Gaming Report: Bombay HC Asks RBI to Reconsider Games 24×7’s Compounding Application, Rajasthan HC Grants Relief to MyTeam11 in GST Case

India’s gaming sector has been operating in an unregulated environment for the lack of a uniformly applicable rule and the ambiguity between games of skill and games of chance. Even as the Ministry for Electronics and Information Technology (MeitY) is gaining public and expert inputs of its draft rules for regulating the country’s gaming sector, two gaming companies were recently granted legal relief in separate cases.

On January 18, a division bench of the Bombay High Court, comprising Justice Gautam S Patel and SG Dige, while hearing a writ petition filed by Play Games 24×7, directed RBI to reconsider the company’s compounding application for issuing equity shares to foreign investors within four weeks of the firm’s fresh application. RBI had refused to process the company’s compounding application on the grounds of specific ‘procedural’ or ‘technical’ contraventions under the Foreign Exchange Management Act, 2000 (FEMA).

In its order, the court noted that Games 24X7 should comply with the laws, and “the mere fact that there is a game of chance on the website does not make the activity gambling unless there is an accompanying reward or promise of a reward.”

The second update comes from Rajasthan, where the Jaipur bench of the Rajasthan High Court directed the DG GST Intelligence (DGGI) not to take coercive action against MyTeam11 Fantasy Sports Pvt Ltd. in a GST evasion case that charged the company`s fantasy platform MyTeam11 of allegedly misclassifying their supply instead of an actionable claim, essentially classifying fantasy sports to be gambling.

Bombay HC Asks RBI to Reconsider Games 24×7’s Compounding Application

In 2021, Games 24×7, the parent company of RummyCircle and My11Circle, filed a writ petition in the Bombay High Court, challenging the Reserve Bank of India’s refusal to process its compounding application for issuing equity shares to foreign investors on the ground`s that the company was offering “games of chance.” The RBI withheld the application citing certain technical contraventions under the Foreign Exchange Management Act, 2000 (FEMA) and its regulations.

On January 18, a division bench of Justices Gautam S Patel and SG Dige, while hearing the case, said that just because a game of chance exists online on the company`s platform, it doesn’t constitute gambling unless there is a monetary prize involved.

Much Awaited Relief

The decision comes as a significant relief for Games 24×7, which had issued equity shares to foreign investors from June 23, 2006, to February 1, 2012, but couldn’t file the necessary reports within 30 days as dictated under FEMA regulations. Play Games filed a compounding application with the RBI to settle the matter. However, the RBI asked the firm to take clarity from the Department for Promotion of Industry and Internal Trade (DPIIT) and the Ministry of Commerce and Industry on the legality of their activity.

In its writ petition, the company said it wrote to the DPIIT multiple times but has yet to receive a response. When directed by the High Court to respond, the DPIIT responded that since Play Games, through its subsidiary Ultimate Games, operates Teen Patti and Call it Right games, its activities fall under gambling and betting. According to DPIIT, such games are prohibited under FEMA regulations and FDI policy.

The petitioner company contended that it has been offering Ultimate Teen Patti since 2015, and the game does not involve any prize money. Similarly, the Call it Right game was offered only in the western markets and not in India.

The Court’s Ruling

Hearing the arguments, Justice Patel said that the petitioner, Games 24×7’s submission on the Ultimate Teen Patti and Call it Right game held merit. In its ruling, the court noted that past judgments by the Supreme Court on games of skill and games of chance underline that to be considered as gambling, a game should be predominantly a game of chance and must be played for a monetary reward. Hence, the court ruled that the games in question were not gambling.

The court emphasized that Games 24×7 must continue to comply with the laws of the land, and “the mere fact that there is a game of chance on the website does not in itself make the activity gambling unless there is an accompanying reward or promise of a reward.”

The bench further noted – “This is the factual and legal position as it emerges from the record before us. We must clarify that whether it is for a past period or for an ongoing or future period, it is undoubtedly necessary that the petitioner must remain clear of any illicit or prohibited gambling activity, whatever the platform. If this is illegal in India, it does not become legitimate merely because it is online or because foreign investors have put money into it. We have the statement made across the Bar and which we will, of course, have to accept as an undertaking to the court that at no point will the Petitioner’s activities involve gambling, so long as it is prohibited by our law. The mere fact that there is a game of chance on the website does not make the activity gambling unless there is an accompanying reward or promise of a reward.”

The court directed the RBI to consider within four weeks a new application by Games 24×7, filed within two weeks from the order, for compounding of procedural lapses between 2006-2012 in the required foreign exchange filings.

Rajasthan HC Calls DGGI’s GST Show Cause Notice on MyTeam11 ‘an abuse of process of law’

At a time when central tax agencies are breathing down on online gaming companies, the Rajasthan High Court has granted significant relief to MyTeam11 Fantasy Sports Private Limited. In an interim order, the Rajasthan High Court has stayed the show cause notice issued to the company by the Directorate General of GST Intelligence (DGGI) on December 9, 2022, considering that the company`s fantasy business was a game of chance.

MyTeam11 had approached the Rajasthan High Court to challenge a show cause notice served to them under Section 74(1) of the Central Goods & Services Tax, 2017. The notice alleged that “MyTeam11 has avoided tax by undertaking activities in the form of betting and misclassified their supply as service instead of actionable claims, which are goods.”

In an order dated January 18, the division bench of Chief Justice Pankaj Mithal and Justice Shubha Mehta observed that several past decisions of the High Court have ruled that fantasy sports are not gambling but a game of skill.

The court restrained DGGI from taking coercive measures to recover any amount from the petitioners pursuant to the impugned show-cause notice until the disposal of the petition. The company was directed to file a reply to the show cause notice within one month.

Further, in the interim order, the bench said, “based on the initial impression, we are satisfied that some of the games offered by MyTeam11 online have already been held to be games of skill rather than that of chance or that of betting/gambling. Thus, when the matter is so settled by various courts, the issuance of the show cause notice is nothing but an abuse of the process of law.”

This is not the first show cause notice served by the DGGI on online gaming companies. The tax authorities served a similar notice worth a record ₹21,000 Crores to GamesKraft Technologies in 2022. Since October, the DGGI has questioned 65-70 online gaming companies. All the major online gaming companies are said to have had these visits from DGGI in the last few months.

Commenting on Rajasthan HC’s interim order, Roland Landers, All India Gaming Federation (AIGF) CEO, said, “For the last 60 years, multiple constitutional courts have held time and again that game of skills cannot be clubbed with gambling and betting. Conflating games of skill with betting and gambling for tax purposes is thus undermining the six decades of Indian jurisprudence. Now the Rajasthan High Court has also echoed the same view in its interim order in favor of games of skill.”