Reliance Natural Gas Sale Classified as Inter‑State Transaction: Supreme Court Bars U.P. from Levying VAT [Read Judgement]

In a recent ruling the Supreme Court has held that the sale of natural gas by Reliance Industries Ltd. from its offshore KG‑D6 block in Andhra Pradesh to buyers in Uttar Pradesh constitutes an inter‑State transaction, thereby excluding U.P.’s jurisdiction to levy Value Added Tax (VAT).

The dispute arose after the Uttar Pradesh Commercial Tax Department imposed VAT on gas supplied through pipelines to fertilizer and chemical units in the state, contending that the sale was completed within U.P. The Allahabad High Court had earlier quashed the assessment, prompting the state’s appeal to the Supreme Court.

The appellant, state of U.P contented that the sale of natural gas by Reliance Industries Ltd. was an intra‑State transaction, making it liable for VAT under the U.P. Value Added Tax Act, 2008. The State argued that the gas was fungible and unascertained, meaning it could not be identified or appropriated to any buyer until it reached the buyers’ premises in U.P.

It claimed that metering and identification of the gas occurred only at the factories of the purchasers, where the gas was received and consumed. The State stated that the movement of gas through pipelines was merely a mode of transport, not part of the sale itself.

The state of U.P relied on Article 286 of the Constitution and argued that the sale did not qualify as inter‑State under Section 3 of the Central Sales Tax Act (CST Act) because the goods were not ascertained at the time of dispatch.

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On the other hand Reliance Industries Ltd. maintained that the sale was an inter‑State transaction, governed by the CST Act, and therefore U.P. had no jurisdiction to levy VAT. Under the Gas Sales and Purchase Agreement (GSPA), the delivery point was clearly defined as Gadimoga, Andhra Pradesh, where ownership and risk passed to the buyers.

The respondent also argued that the movement of gas from Andhra Pradesh to U.P. was occasioned by the contract of sale, satisfying the test of inter‑State sale under Section 3(a) of the CST Act. also stated that minor variations in quantity or calorific value did not change the nature of the transaction.

Justice J.K. Maheshwari observed that under the Gas Sales and Purchase Agreement (GSPA), the title and risk in the gas passed at Gadimoga, Andhra Pradesh, and the subsequent movement to U.P. was a direct consequence of the sale contract.

The Court stated that Article 286 of the Constitution prohibits states from taxing transactions occurring in the course of inter‑State trade or commerce. It reaffirmed that fiscal uniformity and stability are essential for national economic integration and investor confidence.

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Rejecting U.P.’s argument that the gas became identifiable only upon delivery at buyers’ premises, the bench held that minor variations in quantity or processing did not alter the inter‑State character of the sale. Consequently, the VAT demand and assessment orders were declared invalid, and the state was directed to refund the tax collected.

The Supreme Court upheld the Allahabad High Court’s decision and held that the assessment orders and VAT demands issued by U.P. authorities were invalid and quashed.

The Court directed the refund of tax collected from the buyers and reaffirmed that only the state of origin (Andhra Pradesh) is entitled to tax proceeds under Section 9(3) of the CST Act.

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