New Delhi, Feb 11 (UNI): In a significant judgment, the Supreme Court on Tuesday upheld the Sikkim High Court’s decision striking down Section 65(105) of the Finance Act, 1994, as inserted by the Finance Act, 2010, declaring it unconstitutional.
The contentious clause sought to introduce “promotion, marketing, organising, or assisting in organising games of chance, including lottery” as a new category of taxable service.
The petitioners, private companies engaged in the sale of paper and online lottery tickets organized by the Government of Sikkim, had challenged the clause because their activities did not constitute a “taxable service.” They argued that conducting lotteries falls under “betting and gambling,” which is exclusively within the competence of the State legislature under Entry 62 of List II in the Seventh Schedule.
A bench comprising Justice B.V. Nagarathna and Justice N.K. Singh affirmed the Sikkim High Court’s findings and dismissed the Union Government’s appeal.
The Court held that the relationship between lottery distributors and the State of Sikkim is principal-to-principal, not principal-to-agent. As a result, service tax could not be levied on lottery distributors, as they were not rendering any service to the State.
“There being no agency, no service is rendered by the respondent-assessees herein as an agent to the Government of Sikkim. Service tax is not leviable on the transactions between the purchaser of the lottery tickets and the Government of Sikkim,” Justice Nagarathna stated while delivering the operative portion of the judgment.
The bench also reiterated that the activity of promotion, marketing, or organizing games of chance, including lotteries, is covered under “betting and gambling” in Entry 62 of the State List, making the State Legislature the only competent authority to levy tax on such activities.
The Supreme Court’s verdict follows the precedent set in K. Arumugham v. Union of India (2024), where it was held that the sale of lottery tickets by State Governments is an activity for revenue generation and does not constitute a service-attracting service tax liability. However, the respondents will remain liable to pay gambling tax imposed by the State under Entry 62 of List II.
