.05.2005 and the supplementary agreement dated 25.04.2008 between the State of Sikkim and assessee-M/s Sugal and Damani Enterprises Pvt. Ltd. for sale of online computerized network lottery, as under: “AGREEMENT This Agreement made at Gangtok, this the 9th day of May 2005, between the Governor of Skim, through the Principal Secretary to the Government of Sikkim in the Finance Department, revenue and expenditure…… AND M/S Sugal & Damani Partnership firm having its Head office at 6/35W.E.A, Karol Bagh, NEW DELHI-110005… represented by its partner… Whereas the Government with an objective to generate/ raise revenue/funds for the State of Sikkim has decided

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to appoint additional Marketing agent for Computerized Network Lottery by selling lottery tickets to a variety of users through a process of On-Line Computerized Lottery System, which will also provide a venue for healthy entertainment and the Government intends to utilize the funds generated from the sale of the said Computerized Network Lottery tickets for good causes for health, education, infrastructure development and anti-poverty programs, and other developmental activities etc; And Whereas the Government has received offer from M/S Sugal & Damani for appointment as Marketing Agent for the said Computerized Network Lottery. xxx “Agent” means the Sole Distributor and any person acting on behalf of the Sole Distributor as a stockists, sub-stockists, distributor or seller of any Lottery forming part of the Lottery Business. “Agency” means the appointment by the State of the Sole Distributor for marketing/selling of Lotteries on behalf of the State (including the sale and distribution of tickets either itself or through us distributors or stockist/sub-stockist). xxx “Sub-agent/Retailer” means a person appointed by the Marketing Agent above or by any other person(s) duly authorised the Marketing Agent, to operate the lottery terminals and with whom the Marketing Agent (or any other person duly authorized by the agent as detailed above) has entered into a bilateral agreement to operate the lottery terminals or sell tickets. xxx

10. CONSIDERATION In consideration of the arrangement as agreed and contained in this deed of Agreement between the Government and the Marketing Agent, the Marketing Agent has agreed as under:

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a. Minimum guaranteed revenue to the government of Sikkim will be 1% of the turnover up to Rs. 1000 crores or Rs. 10 crores p.a. whichever is higher. b. On additional turnover over and above Rs.1000/- crores the Marketing Agent will pay 0.50% of the additional turnover to the state government. xxx

12. REALISATION OF SALE PROCEEDS The Marketing Agent shall deposit the Sale Proceeds (except prizes payable up to Rs.5000/-) with the Government on a monthly basis, along with account statement of such sale proceeds supported by record/document. xxx

16. CONDUCTING OF STATE ON-LINE COMPUTERIZED NETWORK LOTTERY a) The State On-line Computerizes Network Lottery shall be organised, conducted or promoted by the Government through the Marketing Agent. b) On-line computerized Network Lottery tickets shall be made available to the public through various retailers/sub-agents appointed by the Marketing Agent who will enter into bilateral agreements with these retailer/sub-agents. The date and time of the draw shall be indicated on the tickets themselves. xxx

23. RELATIONSHIP BETWEEN MARKETING AGENT AND THE STATE GOVERNMENT The relationship between the Marketing Agent and the Government will be one of Principal and Agent as defined in the Indian Contracts Act, 1872 as amended. xxx

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28. BANK GUARANTEE (a) The Marketing Agent shall execute in favour of the Government a Bank Guarantee Rs. 1.5 Crores (rupees one crores fifty lakhs) for the performance of the agreement. The Bank Guarantee shall be executed as Security Deposit of a Nationalised Bank in favour of the Principal Secretary to the Government of Sikkim, Finance, Revenue and expenditure Department.

SUPPLEMENTARY AGREEMENT This supplementary agreement is made on this the 25th day of April, 2008 between the Governor of Sikkim, through the Additional Chief Secretary to the Government of Sikkim, Finance, Revenue and Expenditure Department… AND M/s. Sugal and Damani Enterprises Pvt. Ltd., a Joint Stock Company registered under the Companies Act, 1956,… represented by …. Whereas Marketing Agent vide agreement dated 9th May, 2005 (hereinafter referred to as the said agreement) had agreed to conduct Sikkim State Online Lottery and among other terms and conditions, vide clause 10 of the said agreement the Marketing Agent had agreed to pay a sum of Rs.10 crores (Rupees ten crore) per annum as Minimum Assured Revenue @ Rs.1% of the turnover up to Rs.1000 crore and on additional turnover over and above Rs.1000 crore @ Rs.0.50% of the turnover to the Government; And whereas the Marketing Agent submitted that the sale of Online Lottery has reduced due to imposition of Lottery Tax in Maharashtra State by the Government of Maharashtra and banning of all types of lottery in Karnataka State by the Government of Karnataka w.e.f. 1” April, 2007 and requested the Government to review the minimum assured revenue vide their applications dated 25th September, 2007 and dated 16th January, 2008.

