Peers voted to extend the concession to English, Welsh and Northern Irish students who go to Scottish universities. The debate came as the Teaching and Higher Education Bill, which introduces fee payments for all students, returned to the Lords from the House of Commons.
The progress of the Bill will now be delayed while it goes back yet again to the House of Commons for the change to be considered.
Peers voted by 212 to 89 to reject the Government's plans to exempt Scottish students from fourth- year fees but not those from other parts of the United Kingdom.
Lord Mackay of Ardbrecknish, for the Conservatives, told peers: "I do not believe the Government has made its case at all."
He quoted the Labour MP Dennis Canavan (Falkirk West), who said: "I appeal to the Government to see reason. It is a plea for justice."
The Government's House of Lords spokesman on Scotland, Lord Sewel, said no student from the United Kingdom would be prevented from attending a Scottish university because they could not afford the tuition fees.
"Our proposals mean that all students in the UK have the opportunity to study for an honours degree with a maximum contribution of pounds 3,000," he told peers.
"Our policy recognises and observes the diversity of the higher education system in the UK whilst also allowing equality of opportunity."
The Lords amendment had been overturned by MPs in April and is certain to be rejected again by ministers when it returns to the Commons.
It was the Government's 23rd Lords defeat, and the first time since the general election that peers insisted on trying to retain a Lords amendment which had been rejected by the Commons.
Afterwards the Liberal Democrat Higher Education Spokesman, Phil Willis, said it was "farcical" that English, Welsh and Northern Irish students had to pay pounds 1,000 more to go to Scottish universities than the Scots.
"A sum as small as pounds 2m would resolve this unjust anomaly ... had there not been such haste in charging students tuition fees, these students would not find themselves in such a ridiculous situation."
As the Tory amendment was debated, the House of Commons heard that applications to Scottish universities by English students had dropped from 34,500 last year to 33,000 this year.
However, the number of applications to English universities by Scottish students had also dropped.
The Conservative MP for Guildford, Nick St Aubyn, said that the Government was "trying to drive a wedge between Scottish students and those in the rest of the UK".Reuse content