Service Tax Not Leviable On Lottery Distributors As No Agency Exists; Parliamentary Amendments Fail To Alter Substance

A bench of Justices B.V. Nagarathna and Nongmeikapam Kotiswaram Singh heard appeals by the Union of India challenging several orders of the High Court of Sikkim which had set aside provisions of the Finance Act, 1994 and related notifications seeking to impose service tax on lottery distributors and selling agents. The appeals arose from a batch of matters concerning taxation of sale, promotion and facilitation of State-run paper and online lotteries and successive amendments to the service tax laws between 2010 and 2016.

The Court summarised the core holding that the contractual and statutory framework established a principal‑to‑principal commercial relationship between the State and the purchasers/distributors of lottery tickets and that the conduct of lotteries was an activity falling within “betting and gambling” under Entry 62, List II of the Seventh Schedule, thereby remaining within the State’s domain for taxation. The Court rejected the Revenue’s contention that distributors acted as agents rendering taxable “business auxiliary services,” and held that successive amendments seeking to classify distributor activities as taxable services did not alter the substantive legal character of the transactions. The Court, in its reasoning, observed: “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 Court further stated that “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.”

Background The disputes arose after lottery distributors and purchasers who entered agreements with the State of Sikkim were issued service tax registration notices following legislative amendments. Early litigation produced conflicting outcomes and successive parliamentary amendments in 2010, 2012, 2015 and 2016 attempted to capture activities relating to promotion, marketing, organising or facilitating lotteries within the scope of “taxable service” or to carve out distributor activities from negative‑list exclusions. The Sikkim High Court examined model and executed agreements for paper and online lotteries (including clauses on wholesale pricing, return of unsold tickets, bank guarantees, guaranteed minimum revenue and appointment of stockists) and held repeatedly that the transaction was predominantly a sale of actionable claims by the State to distributors and that distributors operated as principals, not agents; it struck down or set aside the impugned statutory provisions and demands. The Union appealed.

The Supreme Court reviewed constitutional entries (Entry 62 List II on “betting and gambling,” Entry 97 List I/residuary power and the service tax regime), statutory amendments, model and executed agreements and relevant precedents including Sunrise Associates, B.R. Enterprises and K. Arumugam. The Court concluded that the legal and commercial substance of the arrangements showed transfer of title or commercial purchase by distributors on wholesale terms, indemnities and bank guarantees, independent appointment of sub‑stockists and assumption of commercial risk, all pointing to principal‑to‑principal relations. The Court found that parliamentary amendments and explanatory provisions could not be read to convert the distributors’ transactions into taxable “services” where no agency relationship or service to the State existed. The appeals by the Union were dismissed and the writ‑petitions of the distributors were upheld; parties were directed to bear their own costs.

Case Details: Case No.: 2025 INSC 181 (Civil Appeal Nos.4289-4290 of 2013 and connected matters) Case Title: Union of India & Others v. Future Gaming Solutions Pvt. Ltd. & Another etc. Appearances: For the Petitioner(s): Sri Chandrashekara Bharathi (learned counsel for the Union of India) For the Respondent(s): Sri S. Ganesh (Senior Counsel) and Sri A.R. Madhav Rao (learned counsel)