States Cannot Levy VAT on Inter-State Natural Gas Transactions Merely Because Delivery or Consumption Ultimately Occurs Within Their Territory

Case Name: State of Uttar Pradesh & Ors. v. Reliance Industries Limited & Ors.

Citation: 2026 INSC 491

Date of Judgment/Order: 15 May 2026

Bench: Justice J.K. Maheshwari and Justice Rajesh Bindal

Held: The Supreme Court held that States cannot impose Value Added Tax on transactions that constitute inter-State sales under Section 3 of the Central Sales Tax Act, 1956 merely because the goods are ultimately consumed, processed, or delivered within their territorial limits. The Court reiterated that once a transaction occasions movement of goods from one State to another pursuant to a pre-existing contract of sale, the transaction acquires the character of an inter-State sale and falls exclusively within the constitutional and statutory regime governing inter-State trade and commerce. The Court further held that contractual clauses determining delivery point, transfer of title, and movement of goods cannot be ignored unless shown to be sham or colourable devices. Emphasizing the principles of fiscal federalism and constitutional allocation of taxing powers, the Court held that States cannot expand their taxing jurisdiction in a manner that results in overlapping taxation contrary to Articles 246, 269, 286 and Entry 92-A of List I of the Constitution.

Summary: The dispute arose from attempts by the State of Uttar Pradesh to levy VAT on sales of natural gas extracted by Reliance Industries Limited from the KG-D6 Basin pursuant to the New Exploration and Licensing Policy and Production Sharing Contract executed with the Union Government. Under Gas Sales and Purchase Agreements (GSPA), Reliance supplied natural gas to various industrial buyers situated in Uttar Pradesh. The contracts provided that delivery, transfer of possession, title, and risk took place at Gadimoga, Andhra Pradesh, after which the gas was transported through pipelines operated by RGTIL and GAIL into Uttar Pradesh. The State of Uttar Pradesh contended that natural gas was fungible and unascertained during transportation, that co-mingling occurred in the pipelines, and that appropriation and ascertainment effectively occurred only when gas reached buyers’ plants in Uttar Pradesh. On this basis, the State sought to treat the transactions as intra-State sales liable to VAT. The Allahabad High Court rejected the State’s case and held that the movement of gas from Andhra Pradesh to Uttar Pradesh was directly occasioned by the pre-existing contracts of sale and therefore constituted inter-State sales under Section 3(a) of the CST Act. Before the Supreme Court, extensive arguments were advanced on constitutional federalism, Article 286, Entry 54 of List II, Entry 92-A of List I, and the legislative scheme of the CST Act. The Court undertook a detailed constitutional analysis of fiscal federalism and reaffirmed that taxing powers of the Union and States are mutually exclusive. Relying upon precedents including Bengal Immunity Co. Ltd. v. State of Bihar, State of Andhra Pradesh v. NTPC, and Hyderabad Engineering Industries v. State of Andhra Pradesh, the Court held that the decisive factor was whether the movement of goods from one State to another was occasioned by the contract of sale. Since the gas moved from Andhra Pradesh to Uttar Pradesh pursuant to binding contractual obligations under the GSPA and GTA framework, the transaction was clearly inter-State in nature. The Court also held that co-mingling or fungibility of natural gas during transportation did not alter the character of the transaction.

Decision: The Supreme Court dismissed the appeals filed by the State of Uttar Pradesh and upheld the judgment of the Allahabad High Court quashing the VAT assessment orders passed against Reliance Industries Limited and connected entities. The Court held that the transactions in question were inter-State sales governed exclusively by the Central Sales Tax Act and beyond the taxing competence of the State of Uttar Pradesh under the VAT regime. The assessment orders, consequential notices, and demands issued by the State authorities were accordingly held unsustainable in law. The State Government was directed to refund the taxes realised pursuant to the impugned assessments in accordance with the High Court’s directions. Pending applications stood disposed of.