Reliance's Supply Of Gas From KG Basin To UP Is Inter-State Sale; VAT Not Applicable : Supreme Court

The Supreme Court on Friday (May 15) has held that the sale of natural gas from the KG-D6 basin in Andhra Pradesh to buyers in another state is an inter-State sale under Section 3(a) of the Central Sales Tax Act, 1956, and therefore not subject to State Value Added Taxes.

A bench of Justice JK Maheshwari and Justice Atul S Chandurkar dismissed a batch of appeals filed by the State of Uttar Pradesh against the classification of the supply of Natural Gas from the KG-D6 basin by Reliance Industries Ltd. (RIL) to buyers in the State of Uttar Pradesh as 'inter-state supply'.

The State of UP sought to levy State VAT on the supply of natural gas within the state, classifying it as 'intra-state' supply; however, the Court rejected its stand, stating that once the gas having been metered, delivered, and title having passed to the buyer's transporter in the State of Andhra Pradesh in terms of the Gas Sales and Purchase Agreement, the sale stood concluded at that point, and “the subsequent commingling of the gas and the re-metering at Auraiya in the State of Uttar Pradesh were mere incidents of transportation…, and cannot create a fresh occasion for the levy of tax under the VAT Act.”

Background

The controversy arose from the sale of natural gas extracted from the KG-D6 basin off the coast of Andhra Pradesh by Reliance Industries, acting as operator of an international consortium under a Production Sharing Contract with the Government of India.

Under Gas Sale and Purchase Agreements (GSPAs), Reliance agreed to sell gas to fertilizer manufacturers located in Uttar Pradesh. The agreements specified that delivery would occur at Gadimoga near Kakinada in Andhra Pradesh. The gas was thereafter transported through pipelines operated by RGTIL and GAIL via Gujarat into Uttar Pradesh.

Despite this contractual structure, the State of Uttar Pradesh, in 2010, sought to impose VAT at 21%, arguing that the sale effectively became intra-State once gas entered the common carrier pipeline system and was delivered in Uttar Pradesh.

The State also argued that because gas in the pipeline became co-mingled and fungible with gas belonging to others, the sale could not be regarded as complete at Gadimoga.

The Allahabad High Court ruled in the buyer's favour, prompting the State to appeal to the Supreme Court.

Decision

Affirming the High Court's ruling, the judgment authored by Justice Maheshwari held that the movement of gas from Andhra Pradesh to Uttar Pradesh was an integral part of the contract of sale and therefore satisfied the test of an inter-State sale under Section 3(a) of the Central Sales Tax Act, as the sale occasioned the movement of goods across State borders.

“...if a sale is technically deemed to have taken place “inside” a particular State under the situs tests of Section 4(2), if that sale simultaneously occasions the movement of goods across State borders, Section 3 takes precedence. The State cannot tax it as a purely local (intraState) sale under its general sales tax laws.”, the court observed.

The Court relied heavily on the Constitution Bench decision in State of Andhra Pradesh v. NTPC, (2002) 5 SCC 203, which laid down the three essential ingredients of an inter-State sale:

(i) there must be a contract of sale, incorporating a stipulation, express or implied, regarding inter-State movement of goods;

(ii) the goods must actually move from one State to another, pursuant to such contract of sale, the sale being the proximate cause of movement; and

(iii) such movement of goods must be from one State to another State where the sale concludes.

Applying this framework, the Bench found that the GSPA expressly contemplated movement of gas from Andhra Pradesh to Uttar Pradesh, gas was physically moved across State boundaries pursuant to the contracts; and title and risk passed to buyers at Gadimoga, Andhra Pradesh.

The Court observed that the “delivery point” under the GSPA was clearly identified as the outlet flange at Gadimoga and that the seller's liability ended once delivery was made there.

Court Cited US Supreme Court Case

The Court also drew upon a US Supreme Court precedent Peoples Natural Gas Co. v. Public Service Commission (270 U.S. 550, 1926), to support its reasoning that the sale concluded at the place of supply i.e., State of AP, making it an interstate movement of goods, rendering the demand of VAT by the State of UP to be unjustifiable.

“the passing of custody and title at the agreed delivery point, without arresting the movement of the gas to its ultimate destination, constitutes the legally operative moment of the transaction, and that the subsequent feeding of gas into a common pipeline, including its inevitable physical commingling with gas from other sources, does not alter or relocate the character of the sale already concluded.”

Ultimately, the Court dismissed all appeals filed by the State of Uttar Pradesh and upheld the Allahabad High Court's decision quashing the VAT assessment orders.

Headnote

Central Sales Tax Act, 1956 – Sections 3 & 4 – Uttar Pradesh Value Added Tax Act, 2008 – Section 7 – Inter-State Sale vs. Intra-State Sale – Common Carrier Pipeline – Co-mingling of Gas – Natural gas was extracted off-shore in Andhra Pradesh, metered and delivered to buyers' designated transporters at Gadimoga (A.P.) under Gas Sales and Purchase Agreements (GSPA) – Title and risk passed to buyers at the delivery point in Andhra Pradesh – The gas was thereafter transported through common carrier pipelines across States to buyers' factories in Uttar Pradesh – The State of Uttar Pradesh levied local VAT treating the transaction as an intra-State sale, on the grounds that the gas moved in a co-mingled, fungible form through a common carrier pipeline and was ascertained only upon re-metering at the consumers' premises in U.P. – Dismissing the State's appeals, the Supreme Court held that once a sale occasions the movement of goods from one State to another pursuant to a pre-existing contract of sale, it constitutes an inter-State sale under Section 3(a) of the CST Act. [Paras 81-83]

