The Supreme Court, on February 11, upheld the High Court of Sikkim's ruling, declaring clause (zzzzn) of Section 65(105) of the Finance Act, 1994, as introduced by the Finance Act, 2010, to be unconstitutional.

The clause in question introduced the activity of "promotion, marketing, organizing, or in any other manner assisting in organizing a game of chance, including lottery," as a new category of taxable service.

The petitioners, private limited companies involved in the sale of paper and online lottery tickets organized by the Government of Sikkim, challenged clause (zzzzn) of Section 65(105) of the Finance Act, 2010. They argued that the activities they engaged in did not fall under the definition of "taxable service."

Additionally, the lottery distributors argued that conducting lotteries constitutes an act of "betting and gambling," a matter over which the State legislature has exclusive authority under Entry 62, List II of the Seventh Schedule. They contended that Parliament, under Entry 97, List I of the Seventh Schedule, does not have the power to levy taxes on activities falling under Entries 34 and 62 of List II.

In the said order, a bench comprising then Chief Justice Permod Kohli and S.P. Wangdi of the High Court declared clause (zzzzn) of Section 65(105) of the Finance Act, 2010, as ultra vires to the Constitution, effectively striking it down.

The High Court ruled in favor of the petitioners, stating that the activities of lottery distributors do not qualify as a service and, therefore, fall outside the scope of taxable service. It further held that the activity of promoting, marketing, organizing, or assisting in organizing a game of chance, including lottery, falls under the term "betting and gambling" in Entry 62 of List II, Seventh Schedule. Consequently, the Court asserted that only the State Legislature has the authority to levy a tax on such activities.

Today, the Supreme Court dismissed the appeals filed by the Union Government against the Sikkim High Court's judgment. A bench of Justice B.V. Nagarathna and Justice N.K. Singh ruled that the relationship between the lottery distributor and the State of Sikkim was one of principal-principal, rather than principal to agent. Since there was no agency relationship, the Respondents (distributors) were not liable to pay service tax, as they were not rendering any service to the State Government.

"There being no agency, no service is rendered by the respondent-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 and the Government of Sikkim," Justice Nagarathna read out the operative portions of the judgment.

However, the respondents will continue to pay the gambling tax levied by the State under Entry 62, List II of the Seventh Schedule.

The Supreme Court affirmed the finding of the High Court that lottery comes under "betting and gambling" under Entry 62 of State List and hence, only the State Government can levy tax. The judgment followed the 2024 verdict in K Arumugham v Union of India which held that sale of lottery tickets by a State Government is not a service but an activity to earn additional revenue, and hence the wholesale lottery purchasers are not promoting or marketing any service rendered by the State so as to attract service tax liability under the head "business auxiliary service."

Case Details: UNION OF INDIA AND ORS. v. FUTURE GAMING SOLUTIONS P.LTD. AND ANR.ETC ., C.A. No. 4289-4290/2013 & connected matters