UNION OF INDIA & OTHERS v. FUTURE GAMING SOLUTIONS PVT. LTD. & ANOTHER ETC

Citation: [2025] 2 S.C.R. 756, (2009) 12 SCC 209, 2025 INSC 181

Court: Supreme Court of India

Bench: B.V. Nagarathna and Nongmeikapam Kotiswar Singh, JJ.

Judgment text

SUPREME COURT OF INDIA Union of India & Others v. Future Gaming Solutions Pvt. Ltd. & Another Etc. [2025] 2 S. C. R. 756 : 2025 INSC 181 Union of India & Others v. Future Gaming Solutions Pvt. Ltd. & Another Etc. (Civil Appeal No(s). 4289-4290 of 2013) 11 February 2025 [B. V. Nagarathna* and Nongmeikapam Kotiswar Singh, JJ. ] Issue for Consideration Matter pertains to the correctness of the judgments of the High Court setting aside various amendments made to the Finance Act, 1994; and whether sole distributor/purchaser of the lottery tickets is liable to pay service tax on the sale of paper and online lottery tickets. Headnotes† Finance Act, 1994 - ss.

65(19), 65(105)(zzzzn), 65B(1), 65B(34), 65B(44), 65B(51), 66B, 66D(i), 66F, 65B(31A), 67 - Various amendment to the Finance Act, 1994, time to time - Sale of lottery tickets - Levy of service tax - Government of Sikkim and lottery distributors, nature of relationship-principal and principal or principal and agent - Respondents-assessees engaged in the business of the sale of paper and online lottery tickets organised by the Government of Sikkim and entered into agreements with the State - Pursuant to amendment by the Finance Act, 2003, inclusion of new category of taxable services-"Business Auxiliary Service" - Issuance of notices to the respondents by the Service Tax Department, requiring them to register for payment of service tax on the activity which the assessees were/are carrying - Series of litigations wherein the respondents has been challenging the provisions levying service tax introduced through various amendments to the Finance Act from 2010-2016, and the High Court has allowed the petitions - Interference: Held: In view of the Finance Act, 1994, and the amendments made, interference with the orders passed by the High Court not called for - At each stage, the amendments made to the Finance * Author Union of India & Others v.

Future Gaming Solutions Pvt. Ltd. & Another Etc. Act, 1994, in order to impose service tax on the sole distributor/ purchaser of the lottery tickets has failed - There being no agency and no service rendered by the respondents-assessees as an agent to the Government of Sikkim, service tax is not leviable on the transactions between the purchaser of the lottery ticketsrespondents and the Government of Sikkim - Having regard to the terms and conditions of the agreement entered into between the government and the respondents, including the nomenclature used to describe the respondents, the respondents were not an agent of the State Government but purchased the lottery tickets at own risk for the purpose of selling it through stockists, etc. and unsold lottery tickets had to be returned to the State Government in order to avoid misuse of the same - Thus, the relationship was one between a principal and principal and not one between principal and agent - Amendment was made to s.

65(105) by insertion of clause (zzzzn) which defined "taxable service", 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 - Furthermore, the intent of the Parliament was that any transaction in an actionable claim (lottery being an actionable claim) would not include an activity carried out for the distribution of lottery by the distributor - Such activity of the distributor would not amount to the activity of betting, gambling or lottery - Although a lottery ticket is nothing but an actionable claim, the conduct of a lottery scheme is nothing but a betting and gambling activity - 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 - Constitution of India - Finance Act, 2007 - Finance Act, 2010 - Finance Act, 2012 - Finance Act, 2015 - Finance Act, 2016 - Service Tax Rules, 1994 r.

7C - Lotteries (Regulation) Act, 1998. [Paras 17. 3. 1, 17. 4, 18. 1, 18. 3, 18. 4-18. 7, 19] Case Law Cited K. Arumugam v. UOI [2024] 8 SCR 830 : 2024 SCC Online SC 2278 - relied on. Union of India v. Martin Lottery Agencies Ltd. [2009] 7 SCR 946 : (2009) 12 SCC 209; State of Haryana v. Suman Enterprises (1994) 758 4 SCC 217; Khoday Distilleries Ltd v. State of Karnataka [1994] Supp. 4 SCR 477 : (1995) 1 SCC 574; Sunrise Associates v. Government of NCT of Delhi [2006] Supp. 1 SCR 421 : (2006) 5 SCC 603; Godfrey Philips India Limited v. State of Uttar Pradesh (2005) 2 SCC 515; Hoechst Pharmaceuticals Ltd. v. State of Bihar [1983] 3 SCR 130 : (1983) 4 SCC 45; Union of India v. HS Dhillon [1972] 2 SCR 33 : AIR 1972 SC 1061; B. R. Enterprises v. State of UP [1999] 2 SCR 1111 : (1999) 9 SCC 700; R. M. D. Chamarbaugwalla v. Union of India [1957] 1 SCR 930 : AIR 1957 SC 628; State of Karnataka v. State of Meghalaya [2022] 18 SCR 516 : (2023) 4 SCC 416; Bhopal Sugar Industries Ltd. v.

STO [1977] 3 SCR 578 : (1977) 3 SCC 147; Sri Tirumala Venkateswara Timber and Bamboo Firm v. Commercial Tax Officer, Rajahmundry [1968] 2 SCR 476 : AIR 1968 SC 784; Moped India Ltd. v. Assistant Collector of Central Excise, Nellore [1985] Supp. 1 SCR 954 : (1986) 1 SCC 125; Alwaye Agencies v. Deputy Commissioner of Agricultural Income Tax and Sales Tax [1988] 3 SCR 879 : AIR 1988 SC 1250; Snow White Industrial Corporation v. Collector of Central Excise [1989] 2 SCR 782 : (1989) 3 SCC 351; M. S. Hameed v. Director of State Lotteries (2001) 249 ITR 186 (Ker); Ahmedabad Stamp Vendors Association v. Union of India (2002) 257 ITR 202 (Guj); Bharti Cellular Limited (Now Bharti Airtel Limited) v. Assistant Commissioner of Income Tax [2024] 2 SCR 1001 : (2024) 8 SCC 608 - referred to. Books and Periodicals Cited Bowstead and Reynolds on Agency, 23rd Edition; Benjamin's Sale of Goods, Eleventh Edition, Sweet & Maxwell - referred to.

List of Acts Constitution of India; Companies Act, 1956; Finance Act, 1994; Lotteries (Regulation) Act, 1998; Finance Act, 2007; Finance Act, 2010; Finance Act, 2012; Finance Act, 2015; Finance Act, 2016; Lotteries (Regulation) Rules, 2010; Sikkim Lotteries (Prohibition on Running of and Sale of Single Digit and Private Lottery Tickets) Act, 1993; Constitution (Eighty-eighth Amendment) Act, 2003; Constitution (One Hundred and First Amendment) Act, 2016; Sale of Goods Act, 1930; Finance Act, 2008; Service Tax Rules, 1994; Contract Act, 1872. Union of India & Others v. Future Gaming Solutions Pvt. Ltd. & Another Etc.

List of Keywords Paper lottery; Online lottery; Betting and Gambling; Service Tax; Principal-principal agreement; Principal-agent agreement; Seventh Schedule; Sole purchasers/distributors of lottery tickets; Taxable services; Actionable claim; Negative list; Noscitur a sociis; Res extra commercium; Residuary power; Concept of agency; Transaction in money or actionable claim; Service tax; Sale of paper and online lottery tickets; Government of Sikkim and lottery distributors; Business Auxiliary Service; Lottery being an actionable claim; Betting, gambling or lottery. Case Arising From CIVIL APPELLATE JURISDICTION: Civil Appeal No(s). 4289- 4290 of 2013 From the Judgment and Order dated 29. 11. 2012 of the High Court of Sikkim in WP Nos. 23 and 36 of 2011 With Civil Appeal Nos. 9506-9507 of 2013, Civil Appeal Nos. 2172- 2173 of 2016, Civil Appeal No. 16118 of 2017, Civil Appeal Nos. 3441, 3444, 3439 and 3442 of 2025 and SLP (C) No. 23945 of 2017 Appearances for Parties Advs.

for the Appellants: N. Venkatraman, A. S. G. , Mukesh Kumar Maroria, H. R. Rao, V. C Bharathi, Udai Khanna, B. K. Satija, Sarthak Karol, Gurmeet Singh Makker, B. Krishna Prasad, Raj Bahadur Yadav, Ms. Rohini Musa. Advs. for the Respondents: S. Ganesh, Sr. Adv. , A. R. Madhav Rao, Arjun Garg, Ms. Kriti Gupta, Ms. Sagun Srivastav, Brahma Prakash Soni, Ms. Rohini Musa, Gautam Narayan, Ms. Asmita Singh, Tushar Nair, Anirudh Anand, Punishk Handa, A. R. Madhav Rao, Mukunda Rao Angara, Sameer Abhyankar, Ms. Ayushi Bansal, Aryan Srivastava, Ms. Ria Dhawan, Rahul Kumar, Aakash Thakur, Sarthak Dora, Mukesh Kumar Maroria, M/s Arputham Aruna and Co. 760 Judgment / Order of the Supreme Court Judgment Nagarathna, J. INDEX* History of this controversy: ................................................... 5 2012 Amendment: ...................................................................... 15 2015 Amendment: .......................................................................

