UNION OF INDIA & OTHERS versus FUTURE GAMING SOLUTIONS PVT. LTD. & ANOTHER ETC. (10/02/2025) — Supreme Court headnote

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Summary

The Supreme Court dismissed the Union's appeals against Sikkim High Court judgments that had freed distributors of Sikkim State lotteries from service tax under each successive amendment to the Finance Act, 1994 (2010, 2012, 2015 and 2016). Reading the paper and online lottery agreements, it held that the distributors bought tickets as principals and resold them on their own account, not as agents of the State, so they rendered no taxable service to the State. It held that conducting a lottery is betting and gambling, taxable only under Entry 62 of List II.

Issues

Whether the relationship between the State of Sikkim and the lottery distributors under the paper and online lottery agreements was principal-to-agent or principal-to-principal.
Whether the distributors' activity was a taxable service under Section 65(105)(zzzzn) of the Finance Act, 1994 (inserted in 2010), or under the negative-list regime of Sections 65B, 66B and 66D as amended in 2012, 2015 and 2016.
Whether the 2015 amendments (Section 65B(31A), Explanation 2 to Section 65B(44), the Explanation to Section 66D(i) and the definition of consideration in Section 67) or the 2016 amendment made distributors liable to service tax.

Provisions considered

Section 65(105)(zzzzn), Finance Act, 1994Inserted in 2010 to tax services of promoting, marketing or assisting in organising games of chance including lottery. Because the distributors were principals buying and reselling tickets, rendering no service to the State, the levy under this clause could not be sustained. (¶¶ 3.5, 13, 18.1, 18.2, 18.7)
Sections 65B(44), 66B and 66D(i) (as inserted in 2012), Finance Act, 1994'Service' excludes a mere transaction in money or actionable claim, and 'betting, gambling or lottery' is in the negative list, so no service tax could be levied on lottery from 01.07.2012. (¶¶ 4, 13, 18.3)
Section 65B(31A), Explanation 2 to Section 65B(44) and Explanation to Section 66D(i) (as amended in 2015 and 2016), Finance Act, 1994These provisions sought to treat a lottery distributor's activity as outside 'transaction in actionable claim' and outside 'betting, gambling or lottery'. The Court read 'lottery' with 'betting and gambling' (noscitur a sociis), held that the amendments did not change the principal-to-principal relationship, and called the 2016 change cosmetic. (¶¶ 5, 6, 13, 18.3, 18.4, 18.6, 18.7)
Section 67, Explanation (a)(iii) (as amended in 2015), Finance Act, 1994Including the distributor's discount or retained margin in 'consideration' had no effect on the substantive levy, because the distributor buys at wholesale price and resells at a higher price, and so renders no service. (¶¶ 5, 13, 18.5)
Sections 182 and 222, Indian Contract Act, 1872An agent acts for and represents the principal and must be indemnified by the principal. The Court applied these provisions and the case law on agency versus sale, looking at substance rather than labels, to find that the distributors were not agents. (¶¶ 15, 15.1, 15.2, 15.4, 15.6, 16.1.1, 16.8)
Articles 246 and 248; Entry 97, List I; Entries 34 and 62, List II, Constitution of IndiaThe Finance Act, 1994 rests on the residuary power under Article 248 and Entry 97. The Court held that conducting a lottery is a betting and gambling activity, regulated under Entry 34 and taxable only by the State under Entry 62 of List II. (¶¶ 11, 11.1, 11.2, 11.3, 11.4, 11.5, 11.6, 12.2, 18.4)

Held

Whether a contract is one of agency or of sale depends on the substance of the whole agreement and the surrounding circumstances, not on labels such as 'agent' or 'purchaser'. A buyer for resale who takes a profit on resale at his own risk, pays a wholesale price and is not indemnified by the supplier is a principal, whereas an agent sells the principal's property on the principal's account, usually for commission (Bhopal Sugar Industries, Alwaye Agencies, Bharti Cellular and others considered). (¶¶ 15.2, 15.3, 15.4, 15.5, 15.6, 16.1, 16.1.1, 16.2, 16.8, 16.8.2, 16.8.3)
Under the 2009 paper lottery agreement, the distributor was a sole purchaser that paid a fixed minimum annual sum, furnished a bank guarantee, paid wholesale prices, bore publicity costs without reimbursement, and appointed stockists on its own terms and at its own risk without any privity with the State. It was therefore a principal, not an agent. The return of unsold tickets and the accounting for unclaimed prizes served only to prevent misuse and keep the scheme transparent. (¶¶ 17.1, 17.1.1, 17.1.2, 17.1.3)
The 2015 and 2016 agreements (sole purchaser/distributor, minimum guaranteed revenue, purchase against invoice, an indemnity running to the State, area distributors appointed at the distributor's own risk) and the online lottery agreements were in substance the same. The online agreement's use of 'marketing agent' and its clause calling the relationship principal and agent did not make the distributor an agent under the Contract Act. (¶¶ 17.2, 17.3, 17.4)
Following K. Arumugam, conducting a lottery is an activity of the State, not a service rendered by it. A distributor who buys tickets outright and resells them through stockists for a profit does not promote the State's business as its agent, so it renders no service to the State. (¶¶ 12.3, 17.5, 18)
Although a lottery ticket is an actionable claim, conducting a lottery is betting and gambling. Read on the principle of noscitur a sociis, the 2015 Explanation to Section 66D(i) cannot take the distributor's activity out of 'betting, gambling or lottery'. Such activity is regulated under Entry 34 and taxable only by the State under Entry 62 of List II. (¶¶ 12, 18.4)
The 2015 change to the meaning of consideration in Section 67, and the 2016 addition of 'on behalf of the State Government' to Explanation 2 to Section 65B(44), did not alter the principal-to-principal relationship. Every attempt by amendment to tax the distributors therefore failed, and no service tax was leviable on the transactions between the distributors and the State. (¶¶ 18.5, 18.6, 18.7, 19)
The Court did not decide whether the aspect theory applied, since the dispute turned on whether the distributors rendered a service as agents of the State. (¶ 10)

Result

The Union of India's appeals were dismissed and the Sikkim High Court judgments upheld; the assessee's appeal (arising from SLP (C) No. 19200 of 2017) was disposed of accordingly; parties to bear their own costs.