The Supreme Court of India has ruled that the sale of natural gas extracted from the KG-D6 basin off the coast of Andhra Pradesh and transported to buyers in Uttar Pradesh constitutes an inter-state sale. A Bench of Justice J.K. Maheshwari and Justice Atul S. Chandurkar held that the State of Uttar Pradesh lacked the jurisdiction to impose Value Added Tax (VAT) on these transactions, as the sale was concluded at the delivery point in Andhra Pradesh. The Court dismissed the appeals filed by the State of Uttar Pradesh, affirming the Allahabad High Court’s judgment that quashed the state’s assessment orders and directed a refund of taxes.
Background of the Case
The case involved the extraction and refining of petroleum and petro-chemical products by Reliance Industries Limited (RIL) under the New Exploration and Licensing Policy (NELP). RIL, as part of an international consortium, entered into a Production Sharing Contract (PSC) with the Government of India for the KG-D6 block. RIL subsequently entered into Gas Sales and Purchase Agreements (GSPAs) with several industrial buyers in Uttar Pradesh, including Tata Chemicals Ltd. and IFFCO.
The gas is extracted offshore, brought to an onshore terminal at Gadimoga, Andhra Pradesh, and delivered to transporters (RGTIL and GAIL). It is then carried via pipelines through Gujarat to Auraiya, Uttar Pradesh. In 2010, the Uttar Pradesh commercial tax authorities issued assessment orders treating these supplies as local (intra-state) sales and levied VAT at 21%. The State’s justification was that because the gas moves in a “co-mingled” and fungible form, it only becomes “ascertained” at the purchasers’ factories in Uttar Pradesh.
Arguments of the Parties
For the Appellants (State of Uttar Pradesh): Senior Counsel Dr. Dinesh Dwivedi argued that natural gas is a fungible good that cannot be tangibly identified until actual delivery at the consumer’s premises. The State contended that the GSPA was not a contract of sale but merely an agreement for the sale of future and unascertained goods. It was argued that:
“Such ascertainment occurs only at the purchasers’ factories in Uttar Pradesh, where the gas is received and appropriated, and it is at that stage that the transaction of sale takes place.”
For the Respondents (Reliance Industries Ltd. & Others): Senior Counsel Dr. Abhishek Manu Singhvi and Senior Counsel Mr. Sunil Gupta argued that the sales were clearly inter-state under Section 3(a) of the Central Sales Tax (CST) Act. They maintained that the GSPA obligated the movement of goods from Andhra Pradesh to Uttar Pradesh and that title passed at Gadimoga. They also pointed out that the State of U.P. had already issued “Form-C” to the buyers, acknowledging the inter-state nature of the trade.
The Court’s Analysis
The Supreme Court examined the constitutional undercurrents of fiscal federalism, noting that the power to tax inter-state trade is reserved for the Union to ensure a “unity of commercial, as well as political, interests.”
On the Point of Sale and Movement of Goods: The Court observed that under Section 3 of the CST Act, a sale is inter-state if it “occasions the movement of goods from one State to another.” Regarding the delivery point, the Court held:
“The seller or the petitioner is absolved of the liability after delivery of gas at Gadimoga to the transporter… the sale consideration also co-relates to the delivery point and thereafter natural gas is transported to outside the State of Andhra Pradesh… thus it appears to be inter-State sale.”
On Co-mingled and Fungible Goods: Rejecting the State’s argument that co-mingling changes the nature of the sale, the Court emphasized that the subsequent physical mixing of gas in a common carrier pipeline is a “statutory obligation” and a “mere incident of transportation.” The Bench noted:
“The subsequent commingling of the gas and the re-metering at Auraiya in the State of Uttar Pradesh were mere incidents of transportation, attendant upon a sale already fully completed in another State, and cannot create a fresh occasion for the levy of tax under the VAT Act.”
On the 2016 Amendment to the CST Act: The Court addressed the 2016 amendment which added Explanation 3 to Section 3 of the CST Act, clarifying that co-mingled gas in common carrier pipelines constitutes inter-state movement. The Court rejected the State’s plea that this was only prospective, holding it to be “clarificatory” and “inserted as abundant caution to formalise the pre-existing situations.”
On the Public Trust Doctrine: Regarding the State’s reliance on the Public Trust Doctrine to claim taxing rights, the Court held:
“The doctrine… cannot be utilised to enable multiple taxation by State upon a single inter-State transaction, when the constitutional scheme has expressly and exclusively reserved that field to the Union.”
Final Decision
The Supreme Court found that the inter-state movement was pursuant to a contract of sale and that the sale stood concluded in Andhra Pradesh. Therefore, the State of Uttar Pradesh had no jurisdiction or statutory right to impose VAT.
Dismissing the appeals, the Court concluded:
“We do not find any valid reason to interfere with the well-reasoned judgment of the High Court. It needs to be observed that High Court’s order is in line with the constitutional scheme and statutory mandate.”
Case Details:
Case Title: State of Uttar Pradesh & Ors. v. Reliance Industries Limited & Ors. (with connected matters)
Case No.: Civil Appeal No. 3910 of 2016
Bench: Justice J.K. Maheshwari and Justice Atul S. Chandurkar
Date: May 15, 2026