20 2016 Amendment: ....................................................................... 23 Submissions before this Court: ................................................. 26 Points for Consideration: ........................................................... 37 Relevant constitutional provisions: ....................................... 38 Relevant Case Law on lotteries: ................................................ 44 B. R. Enterprises: ............................................................. 44 Sunrise Associates: ........................................................ 45 State of Karnataka: ......................................................... 47 K. Arumugam: ................................................................. 47 Legal Framework: ....................................................................... 51 Agreements under consideration: ..........................................

67 Paper Lotteries: .............................................................. 67 Online Computerised Agreement: ................................ 78 Agency: .................................................................................... 83 Case Law: ................................................................................ 90 Agreements: ............................................................................. 105 Controversy between the Parties: ............................................. 113 * Ed. Note: Pagination as per the original Judgment. Union of India & Others v. Future Gaming Solutions Pvt. Ltd. & Another Etc. Leave granted in SLP (C) No. 18565 of 2014; SLP (C) No. 30629 of 2014; SLP (C) No. 14111 of 2015; SLP (C) No. 19200 of 2017 and SLP (C) No. 23945 of 2017. 2. This batch of cases assail various orders of the High Court of Sikkim passed in several writ petitions which were filed by the respondent- assesses.

The appellant is the Union of India in all these cases except in SLP (C) No. 19200 of 2017. For immediate reference, the following table which has been provided by learned counsel for the Union of India would indicate the details: Sl. Case No(s). Name of the Impugned Amendment Assessee(s) Judgment Year No. & Order Dated 1 C. A. NOS. 1. F u t u r e G a m i n g 29. 11. 2012 2010 4289-4290/2013 Solutions Pvt. Ltd. 2. Summit Online Trade Solutions Pvt. Ltd 2 C. A. NOS. 1. Summit Online Trade 10. 05. 2013 2010 9506-9507/2013 Solutions Pvt. Ltd. 2. F u t u r e G a m i n g Solutions India Pvt. Ltd. 3 SLP(C) No. Future Gaming Solutions 24. 09. 2013 2012 18565/2014 India Pvt. Ltd. 4 SLP(C) No. Summit Online Trade 13. 05. 2014 2012 30629/2014 Solutions Private Limited 5 SLP(C) No. Tashi De Lek Gambling 15. 07. 2014 2012 14111/2015 Solutions Pvt. Ltd. 6 C. A. NOS. 1. Future Gaming & Hotel 14. 10. 2015 2015 2172-2173/2016 Services Pvt. Ltd. 2. Summit Online Trade Solutions Pvt. Ltd. 7 SLP(C) No.

Future Gaming & Hotel 23. 03. 2017 2016 19200/2017 Services (P) Ltd. 8 SLP(C) No. Summit Online Trade 23. 03. 2017 2016 23945/2017 Solutions (P) Ltd. 9 C. A. No. Future Gaming & Hotel 23. 03. 2017 2016 16118/2017 Services (P) Ltd. 762 2. 1 The petitioners before the High Court (respondents-assessees herein) are companies incorporated as private limited companies under the Companies Act, 1956. The respondents-assessees herein are engaged in the business of the sale of paper and online lottery tickets organised by the Government of Sikkim. They entered into respective agreements with the State of Sikkim. 2. 2 Since these cases assail the amendments made to the provisions of the Finance Act, 1994 from time to time commencing from the year 2012, the factual backdrop of these cases shall be in accordance with the amendments made to the Act and shall be stated chronologically. History of this controversy: 3.

The Parliament introduced service tax through the Finance Act, 1994 under Chapter V, which took effect on 01. 07. 1994. Later, through the Finance Act, 2003, the Finance Act,1994 was amended to include a new category of taxable services, namely "Business Auxiliary Service," under sub-section (19) of Section 65, effective from 01. 07. 2003. Pursuant to this amendment, the Service Tax Department issued notices to the respondents-assessees herein, under the amended Finance Act in 2007, requiring them to register under the said Act for payment of service tax. 3. 1 Being aggrieved, the respondents-assessees herein approached the High Court in W. P. (C) No. 19 of 2007, titled Martin Lottery Agencies Ltd. vs. Union of India, challenging the levy of service tax upon the sale of lottery tickets. Vide judgement dated 18. 09.

2007, the High Court allowed the writ petition filed by the respondents-assessees herein declaring that service tax was not payable on the activity undertaken by the respondentsassessees herein. 3. 2 The aforesaid judgment came to be challenged before this Court in Civil Appeal No. 3239 of 2009. During the pendency of the Civil Appeal, the Finance Act, 1994 was further amended with the introduction of an "Explanation" to Section 65(19)(ii) of the Finance Act, 1994. The Explanation is reproduced hereunder: - "Explanation. - For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, Union of India & Others v. Future Gaming Solutions Pvt. Ltd. & Another Etc.

"service in relation to promotion or marketing of service provided by the client" includes any service provided in relation to promotion or marketing of games of chance, organized, conducted or promoted by the client, in whatever form or by whatever name called, whether or not conducted online, including lottery, lotto, bingo; [Explanation inserted vide Finance Act, 2008 w. e. f. 16th May, 2008]" 3. 3 In Union of India vs. Martin Lottery Agencies Ltd, Civil Appeal 3239 of 2009 reported in (2009) 12 SCC 209, this Court delivered its judgment on 05. 05. 2009holding that the High Court had rightly set aside the notices issued to the respondentsassessees herein. However, this Court held that the Explanation to Section 65(19)(ii) of the Finance was a substantive law and declared it to be prospective in operation. Regarding the validity of the Explanation, the issue was left open. 3. 4 The respondents-assessees herein, again, approached the High Court by filing Writ Petition (C) No.

36 of 2009 titled M/s. Future Gaming Solutions Pvt. Ltd. vs. Union of India challenging the validity of the Explanation to Section 65 (19) (ii) of the Finance Act, 1994. The High Court dismissed the writ petitions vide judgement dated 30. 07. 2010. Being aggrieved by this dismissal, the respondents-assessees herein approached this Court by filing a Special Leave Petition, being SLP (C) No. 26771 of 2010. The same was converted as a Civil Appeal No. 2782 of 2012. Recently this Court (this very Bench) in Civil Appeal Nos. 2842- 2848 of 2012 titled as K. Arumugam vs. UOIdated 08. 08. 2024 reported in 2024 SCC Online SC 2278 ("K. Arumugam") and batch including Civil Appeal No. 2782 of 2012 allowed the appeals preferred by the respondents-assessees herein and set aside the order passed by the High Court dated 30. 07.

2010 and held that lottery tickets being actionable claims and not being goods within the meaning of sub-clause (i) of clause (19) of Section 65 of the Finance Act, 1994, would expressly get excluded from the scope of the said provision. In the circumstances, service tax on the promotion or marketing or sale of lottery tickets which are actionable claims could not have been levied under the said sub-clause. 3. 5 However, during the pendency of the above appeal, the Finance Act, 1994 again came to be amended with the deletion of the Explanation to Section 65(19)(ii) and the introduction of a new category of "taxable service" vide clause (zzzzn) to sub-section (105) of Section 65 vide the Finance Act, 2010 with effect from 01. 07. 2010. Clause (zzzzn) to sub-section (105) of Section 65 reads as under: "(105) "taxable service" means any service provided or to be provided,- ...

(zzzzn) to any person, by any other person, for promotion, marketing, organising or in any other manner assisting in organizing games of chance, including lottery, Bingo or Lotto in whatever form or by whatever name called, whether or not conducted through internet or other electronic networks;" 3. 6 Challenging this amended clause (zzzzn) to sub-section (105) to Section 65 of the Finance Act, 1994, the assesses filed writ petitions before the High Court. Primarily, the High Court examined the relevant clauses of the agreements. 3. 7 After hearing the rival contentions made by the respective parties, the High Court allowed the writ petitions i. e. , W. P. (C) No. 36 of 2011 and W. P. (C). No. 26 of 2011 by way of common judgement and order dated 29. 11. 2012. The pertinent findings in the judgement dated 29. 11. 2012 have been culled out hereinunder: a.

