• Dated 26^th May, 2026

Interstate Movement of Natural Gas Pursuant to Sale Contract Held Taxable Only Under CST - Supreme Court

BRIEF FACTS:

The Assessee was engaged in supply of natural gas extracted from the KG-D6 Basin situated off the coast of Andhra Pradesh to buyers located in Uttar Pradesh. Under the Gas Sale and Purchase Agreements (GSPA), the delivery point for transfer of gas was fixed at Gadimoga, Andhra Pradesh, where title and risk in the gas stood transferred to the buyers. Thereafter, the gas was transported through pipeline networks to the buyers situated in Uttar Pradesh. The State authorities sought to levy VAT under the Uttar Pradesh VAT Act on the ground that the gas was ultimately consumed in Uttar Pradesh and remained unascertained till delivery at the buyers' premises. According to the Department, the sale was completed only upon receipt and measurement of gas in Uttar Pradesh. Aggrieved by the levy of VAT, the Assessee challenged the proceedings contending that the transactions constituted inter-State sales under Section 3(a) of the CST Act.

ASSESSEE'S CONTENTION:

The Assessee contended that the transactions constituted inter-State sales within the meaning of Section 3(a) of the CST Act since the movement of natural gas from Andhra Pradesh to Uttar Pradesh was occasioned by the contract of sale itself. It was submitted that the GSPA specifically provided for transfer of title and risk at Gadimoga, Andhra Pradesh, and therefore the subsequent movement through pipelines to Uttar Pradesh did not alter the character of the transaction. The Assessee further argued that the fungible nature of natural gas and its co-mingling during transportation was irrelevant for determining whether the sale was inter-State in nature. Reliance was also placed upon Articles 269 and 286 of the Constitution to contend that the State Legislature lacked jurisdiction to impose VAT on an inter-State transaction.

DEPARTMENT'S CONTENTION:

The Department contended that the gas transported through the common carrier pipeline network and remained unascertained till delivery at the buyers' premises in Uttar Pradesh and therefore the sale stood completed within the State of Uttar Pradesh. It was argued that the site of sale was within Uttar Pradesh since the gas became identifiable only upon receipt and measurement by the buyers. The Department further submitted that the contractual stipulations regarding transfer of title at Gadimoga were not determinative for deciding taxability under the VAT law.

DECISION:

The Supreme Court upheld the view that the transactions constituted inter-State sales under Section 3(a) of the CST Act and consequently held that the levy of VAT by the State of Uttar Pradesh was unsustainable. The Court observed that the determining test for an inter-State sale is whether the movement of goods from one State to another is occasioned by the contract of sale itself. In the present case, the movement of natural gas from Andhra Pradesh to Uttar Pradesh was held to be an inseparable incident of the contractual arrangement entered into between the parties. The Court noted that the GSPA specifically fixed Gadimoga, Andhra Pradesh as the delivery point and provided that title and risk in the gas would pass at that location itself. The subsequent transportation of gas through the pipeline network to Uttar Pradesh was therefore pursuant to the contract of sale.

The Supreme Court further rejected the contention of the Department that co-mingling or fungibility of natural gas altered the nature of the transaction. The Court held that merely because the gas transported through pipelines became fungible in nature, the inter-State character of the sale would not stand displaced. The Court also emphasized the constitutional scheme governing fiscal federalism and observed that the Constitution creates separate and exclusive taxing fields for the Union and the States so as to avoid overlapping taxation. It was held that permitting the State of Uttar Pradesh to levy VAT on the transactions would amount to taxation of an inter-State sale contrary to Articles 269 and 286 of the Constitution. Accordingly, the levy of VAT by the State authorities was held to be without jurisdiction.

BTA's COMMENT:

The ruling is a significant reaffirmation of the settled principles governing inter-State sales under Section 3(a) of the CST Act. The judgment reiterates that the determining factor for an inter-State sale is whether movement of goods from one State to another is occasioned by the contract of sale itself. The place of eventual consumption or receipt of goods cannot by itself determine the situs of taxation. The Supreme Court has also clarified that fungibility or co-mingling of goods during transportation through a common carrier system does not alter the nature of an inter-State transaction. The decision assumes importance for sectors dealing with natural gas, petroleum products and other fungible commodities transported through pipeline or transmission networks. The judgment further reinforces the constitutional principle that taxing powers allocated to the Union and the States are mutually exclusive and overlapping levies resulting in double taxation are impermissible.

Case Reference-State of Uttar Pradesh vs Reliance Industries Ltd. & Ors. (Supreme Court of India, decided on 15 May 2026, reported in 2026 (42) Centax 282 (SC))

Author- Shristy Pathak

Edited by- Madhurima Bose