A) ABSTRACT / HEADNOTE

The Supreme Court in Union of India & Others v. Future Gaming Solutions Pvt. Ltd. & Another (11 Feb 2025) examined whether successive amendments to the Finance Act, 1994 validly attracted service tax on entities functioning as sole purchasers/ distributors of State-run paper and online lotteries organised by the Government of Sikkim.

The petitions raised two interlinked questions:

(i) whether the transactions of buying and reselling lottery tickets by the respondents constituted a service taxable under the Finance Act after amendments between 2010–2016; and

(ii) whether the contractual and statutory matrix established a principal–agent relationship (making respondents liable as service providers) or a principal–principal / buyer–seller relationship (excluding service tax).

The Court analysed the statutory definitions introduced across Finance Acts (2010, 2012, 2015, 2016), the negative list concept, the concept of actionable claim, and the Lotteries regulatory regime. Reliance was placed on earlier precedents recognizing lottery tickets as actionable claims and on constitutional allocation of taxing powers (Entries in the Seventh Schedule).

In substance the Court upheld the High Court’s findings: the contractual terms, real substance of dealings, and the nature of lottery as an activity in the domain of betting and gambling demonstrated that respondents were purchasing tickets at their own risk and operating as principals; no agency-based service was rendered to the State such as to attract service tax under the amended Finance Act provisions. Consequently the appeals by the Union were dismissed.

Keywords: paper lottery, online lottery, service tax, actionable claim, principal–principal, principal–agent, negative list, Finance Act (2010–2016), Lotteries (Regulation) Act, 1998.

B) CASE DETAILS

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The litigation originates from notices issued to private companies engaged as sole purchasers/ distributors of State of Sikkim lotteries, requiring registration and service-tax payment after progressive amendments to the Finance Act, 1994. Successive statutory changes (notably Finance Acts of 2010, 2012, 2015 and 2016) sought to squarely include activities “for promotion, marketing, organising or in any manner assisting in organising games of chance, including lottery” within taxable services and to carve out how actionable claims and negative list doctrines apply.

The respondents repeatedly challenged these amendments before the Sikkim High Court which, on careful scrutiny of the contractual terms between State and distributors, held that respondents purchased tickets at discounted wholesale/actual-sold terms, bore commercial risks, undertook advertising costs, appointed stockists, and (in some agreements) returned unsold tickets factors consistent with a buyer/reseller profile rather than an agent rendering a service for the State. The High Court concluded that the impugned statutory changes either attempted to tax activities reserved to State legislatures under Entry 62 (betting and gambling) or mischaracterised the substance of the contractual relationship.

The Union appealed. This Court analysed the statutory amendments, prior precedents including Sunrise Associates and B.R. Enterprises, and the agreements’ clauses to resolve whether the real relationship was principal–agent or principal–principal and whether service tax could constitutionally attach.

D) FACTS OF THE CASE

The respondents are private limited companies appointed under written agreements by the Government of Sikkim as exclusive sole purchasers or distributors for paper and online lottery schemes. Agreements varied across time (2004, 2008, 2009) but commonly set wholesale/actual-sold pricing, delivery terms, payment obligations, bank guarantees, responsibility for advertising and terminal operations (online), and mechanisms for return/adjustment of unsold tickets in certain versions. Some agreements required full payment on delivery (2004 form), while later agreements shifted to actual-sold regimes or a combination of guarantees and minimum payments. Respondents appointed stockists/resellers; the State did not directly contract with those stockists.

Respondents received discounts/margins (difference between face value and purchase price) which they retained and used to cover expenses and profit. Notices for service-tax registration and retrospective liability were issued after the Government introduced the Explanation (2008), clause (zzzzn) (2010), and subsequent redefinitions (2012 onward) to capture lottery-related promotional/organising activities as taxable services. The respondents challenged these amendments, and the High Court repeatedly sided with them, striking down or reading down several amendments on competence and substance grounds. The Union pursued appeals in this Court.

E) LEGAL ISSUES RAISED

i. Whether the respondents’ activity of purchasing and reselling State lottery tickets constitutes a service taxable under the Finance Act after the amendments of 2010–2016?

ii. Whether the contractual and statutory matrix establishes an agency relationship (making respondents providers of taxable promotion/marketing/organising services) or a principal–principal sale (buyer–seller) relationship?

iii. Whether Parliament had legislative competence to impose service tax on activities which fall within betting and gambling and the State’s exclusive domain under Entry 62 List II?

iv. Whether lottery tickets being actionable claims exclude them from being taxable as services or goods under the service tax regime?