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“10. CONSIDERATION:- In consideration of the arrangement as agreed and contained in this deed of Agreement between the Government and the Marketing Agent, the Marketing Agent has agreed as under: Minimum guaranteed revenue to the Govt. of Sikkim will be 1% of the turnover up to Rs. 1000 Crores or Rs. 10 crores p.a. whichever is higher. On additional turnover over and above Rs.1000 crores the Marketing Agent will pay 0.25% of the additional turnover to the State Government.” The other terms and conditions of the aforesaid agreement shall remain unchanged.”

Agency:

15. Before proceeding to answer the contentions advanced at the Bar on the nature of relationship between the Government of Sikkim and the respondents-assessees herein, it would be useful to refer to the concept of agency. This is because if the relationship is in the nature of an agency (on the premise that the latter are rendering service to the State Government on the basis of the agreements entered into between the parties), then service tax is liable to be paid by the respondents-assessees herein under the Finance Act, 1994. 15.1 The relevant provisions of the Indian Contract Act, 1872 read as under: “182.“Agent” and “principal” defined.— An “agent” is a person employed to do any act for another, or to represent another in dealings with third person. The person for whom such act is done, or who is so represented, is called the “principal”.

183. Who may employ agent.— Any person who is of the age of majority according to the law to which he is subject, and who is of sound mind, may employ an agent.

184. Who may be an agent.— As between the principal and third person any person may become an agent, but

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no person who is not of the age of majority and of sound mind can become an agent, so as to be responsible to his principal according to the provisions in that behalf herein contained.

185. Consideration not necessary.— No consideration is necessary to create an agency.

186. Agent’s authority may be expressed or implied.— The authority of an agent may be expressed or implied.

187. Definitions of express and implied authority.— An authority is said to be express when it is given by words spoken or written. An authority is said to be implied when it is to be inferred from the circumstances of the case; and things spoken or written, or the ordinary course of dealing, may be accounted circumstances of the case.

188. Extent of agent’s authority.— An agent, having an authority to do an act, has authority to do every lawful thing which is necessary in order to do such act. An agent having an authority to carry on a business, has authority to do every lawful thing necessary for the purpose, or usually done in the course, of conducting such business. xxx

191. “Sub-agent” defined.— A “sub-agent” is a person employed by, and acting under the control of, the original agent in the business of the agency. xxx

222. Agent to be indemnified against consequences of lawful acts.— The employer of an agent is bound to indemnify him against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him.” 15.2 According to Bowstead and Reynolds on Agency, 23rd Edition, agency is the fiduciary relationship which exists between two persons, one of whom expressly or impliedly manifests assent that the other should act on his behalf so as to affect his legal relations with third parties and the other of whom similarly

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manifests assent so as to act or so acts pursuant to the manifestation. Thus, the one on whose behalf the act or acts have to be done is called the principal and the other who is to act is called the agent. Any person other than the principal and the agent may be referred to as the third party. The authority of the agent to act on behalf of the principal constitutes a power to affect the principal’s legal relations with third parties. Such authority could be called actual authority or apparent authority. Thus, the essence of agency is that a person acts on the principal’s behalf. Therefore, the term agency is used to connote an authority or capacity in one person to create legal relations between a person occupying the position of principal and third parties. Usually, the legal relations so created will be contractual in nature. Conversely, the mere fact that a person does something in order to benefit another and the latter is relying on the former to do so or may have requested or even contracted for performance of the action, does not make the former the agent of the latter. The centrality to agency is the conferral of authority to alter legal relations; as such in common law, being an agent is not a status but a description of a person, while and only so long as the person is exercising such authority. Thus, where one person (the principal), requests or authorises the other (agent), to act on his behalf and the other agrees to do so, the law recognises that such agent has power to affect the principal’s legal position by acts which, though performed by the agent, are to be treated in certain respects as if they were acts of the principal. It is common to regard control by the principal as a defining characteristic of agency. Thus, agency is termed as acting on behalf of the principal and subject to principal’s control. 15.3 An agency has to be distinguished from other relationships such as an agent and trustee; agent and bailee; agent and employee; agent and independent contractor; agent and seller; agent and buyer; agent and borrower; agent and person supplying services. 15.4 Suppliers of the goods of a manufacturer, whether on a retail or wholesale basis, who have some form of concession as a regular stockist, distributor or franchisee, are often described as agent, selling agent, main agent, etc. for the manufacturer of goods which they supply. However, nowadays the distributor actually