The High Court took note of the fact that lottery, per se, falls within the expression "betting and gambling", which is considered pernicious in nature. It receives legal validity only if it is run or authorised by the State Government, subject to the conditions laid down in Section 4 of the Lotteries (Regulation) Act, 1998 which is a Central enactment. The Court further observed that it is the State's privilege that can be partially delegated to another party, provided they adhere to the statutory conditions contained in the regulatory Act. b. Although no Entry in any of the Lists of the Seventh Schedule specifically provides for levying taxes on Union of India & Others v. Future Gaming Solutions Pvt. Ltd. & Another Etc. lotteries, the power to enact laws for taxing lotteries must be understood as inherent within the expressions "betting and gambling," as lottery activities fall within this category. c.

The High Court noted that betting and gambling itself is an activity though the lottery ticket is a tangible thing that carries with it the right to participate in the game of chance. Thus, all activities right from the publishing of the lottery tickets to participation in the game of chance, declaration of draw and even distribution of prize to the winner fall within the purview of the expression 'betting and gambling'. Thus 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. d. The High Court applied the test of the principle of pith and substance and observed that the power to levy tax on lotteries, which are considered games of chance and fall under "betting and gambling" in Entry 62 - List II, lies exclusively with the State Legislature.

Consequently, Parliament's authority to impose such a tax under its residuary power in Entry 97 - List I, read with Article 248 of the Constitution, is excluded. The High Court held that while Parliament is competent to levy service tax under Entry 97 - List I, 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. e. The High Court further held that when a distributor purchases goods at a commercial price, they are not acting as an agent for the manufacturer. f.

The High Court observed that in the case at hand, the lottery tickets are sold as goods by the State Government to the assesses therein at a discounted price of 70 paise per ticket, compared to the MRP of Re. 1. The predominant 766 part of the transaction is a sale of goods. While considering the 30% discount offered to the respondents-assessees herein on the MRP, the High Court took note that offering such discounts is a normal trade practice in any sale and purchase transaction. If the seller sells the goods at the MRP to the ultimate consumer, intermediaries must receive a discount to cover establishment costs, logistics, and some margin of profit. g. Upon perusal of various clauses in the agreement, the High Court observed that the State Government appoints stockists or distributors to sell the tickets to ultimate buyers, who purchase them at the MRP. These intermediaries must be provided discounts from the MRP to cover their expenses and ensure a profit margin. h.

The High Court also held that the advertisement expenses incurred for promoting the State lottery are borne by the respondents-assessees herein to promote their own business, not as a service to the State Government. Clause (20) of the agreement further stipulates that the petitioner therein is solely responsible for incurring all advertising expenses, including the publication of lottery results. i. In light of the above observations, the High Court 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. 3. 8 The High Court ultimately concluded as under: (i) "In the backdrop of discussion on Ground (A) we have no hesitation to conclude that the activities of the lottery distributors i. e.

the petitioners herein do not constitute a service and thus beyond the purview of "taxable service" as statutorily defined under clause (zzzzn) of sub-section 105 of Section 65 of the Finance Act, 1994 as amended vide Finance Act, 2010. (ii) The activity of promotion, marketing, organizing or in any other manner assisting in organising game of Union of India & Others v. Future Gaming Solutions Pvt. Ltd. & Another Etc. chance including lottery is an activity included in the expression "betting and gambling" as incorporated under Entry 34 and 62 of List II to Seventh Schedule of Constitution of India. (iii) The activity of promotion, marketing, organizing or in any other manner assisting in organizing game of chance including lottery being an activity of "betting and gambling" under Entry 62, List II to Seventh Schedule of Constitution of India, the State Legislature alone is competent to levy any tax on such activity under Entry 62.

(iv) The Parliament has the competence and jurisdiction to levy taxes on any subject matter including "service tax" under Entry 97, List I, read with Article 248 of the Constitution of India except where such powers are traceable to any of the entries in List II and III to Seventh Schedule of Constitution of India. (v) Power to tax the activity of "betting and gambling" as explained above being within the exclusive domain of State Legislature under Entry 62, List II, the Parliament in exercise of its residuary power under Entry 97, List I to Seventh Schedule of Constitution of India lacks legislative competence to impose any tax including "service tax" on such activity. " 3.

9 In view of the above conclusions, the petitions were allowed striking down clause (zzzzn) to sub-section (105) of Section 65 of Finance Act, 1994 as introduced vide Finance Act, 2010 as ultra vires the Constitution having been enacted in contravention to Entry 97 - List I to Seventh Schedule read with Article 248 of Constitution of India. Consequently, all actions of imposing service tax upon the respondents-assessees herein being distributors of lottery organized by State of Sikkim were set aside. Since the respondents-assessees herein had secured registration and had paid service tax under the impugned provision on their own, the judgment was to operate prospectively. 3. 10Being aggrieved by the judgement of the High Court of Sikkim in Writ Petition (Civil) No. 36 of 2011 and other allied writ 768 petitions dated 29. 11.

2012 allowing the writ petitions filed by the respondents-assessees herein and striking down clause (zzzzn) to sub-section (105) of Section 65 of Finance Act, 1994 as introduced vide Finance Act, 2010 as ultra vires the Constitution of India being enacted in contravention of Article 248 of the Constitution of India read with Entry 97 - List I to the Seventh Schedule thereto and setting aside all consequential actions of the Revenue in imposing service tax upon the respondentsassessees herein (distributors of lottery organised by State of Sikkim), the Revenue has preferred the present Civil Appeal Nos. 4289-4290 of 2013. 2012 Amendment: 4. During the pendency of the matter before this Court, the Finance Act, 1994, was amended once again by the Finance Act, 2012, whereby several provisions were introduced giving a new dimension to the meaning of 'taxable service' as services that would be taxable thereunder.

The relevant provisions of the Finance Act, 1994, as amended, by the Finance Act, 2012, which is effective from 01. 07. 2012 read as under:- "65B. In this Chapter, unless the context otherwise requires,-- (1) "actionable claim" shall have the meaning assigned to it in section 3 of the Transfer of Property Act, 1882 (4 of 1882); xxx (34) "negative list" means the services which are listed in section 66D; xxx (44) "service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include-- (a) an activity which constitutes merely,-xxx (iii) a transaction in money or actionable claim; Union of India & Others v. Future Gaming Solutions Pvt. Ltd. & Another Etc. (51) "taxable service" means any service on which service tax is leviable under section 66B; Charge of service tax on and after Finance Act, 2012. 66B.

There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed. Negative list of services. 66D. The negative list shall comprise of the following services, namely:-xxx (i) betting, gambling or lottery; xxx" 4. 1 On the introduction of the aforesaid amendments the respondents-assessees herein had intimated to the Revenue vide letter Ref. No. FGSIPL/SK/0024/ 12-13 dated 28. 06. 2012 stating that in view of the change in the legal position the respondents-assessees herein would not be paying service tax with effect from 01. 07. 2012. 4. 2 In response to the above, the Revenue issued letter C. No. V(3)7/ ST/FGSIPvtLtd/GTK/2009/295 dated 06. 07. 2012 stating that as per the Notification. No. 36/2012 ST dated 20. 06.

2012 read with Rule 6(7C) of the Finance Act, 1994 (as amended), the distributor or selling agents are liable to pay service tax at the rate specified for the taxable service of promoting, organizing or in any other manner assisting in arranging lottery. Being aggrieved by this communication dated 06. 07. 2012 and the Finance Act, 2012, the respondents-assessees herein approached the High Court by filing Writ Petition No. 32 of 2012. The respondentsassessees herein assailed the Amendment Act of 2012 on the various grounds. 4. 3 After hearing the rival parties, the High Court allowed the writ petition filed by respondents-assessees herein before the 770 High Court vide order dated 24. 09. 2013 and set aside the amendments in 2012 made to the Finance Act, 1994. The relevant findings of the High Court are as follows: a.

