Gas Sold at Gadimoga Is Inter-State Sale, CST Act Explanation 3 Is Clarificatory, U.P. Cannot Levy VAT: Supreme Court in State of U.P. v. Reliance Industries [2026 INSC 491]

In State of Uttar Pradesh & Ors. v. Reliance Industries Limited & Ors. (2026 INSC 491), the Supreme Court held that title and risk in the gas passed to the buyers at the delivery point at Gadimoga, Andhra Pradesh, and the sale occasioned its movement to Uttar Pradesh. The transaction was therefore an inter-State sale, which falls within the Union's exclusive taxing field, and Uttar Pradesh could not tax it under the U.P. VAT Act, 2008 (paras 76, 82–86). Explanation 3 to Section 3 of the CST Act, inserted by Act 28 of 2016, was added by way of abundant caution and applies from the date the main provision came into force (paras 64, 66). Co-mingling of gas in a common carrier pipeline, re-metering and processing at Auraiya, Section 4 of the CST Act, Section 23(2) of the Sale of Goods Act and the public trust doctrine did not change the result (paras 83–88). A Bench of Justice J.K. Maheshwari and Justice Atul S. Chandurkar dismissed the State's appeals (paras 89–90).

Status: Allahabad High Court (Lucknow Bench) judgment dated 07.09.2012 in Writ Petition No. 6281 of 2010 and connected cases upheld; Civil Appeal No. 3910 of 2016 and connected Civil Appeal Nos. 3913, 3914 and 3915 of 2016 dismissed (paras 3, 89–90).

Headnote: VAT on Inter-State Sale of Natural Gas Through Pipeline

Constitution of India – Articles 265, 269, 286 – Seventh Schedule, List I Entry 92-A and List II Entry 54 – Central Sales Tax Act, 1956 – Sections 3, 4, 8(4), 9 – Explanation 3 to Section 3 (Act 28 of 2016) – Central Sales Tax Rules, 1957 – Rule 12 – Uttar Pradesh Value Added Tax Act, 2008 – Sections 7, 25 – Sale of Goods Act, 1930 – Section 23(2) – Natural gas – Common carrier pipeline – Co-mingling – Inter-State sale versus intra-State sale – Clarificatory explanation – Retrospective operation – Form-C – Approbate and reprobate – Public trust doctrine.

Held: (i) Under Article 269(1) the Union alone can levy and collect tax on sales in the course of inter-State trade; after the Sixth Amendment, Entry 54 of List II does not extend to such sales, and Section 3 of the CST Act gives effect to that constitutional bar (paras 56, 76).

(ii) Explanation 3 to Section 3 of the CST Act, added w.e.f. 14.05.2016 after the Office Memorandum issued on the decision of the Cabinet Committee on Economic Affairs, was inserted by way of abundant caution; being clarificatory, it applies from the date the main provision came into force, and the State's plea that it is only prospective was rejected (paras 61–66, 76(vii)).

(iii) Section 4 of the CST Act is subject to Section 3; once a sale occasions the movement of goods from one State to another, Section 3 prevails and the situs tests in Section 4(2) cannot make it an intra-State sale (paras 67–71, 83).

(iv) Section 7 of the U.P. VAT Act only reflects the limits already drawn by the Constitution and the CST Act; it has no independent operation for a transaction within the CST Act (paras 72, 76(viii)).

(v) Under Clauses 2 and 7 of the Gas Sales and Purchase Agreement, title and risk passed at Gadimoga; the sale was concluded there and occasioned the movement of gas to Uttar Pradesh, making it an inter-State sale; co-mingling, re-metering at Auraiya and processing by GAIL were mere incidents of transportation (paras 82, 84–86).

(vi) Having issued Form-C to the buyers, the State could not approbate and reprobate; and the public trust doctrine, rooted in environmental jurisprudence, cannot be used to create a taxing jurisdiction that the Constitution has not conferred (paras 83, 88).

(paras 56–90)

Case Details: State of U.P. v. Reliance Industries (2026 INSC 491)

Final Outcome: Civil Appeal No. 3910 of 2016 dismissed; connected Civil Appeal Nos. 3913, 3914 and 3915 of 2016 also dismissed; High Court judgment quashing the VAT assessment and directing refund upheld (paras 19, 89–90).

