SUPREME COURT IN FUTURE GAMING CASE: RELEVANCE FOR GST ?

[Dr. Sanjiv Agarwal]

In UNION OF INDIA & OTHERS VERSUS FUTURE GAMING SOLUTIONS PVT. LTD. & ANOTHER ETC. - 2025 (2) TMI 483 - SUPREME COURT, Civil Appeals and SLP’s were preferred by Union of India against bunch of judgments passed by High Court of Sikkim in various cases pertaining to Future Gaming Solutions, Summit Online Trade Solutions and Tashi De Lek Gaming Solutions in matters pertaining to Service Tax. The Court discussed and analyzed the provisions of Article 246 and 248 of Constitution of India and Section 65B(44) of Finance Act, 1994.

During the pre-GST regime, in which Service Tax was levied w.e.f. 01.07.2003 under section 65(19) of Finance Act, 1994 and the Department issued notices to the respondent-assessees. The assessees filed writ petitions in High Court and Sikkim High Court in MARTIN LOTTERY AGENCIES LTD. VERSUS UNION OF INDIA - 2007 (9) TMI 39 - SIKKIM 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 respondents-assessees herein. This was challenged by Union of India before Supreme Court and in UNION OF INDIA & ORS. VERSUS M/S MARTIN LOTTERY AGENCIES LTD. - 2009 (5) TMI 1 - SUPREME COURT Supreme Court delivered its judgment on 05.05.2009 holding that the High Court had rightly set aside the notices issued to the respondents assessees herein. However, 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.

The explanation referred above was added to section 65(19)(ii) as follows:

“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; [Explanation inserted vide Finance Act, 2008 w.e.f. 16th May, 2008]”

However, in 2010, w.e.f. 01.07.2010, the above explanations was omitted and a new category of taxable service was inserted under Section 65(105)(zzzzh) as follows:

“(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;”

Subsequently, the new service was challenged and 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.

The Apex Court in the instant case examined the following constitutional provisions:

• Article 246 – subject matter of laws made by Parliament and by the legislatures of states.
• Article 248 – Residuary powers of legislature

The Apex Court observed and held as under after examination of constitutional provisions, Finance Act, 1994 and agreements:

1. Though lottery ticket is nothing but an actionable claim, conduct of a lottery scheme is nothing but a betting and gambling activity which is regulated under Entry 34 of List II (State List) of Seventh Schedule of Constitution, with Entry 62 of List II (State List) being taxation entry which enables imposition of tax by State Government.
2. Negative List introduced under Section 66D of Finance Act, 1994 with effect from 1-7-2012 included activity of betting, gambling or lottery under Clause (i) thereof, hence, no Service Tax on conduct of lottery could be levied by Central Government.
3. There being no agency and no service rendered by assessees as an agent to State Government, Service Tax was not leviable on transactions between purchaser of tickets viz. assessees and State Government.
4. Conduct of a lottery scheme is nothing but a betting and gambling activity which is regulated under Entry 34 of List II (State List), with Entry 62 of List II (State List) being taxation entry. Therefore, it is only Entry 62 of List II (State List) of Seventh Schedule of Constitution which enables imposition of tax by State Government.
5. Agency is fiduciary relationship which exists between two persons, one whom expressly or impliedly manifests assent that other should act on his behalf so as to affect his legal relations with third parties and other of whom similarly manifests assent so as to act or so acts pursuant to manifestation. Person on whose behalf act or acts have to be done is called principal and other person who is to act is called agent. Any person other than principal and agent may be referred to as third party.
6. Mere fact that a person does something in order to benefit another and latter is relying on former to do so or may have requested or even contracted for performance of action, does not make former agent of latter.
7. To determine nature of transaction, whole agreement must be looked into as 'test is ultimately one of substance rather than form’.
8. Expression 'betting, gambling or lottery' appearing in Explanation to Section 66D(i) of Finance Act, 1994 has to be given its true intent and meaning as conducting a lottery is nothing but an activity coming within scope of betting and gambling. This is by application of principle of noscitur a sociis where expression 'lottery' takes its meaning from 'betting and gambling.
1. Residuary power under Article 248 of Constitution of India is reserved to Parliament to legislate on any subject provided such power is not included in either List III (Concurrent List) or List II (State List) of Seventh Schedule of Constitution.
10. Wide words of a substantive Article like Article 248 of Constitution of India should be given full effect and they cannot be cut down by wording in Lists in Seventh Schedule merely because certain known taxes have not been included there.

The Apex Court affirmed the Sikkim High Court judgement and found no merit in the appeals filed by Union of India and others. The revenue appeal / SLP was accordingly dismissed.

Relevance under GST

The importance and relevance of the instant Apex Court judgment can be traced to the provisions of CGST Act, 2017 wherein specified supplies are out of the scope of levy of GST.

Section 7 of CGST Act, 2017 provides for scope of supply which has to be read with schedule 1, 2 and 3 to the Act. Entry 6 to Schedule III which deals with activities or transactions which shall be treated neither as a supply of goods nor a supply of services provides for ‘actionable claims other than specified actionable claims’ w.e.f. 01.10.2023 prior to which the entry was ‘actionable claims other than lottery betting gambling’.

Further, w.e.f. 01.10.2023, definition of ‘online gaming’ [2(80A)], ‘online money gaming’ [2(80B)] and ‘specified actionable claim’ [2(102A)] were inserted.

The specified actionable claims in Section 2(102A) are defined as under:

"Specified actionable claim" means the actionable claim involved in or by way of—

(i) betting;

(ii) casinos;

(iii) gambling;

(iv) horse racing;

(v) lottery; or

(vi) online money gaming;

In view of the above, w.e.f. 01.10.2023, betting, casinos, gambling, horse racing, lottery and online money gaming become taxable. The interpretation in the instant judgement would therefore, hold good.