The High Court held that the lottery being an 'actionable claim' does not fall within the purview of the service tax laws as introduced by the new provisions of the Finance Act, 2012. b. The High Court found no change in the circumstance as regards the position found in the earlier issues set out above except that clause (zzzzn) of sub-section (105) of Section 65 of the Finance Act, 2010, and the replaced service tax law regime under the Finance Act, 2012, in the form of Section 65B and sub-sections thereunder, Sections 66B and 66D were already dealt with earlier. c. The High Court observed that even under sub-section (34) of Section 65B read with Sections 66B and 66D lottery stands excluded from the purview of service tax under the Finance Act, 2012 as being one in the 'negative list'; d.

Further, the High Court held that activities comprising of promotions, organising, reselling or any other manner assisting in arranging of lottery tickets of the State Lotteries do not establish the relationship of a principal or an agent but rather that of a buyer and a seller. This was in view of the nature of the transaction consisting of bulk purchases of lottery tickets by the respondentsassessees herein from the State Government on full payment on a discounted price as a natural business transaction and other related features like there being no privity of contract between the State Government and the stockists, agents, resellers under the respondentsassessees herein. Thereafter, following the order dated 24. 09. 2013, the High Court passed orders dated 13. 05. 2014 and 15. 07. 2015. 4. 4 Being aggrieved by the orders passed by the High Court dated 24. 09. 2013, 13. 05. 2014 and 15. 07. 2015 the Union preferred SLPs before this Court being SLP (C) No. 18565 of 2014, SLP (C) No.

30629 of 2014 and SLP (C) No. 14111 of 2015, respectively. Union of India & Others v. Future Gaming Solutions Pvt. Ltd. & Another Etc. 2015 Amendment: 5. The Parliament again made amendments to the Finance Act, 1994 vide the Finance Act, 2015 The amendment is extracted as below: "65B. In this Chapter, unless the context otherwise requires,-xxx (31A) "lottery distributor or selling agent" means a person appointed or authorised by a State for the purposes of promoting, marketing, selling or facilitating in organising lottery of any kind, in any manner, organised by such State in accordance with the provisions of the Lotteries (Regulation) Act, 1998 (17 of 1998); xxx (44) "service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include-- (a) an activity which constitutes merely,-xxx (iii) a transaction in money or actionable claim; xxx Explanation 2.

--For the purposes of this clause, the expression "transaction in money or actionable claim" shall not include-- xxx (ii) any activity carried out, for a consideration, in relation to, or for facilitation of, a transaction in money or actionable claim, including the activity carried out-- (a) by a lottery distributor or selling agent in relation to promotion, marketing, organising, selling of lottery or facilitating in organising lottery of any kind, in any other manner; xxx 772 Negative list of services. 66D. The negative list shall comprise of the following services, namely:-xxx (i) betting, gambling or lottery; Explanation. --For the purposes of this clause, the expression "betting, gambling or lottery" shall not include the activity specified in Explanation 2 to clause (44) of section 65. xxx Valuation of taxable services for charging service tax: 67.

(1) Subject to the provisions of this Chapter, service tax chargeable on any taxable service with reference to its value, then such value shall,-- (i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him; xxx Explanation. --For the purposes of this section,-- (a) "consideration" includes-xxx (iii) any amount retained by the lottery distributor or selling agent from gross sale amount of lottery ticket in addition to the fee or commission, if any, or, as the case may be, the discount received, that is to say, the difference in the face value of lottery ticket and the price at which the distributor or selling agent gets such ticket. " 5. 1 The aforesaid amendments were challenged by the respondentsassessees herein before the High Court by filing W. P. (C) No. 39 of 2015 and W. P. (C) No. 40 of 2015. By the impugned order and judgement dated 14. 10.

2015, the High Court allowed the writ petitions filed by the respondents-assessees herein and held as under: a. The respondents-assessees herein, in buying and selling the lottery tickets are not rendering any service to the Union of India & Others v. Future Gaming Solutions Pvt. Ltd. & Another Etc. State and therefore, their activity does not fall within the meaning of 'service' as provided under clauses (31A) and (44) of Section 65B and, therefore, outside the purview of Explanation 2 to the said Section; b. In any case, since by the Explanation the scope of Section 66D which is the main provision which is sought to be expanded, is ultra vires the Finance Act, 1994, it is accordingly struck down; 5. 2 Being aggrieved by this impugned order and judgment dated 14. 10. 2015, the Union of India approached this Court by filing Civil Appeal Nos. 2172-73 of 2016. 2016 Amendment: 6.

In the meantime, the Parliament came out with an amendment to the Finance Act, 2016 to the following effect: "In Section 65B- (b) in clause (44), in Explanation, 2, in sub-clause (ii), for item (a), the following item shall be substituted, namely- (a) by a lottery distributor or selling agent on behalf of the State Government, in relation to promotion, marketing, organizing, selling of lottery or facilitating in organizing lottery or any kind, in any other manner, in accordance with the provisions of the Lottery (Regulation) Act, 1998. " 6. 1 Again, this amendment to the Finance Act, 2016 was challenged before the High Court of Sikkim by the respondents-assessees herein in Writ Petition No. 34 of 2016 and Writ Petition No. 48 of 2016. 6. 2 The High Court vide impugned order and judgement dated 23. 03.

2017 allowed the writ petitions and held that the amendments carried out by the Finance Act, 2016, are not capable of being implemented for imposition and levy of service tax on the services allegedly provided by the respondentsassessees herein. The salient findings of the High Court are as follows: a. The High Court held that taxation is a distinct matter for the purpose of legislative competence and it must flow from the specific Entry provided for levy and imposition of taxes. b. The relevant service tax leviable is on promotion, marketing, organizing, selling of lottery or facilitating in organizing lottery of any kind, in any other manner. The Union Parliament is conferred with the power and competence under Article 268A read with Entry 97 - List I (Union List) to impose and levy service tax on other related activities. Hence, the High Court noted that the impugned amendment brought in Finance Act, 2016 is not unconstitutional.

However, the Court noted that the Division Benches of the High Court in W. P. (C) Nos. 36 & 23 of 2011(Future Gaming Solutions Pvt. Ltd. vs. Union of India);W. P. (C) No. 32 of 2012 (Future Gaming Solutions India Pvt. Ltd. vs. Union of India) and W. P. (C) No. 39 of 2015 (Future Gaming & Hotel Services Pvt. Ltd. vs. Union of India) have categorically held that the Union-Parliament lacks competence to impose service tax and the concerned amendments were held as ultra vires to the Constitution of India. This issue has attained finality and was pending for consideration at that time before this Court. c. There is no mechanism to ascertain and compute the service rendered by a person for promoting, marketing, selling or facilitating in organizing a lottery of any kind, in any manner, organized by such State in accordance with the provisions of the Lotteries (Regulation) Act, 1998. 6. 3 Being aggrieved by the above-impugned judgement and order dated 23. 03.

2017, the Union of India has approached this Court in SLP (C) No. 23945 of 2017 and SLP (C) No. 16118 of 2017. Being aggrieved by the specific findings in judgment dated 23. 03. 2017 wherein the High Court held that there was no mechanism or methodology to ascertain and compute the services rendered by the respondent-assessees, the respondent-assessee has filed SLP (C) No. 19200 of 2017. Submissions before this Court: 7. Learned Counsel for the Revenue, Sri Chandrashekara Bharathi made the following submissions: a. The statutory framework governing lotteries, particularly the Lotteries (Regulation) Act of 1998 ("Lotteries Act", for short) Union of India & Others v. Future Gaming Solutions Pvt. Ltd. & Another Etc. and related rules, mandate that the organizing State must be the ultimate seller of lottery tickets to the public, inherently establishing an agency relationship between the State of Sikkim and the respondents-assessees herein in these cases.

Article 246(1) of the Indian Constitution empowers Parliament to legislate on lotteries conducted by the government, which it exercised by enacting the Lotteries Act. Section 4(c) of this Act prescribes that the State government must sell tickets "either itself or through distributors or selling agents. " Further, Rule 2(1) (c) of the Lotteries (Regulation) Rules, 2010 ("Lotteries Rules", for short) defines a "distributor or selling agent" as an entity appointed by the organizing State to sell tickets on behalf of the State. Learned counsel argued that the use of terms such as "through" and "on behalf of" in the statute is conclusive evidence of the intended agency relationship, as these terms denote that the respondents-assessees herein are merely facilitating sales on behalf of the State, not as independent principals. b. The judgment in State of Haryana vs.

