Karnataka High Court quashes GST notice issued to online gaming platform Gameskraft

The Karnataka High Court on Thursday quashed a show-cause notice issued to online gaming platform Gameskraft by the Directorate General of Goods and Services Tax Intelligence despite the High Court’s stay on a previous ₹21,000 crore tax notice issued to the company. .Justice SR Krishna Kumar passed the order in a plea challenging the subsequent show-cause notices. "The impugned Show Cause Notice dated 23.09.2022 issued by the respondents to the petitioners is illegal, arbitrary and without jurisdiction or authority of law and deserves to be quashed," the order said. .The single-judge held that the judgement in the case of All India Gaming Federation v State of Karnataka was a total and complete answer not only to the various contentions urged by the respondents, but also covered the issues which arose in the pleas."There is a distinct difference between games of skill and games of chance; games such as rummy, etc. as was discussed in several decisions above and particularized in the Division Bench decision of this Court in All India Gaming Federation’s case supra, whether played online or physical, with or without stakes would be games of skill and test of predominance would apply," the Court said..It further underscored that a game of skill whether played with stakes or without stakes will not amount to gambling. "Rummy is substantially and preponderantly a game of skill and not of chance; Rummy whether played with stakes or without stakes is not gambling," it said..With these observations, the Court held that the online rummy game and other digital games played on the petitioners’ platforms were not taxable as 'betting’ and ‘gambling’..Gameskraft was issued an intimation notice from the GST authorities on September 8 2022 raising a demand of ₹21,000 crore, which was challenged before the High Court.The single-judge had on September 23, 2022 stayed this notice, observing that there were several contentious issues in the case.“If the same is not stayed, the petition would be rendered infructuous and as such, I deem it just and appropriate to stay the impugned Intimation pending disposal of this petition”, the single-judge had stated..However, the online gaming company claimed that despite this stay order, the authorities illegally, contemptuously and maliciously issued the show cause notice on the very same day as the High Court’s order.The petition also highlighted that Ramesh Prabhu, Chief Financial Officer of the company himself was levied with a personal penalty..The petition argued that the allegations in the GST authorities' show-cause notice were exactly the same as those in the intimation notice which had already been stayed.“Given the main proceedings are already stayed, the action of the Respondents in the present ought to be stayed since it is a flagrant violation of this Court’s order," the plea argued..Further, it was submitted that the issue of taxability of online gaming was pending consideration before the GST Council for more than three years. In this light, the authorities had erred in alleging that the gameplay facilitated by the petitioner was taxable at 28 per cent..The petition also pointed out that the Respondents' entire case was built on the erroneous surmise that the activities undertaken by Gameskraft were an actionable claim and not a service.In this regard, it was submitted that if interim relief was not granted to the petitioner, it would cause irreparable loss of goodwill and reputation. Therefore, the show-cause notice was sought to be stayed..The issue stemmed from a raid conducted by the GST authorities on Gameskraft's office in November 2021, which culminated in an order by which all the company's bank accounts were attached.Pertinently, the quantum of amount alleged to be evaded by Gameskraft was at first marked at ₹419 crore. However, this increased to ₹5,000 crores, and ultimately to over ₹21,000 crores after July 2022 when the respondents changed their narrative and began to allege that Gameskraft might be indulging in betting."It is submitted that the aforesaid averments of the Respondents would itself depict that the course of investigation had suddenly changed mid-way," the petition contended..Gameskraft and its founders were represented by Senior Advocates Udaya Holla and Abhishek Manu Singhvi assisted by Suhaan Mukherji, Siddhartha HM, Abhishek Manchanda, and Nikhil Parikshith from PLR Chambers.Sudipta Bhattacharjee, Onkar, Harsh Makhija, Arjyadeep Roy and Rishabh Prasad from Khaitan & Co also represented Gameskraft. Senior Advocate Mukul Rohatgi appeared for the All India Gaming Federation assisted by Pradeep Nayak, Anupama Hebbar, Sankeerth Vittal, Karan Gupta and Siddharth Aiyanna from Keystone Partners as well as a team from Khaitan & Co.Senior Advocates Arvind Datar and Sajjan Poovayya assisted by Advocates L Badrinarayanan, Ravi Raghavan, Ashish Philip and Karan Sachdev appeared for the E-Gaming Federation. .[Read Judgment]