Reliance’s Contractual Natural Gas Movement Via Common Carrier Is Inter-State Sale: UP Cannot Levy VAT: Supreme Court
The Bench noted that physical co-mingling of fungible goods in transit does not shift the taxable situs if the sale occasions movement across state borders.
The Supreme Court in its recent judgment, has clarified the constitutional and statutory landscape governing the taxation of fungible goods, such as natural gas, transported through common carrier pipelines. The Court held that when a contract of sale occasions the movement of goods from one State to another, the transaction must be characterised as an inter-State sale under Section 3(a) of the Central Sales Tax (CST) Act, 1956. This characterisation remains undisturbed even if the goods are co-mingled with other supplies during transit, provided that an equivalent quantity introduced in one State is taken out in another.
The Court said that the delivery point specified in a Gas Sales and Purchase Agreement (GSPA) determines the point where title and risk pass. Consequently, any subsequent processing or re-metering for operational efficiency does not relocate the taxable situs to the destination State.
Justice J.K. Maheshwari and Justice Atul S. Chandurkar accordingly, upheld the Allahabad High Court’s judgment, finding no valid reason to interfere with its well-reasoned order, and the appeals filed by the State of Uttar Pradesh were dismissed. It observed, “…the gas having been metered, delivered, and title having passed at Gadimoga in the State of Andhra Pradesh in terms of the GSPA, the sale stood concluded at that point. 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. Therefore, the movement of gas via common carrier, does not change the nature of sale to disentitle the benefit of Section 3 of the CST Act. Further, even the Clause 2.6(a) of the GTA stipulates that the transporter shall not receive any title and is merely transporting and delivering the gas on behalf of the buyer”.
Senior Advocate Dinesh Dwivedi appeared for the appellants and Senior Advocates Dr. Abhishek Manu Singhvi, Sunil Gupta, Kavin Gulati appeared for the respondents.
Reliance Industries Limited (RIL), acting as an operator for an international consortium, extracts natural gas from the KG-D6 basin off the coast of Andhra Pradesh. RIL entered into GSPAs with various buyers in Uttar Pradesh, stipulating the delivery point at Gadimoga, Andhra Pradesh.
At this point, the gas is metered and title passes to the buyers, who then transport it to Uttar Pradesh through common carrier pipelines operated by RGTIL and GAIL.
The State of Uttar Pradesh sought to levy Value Added Tax (VAT) on these transactions, arguing that since the gas is fungible and co-mingled during transit, the sale is only completed upon actual appropriation at the buyers' factories within Uttar Pradesh.
The Additional Commissioner, Commercial Tax, Lucknow, passed an assessment order on June 11 2010, treating the transactions as intra-State sales and fixing a tax liability at 21 percent. RIL challenged this order before the Allahabad High Court, which subsequently quashed the assessment, holding the transactions to be inter-State sales and directing a refund of the tax realized. Aggrieved by this, the State of Uttar Pradesh appealed to the Supreme Court.
The Court noted that under Section 3(a) of the CST Act, a sale is inter-State if it occasions the movement of goods from one State to another. It noted that the GSPA and Gas Transportation Agreements (GTA) clearly established a direct nexus between the sale and the movement of gas from Andhra Pradesh to Uttar Pradesh.
“The High Court, on a detailed examination of the GSPA and the GTA, returned clear findings on each of the contentions now urged before this Court by the State of Uttar Pradesh. It held that the delivery point of natural gas to the buyer is unambiguously at Gadimoga in the State of Andhra Pradesh, where measurement is carried out, and that the seller stands absolved of all liability immediately upon delivery at that point, the sale consideration correlating exclusively to the measured quantity at Gadimoga. It further held that the transporter carries the gas from the delivery point to the exit point without acquiring any right or title in the gas, and that the GTA is an agreement solely for carriage and not for sale…”, the Bench said.
“…On the specific argument, now reiterated before this Court, that the co-mingling of gas in the common carrier pipeline renders the goods unascertained and relocates the point of sale to Auraiya in Uttar Pradesh, the High Court categorically rejected the same, holding that the transportation of gas in a common pipeline on an open access basis does not affect the inter-State character of the original transaction, and that any processing or change in the nature of gas during transportation does not alter the nature of the sale effected in pursuance of inter-State trade. The aforesaid clause 2 of GSPA clearly stipulates the definition of ‘delivery point’. A plain reading of the aforesaid clause 2 read with clause 7 indicate that, there is no doubt, the title and risk both pass at the delivery point on delivery to the buyers designee, i.e., at Gadimoga where RIL’s facilities are interconnected to the facilities of the transporter.”, the Bench noted further.
The Court relied on a 2016 clarificatory amendment to Section 3, which stipulates that contractual movement through a common carrier distribution system constitutes physical movement of goods, regardless of co-mingling.
Furthermore, the Court rejected the State's reliance on the Public Trust Doctrine, stating that while the Union holds natural resources in trust, the doctrine cannot be used to override the constitutional division of taxing powers or create taxing jurisdiction where none exists.
Cause Title: State of Uttar Pradesh & Ors. v. Reliance Industries Limited & Ors. (Neutral Citation: 2026 INSC 491)
Appearances:
Appellants: Dinesh Dwivedi, Sr. Adv., Bhakti Vardhan Singh, AOR, Vikas Singh Jangra, Nishant Singh, Narendra Pandey, Sauvik Singh, J Tarun Kumar, Ankit Khatri, Advocates.
Respondents: Dr. Abhishek Manu Singhvi, Sr. Adv., K.R. Sasiprabhu, AOR, Shubhranshu Padhi, Ashwin M. Dave, Ketan Dave, Rishit Badiani, Avishkar Singhvi, Vishnu Sharma A.S., Nidhiram Sharma, Pranav Giri, Yashrath Misra,. tushar Bhardwaj, Naveen Kumar, AOR, Nidhi Mohan Parashar, AOR, Shailendra Swarup, AOR, Kavin Gulati, Sr. Adv., Ruby Singh Ahuja, Ravneet Kaur Malik, Devang Kumar, Abhyuday Mishra, M/S. Karanjawala & Co., AOR Dr. N. Visakamurthy, AOR, Devina Sehgal, AOR, Sahil Bhalaik, AOR, Advocates.