Suman Enterprises, (1994) 4 SCC 217 held that a State-organized lottery requires the State to retain core control to protect public trust in the scheme. In that case, this Court stated four essential characteristics that distinguish a State-organized lottery: (i) tickets must bear the State's logo, be printed under the State's authority, and be sold directly by the State or its designated agents; (ii) the sale proceeds must be credited to the State's funds; (iii) draws must be conducted by the State; and (iv) unclaimed prize money must revert to the State. By retaining control over these aspects, the State ensures that the public's trust in the lottery's fairness and legitimacy is maintained. That these characteristics form the backbone of the Lotteries Act, and when combined with statutory language, they mandate an agency relationship between the respondents-assessees herein and the State, which cannot be unilaterally recharacterized as principal to principal. c.

The State of Sikkim's monopoly over the lottery business in the region, as enacted under the Sikkim Lotteries (Prohibition on Running of and Sale of Single Digit and Private Lottery Tickets) Act, 1993, further supports the agency interpretation. Learned counsel cited Khoday Distilleries Ltd vs. State of Karnataka, (1995) 1 SCC 574 and argued that the State can 776 either conduct the monopoly business itself or do so through agents but cannot delegate its core functions to independent entities without compromising the monopoly. The counsel argued that in lotteries, as in the sale of alcohol monopolized by the State, the organizing State cannot delegate its position as the primary seller and principal. d.

As per clauses in the agreements between the State of Sikkim and the respondents-assessees herein, specifically focusing on clauses that indicate a principal-agent relationship, two critical "condition precedents" that help determine whether an agency exists are, namely, (i) the capacity in which the sale is conducted, i. e. , whether the respondents-assessees herein are selling the tickets as their own or on behalf of the State; and (ii) the allocation of risk and reward, which lies with the principal in an agency relationship. e. Various versions of agreements between the State and the respondents-assessees herein, notably those signed in 2004, 2008 and 2009 were referred to. Initially, under the 2004 agreement, the respondents-assessees herein purchased lottery tickets on an "all sold" basis, meaning they bought all tickets upfront and assumed the associated risk.

However, subsequent amendments, particularly in 2008 and 2009, shifted this arrangement to an "actual sold" basis, where the respondentsassessees herein took delivery of the tickets without upfront payment, returning unsold tickets to the State. Additionally, the State's revenue became tied to the actual sales made by the respondents-assessees herein rather than a fixed sum, indicating that the State retained the risk and reward from ticket sales, characteristic of a principal-agent relationship. f. For online lotteries, the agreements did not involve any physical transfer of tickets to the respondents-assessees herein. Instead, tickets were directly sold by the State to customers through computer terminals managed by the respondents-assessees herein. Learned counsel argued that this arrangement further underscored the agency relationship, as the respondentsassessees herein merely facilitated sales made by the State, with the State bearing the risk associated with prize payouts.

It was emphasised that the respondents-assessees herein received Union of India & Others v. Future Gaming Solutions Pvt. Ltd. & Another Etc. a commission calculated as a percentage of total sales after deducting the State's revenue and prize distributions, which aligns with compensation typically earned by agents. g. Further, the respondents-assessees' argument before the High Court was that they occasionally incurred losses due to unsold tickets or fluctuating demand, thereby bearing risk and acting as principals. Learned counsel for the Revenue sought to rebut this contention by submitting that under the amended agreements, unsold tickets were returned to the State, with no financial obligation on the part of the respondents-assessees herein. In online lotteries, while the respondents-assessees herein may have to temporarily cover prize payouts under INR 10,000/- the risk ultimately remained with the State, which controlled the final prize distribution.

That occasional operational costs borne by the respondents-assessees herein, such as those related to maintaining terminals or sub-agent commissions, were incidental to their role as agents and did not alter the fundamental agency relationship. h. Learned counsel for the Revenue thus concluded that both statutory requirements and the practical structure of the agreements compel the interpretation of the respondents- assessees' role as agents of the State of Sikkim. He asserted that these agreements, along with judicial precedents and statutory provisions, leave no room for a principal-principal relationship. By mandating that the State remains the ultimate seller and by ensuring that risk and reward lie with the State, the Lotteries Act and the related legal framework firmly establish respondents- assessees' position as agents acting on behalf of the State.

Accordingly, it was urged that service tax, calculated on the basis of services provided, should apply to the respondentsassessees herein as agents in line with the legislative intent and legal precedent. 8. Per contra, Sri S Ganesh, learned senior counsel and Sri A. R. Madhav Rao, learned counsel appearing for the respondents-assessees broadly advanced the following submissions: a. The respondents-assessees herein in these cases operated independently on a principal-to-principal basis and the agreement between the State and the respondents-assessees herein is 778 structured in a way that reflects a buyer-seller relationship and not an agency. b. The respondents-assessees herein are mandated to pay a guaranteed minimum amount of Rs. 8 crores to the State Government irrespective of the number of tickets sold. Additionally, the respondents-assessees herein have to furnish a bank guarantee to secure payment.

The State does not indemnify the respondents-assessees herein, in case of any loss. Therefore, indemnification being a hallmark of agency but in the instant cases, the respondents-assessees herein are bearing all the financial risk and the State Government does not indemnify the respondents-assessees herein, then the relationship between the parties has to be principal to principal. c. Once the respondents-assessees herein purchase tickets from the State, it sells them onward at its discretion to sub- contractors or stockists. The sale proceeds exclusively belong to the respondents-assessees herein. The State government has no privity of contract with the sub-distributors. Therefore, it was argued that the respondents-assessees herein are not operating on behalf of the State Government. d. That the respondents-assessees herein bear the entire cost of marketing and advertising without reimbursement from the State Government.

Further, the respondents-assessees herein appoint stockists and sellers independently at its own risk. Hence, there is no notion of agency involved. e. Thus, service tax under the Finance Act, 1994 does not arise in the present case since no service is being provided by the respondents-assessees herein. It was argued that the respondents-assessees herein are involved in a purchase and resale arrangement. f. In K. Arumugam, this Court held that buying lottery tickets and reselling them does not amount to marketing services. g. Section 67 of the Finance Act requires service tax to be made applicable only when there is consideration for a specific service. In the present case, the margins earned by the respondentsassessees herein do not represent any commission or service. There is no service or consideration in the present case as the Union of India & Others v. Future Gaming Solutions Pvt. Ltd. & Another Etc.

transaction is an outright sale at a price lower than the maximum price of each lottery ticket. h. Lottery tickets constitute actionable claims and thus transactions involving actionable claims are exempted under Section 66D of the Finance Act, 1994. The argument of the Revenue that the lottery ticket is actionable only in the hands of the ultimate buyer is false and baseless. In response, it was submitted that the nature of tickets remains unchanged regardless of ownership, as established in Sunrise Associates vs. Government of NCT of Delhi, (2006) 5 SCC 603, ("Sunrise Associates"). i. That levy of service tax on lottery distributors infringes the State government's exclusive power to legislate on "betting and gambling" under Entry 62 - List II of the Constitution, Buttressing his submissions, learned senior counsel relied on Godfrey Philips India Limited vs.

State of Uttar Pradesh, (2005) 2 SCC 515 emphasizing that Parliament cannot use a residuary entry under Entry 97 - List I to impose taxes on subjects reserved for the States. j. That aspects theory cannot be applied to the present case to justify service tax. The sale of lottery tickets is a single transaction and cannot be split artificially into a sale and a service. k. Taxing such transactions as services would create uncertainty for other industries. If every resale of goods could be labelled as a service, it would disrupt the established business practices across sectors. 9. Learned counsel for Union of India addressed and rebutted several contentions made by the respondents-assessees herein to support their claim of operating as principals. One of the key arguments by the respondents-assessees herein was that they were in the "business" of buying and selling lottery tickets, and therefore should be considered independent principals.

Learned counsel countered this by referring to Sunrise Associates, which held that the purchase of a lottery ticket confers a conditional interest in the prize money (an actionable claim) to the buyer. Since the respondents-assessees herein do not possess any actionable claim (as they cannot participate in the lottery), they cannot be classified as true "buyers" of lottery tickets. Thus, they are limited to selling tickets only as agents of the State. 780 Points for Consideration: 10. The following points would arise for our consideration: a) Whether the impugned judgments of the High Court of Sikkim would call for any interference in these appeals? b) If not, what order? At this stage, we state that we need not go into the question regarding the aspect theory/doctrine being made applicable to these cases. This is because we are dealing with the question whether service tax is liable to be paid by the respondent-assessees.

According to the appellant- Union of India they 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 respondent-assessees that they are not agents of the Government of Sikkim but their relationship is on principal to principal basis. If we hold that the relationship between the State of Sikkim is of principal-agent then the respondents-assessees herein are liable to pay service tax as an agent. However, this does not detract from the respondent-assessees being liable to pay tax on gambling as the conduct of lotteries is nothing but a gambling activity as per Entry 62 - List II of the Seventh Schedule of the Constitution of India. Therefore, it is necessary for us to consider whether the respondents-assessees are engaged as agents by the principal-Government of Sikkim or the relationship is one of principal to principal. Relevant constitutional provisions: 11.

