The Supreme Court held that sale of natural gas under the GSPA occasioned inter-State movement from Andhra Pradesh to Uttar Pradesh and therefore constituted an inter-State sale under s. 3 CST Act, beyond the VAT jurisdiction of Uttar Pradesh.
Facts
The Union Government introduced the New Exploration and Licensing Policy (NELP) to encourage private and foreign participation in petroleum exploration. Pursuant thereto, Reliance Industries Ltd. (RIL), along with Niko Ltd. and BP Exploration, formed an international consortium and entered into a Production Sharing Contract (PSC) with the Union of India for exploration and production from the KG-D6 block situated offshore Andhra Pradesh.
Under the PSC, extracted natural gas was sold to buyers under Gas Sale and Purchase Agreements (GSPA). Delivery was contractually fixed at Gadimoga, Andhra Pradesh, where gas was metered and title and risk were stated to pass to buyers. The buyers separately entered into Gas Transportation Agreements (GTA) with RGTIL and GAIL for transportation of gas to Uttar Pradesh.
The State of Uttar Pradesh imposed VAT under the s. 25 U.P. VAT Act, 2008, treating the transaction as an intra-State sale on the reasoning that gas was fungible, unascertained, and became identifiable only upon receipt at buyers’ premises in Uttar Pradesh. The Allahabad High Court quashed the assessment, holding the transaction to be an inter-State sale under the CST Act, 1956.
Issues Framed
Whether the sale of natural gas under the GSPA constituted an inter-State sale under s. 3 CST Act or an intra-State sale liable to VAT in Uttar Pradesh.
Court’s Reasoning
(a) The Court extensively discussed the constitutional structure governing fiscal federalism under Arts. 246, 265, 269 and 286 Const. of India. It observed that taxing powers of the Union and States are “mutually exclusive” and constitutional interpretation must avoid overlapping taxation. Referring to Bengal Immunity Co. Ltd. v. State of Bihar and Hoechst Pharmaceuticals Ltd. v. State of Bihar, the Court reiterated that States cannot tax inter-State sales.
(b) The Court held that s. 3 CST Act governs transactions where movement of goods from one State to another is occasioned by the contract of sale. The decisive test is not where property ultimately passes, but whether the movement is integrally connected with the contract.
(c) Examining the GSPA, the Court noted that delivery, transfer of title, and transfer of risk occurred at Gadimoga, Andhra Pradesh. The buyers were contractually obliged to arrange transportation thereafter through separate GTA arrangements. The movement of gas from Andhra Pradesh to Uttar Pradesh was thus directly occasioned by the contract itself.
(d) The Court rejected the State’s argument that natural gas remained unascertained or fungible until delivery in Uttar Pradesh. It held that metering and allocation at Gadimoga sufficiently identified the goods for purposes of sale. Subsequent co-mingling during transportation did not alter the inter-State character of the transaction.
(e) The Court further observed that the State of Uttar Pradesh itself had issued Form-C under s. 8(4) CST Act, thereby recognizing the transactions as inter-State sales. The assessing authority could not subsequently disregard the contractual framework absent any finding that the agreements were sham transactions.
Held
The transactions constituted inter-State sales under s. 3(a) CST Act. Uttar Pradesh lacked jurisdiction to levy VAT under the U.P. VAT Act, 2008. The judgment of the Allahabad High Court quashing the assessment orders and directing refund was affirmed.
Ratio
Where a contract of sale itself occasions movement of goods from one State to another, the transaction constitutes an inter-State sale under s. 3(a) CST Act, notwithstanding subsequent transportation arrangements, fungibility, or co-mingling of goods during transit.
Case Details
Citation: 2026 INSC 491
Decided on: 2026
Case Title: State of Uttar Pradesh v. Reliance Industries Limited
Court: Supreme Court of India
Bench: J.K. Maheshwari, J.