Priority of Section 3 over Section 4 of the Central Sales Tax Act, 1956 - Section 4 of the CST Act is expressly made subject to Section 3 of the Act. Even if a sale is fictionally deemed to have taken place "inside" a particular State under the situs tests of Section 4(2) (based on the place of appropriation of unascertained or future goods), if that sale simultaneously occasions the movement of goods across State borders, Section 3 takes precedence and overrides Section 4 - The State cannot tax it as a purely local (intra-State) sale under its general sales tax laws once the transaction fulfills the conditions of an inter-State trade under Section 3. [Para 71-83]

Relevance of Co-mingling and Fungibility in Common Carrier Transportation - The physical co-mingling of natural gas with the gas of other parties in a common transport or distribution pipeline does not affect or alter the inter-State character of the transaction - The subsequent physical blending and re-metering at the destination are mere incidents of transportation attendant upon a sale already fully concluded at the delivery point in the originating State where the title and risk had passed. [Paras 81, 85]

Nature and Scope of Explanation 3 to Section 3 of the Central Sales Tax Act, 1956 - Explanation 3 to Section 3 of the CST Act (introduced vide Act 28 of 2016) is purely clarificatory and curative in nature, inserted ex abundanti cautela to formalize the pre-existing situation - It did not alter the existing understanding or create a new regime but explicitly codified the pre-existing legal position that the movement of gas through a common carrier pipeline from one State to another, despite co-mingling, is deemed an inter-State movement - Being clarificatory, the argument that it applies only prospectively is misplaced and rejected. [Paras 61 - 66]

Inapplicability of the Public Trust Doctrine to Fiscal Claims and Tax Situs - The Public Trust Doctrine is rooted in environmental jurisprudence (Articles 21, 48A, and 51A(g)) to ensure normative standards of resource management by the State as a trustee - It cannot be extended beyond its avowed purpose to serve as an instrument to override the constitutional scheme of legislative competence or to artificially create a local taxing jurisdiction for a State in clear breach of constitutional limitations under Articles 269 and 286. [Relied on Tata Iron and Steel Co. Limited v. S.R. Sarkar & Ors., 1960 SCC OnLine SC 106; State of Andhra Pradesh v. National Thermal Power Corporation, (2002) 5 SCC 203; Manganese Ore (India) Ltd. v. The Regional Assistant Commissioner of Sales Tax, Jabalpur, (1976) 4 SCC 124; Sedco Forex International Drill. Inc. and Ors. v. CIT, Dehradun & Anr., (2005) 12 SCC 717; Sree Sankaracharya University of Sanskrit & Ors. v. Dr. Manu & Anr., (2023) 19 SCC 30; Para 88]

Cause Title: STATE OF UTTAR PRADESH & ORS. VERSUS RELIANCE INDUSTRIES LIMITED & ORS. (with connected cases)

Citation : 2026 LiveLaw (SC) 502

Click here to download judgment

Appearance:

For Appellant(s) : Mr. Dinesh Dwivedi, Sr. Adv. Mr. Bhakti Vardhan Singh, AOR Mr. Nishant Singh, Adv. Mr. Narendra Pandey, Adv. Mr. Sauvik Singh, Adv. Mr. J Tarun Kumar, Adv. Mr. Ankit Khatri, Adv.

For Respondent(s) :Dr. Abhishek Manu Singhvi, Sr. Adv. Mr. K. R. Sasiprabhu, AOR Mr. Shubhranshu Padhi, Adv. Mr. Ashwin M Dave, Adv. Mr. Rishit Badiani, Adv. Mr. Ketan Dave, Adv. Mr. Avishkar Singhvi, Adv. Mr. Vishnu Sharma A S, Adv. Mr. Yasharth Misra, Adv. Mr. Pranav Giri, Adv. Mr. Nidhiram Sharma, Adv. Ms. Vidhatri, Adv. Mr. Naveen Kumar, AOR Mr. Sarad Kumar Sunny, Adv. Ms. Nidhi Mohan Parashar, AOR Mr. Vikrant Kumar, Adv. 1 Mr. Madhav Binzani, Adv. Mr. Sunil Gupta, SR. Adv. Ms. Bindu Saxena, Adv. Ms. Aparajita Swarup, Adv. Mr. Shailendra Swarup, AOR M/S. Karanjawala & Co., AOR Mr. Kavin Gulati, Sr. Adv. Ms. Ruby Singh Ahuja, Adv. Ms. Raveent Kaur Malik, Adv. Ms. Ravneet Kaur Malik, Adv. Mr. Devang Kumar, Adv. Mr. Abhyday Mishra, Adv. Ms. Archana Pathak Dave Ld, A.S.G. Mr. Karan Lahiri, Adv. Ms. Pallavi Mishra, Adv. Mr. Gaurav Arya, Adv. Mr. Aaditya Dixit,, Adv. Mr. Vaibhav Dwivedi, Adv. Mr. Kamal Digpaul, Adv. Dr. N. Visakamurthy, AOR Ms. Devina Sehgal, AOR Mr. Srikanth Varma Mudunuru, Adv. Mr. Sahil Bhalaik, AOR Mr. Siddharth Anil Khanna, Adv. Mr. Ritik Arora, Adv. Mr. Shivam Mishra, Adv. Mr. Mihir Joshi, Adv.