In order to better understand the controversy in these cases, it would be relevant to advert 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 respondentsassessees herein in these cases. 11. 1Article 246 of the Constitution of India pertains to the division of subjects between the Parliament and State Legislatures in the form of three lists in the Seventh Schedule of the Constitution, namely List I - Union List, List II - State List and List III - Concurrent List. It would be useful to extract Article 246 of the Constitution as under: Union of India & Others v. Future Gaming Solutions Pvt. Ltd. & Another Etc. "246. Subject-matter of laws made by Parliament and by the Legislatures of States.

(1) Notwithstanding anything in clauses (2) and (3), Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule (in this Constitution referred to as the "Union List"). (2) Notwithstanding anything in clause (3), Parliament, and, subject to clause (1), the Legislature of any State also, have power to make laws with respect to any of the matters enumerated in List III in the Seventh Schedule (in this Constitution referred to as the "Concurrent List"). (3) Subject to clauses (1) and (2), the Legislature of any State has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule (in this Constitution referred to as the "State List"). (4) Parliament has power to make laws with respect to any matter for any part of the territory of India not included in a State notwithstanding that such matter is a matter enumerated in the State List. " 11.

2Article 248 deals with Residuary power of Legislatures and the same reads as under: "248. Residuary powers of legislation. (1) Subject to Article 246A, Parliament has exclusive power to make any law with respect to any matter not enumerated in the Concurrent List or State List. (2) Such power shall include the power of making any law imposing a tax not mentioned in either of those Lists. " At this stage itself, it may be mentioned that the residuary power is reserved to the Parliament to legislate on any subject provided such power is not included in either the Concurrent List or the State List. 11. 3The Finance Act, 1994 was enacted by the Parliament in terms of Article 248 of the Constitution of India read with Entry 97 - 782 List I which reads as under: "97. Any other matter not enumerated in List II or List III including any tax not mentioned in either of those Lists. " 11.

4It is also pertinent to mention that Entry 92-C - List I which deals with taxes on services was inserted by the Constitution (Eighty-eighth Amendment) Act, 2003, but was not notified and was omitted by the Constitution (One Hundred and First Amendment) Act, 2016 with effect from 16. 09. 2016. In the circumstances, we observe that the Finance Act, 1994 is relatable to Entry 97 - List I. Subsequently, vide the same Constitution (One Hundred and First Amendment) Act, 2016, Article 246A was inserted as a special provision with respect to goods and services tax. 11. 5For the sake of completion, it would also be relevant to refer to Entries 33 and 34 - List II. Entries 33 and 34 - List II are the regulatory Entries, which read as under: "33. Theaters and dramatic performances; cinemas subject to the provisions of entry 60 of List I; sports, entertainments and amusements. 34. Betting and gambling. " 11.

6Entry 62 - List II (State List) as it stood then, dealt with taxes on luxuries including taxes on entertainment, amusement, betting and gambling, etc. The said Entry has subsequently been amended with effect from 16. 09. 2016. However, it is not necessary to extract the amended Entry as these appeals pertain to the period prior to 16. 09. 2016. Entry 62-List II is a taxation Entry. The unamended Entry 62-List II is extracted as under: "62. Taxes on luxuries, including taxes on entertainments, amusements, betting and gambling. " 11. 7In Hoechst Pharmaceuticals Ltd. vs. State of Bihar, (1983) 4 SCC 45, it has been observed that taxation is a distinct matter for purposes of legislative competence. There is a distinction made between general subjects of legislation and taxation. The general subjects of legislation are dealt with in one group of entries and power of taxation in a separate group. The power Union of India & Others v. Future Gaming Solutions Pvt. Ltd. & Another Etc.

to tax cannot be deduced from a general legislative entry as an ancillary power. 11. 8In Union of India vs. HS Dhillon, AIR 1972 SC 1061, it was observed that the function of Article 246(1), read with Entries 1-96 - List I, is to give positive power to Parliament to legislate in respect of these entries. Object is not to debar Parliament from legislating on a matter, even if other provisions of the Constitution enable it to do so. Accordingly, it cannot be interpreted that the words "any other matter" occurring in Entry 97 - List I, to mean a topic mentioned by way of exclusion. These words really refer to the matters contained in each of the Entries 1 to 96. The words "any other matter" had to be used because Entry 97 - List I follows Entries 1-96 - List I. It is true that the field of legislation is demarcated by Entries 1-96 - List I, but demarcation does not mean that if Entry 97 - List I confers additional powers, we should refuse to give effect to it.

At any rate, whatever doubt there may be on the interpretation of Entry 97, List I is removed by the wide terms of Article 248. It is framed in the widest possible terms. On its terms the only question to be asked is: Is the matter sought to be legislated or included in List II or in List III or is the tax sought to be levied mentioned in List II or in List III: No question has to be asked about List I. If the answer is in the negative then it follows that Parliament has power to make laws with respect to that matter or tax. According to this Court, if a Central Act is challenged as being beyond the legislative competence of Parliament, it is enough to enquire if it is a law with respect to matters or taxes enumerated in List II. If it is not, no further question arises.

Thus, the wide words of a substantive Article like Article 248 should be given full effect and they cannot be cut down by the wording in the Lists in Schedule VII merely because certain known taxes have not been included therein. Relevant Case Law on lotteries: B. R. Enterprises: 12. The nature and characters of lottery was deliberated upon in B. R. Enterprises vs. State of UP, (1999) 9 SCC 700 ("B. R. Enterprises"), 784 wherein it was held that the lotteries are a form of gambling and in R. M. D. Chamarbaugwalla vs. Union of India, AIR 1957 SC 628, it was observed that gambling actives are in the very nature and essence res extra commercium. Even though lotteries were permitted under the regulating power of the State, they could not be given the status of trade and commerce "as understood in common parlance". Trade and commerce within the meaning of Articles 301 to 304.

That there are three ingredients in the sale of lottery tickets, namely (i) price, (ii) chance, and (iii) consideration. That Entry 62 - List II refers to taxes on betting and gambling and lotteries whether conducted by private agencies or by the State are nothing but gambling. That even though the state may conduct lotteries, the element of chance remains, with no skill involved, while in a trade there is skill involved with no chance. Even if the State conduct lotteries, the element of chance remains, with no skill involved and even the organisation and conduct of the lotteries by the State Government are within the boundaries of gambling. That the only purpose of having stringent measures vis-à-vis lotteries being conducted by the State was to inculcate faith in the participants of such lottery being conducted fairly with no possibility of fraud or misappropriation and deceit and assure the hopeful recipients of high prizes that all is fair and safe.

That the object was to assure the participants that the proceeds from the sale of lottery tickets are credited to the public accounts of the State and would not be in the hands of any individual group or association and thus to bring about a transparency in the organisation of the lottery by the State, subject to the regulation. Even then, the activity of conduct of the lottery would remain in the realm of gambling. Sunrise Associates: 12. 1In the case of Sunrise Associates, the Constitution Bench of this Court speaking through Ruma Pal, J. , opined that lottery tickets can be categorized as actionable claims. The relevant paragraphs of the said judgment read as under: "40. An actionable claim would include a right to recover insurance money or a partner's right to sue for an account of a dissolved partnership or the right to claim the benefit of a contract not coupled with any liability (see Union of India v. Sri Sarada Mills Ltd. [(1972) 2 SCC 877] , SCC at p. 880).

A claim Union of India & Others v. Future Gaming Solutions Pvt. Ltd. & Another Etc. for arrears of rent has also been held to be an actionable claim (State of Bihar v. Maharajadhiraja Sir Kameshwar Singh [(1952) 1 SCC 528 : 1952 SCR 889 : AIR 1952 SC 252] , SCR at p. 910). A right to the credit in a provident fund account has also been held to be an actionable claim (Official Trustee v. L. Chippendale [AIR 1944 Cal 335 : ILR (1943) 2 Cal 325] ; Bhupati Mohan Das v. Phanindra Chandra Chakravarty [AIR 1935 Cal 756 : 40 CWN 102] ). In our opinion a sale of a lottery ticket also amounts to the transfer of an actionable claim. 44. The question is, what is this right which the ticket represents? There can be no doubt that on purchasing a lottery ticket, the purchaser would have a claim to a conditional interest in the prize money which is not in the purchaser's possession.