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buys from the manufacturer and resells it to his own customers. In such cases, the term ‘agent’ is used in a complimentary sense only, i.e., not to transact any business on behalf of the principal, except as regards purchase of the goods from the principal. Such a relationship is quite different from an agency. The distinction between an agent and the buyer for resale normally turns on whether the person concerned acts personally to make such profit as can be made, or is remunerated by pre-arranged commission. A supplier who fixes the resale price is likely to be a buyer for resale. If a party takes a profit on the resale, it will make him a seller. On the other hand, if a commission is paid on the resale, then, he is likely to be an agent. 15.5 In Benjamin’s Sale of Goods, Eleventh Edition, Sweet & Maxwell, it has been stated that sale has to be distinguished from a contract of agency. When goods are delivered to another for sale to a third party, the recipient may be an outright buyer, or may take the goods on sale or return, or may merely be the supplier’s agent to sell the goods, or an agent on a del credere commission, i.e., an agent who guarantees to the principal that the buyer will duly pay the price. 15.6 To determine the nature of the transaction, the whole agreement must be looked into as “the test is ultimately one of substance rather than form”. However, there are certain indicators. It is not conclusive that the consignee should be described in the contract as an “agent” or even “sole agent”, or conversely that the transaction should be called a “sale”, although the way in which the parties label the transaction will, typically, play a significant part in the court’s determination of the issue. Also, certain stipulations may be consistent with both sale (and especially sale or return) and agency, and, therefore, cannot be taken as indicative of either; for instance, the transfer to the consignee of the property in goods shipped upon the acceptance of drafts. It is, however, evidence towards a sale that the recipient is entitled to sell at whatever price the recipient thinks fit, accounting to the supplier only for a predetermined sum, and this interpretation is given further support, if the recipient is free to alter or improve the goods. Where the consignee pays wholesale prices for the goods, he is likely to be acting as a principal in the sale. If the consignee sells (whether for cash or

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on credit) to a retail purchaser, this immediately gives rise to a debt to the supplier for the listed price, the transaction becomes quite inconsistent with agency, including del credere agency, and would be consistent only with sale or return.

Case Law:

16. Learned counsel for the respective parties relied upon the following cases in support of their submissions: 16.1 In Bhopal Sugar Industries Ltd. vs. STO, (1977) 3 SCC 147, (“Bhopal Sugar Industries Ltd.”) the question was whether the contract was one of agency or sale. This Court held that the question will have to be determined having regard to the terms and recitals of the agreement, the intention of the parties as may be spelt out from the terms of the document and the surrounding circumstances and having regard to the course of dealings between the parties. While interpreting the terms of the agreement, the Court has to look to the substance rather than the form of it. The mere fact that the word “agent” or “agency” is used or the words “buyer” and “seller” are used to describe the status of the parties concerned is not sufficient to lead to the irresistible inference that the parties did in fact intend that the said status would be conferred. In this case, the point for consideration was whether at the time when the appellant was consuming high speed diesel oil and petrol for its own purposes, was it doing so as the owner of these articles or merely as an agent under an agreement with Caltex Company. If the relationship was of an agent, then the usage of those articles or properties by the appellant therein would amount to a sale so as to be exigible to sales tax. On the other hand, if the diesel or petrol was used by the appellant therein as an owner of those articles, then sales tax would have been paid by the appellant therein when property had passed on to it and were received by the appellant therein. 16.1.1 In this context, this Court observed that a contract of agency differs essentially from a contract of sale inasmuch as an agent, after taking delivery of the property, does not sell it as his own property but sells the same as the property of the principal and under

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his instructions and directions. Furthermore, since the agent is not the owner of the goods, if any loss is suffered by the agent then he is to be indemnified by the principal. It was further observed that while interpreting the terms of the agreement, the Court has to look to the substance rather than the form of it. Thus, the mere formal description of a person as an “agent” or “buyer” is not conclusive, unless the context shows that the parties clearly intended to treat a buyer as a buyer and not as an agent. 16.1.2 It was further observed on an examination of the terms of the contract therein that Hispeedol (petroleum product) had been sold to the appellant therein and not held by it merely as an agent of the Caltex Company. Therefore, the agreement therein contained some elements of agency but having regard to the fact that the appellant therein was consuming the Hispeedol or petrol for its own purpose, it was acting as an owner of the goods and if it consumed the same for its own purposes, it was not doing so as agent but as owner which it was fully entitled to do. Therefore, it would not constitute a sale so as to be exigible to sales tax. 16.2 Reference could also be made to Sri Tirumala Venkateswara Timber and Bamboo Firm vs. Commercial Tax Officer, Rajahmundry, AIR 1968 SC 784, wherein this Court observed that there is a distinction between a contract of sale and a contract of agency by which the agent is authorised to sell or buy on behalf of the principal. The essence of a contract of sale is the transfer of title to the goods for a price paid or promised to be paid. The transferee in such a case is liable to the transferor as a debtor for the price to be paid and not as an agent for the proceeds of the sale. The essence of agency to sell is the delivery of the goods to a person who is to sell them, not as his own property but as the property of the principal who continues to be the owner of the goods, and will therefore be liable to account for the sale proceeds. That in certain trades the word “agent” is often used without any reference to the law of principal and agent. But the true relationship of the parties in such a case has to be gathered from the nature of the contract,