Case: State of Uttar Pradesh & Ors. v. Reliance Industries Limited & Ors.; with State of Uttar Pradesh & Ors. v. M/s. Tata Chemicals Ltd. & Ors.; State of Uttar Pradesh & Ors. v. M/s. Kribhco Shyam Fertilizers Ltd. & Ors.; and State of Uttar Pradesh & Ors. v. Indian Farmers Fertilizers Cooperative Ltd. & Ors.

Neutral Citation: 2026 INSC 491

Case No.: Civil Appeal No. 3910 of 2016 with Civil Appeal Nos. 3913, 3914 and 3915 of 2016

Court: Supreme Court of India (Civil Appellate Jurisdiction) – Reportable

Date of Decision: 15 May 2026

Bench: Justice J.K. Maheshwari (author) and Justice Atul S. Chandurkar

Relevant Acts & Sections: Constitution of India – Articles 265, 269, 286, Entry 92-A of List I and Entry 54 of List II; Central Sales Tax Act, 1956 – Sections 3 (with Explanations 1, 2 and 3), 4, 8(4) and 9; Central Sales Tax Rules, 1957 – Rule 12; Uttar Pradesh Value Added Tax Act, 2008 – Sections 7 and 25; Sale of Goods Act, 1930 – Section 23(2)

Impugned Order: Judgment dated 07.09.2012 of the Division Bench of the Allahabad High Court (Lucknow Bench) in Writ Petition No. 6281 of 2010 and connected cases, quashing the assessment order dated 11.06.2010 of the Additional Commissioner Grade-II, Commercial Tax, Lucknow, and directing refund of the tax realised (paras 3, 18–19)

Counsel: Dr. Dinesh Dwivedi, Senior Advocate, for the appellant State; Dr. Abhishek Manu Singhvi, Senior Advocate, for Respondent No. 1; Mr. Sunil Gupta, Senior Advocate, for Respondent Nos. 4 and 5 (paras 21–23)

Source: Supreme Court of India

Key Holdings of the Supreme Court

• Tax on the sale of goods in the course of inter-State trade is in the exclusive domain of the Union under Article 269 and the CST Act; a State cannot impose its sales tax or VAT on it (paras 56, 76).
• Explanation 3 to Section 3 of the CST Act, on gas carried through a common carrier pipeline, is clarificatory and operates from the date the main provision came into force (paras 64, 66).
• Section 4 of the CST Act is subject to Section 3; it cannot be used to treat an inter-State sale as a sale inside the State (paras 70–71, 83).
• The sale of gas was concluded at Gadimoga, Andhra Pradesh, where title and risk passed, and it occasioned the movement of gas to Uttar Pradesh; it was an inter-State sale (paras 82, 84).
• Co-mingling in the common carrier pipeline, re-metering at Auraiya and processing by GAIL do not change the inter-State character of the sale (paras 85–86).
• A State that issued Form-C for the transactions cannot later treat them as intra-State sales, and the public trust doctrine gives no taxing power (paras 83, 88).

Brief Facts of the Case

Under the New Exploration and Licensing Policy, 1999, a consortium of Reliance Industries Limited (RIL) and Niko Limited, later joined by BP Exploration (Alpha) Limited, won the deep-water KG-D6 block off the coast of Andhra Pradesh, and a Production Sharing Contract was signed with the Government of India on 12.04.2000 (paras 5–8). RIL entered into Gas Sales and Purchase Agreements (GSPA) with buyers allotted gas under the Gas Utilization Policy, including buyers in Uttar Pradesh. Under the GSPA, the delivery point was at Gadimoga near Kakinada, Andhra Pradesh, and title and risk passed to the buyer there (para 11).

The buyers made separate Gas Transportation Agreements with RGTIL and GAIL. The gas was metered at Gadimoga, carried by RGTIL's pipeline to Hazira in Gujarat, and then by GAIL's pipelines to Auraiya in Uttar Pradesh, from where the buyers took it to their plants (paras 12–13).