The right would fall squarely within the definition of an actionable claim and would therefore be excluded from the definition of "goods" under the Sale of Goods Act and the sales tax statutes. This was also accepted in H. Anraj [(1986) 1 SCC 414 : 1986 SCC (Tax) 190] when the Court said that to the extent that the sale of a lottery ticket involved a transfer of the right to claim a prize depending on chance, it was an assignment of an actionable claim. Significantly in B. R. Enterprises v. State of U. P. [(1999) 9 SCC 700] construing H. Anraj [(1986) 1 SCC 414 : 1986 SCC (Tax) 190] the Court said: (SCC p. 746, para 52) "52. So, we find three ingredients in the sale of lottery tickets, namely, (i) prize, (ii) chance, and (iii) consideration. So, when one purchases a lottery ticket, he purchases for a prize, which is by chance and the consideration is the price of the ticket. " State of Karnataka: 12. 2In State of Karnataka vs.

State of Meghalaya, (2023) 4 SCC 416 ("State of Karnataka"), a two-Judge Bench of this Court of which one of us (Nagarathna, J. ) was a member 786 and who authored the judgment, observed in paragraphs 159 as under: "159. Hence under Entry 62 of List II, the specific power to tax an activity which is "betting and gambling" is reserved with the State Legislature and cannot be read within the scope and ambit of Entry 40 of List I which is inherently restricted in its scope. " K. Arumugam: 12. 3The Union of India sought to levy service tax on the premise that the activity which the assessees were/are carrying on was a business auxiliary service within the definition of Section 65(19) of the Finance Act, 1994 and therefore, chargeable to service tax. The same was resisted by the assessees by filing writ petitions before the High Courts.

Both the High Courts of Sikkim as well as that of Kerala held against the assessees and opined that service tax is leviable on their activity under the nomenclature of business auxiliary service. Hence appeals were filed before this Court. The following questions arose for consideration: "1. Whether the activity of the appellants - assessees would attract service tax within the scope and ambit of Section 65(19)(ii) read with Section 65(105)(zzb) of the Finance Act, 1994? If not, what relief(s) the appellants are entitled to? 2. What Order? " In K. Arumugam,on a plain reading of the Explanation in light of the activity actually carried on by the appellant(s)-assessee(s) therein, it was clear that the outright purchase of lottery tickets from the promoters of the State or Directorate of Lotteries, as the case may be, was not a service in relation to promotion or marketing of service provided by the client, i. e. , the State, conducting the lottery.

The conduct of lottery is a revenue generating activity by a State or any other entity in the field of actionable claims. The client, i. e. , the State was not engaging in an activity of service while dealing with the business of lottery. Explanation to sub-clause (ii) of clause (19) of Section 65 of the Finance Act, 1994 could not bring within sub-clause (ii) Union of India & Others v. Future Gaming Solutions Pvt. Ltd. & Another Etc. activity by assuming it was initially covered under sub-clause (i) thereof but in fact was not, by virtue of the definition of goods under the very same Act read with Section 2(7) of the Sale of Goods Act, 1930. It was observed that the mere insertion of an explanation could not make an activity a taxable service when it was not covered under the main provision (which had to be read into the said sub-clause by virtue of the legislative device of express incorporation).

This is because sale of lottery tickets is not a service in relation to promotion or marketing of service provided by a client, i. e. , the State in the instant case. Conducting a lottery which is a game of chance is ex facie a privilege and an activity conducted by the State and not a service being rendered by the State. The said activity would have a profit motive and is for the purpose of earning additional revenue to the State exchequer. The activity is carried out by sale of lottery tickets to persons, such as the assessees herein, on an outright basis and once the lottery tickets are sold and the amount collected, there is no further relationship between the assessees herein and the State in respect of the lottery tickets sold. The burden is on the assessees herein to further sell the lottery tickets to the divisional/regional stockists for a profit as their business activity.

It was observed that the activity is not a promotion or a marketing service rendered by the assessees to the State within the meaning of sub-clause (ii) of clause (19) of Section 65 of the Finance Act, 1994. This is because, to reiterate, the States are not rendering a service but engaged in the activity of conducting lottery to earn additional revenue. Moreover, once the lottery tickets are sold by the Directorate of Lotteries - a Department of the State, there is transfer of the title in the lottery tickets to the vendees, who, as owners of the said lottery tickets, in turn sell them to stockists and others. Thus, there is no promotion of the business of the State as its agent. Thus, there is no 'principal--agent' relationship which would normally be the case in a relationship where a business auxiliary service is rendered. The relationship between the State and the appellants is on a principal to principal basis.

Thus, there is no activity of promotion or marketing of a service on behalf of the State. Neither is the State, which conducts the lottery, rendering a service within the meaning of the Finance Act, 1994. 788 Legal Framework: 13. For ease of reference, the provisions relating to imposition of service tax on the sale of lotteries in five different periods namely, from 01. 07. 2003 to 30. 06. 2010, from 01. 07. 2010 to 30. 06. 2012, from 01. 07. 2012 to 31. 05. 2015, from 01. 06. 2015 to 31. 03. 2016 and from 01. 04. 2016 to 30. 06. 2017 are encapsulated under the respective headings: "I. PERIOD FROM 01. 07. 2003 TILL 30. 06. 2010 No matter is pending in relation to this period as they have been disposed off by this Court in K. Arumugam v. Union of India & Others (2022 SCC Online SC 2278) Provision Finance With Effect Act From 65(105(zzb) 2003 01. 07. 2003 65(19) 2003 01. 07. 2003 Explanation inserted to 2008 16. 05. 2008 Section 65(19)(ii) 1.

Section 65(105)(zzb) Taxable Service means any service provided to a client, by a commercial concern in relation to business auxiliary service 2. Section 65(19) 'Business Auxiliary Service' means any service in relation to i) promotion or marketing or sale of goods produced or provided by or belonging to the client; or ii) promotion or marketing of service provided by the client; or iii) any customer care service provided on behalf of the client; or iv) any incidental or auxiliary support service such as billing, collection or recovery of cheques, accounts and remittance, evaluation of prospective customer and public relation services Union of India & Others v. Future Gaming Solutions Pvt. Ltd. & Another Etc. 3.

Section 65(19) after Explanation inserted to sub- clause (ii) through Section 90(3) of the Finance Act, 2008 'Business Auxiliary Service' means any service in relation to i) promotion or marketing or sale of goods produced or provided by or belonging to the client; or ii) promotion or marketing of service provided by the client; or Explanation- For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, "service in relation to promotion or marketing of service provided by the client" includes any service provided in relation to promotion or marketing of games of chance, organized, conducted or promoted by the client, in whatever form or by whatever name called, whether or not conducted online, including lottery, lotto, bingo; iii) any customer care service provided on behalf of the client; or iv) any incidental or auxiliary support service such as billing, collection or recovery of cheques, accounts and remittance, evaluation of prospective customer and public relation services II.

PERIOD FROM 01. 07. 2010 TILL 30. 06. 2012 This period pertains to (i) Civil Appeal 4289-4290 of 2013 and (ii) Civil Appeal 9506-9507 of 2013. Provision Finance With Effect Act From Removal of Explanation 2010 01. 07. 2010 to Section 65(19)(ii) Insertion of Section 2010 01. 07. 2010 65(105)(zzzzn) Insertion of Rule 7C Notification 08. 10. 2010 49/2010 790 1. Removal of Explanation to Section 65(19)(ii) through Section 76(A)(1) of the Finance Act, 2010 76(A): In Section 65, save as otherwise provided, with effect from such date as the Central Government may, by notification in the Official Gazette, appoint- (1) in clause (19), in sub-clause (ii), the Explanation shall be omitted 2.

Insertion of Section 65(105)(zzzzn) through Section 76(A)(6)(l) of the Finance Act, 2010 Taxable Service means any service provided to any person, by any other person, for promotion, marketing, organizing or in any other manner assisting in organizing games of chance, including lottery, Bingo or Lotto in whatever form or by whatever name called, whether or not conducted through internet or other electronic networks; 3. Section 66 as it existed during the period 01. 07. 2010 to 30. 06.

