Supreme Court Holds State Cannot “Approbate & Reprobate” In Inter-State Gas Sale Dispute
In a significant ruling concerning inter-State taxation and constitutional limitations on State taxing powers, the Supreme Court has held that supply of natural gas from Andhra Pradesh to buyers situated in Uttar Pradesh constituted an inter-State sale under Section 3(a) of the Central Sales Tax Act and therefore VAT could not be levied by the State of Uttar Pradesh.
Key Observation
The Supreme Court emphasized that once the movement of goods from one State to another is occasioned by a pre-existing contract of sale, the transaction qualifies as an inter-State sale under Section 3(a) of the CST Act.
The Court further observed that the tax department cannot simultaneously accept a transaction as an inter-State sale for concessional CST purposes and thereafter attempt to treat the same transaction as intra-State sale for VAT purposes.
Background Of The Dispute
Reliance Industries Ltd. (RIL), along with consortium partners, was engaged in extraction and supply of natural gas from the KG-D6 basin under the New Exploration Licensing Policy (NELP) and Production Sharing Contract entered with the Government of India.
Under the Gas Sale and Purchase Agreements (GSPA), delivery of gas was agreed to take place at Gadimoga, Andhra Pradesh. Title and risk in the gas also passed at the said delivery point.
Transportation thereafter was separately undertaken through pipeline operators including RGTIL and GAIL for movement of gas to industrial buyers located in Uttar Pradesh.
Despite the above contractual framework, the VAT authorities in Uttar Pradesh sought to levy VAT on the ground that the gas was ultimately consumed in Uttar Pradesh and that ascertainment allegedly took place at the buyer’s premises.
What The Supreme Court Held
The Supreme Court upheld the Allahabad High Court ruling and held that the movement of natural gas from Andhra Pradesh to Uttar Pradesh was pursuant to a pre-existing contract of sale and therefore squarely covered within Section 3(a) of the CST Act.
The Court observed that once the movement of goods from one State to another is directly linked with the contract of sale, the transaction becomes an inter-State sale irrespective of where final consumption takes place.
The Bench further clarified that:
- Subsequent transportation through pipelines does not alter the inter-State nature of the transaction.
- Commingling of gas during transportation is irrelevant once delivery and transfer of title already occurred at the contractual delivery point.
- Re-metering or measurement at the buyer’s premises cannot convert an inter-State sale into an intra-State transaction.
- Constitutional limitations under Article 269 and Article 286 prevent overlapping State taxation.
Department Cannot “Approbate & Reprobate”
One of the most important aspects highlighted before the Supreme Court was that the State of Uttar Pradesh had itself issued C Forms to the buyers under the CST regime.
By issuing C Forms, the Department had already accepted and recognized the transactions as inter-State sales eligible for concessional CST treatment.
The Supreme Court accepted the contention that the Department cannot subsequently take a contradictory position and seek to levy VAT by alleging the same transaction to be intra-State in nature.
Key Takeaways
- Movement of goods pursuant to a pre-existing contract of sale constitutes inter-State sale under Section 3(a) of the CST Act.
- Destination State cannot levy VAT once the transaction qualifies as inter-State sale.
- Issuance of C Forms by the Department strengthens the recognition of inter-State character of the transaction.
- Tax authorities cannot “approbate and reprobate” by taking inconsistent positions for the same transaction.
- Contractual clauses relating to delivery point, transfer of title, and movement of goods remain crucial in determining situs of sale.
Firm Comments
The ruling is likely to have significant implications beyond the oil and gas sector, particularly for industries operating through integrated infrastructure and transmission networks.
Businesses operating through centralized infrastructure, interstate transmission systems, or common carrier networks should therefore carefully evaluate contractual clauses governing delivery point, movement of goods, and transfer of title while assessing indirect tax exposure.
Conclusion
The judgment reinforces the constitutional scheme governing inter-State taxation and provides important clarity on the scope of Section 3(a) of the CST Act.
The ruling also serves as a strong precedent against inconsistent tax positions adopted by authorities and reiterates that the Department cannot both accept and deny the inter-State character of the same transaction depending upon revenue considerations.