Read Time: 10 minutes

Synopsis

The Supreme Court on February 11, 2025, said the Centre cannot impose service tax on distributors involved in promoting, marketing, and organising lottery. It ruled that only the State Governments can exercise the power to impose the tax.

A bench of Justices B V Nagarathna and N Kotiswar Singh upheld the Sikkim High Court's judgments by dismissing the Union Government's appeals as without merit. The Centre's appeals challenged the high court's judgments of 2012, 2013, 2014, 2015, and 2017 related to power arising out of amendments by the Finance Acts.

"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," the bench said.

The bench 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," the bench said.

The high court had held that the power to levy tax on the organisation, promotion and marketing of lottery being an act of betting and gambling, comes within the exclusive domain of Entry 62 - List II of the Seventh Schedule of the Constitution.

The high court had also held that while Parliament is competent to levy service tax under Entry 97 – List I.

However, this does not imply that it can impose such a tax on lotteries, as the power to levy taxes on this subject has been conferred on the State Legislature in List II. That the residuary powers of Parliament can only be exercised when no Entry in any of the Lists provide a legislative field. Hence, it is the exclusive legislative domain of the State Legislature to levy tax of any nature on lotteries by virtue of Entry 62 - List II, the apex court held.

The high court had also held that in the case at hand the lottery is organised by the State Government through its various stockists etc but cannot be construed to be a service rendered to the State Government. Hence, the question of service tax does not arise.

The Union government claimed the respondents are liable to pay service tax as they are rendering a service to State of Sikkim as an agent. On the other hand, it is the case of the respondents that they are not agents of the Government of Sikkim but their relationship is on principal to principal basis.

The court adverted to the provisions of the Constitution as well as the provisions of the Finance Act, 1994 along with the amendments made which have sought to impose service tax on the respondents-assessees herein in these cases. It also referred to case law on lotteries.

The counsel for the parties referred to two-fold agreements; one set dealt with paper lottery and another set of agreements dealt with online computerised lotteries.

Having gone through those agreements, the bench said, it clearly emerged 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).

The court said 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," the bench said.

The court thus held that 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 the Supreme Court, would not persuade it to take a different view from what the Sikkim High Court had taken.

Case Title: Union of India Vs Future Gaming Solutions Pvt Ltd & Another Etc