2012 There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent of the value of taxable services referred to in sub-clauses (a), (d), (e), (f), (g), (h), (i), (j), (k), (1), (m), (n), (o), (p), (q), (r), (s), (t), (u), (v), (w), (x), (y), (z), (za), (zb), (zc), (zh), (zi), (zj), (zk), (zl), (zm), (zn), (zo), (zq), (zr), (zs), (zt), (zu), (zv), (zw), (zx), (zy), (zz), (zza), (zzb), (zzc), (zzd), (zze), (zzf), (zzg), (zzh), (zzi), (zzk), (zzl), (zzm), (zzn), (zzo), (zzp), (zzq), (zzr), (zzs), (zzt), (zzu), (zzv), (zzw), (zzx), (zzy), (zzz), (zzza), (zzzb), (zzzc), (zzzd), (zzze), (zzzf), (zzzg), (zzzh), (zzzi), (zzzj), (zzzk), (zzzl), (zzzm), (zzzn), (zzzo), (zzzp), (zzza), (zzzr), (zzzs), (zzzt), (zzzu), (zzzv), (zzzw), (zzzx), (zzzy), (zzzz), (zzzza), (zzzzb), (zzzzc), (zzzzd), (zzzze), (zzzzf), (zzzzg), (zzzzh), (zzzzi), (zzzzj), (zzzzk), (zzzzl), (zzzzm), (zzzzn), (zzzzo), (zzzzp), (zzzzq), (zzzzr), (zzzzs), (zzzzt), (zzzzu), (zzzzv) and (zzzzw)] of clause (105) of Section 65 and collected in such manner as may be prescribed.

Union of India & Others v. Future Gaming Solutions Pvt. Ltd. & Another Etc. 4. Section 67 containing the definition of 'consideration' from 01. 04. 2006 till 31. 05. 2015 (1) Subject to the provisions of this Chapter, service tax chargeable on any taxable service with reference to its value shall,-- (i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him; (ii) in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money, with the addition of service tax charged, is equivalent to the consideration; (iii) in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner.

(2) Where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged. (3) The gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such service. (4) Subject to the provisions of sub-sections (1), (2) and (3), the value shall be determined in such manner as may be prescribed. Explanation. --For the purposes of this Section,-- "(a) "consideration" includes any amount that is payable for the taxable services provided or to be provided; 5. Insertion of Rule 7C to Service Tax Rules, 1994 by clause (2) of Notification 49/2010 dated 08. 10.

2010 (7C) The distributor or selling agent, liable to pay service tax for the taxable service of promotion, marketing, 792 organising or in any other manner assisting in organising lottery, referred to in sub-clause (zzzzn) of clause (105) of Section 65 of the said Act (hereinafter referred to as the said sub-clause), shall have the option to pay an amount at the rate specified in column (2) of the Table given below, subject to the conditions specified in the corresponding entry in column (3) of the said Table, instead of paying service tax at the rate specified in Section 66 of Chapter V of the said Act: S. No Rate Condition (1) (2) (3) 1. Rs. 6000/- on every Rs. If the lottery or lottery 10 Lakh (or part of the scheme is one where Rs. 10 Lakh) of aggregate the guaranteed prize face value of lottery tickets payout is more than printed by the organizing 80% State for a draw 2. Rs. 9000/- on every Rs. If the lottery or lottery 10 Lakh (or part of Rs.

10 scheme is one where Lakh) of aggregate face the guaranteed prize value of lottery tickets payout is less than printed by the organizing 80% State for a draw Provided that in case of online lottery, the aggregate face value of lottery tickets for the purpose of this sub-rule shall be taken as the aggregate value of tickets sold, and service tax shall be calculated in the manner specified in the said Table. Provided further that the distributor or selling agent shall exercise such option within a period of one month of the beginning of each financial year and such option shall not be withdrawn during the remaining part of the financial year. Provided also that the distributor or selling agent shall exercise such option for financial year 2010-11, within a period of one month of the publication of this sub-rule in Union of India & Others v. Future Gaming Solutions Pvt. Ltd. & Another Etc.

the Official Gazette or, in the case of new service provider, within one month of providing of service under the said sub-clause and such option shall not be withdrawn during the remaining part of that financial year. Explanation. - For the purpose of this sub-rule- (i) 'distributor or selling agent' shall have the meaning assigned to them in clause (c) of the rule 2 of the Lottery (Regulation) Rules, 2010 notified by the Government of India in the Ministry of Home Affairs published in the Gazette of India, Part-II, Section 3, sub-section (i) vide number G. S. R. 278(E) dated 1st April, 2010 and shall include distributor or selling agent authorised by the lottery organising State. (ii) 'draw' shall have the meaning assigned to it in clause (d) of the rule 2 of the Lottery (Regulation) Rules, 2010 notified by the Government of India in the Ministry of Home Affairs published in the Gazette of India, Part-II, Section 3, sub-section (i) vide number G. S. R. 278(E) dated 1st April, 2010.

(iii) 'online lottery' shall have the meaning assigned to it in clause (e) of the rule 2 of the Lottery (Regulation) Rules, 2010 notified by the Government of India in the Ministry of Home Affairs published in the Gazette of India, Part- II, Section 3, sub-section (i) vide number G. S. R. 278(E) dated 1st April, 2010. (iv) 'organising state' shall have the meaning assigned to it in clause (f) of the rule 2 of the Lottery (Regulation) Rules, 2010 notified by the Government of India in the Ministry of Home Affairs published in the Gazette of India, Part-II, Section 3, sub-section (i) vide number G. S. R. 278(E) dated 1st April, 2010. III. PERIOD FROM 01. 07. 2012 TILL 31. 05. 2015 This period pertains to (i) SLP (C) No. 18565 of 2014 (ii) SLP (C) No. 30629 of 2014 and (iii) SLP (C) No. 14111 of 2015 794 Provision Finance With Effect Act From Insertion of Section 65B(1) 2012 01. 07. 2012 Insertion of Section 65B(44) 2012 01. 07. 2012 Insertion of new Charging 2012 01. 07.

2012 Section 66B Insertion of Negative List 2012 01. 07. 2012 Section 66D(i) Section 66F 2012 01. 07. 2012 Cosmetic Amendment to Notification 20. 06. 2012 Rule 7C 36/2012 1. Insertion of Section 65B(1) through Section 143(C) of the Finance Act, 2012 "actionable claim" shall have the same meaning assigned to it in section 3 of the Transfer of Property Act, 1882 (4 of 1882) 2. Insertion of Section 65B(44) through Section 143(C) of the Finance Act, 2012 "service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include: (a) an activity which constitutes merely.

- (i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or (ia) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of Article 366 of the Constitution; or (ii) a transaction in money or actionable claim (b) a provision of service by an employee to the employer in the course of or in relation to his employment; (c) fees taken in any Court or tribunal established under any law for the time being in force. Union of India & Others v. Future Gaming Solutions Pvt. Ltd. & Another Etc. Explanation 1.

-- For the removal of doubts, it is hereby declared that nothing contained in this clause shall apply to,-- (A) the functions performed by the Members of Parliament, Members of State Legislature, Members of Panchayats, Members of Municipalities and Members of other local authorities who receive any consideration in performing the functions of that office as such member; or (B) the duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or (C) the duties performed by any person as a Chairperson or a Member or a Director in a body established by the Central Government or State Governments or local authority and who is not deemed as an employee before the commencement of this Section.

Explanation IA- For the purposes of this clause, transaction in money shall not include any activity relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination to another form, currency or denomination for which a separate consideration is charged; Explanation 2. -- For the purposes of this Chapter,-- (a) an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons; (b) an establishment of a person in the taxable territory and any of his other establishment in a non-taxable territory shall be treated as establishments of distinct persons. Explanation 3. -- A person carrying on a business through a branch or agency or representational office in any territory shall be treated as having an establishment in that territory; 3.

Insertion of new Charging Section 66B through Section 143(F) of Finance Act, 2012 796 There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent, on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed. 4. Insertion of Negative List Section 66D through Section 143(F) of Finance Act, 2012 The negative list shall comprise of the following services, namely:- (a)... (h) (i) betting, gambling or lottery; 5. Cosmetic Amendment to Rule 7C vide Clause (7)(7) of Notification 36/2012 dated 20. 06.

2012 (7C) The distributor or selling agent, liable to pay service tax for the taxable service of promotion, marketing, organising or in any other manner assisting in organising lottery, shall have the option to pay an amount at the rate specified in column (2) of the Table given below, subject to the conditions specified in the corresponding entry in column (3) of the said Table, instead of paying service tax at the rate specified in section 66B of Chapter V of the said Act: S. No Rate Condition (1) (2) (3) 1. Rs. 6000/- on every Rs. If the lottery or lottery 10 Lakh (or part of the scheme is one where Rs. 10 Lakh) of aggregate the guaranteed prize face value of lottery tickets payout is more than printed by the organizing 80%