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its terms and conditions, and the terminology used by the parties is not decisive of the said relationship. 16.3 In Moped India Ltd. vs. Assistant Collector of Central Excise, Nellore, (1986) 1 SCC 125, one of the questions was whether the commission allowed in respect of different varieties of mopeds to the dealers could be regarded as a trade discount or not. The contention was that the commission allowed to the dealers was a trade discount and was, therefore, liable to be deducted in determining the excisable value of the mopeds. In the agreement, the amount was referred to as “commission” but the label given by the parties could not be determinative because it was for the Court to decide whether the amount was a “trade discount” or not, whatever be the name given to it. Having regard to the terms of the agreement, this Court held that it was on a principal to principal basis. That under the agreement, mopeds were sold by the appellants therein to the dealers and the dealers did not act as agents of the appellants for the purpose of effecting sales on behalf of the appellants therein. Having regard to various clauses of the agreement considered in the said case, it was held that the relationship between the appellants and the dealers therein was on a principal to principal basis and therefore, the amount allowed to the dealers in respect of different varieties of mopeds was a trade discount. The appellants therein charged to the dealers the price of the mopeds sold to them less the amount of Rs.110, Rs.145 and Rs.165 as commission in respect of different varieties of mopeds. These amounts allowed to the dealers were clearly ‘trade discount’ liable to be deducted from the price charged to the dealers for the purpose of arriving at the excisable value of the mopeds. 16.4 In Alwaye Agencies vs. Deputy Commissioner of Agricultural Income Tax and Sales Tax, (AIR 1988 SC 1250), the assessee- firm was appointed as distributor by the Travancore Cochin Chemicals Ltd. (Company) to effect the sale of certain chemical manufactured by the said company in the area covered by the Kerala State under an agreement entered into on 11.02.1967. This Court examined whether under the agreement, the assessee firm was an agent of the said company, or whether under the agreement the assessee firm was really a purchaser

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of the goods which were booked by it. In the Agreement, the stipulation was that the distributor had the right of the sale of the product within the stipulated area. Bulk supplies were effected in wagon load or lorry-load by the said company direct to the customer, but only provided that the distributor arranged the payment as per the agreement and also took the responsibility to bear entirely the resultant effects and risk from the said direct dispatches. Though the company had fixed the price at which the goods were to be sold to the customers, it did not lead to the conclusion that the distributor was merely an agent. Under the agreement, what the distributor received was described as a “rebate” and not a “commission” as one would normally accept in the agreement of agency. Significantly, the supplies were made to the distributor against payment either immediate or deferred as provided in the agreement, and even when the goods were destined directly to the customer, it was the distributor who had to guarantee to arrange the payment. That where there was some time lag between the sending of the goods and the payment, the goods were to be insured at the cost of the assessee therein. This Court observed that this circumstance clearly showed that in respect of the goods dispatched under orders placed by the distributors, the latter really acted as purchasers of the goods which they in turn sold to the customers and did not merely act as agents of the said company. That in respect of these transactions, the goods dispatched passed to the distributor on the bills being endorsed and handed over to the distributors. Consequently, the appeal was dismissed. 16.5 This Court considered the nature of the agreement being one of sale or one of sole selling agency in the case of Snow White Industrial Corporation vs. Collector of Central Excise, (1989) 3 SCC 351. One of the clauses of the agreement was that unsold stocks lying with the seller (Gillanders) had to be returned to the appellants therein at the time of termination of contract by either of the parties. In the aforesaid context, it was held that the agreement was for a sole selling agency and not as an outright sale. 16.6 In M.S. Hameed vs. Director of State Lotteries, (2001) 249 ITR 186 (Ker), the facts were that the petitioner therein received

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in bulk quantities of lottery tickets from the State Government. They were given a discount which was on a slab system, such as for the purchase of 50,001 and above tickets, there was a 28% discount. The petitioners contended that the tickets purchased were thereafter distributed to other agents and sub-agents on commission basis. That after purchase of the tickets, it was not for the Government to look out as to how they were distributed and there was no control over the affairs thereafter. That there was only payment of the price of the ticket fixed as payable by the principal, and no commission or discount was paid to them by the Government. That Section 194G of the Income Tax Act, which imposes liability on the person responsible for paying to any person who is or has been stocking, distributing, purchasing or selling lottery tickets, any income by way of commission, remuneration, on such tickets in all amounts exceeding Rs.1000, to deduct income tax thereon at the rate of 10%, had no application. Hence, the demand of tax was without jurisdiction. The Kerala High Court considered the question whether the amount received as commission or discount or any incentive or as a margin is income or earning which was taxable at the hand of the assessee concerned, coming under the purview of Section 194G of the Income Tax Act. It was observed that if the face value of the lottery ticket was Re. 1, the petitioner therein would receive it at Rs. 0.72 paise and could sell at any price and it was not the State’s business to enquire into the matter at all. It was observed that the deduction under Section 194G was on any person responsible for paying to any person any income by way of commission, etc. who purchased or sold or stocked lottery tickets, in this case, the State Government. The deduction was to be made at the time of credit of such income to the account of the payee or at the time of payment of such income. The Kerala High Court observed that when the deduction is contemplated at the time of the payment to the person concerned but it is shown that there was no payment to the agent at the time of purchase of the ticket, the section automatically becomes inapplicable. That the ticket is given on a discount of 28%, can by no imagination be pressed into service for an interpretation that, nonetheless, 10% of 28 paise is deductible as tax. Thus, it was held that Section 194G was not applicable. The Kerala High Court held that since the lottery