F) PETITIONER / APPELLANT’S ARGUMENTS

The Union argued that statutory language (Lotteries Act & Rules plus agreements) envisaged distributors as entities selling on behalf of the State and that amendments expressly intended to capture promotional/organising assistance as taxable service (Finance Act clauses). Reliance was placed on terminology in the Lotteries Rules referring to distributors or selling agents, on clauses in agreements (which, per Revenue, left key revenue and control with the State), and on precedents equating State-authorised sale mechanisms with agency constructs in similar monopolised commodities. It was argued that where respondents acted as facilitators of State lotteries, they rendered services to the State that Parliament could tax under its residuary/Entry 97 powers.

G) RESPONDENT’S ARGUMENTS

Respondents maintained they purchased tickets outright (subject to certain contract clauses), bore commercial risk (minimum payments, bank guarantees, marketing expenses), appointed and remunerated stockists independent of the State, and retained sale proceeds. They contended lottery tickets are actionable claims (per Sunrise Associates, B.R. Enterprises), and the purchase-resale transaction is not a service rendered to the State. Further, taxing such transactions intrudes into State domain over betting and gambling (Entry 62), and the amendments could not, by label, convert a sale into a taxable service.

H) JUDGMENT

The Court conducted a textual, purposive and contextual reading of the Finance Act amendments and the agreements. It reaffirmed that lottery tickets operate as actionable claims and that the initiation and conduct of lotteries fall within the regulatory ambit of betting and gambling (State List). The Court emphasised substance over form: the factual matrix purchase on wholesale/actual-sold terms, bank guarantees, obligation to pay minimums, retention of margins, responsibility for advertising and appointment of stockists, return of unsold tickets in certain contracts pointed to respondents acting as buyers/resellers, not agents making contracts on behalf of the State or affecting the State’s legal position.

The Court analysed agency law principles (difference between power and authority, fiduciary obligations, indemnity for agents, control/contract-making power) and found those elements missing. Consequently, the amendments’ attempt to treat the distributors’ activities as “promotion/marketing/organising” services did not alter the essential legal character of the underlying transactions. The Court also noted constitutional limits: where an activity falls within Entry 62 (betting and gambling), the State has exclusive competence to tax. Balancing these considerations, the Court declined to disturb the High Court rulings and dismissed the Union’s appeals; parties to bear their own costs.

a. RATIO DECIDENDI

The dispositive ratio is that where the substance of the contractual relationship is an outright commercial purchase and resale of actionable claims (lottery tickets) with risk allocation and commercial autonomy vesting in the purchaser, such transactions are not services rendered to the State for purposes of the Finance Act; statutory amendments cannot, in form alone, convert a principal–principal sale into a taxable principal–agent service. Where lotteries fall within betting and gambling (Entry 62 List II), taxation of the organising/promoting activity touches State competence and statutory amendments by Parliament must respect that constitutional division.

b. OBITER DICTA 

The Court discussed agency doctrine distinctions (agent vs. independent contractor; power vs. authority), stressed pith and substance and substance over nomenclature, and observed practical difficulties in ascertaining a service-value for promotional activities where sale-of-actionable-claim structure predominates. It remarked on earlier precedents (e.g., K. Arumugam) clarifying the limits of Explanation/insertion devices within the Finance Act.

c. GUIDELINES 

• Examine the contractual clauses and real-world operation to determine whether title and risk pass (buyer) or principal retains title/risks (agent).

• Treat lottery tickets as actionable claims; avoid artificial recharacterisation by statutory labels.

• Respect constitutional allocation: activities squarely within betting and gambling attract State taxation competence.

I) CONCLUSION & COMMENTS

The judgment vindicates a firm, substance-focused approach: fiscal labels or after-the-fact statutory insertions cannot supplant the contractual and factual reality that defines the legal relationship. For practitioners, the case reinforces careful drafting of distributor agreements and the continuing relevance of constitutional entries in taxing debates. Tax authorities must navigate the boundary between legitimately taxing services and intruding upon State-regulated gambling activities. The decision also underscores the doctrinal protection afforded to actionable claims in tax characterisation disputes.

J) REFERENCES

a. Important Cases Referred

1. K. Arumugam v. Union of India, Civil Appeals (batch), judgment dated 8 Aug 2024.

2. Union of India v. Martin Lottery Agencies Ltd., (2009) 12 SCC 209.

3. Sunrise Associates v. Government of NCT of Delhi, (2006) 5 SCC 603.

4. B.R. Enterprises v. State of U.P., (1999) 9 SCC 700.

5. R.M.D. Chamarbaugwalla v. Union of India, AIR 1957 SC 628.

6. State of Karnataka v. State of Meghalaya, (2023) 4 SCC 416.

b. Important Statutes Referred

1. Finance Act, 1994 (amendments via Finance Acts 2003, 2008, 2010, 2012, 2015, 2016).

2. Lotteries (Regulation) Act, 1998; Lotteries (Regulation) Rules, 2010.

3. Sale of Goods Act, 1930 (definition of goods and passage of title).

4. Constitution of India — Entry 62 List II, Entry 97 List I, Articles 246 & 248.