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tickets were sold at a discounted price, the purchasers were sought to be taxed as agents which could not be the case as there was no transaction under an agency and the petitioner therein were not liable to be covered under Section 194G of the Income Tax Act. 16.7 Ahmedabad Stamp Vendors Association vs. Union of India, (2002) 257 ITR 202 (Guj), raised a question with regard to whether, the petitioners therein being stamp vendors were agents of the State Government who were being paid commission or brokerage or whether the sale of stamp papers by the Government to the licensed vendors was on principal to principal basis involving a contract of sale. Reference was made to Bhopal Sugar Industries Ltd. and also to the meanings of the expressions “commission” and “discount”. The licensed vendors have to pay for the price of the stamp paperless the discount at the rates provided varying from 0.5% to 4%. It was not that the stamp vendor collected the stamp papers from the Government, sold them to the retail customers and then deposited the sale proceeds with the Government less the discount. The liability of the stamp vendor to pay the price less the discount was not dependent upon or contingent to sale of stamp papers by the licensed vendor. The licensed vendor was not entitled to get any compensation or refund of the price if the stamp papers were lost or destroyed. The crucial question was whether the ownership in the stamp papers passed to the stamp vendor when the Treasury Officer delivered stamp papers on payment of price less discount. Clause (b) of sub-rule (2) of Rule 24 of Gujarat Stamps Supply and Sales Rules, 1987 indicated that the discount which the licensed vendor had obtained from the Government was on purchase of the stamp papers. Consequently, it was held that the discount made available to the stamp vendors under the provisions of the aforesaid 1987 Rules did not fall within the expression “commission” or “brokerage” under Section 194H of the Income Tax Act, 1961. 16.8 In Bharti Cellular Limited (Now Bharti Airtel Limited) vs. Assistant Commissioner of Income Tax, (2024) 8 SCC 608, the assessees therein were cellular mobile service providers and the issue related to the liability to deduct tax at source under Section 194-H of the Income Tax Act, 1961 on the amount

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which, as per the Revenue, was a commission payable to an agent by the assessees under the franchise/distributorship agreement between the assessees and the franchisees/ distributors. Though the matter was under the provisions of the Income Tax Act and Section 194-H of the said Act which imposes the obligation to deduct tax at source by any person responsible for paying at the time of credit or at the time of payment, whichever is earlier, to a resident, any income by way of commission or brokerage, nevertheless, the law of agency was considered. This was specially in the context of the expression “acting on behalf of another person”. Referring to Section 182 of the Contract Act which defines “agent” and “principal”, it was observed that agency is a triangular relationship between the principal, agent and the third party. In order to understand the relationship, one has to examine the inter se relationship between the principal and the third party and the agent and the third party. In this regard, it was observed that certain factors or aspects must be taken into consideration while examining whether a legal relationship of a principal and agent exists, as under: (a) “The essential characteristic of an agent is the legal power vested with the agent to alter his principal’s legal relationship with a third party and the principal’s co-relative liability to have his relations altered. (b) As the agent acts on behalf of the principal, one of the prime elements of the relationship is the exercise of a degree of control by the principal over the conduct of the activities of the agent. This degree of control is less than the control exercised by the master on the servant, and is different from the rights and obligations in case of principal to principal and independent contractor relationship. (c) The task entrusted by the principal to the agent should result in a fiduciary relationship. The fiduciary relationship is the manifestation of consent by one person to another to act on his or her behalf and subject to his or her control, and the reciprocal consent by the other to do so. (d) As the business done by the agent is on the principal’s account, the agent is liable to render accounts thereof to

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the principal. An agent is entitled to remuneration from the principal for the work he performs for the principal.” 16.8.1 It was further observed that three other relevant aspects or considerations should be noted. First, is the difference between “power” and “authority”. The second consideration is that the primary task of an agent is to enter into contracts on behalf of his principal, or to dispose of his principal’s property. The third consideration is that the substance of the relationship between the parties, notwithstanding the nomenclature given by the parties to the relationship, is of primary importance. 16.8.2 In this case, three distinct relationships were considered which are different from the relationship of an agency. The first is the difference between an agent and a servant which is not relevant for this case. Next, the difference between a principal-agent and principal-principal relationship was considered with reference to Bhopal Sugar Industries Ltd. It was observed that an agent, after taking delivery of the property, does not sell it as his own property but sells the same as the property of the principal and under his instructions and directions. Therefore, if the agent is not the owner of the goods and if any loss is suffered by the agent, he is to be indemnified by the principal. This is unlike a contract of sale where title to the property passes on to the buyer on delivery of the goods for a price paid or promised. The buyer then becomes the owner of the property and the seller has no vestige of title left in the property. Third is the case of independent contractor, wherein if the party is concerned about acting for himself and making the maximum profit possible, he is usually regarded as a buyer or an independent contractor and not as an agent of the principal. This would be true even when certain terms and conditions have been fixed relating to the manner in which the seller conducts his business. 16.8.3 Distinguishing the relationship of a principal with independent contractor from that of an agency, it was observed that an independent contractor is free from

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Union of India & Others v. Future Gaming Solutions Pvt. Ltd. & Another Etc.

control on the part of his employer, and is only subject to the terms of his contract. On the other hand, an agent is not completely free from control, and the relationship to the extent of tasks entrusted by the principal to the agent is fiduciary. Sometimes an independent contractor looks like an agent from the point of view of the control exercisable over him, but on an overview of the entire relationship, it may not be an agency. It was further observed that the distinction is that independent contractors work for themselves even when they are employed for the purpose of creating contractual relations with the third persons. It was further observed that the term “agent” should be restricted to one who has the power of affecting the legal position of his principal by the making of contracts, or the disposition of the principal’s property; viz. an independent contractor who may, incidentally, also affect the legal position of his principal in other ways. Agreements:

17. The relevant Clauses of the agreements which were adverted to before this Court have been extracted above. 17.1 In the agreement dated 10.08.2009, the respondent-assessee (M/s Future Gaming Solutions Pvt. Ltd.) is referred to as an exclusive sole purchaser of the conventional weekly paper lottery and bumper lottery with denomination of rupee one organised by the Government of Sikkim on actual sold basis. In consideration of the appointment of the respondent-assessee herein as sole purchaser, a sum of Rs.8 crores (Rupees Eight Crores) per annum had to be paid by the respondent-assessee herein to the Government for the first year of the extended period effective from 18.10.2009 to 17.10.2010 and a sum of Rs.10 crores (Rupees Ten Crores) per annum for the second year of the extended period effective from 18.10.2010 to 17.10.2014. This was the minimum payment that had to be made by the sole purchaser to the Government of Sikkim for parting with the lottery tickets. The sole purchaser had to provide in favour of the Government of Sikkim with a bank guarantee of Rs.10 crores (Rupees Ten Crores) as a security deposit, which was

p. 828

to deliver the tickets to the sole purchaser at the destination as may be agreed upon. 17.1.1 Clauses (14) to (16) are significant in this agreement. Clause (14) stated that the Government of Sikkim shall deliver to and the sole purchaser shall take delivery from the Government whole of the lottery tickets printed for a draw of a particular scheme with a clear understanding that if the sole purchaser was not able to sell the whole tickets, he shall return the unsold tickets to the Government within 15 days from the date of draw, which would then be destroyed after verification. This was to avoid any possible misuse of the lottery tickets leading to questioning of a draw of lottery in a particular scheme. That the wholesale prices of the tickets sold was to be determined by the Government on the basis of the prize amount, cost of paper, cost of printing, draw expenses, transportation charges and the Government share of revenue as fixed under clause (4) extracted above. That the prices of the tickets could be changed under certain circumstances. Also, the State Government could realise the full payment of the tickets resold from the sole purchaser at wholesale rates as per clause (14) referred to above. The wholesale rate of the tickets sold by the State Government to the sole purchaser had to be paid after actually selling the same. That, for information of the Government, the sole purchaser had to produce monthly return of sales tax, if any, paid to the respective State Governments wherever the tickets are sold. 17.1.2 That the sole purchaser could at his own cost and expenses give publicity to Sikkim State lotteries through various media platforms, both print and electronic, without seeking any reimbursement from the State Government. Further, the sole purchaser could appoint stockists, selling agents or sellers for further resale in different parts of the country on his own terms and at his own risk and responsibility. That this did not entail any privity of contract between the State Government and such entities. As a result, the sole purchaser’s obligation towards the State Government was not discharged

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Union of India & Others v. Future Gaming Solutions Pvt. Ltd. & Another Etc.

despite appointment of stockists, selling agents or other sellers. Unclaimed prize was the property of the State Government and the full accounts of unclaimed prizes had to be rendered by the sole purchaser for prizes up to Rs.5,000/- (Rupees Five Thousand). The sole purchaser had to maintain proper books of accounts and get the same audited and the State Government had the right to inspect the books of accounts maintained by the sole purchaser, if deemed necessary. 17.1.3 Having regard to the aforesaid terms and conditions of this agreement including the nomenclature used to describe the respondent-assessee herein, it clearly emerges that the respondent-assessee was not an agent of the State Government but purchased the lottery tickets at his own risk for the purpose of selling it through stockists, etc. The unsold lottery tickets had to be returned to the State Government in order to avoid misuse of the same and in order to ascertain the number of tickets sold. The prices of tickets were determined as wholesale prices which were as per clause (14) and paid by the respondent-assessee herein to the State Government in terms of clause (4). 17.2 Agreement dated 24.01.2015 between the State of Sikkim and M/s. Future Gaming and Hotel Services Private Limited has described the said assessee as a sole purchaser/distributor/ promoter. Clause (7) of the said agreement states that the sole purchaser/distributor shall purchase the lottery tickets from the Sikkim Government for further sales, and payments shall be made by the sole purchaser or distributor to the Government for such tickets as per the invoice raised by the Government. The sale proceeds for sale of lottery tickets had to be credited by the sole purchaser or distributor into the treasury etc. of the State of Sikkim as per the invoice raised by the State Government on the sole purchaser or distributor. The sole purchaser or distributor had to deposit the sale proceeds ensuring Guaranteed Revenue. Clause (10) of the agreement spoke of Minimum Guaranteed Revenue which was Rs.15,00,12,800/- up to a turnover of Rs.9000 crores per annum and on an additional turnover over and above Rs.9000 crores per annum, the sole purchaser or

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distributor had to pay 0.25 per cent of the additional turnover to the Government of Sikkim. For that purpose, the sole purchaser or distributor has to submit monthly turnover of the proceeds of the sale of lottery/schemes to the Government of Sikkim by 15th of the succeeding month. The annual financial and systems’ audit of the various lottery schemes had to be conducted by the Government to ensure that the Act and the Rules are not violated. Also, the sole purchaser or distributor had to get its accounts audited internally and have reconciliation of the records from time to time. The sole purchaser or distributor had the responsibility to indemnify the State Government against all claims in relation to the sale of lottery tickets during the term of the agreement. 17.3 The agreement dated 06.06.2016 between the State of Sikkim and M/s Future Gaming and Hotel Services Private Limited also describes the assessee as a sole purchaser/ distributor. This agreement was stated to be in consonance with the model agreement circulated by the Ministry of Home Affairs, Government of India by letter dated 28.12.2011. Under the said Agreement, all unsold tickets, if any, at the time of draw with the sole purchaser or distributor had to be returned to the Director of Lotteries, Government of Sikkim or the authorized officer. Also, a statement of sold tickets for each draw of different schemes had to be submitted by the Distributor to the Director of Lotteries within nine days from the date of draw. Under this agreement also, the distributor on its own terms and on its own risk and responsibility had to appoint Area Distributors/Stockists to sell the lottery tickets of the Government of Sikkim in discharge of its obligation under the Agreement. This agreement also had the guaranteed revenue clause under which the distributor had to deposit the guaranteed revenue to the Government as per their bid rate quoted in the tender. 17.4 We have perused the agreements between the Government of Sikkim and the respondent-assessee with regard to online computerised lottery. The clauses of the said agreement are similar in substance to the clauses of the agreement with regard to paper lotteries which have been discussed above. Merely because the online agreement uses the expression “marketing agent”, it would not imply that respondent-assessee

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Union of India & Others v. Future Gaming Solutions Pvt. Ltd. & Another Etc.

is an agent within the meaning of the expression under the provisions of the Contract Act dealing with agency. Hence, on a consideration of the agreements for the sale of online lottery tickets in juxtaposition with the agreement for the sale of paper lotteries, we find that there is a great similarity in the clauses of the agreement and hence, agreement concerning sale of online lottery tickets also is one between principal and principal and not between principal and agent. 17.5 Recently, this Court in K. Arumugam observed that conducting a lottery which is a game of chance, is an activity conducted by the State and not a service being rendered by the State which would enable the engaging of an agent such as respondents- assessees herein for the purpose of rendering of such a service. That the assessees who buy the lottery tickets on outright sale basis have the burden of selecting them through stockists for a profit as their business activity. The differential in the price paid to the State for the lottery tickets that are made available to the assessee to sell and the sale price is the profit of the assessee. Thus, there is no promotion of the business of the State which conducts lotteries as an agent. Consequently, there is no principal-agent relationship, rather it is one of principal to principal. The conclusions in K. Arumugam are apposite to these cases also.

Controversy between the Parties:

18. The parliamentary amendments made to the Finance Act, 1994, for the purpose of imposing service tax on the respondents-assessees herein as ‘business auxiliary service’ under sub-section 19 of Section 65 of the said Act effective from 01.07.2003 and by way of the insertion of the Explanation to Section 65(19)(ii) of the Finance Act, 1994 culminated in the judgment of this Court in K. Arumugam. In the said case, this Court held that the relationship between the Government of Sikkim and the assessees therein was not that of principal and agent but one of principal and principal. Therefore, up to the year 2010, the lis between the parties ended with the judgment in K. Arumugam. 18.1 For the period from 01.07.2010 till 30.06.2012, amendment was made to Section 65(105) by insertion of clause (zzzzn) which defined promotion, marketing, organizing or in any other manner

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assisting in organizing games of chance, including lottery, bingo or lotto in whatever form or by whatever name called, whether or not conducted through internet or other electronic networks as a “taxable service”. The Sikkim High Court observed that the said clause essentially means the conducting of lotteries within the scope and ambit of betting and gambling as per Entry 62 - List II of the Seventh Schedule of the Constitution and therefore, on the very same activity of betting and gambling, service tax cannot be levied. 18.2 The High Court further held that when a sole purchaser/ distributor/promoter purchases the lottery tickets from the State Government for the purpose of onward sales through stockists etc., it was not acting as an agent of the State Government but in its own right as a principal. Thus, the relationship between the State Government and the sole distributor was one between a principal and principal and not one between principal and agent. That various clauses of the Agreement indicated that the sole distributor was acting in its own right on purchase of the lottery tickets for onward sales, having regard to the Lotteries Act which is a Central Government legislation and bearing in mind the faith of the general public/customers in the lottery schemes conducted by the Government of Sikkim. It was only for the above purposes that various clauses of the agreement sought to enhance transparency in the lottery business, which was a part of the revenue earning endeavours of the State of Sikkim through various lottery schemes. In the circumstances, the High Court set-aside the demands for payment of service tax made by the Central Government. 18.3 At the same time, the Finance Act, 2012, by an amendment of Finance Act, 1994, introduced the Negative List under Section 66D which comprised of various services on which no service tax could be levied or collected. The List included the activity of betting, gambling or lottery. Hence, no service tax on the conduct of the lottery could be levied by the Central Government. However, in 2015, another amendment was made to the Finance Act, 1994 by substituting Explanation 2 in clause (44) of Section 65B, wherein the expression “transaction in money or actionable claim” was defined to not include, inter alia, any activity carried out, for a consideration, in relation to, or for facilitation of, a

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Union of India & Others v. Future Gaming Solutions Pvt. Ltd. & Another Etc.

transaction in money or actionable claim including the activity carried out, inter alia, by a lottery distributor or selling agent in relation to promotion, marketing, organizing, selling of lottery or facilitating in organizing of lottery of any kind in any other manner. The expression “lottery distributor or selling agent” was defined by inserting clause (31A) to Section 65B to mean a person appointed or authorized by a State for the purposes of promoting, marketing, selling or facilitating in organizing lottery of any kind, in any manner, organized by such State in accordance with the provisions of the Lotteries (Regulation) Act, 1998. Since “betting, gambling or lottery” was included in the Negative List, an Explanation was inserted to Section 66D(i) to say that the said expression “betting, gambling or lottery” shall not include the activity specified in Explanation 2 to clause (44) of Section 65B. Thus, the intent of the Parliament was that any transaction in an actionable claim (lottery being an actionable claim) would not include an activity carried out for the distribution of lottery by the distributor. In other words, such activity of the distributor would not amount to the activity of betting, gambling or lottery. 18.4 We do not think that such a meaning could be attributed to the activity of the distributor involved in the selling of lottery or facilitating or organizing of lottery in any manner. The expression “betting, gambling or lottery” in the Explanation to Section 66D(i) has to be given its true intent and meaning as conducting a lottery is nothing but an activity coming within the scope of betting and gambling. This is by the application of the principle of noscitur a sociis where the expression “lottery” takes its meaning from “betting and gambling”. Although a lottery ticket is nothing but an actionable claim, the conduct of a lottery scheme is nothing but a betting and gambling activity. Therefore, it is only Entry 62 – List II which enables the imposition of tax by the State Government. The activity of betting and gambling which includes conducting of a lottery is regulated under Entry 34 – List II, with Entry 62 – List II being the taxation entry. 18.5 By way of Finance Act, 2015, clause (a) of the Explanation to Section 67 containing the definition “consideration” was amended to include, inter alia, any amount retained by the lottery distributor or selling agent from gross sale of lottery tickets in

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addition to the fee or commission, if any, or, as the case may be, the discount received, i.e., the difference in the face value of the lottery ticket and the price at which the distributor or selling agent gets that ticket. The said amendment would have no consequence and bearing on the substantive provisions for the reasons that we have stated above. This is because the distributor buys at wholesale price from the State Government and sells it at a higher price to the retailer. 18.6 Thereafter, the amendment made to clause [ii(a)] of the Explanation 2 to Section 65B(44) in the year 2016 that the expression “transaction in money or actionable claim” would not include any activity carried out, for a consideration, in relation to, or for facilitation of, a transaction in money or actionable claim, including the activity carried out, inter alia, by a lottery distributor or selling agent on behalf of the State Government, in relation to promotion, marketing, etc. in accordance with the provisions of the Lotteries (Regulation) Act, 1998 is only an innocuous amendment which is only cosmetic in nature. 18.7 In the circumstances, we find that at each stage, the amendments made to the Finance Act, 1994, in order to impose service tax on the sole distributor/purchaser of the lottery tickets (respondents-assessees herein) have been unsuccessful. We have reasoned that the amendment to the said definition would in no way detract from the substance of the relationship between the State Government and the sole distributor or purchaser of the lottery tickets which is one of principal to principal and not of principal-agent. There being no agency and no service rendered by the respondents-assessees herein as an agent to the Government of Sikkim, service tax is not leviable on the transactions between the purchaser of the lottery tickets (respondents-assessees herein) and the Government of Sikkim.

19. The detailed analysis of the relevant provisions of the Finance Act, 1994, and amendments made thereto in light of the clauses of the Agreements highlighted during the course of submissions as well as the judgments of this Court, would not persuade us to take a different view from what the Sikkim High Court has taken.

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Union of India & Others v. Future Gaming Solutions Pvt. Ltd. & Another Etc.

20. In view of the aforesaid discussion, we find no merit in the appeals filed by the Union of India and others. Hence these appeals are dismissed. The appeal filed by the assessee is disposed accordingly. Parties to bear their own costs.

Result of the case: Appeals disposed of.