An ex parte provisional assessment under Section 25 of the U.P. VAT Act was made against RIL on 25.01.2010 for April 2009 to November 2009. After a first appeal was dismissed and the Trade Tax Tribunal remanded the matter, a fresh assessment order dated 11.06.2010 again fixed liability at 21 percent (paras 14–17). The Allahabad High Court allowed RIL's writ petition, quashed the assessment and all consequential orders, and directed refund of the tax realised. The State appealed (paras 17–20).

Issues Before the Supreme Court

1. Whether the sale of natural gas by RIL to buyers in Uttar Pradesh was an inter-State sale or an intra-State sale (para 77).
2. Whether the State of Uttar Pradesh had jurisdiction or statutory right to impose VAT on the transaction (para 77).
3. Whether Explanation 3 to Section 3 of the CST Act, added in 2016, applies only prospectively or clarifies the earlier position (paras 61–62).

Court's Findings and Reasoning

Stability in fiscal law (para 25): The Court observed that the matter went beyond a mere tax dispute; where international consortiums are involved, the rule of law demands a stable and ascertainable legal regime, which also helps attract foreign investment.

Constitutional scheme (paras 31–57): The State's taxing power is limited by abstraction, eclipse and division under the Constitution (para 33). After Bengal Immunity, the Sixth Amendment, 1956 inserted Entry 92-A in List I, substituted Entry 54 in List II and gave Parliament exclusive power under Article 269 to tax inter-State sales and to frame principles for when a sale is inter-State, which Parliament did by enacting the CST Act (paras 54–57).

Explanation 3 is clarificatory (paras 61–66): The Office Memorandum dated 21.07.2015, issued after the decision of the Cabinet Committee on Economic Affairs on 25.03.2015, clarified that gas co-mingled in a common carrier pipeline is treated as moving from one State to another if an equivalent quantity is taken out in another State. That clarification became Explanation 3. Applying Sedco Forex and Sree Sankaracharya University, the Court held that the Explanation did not alter the scope of Section 3 and must be read as effective from the date the main provision came into force (paras 64–66).

Interplay of Sections 3 and 4 (paras 67–72): Section 4 fixes the situs of a sale but is subject to Section 3. If a sale occasions the movement of goods across State borders, Section 3 takes precedence and the State cannot tax it as a local sale; Section 4 only identifies the State that collects the Central Sales Tax. Section 7 of the U.P. VAT Act merely reflects these constitutional limits (paras 70–72).

Sale concluded at Gadimoga (paras 81–82): Agreeing with the High Court's findings on the GSPA and the GTA, the Court held that under Clauses 2 and 7 of the GSPA, title and risk passed at the delivery point at Gadimoga, and RIL's role ended when the gas was handed over to RGTIL there. The transporter acquired no title, and the GTA was only an agreement for carriage.

Form-C and Section 4 (para 83): The State had itself issued Form-C to the buyers under Section 8(4) of the CST Act and Rule 12 of the CST Rules, and could not approbate and reprobate. Relying on Tata Iron and Steel Co. v. S.R. Sarkar, the Court held that once Section 3 is satisfied, Section 4 has no application.

Unascertained goods and Section 23(2) (para 84): Delivery to a carrier for transmission to the buyer is itself appropriation under Section 23(2) of the Sale of Goods Act; in any event, for Section 3 it does not matter whether the goods are ascertained or unascertained, as held in Manganese Ore (India) Ltd. following Balabhagas Hulaschand.

Co-mingling and processing (paras 85–86): Co-mingling is a statutory obligation under the PNGRB Act, 2006 and the 2008 Access Code Regulations, which require common carriers on an open access basis. Following Peoples Natural Gas Co. v. Public Service Commission, the Court held that once the gas was metered and title passed at Gadimoga, later co-mingling, re-metering at Auraiya and any processing by GAIL as transporter were incidents of transportation and did not create a fresh taxable sale in Uttar Pradesh.

Gujarat High Court ruling distinguished (para 87): In State of Gujarat v. Gas Authority of India Limited, GAIL was itself the seller, whereas here it was only a transporter; that decision had no application.

Public trust doctrine (para 88): The doctrine, as explained in M.C. Mehta v. Kamal Nath and Intellectuals Forum, Tirupathi, concerns the protection of natural resources; it does not fix the taxable situs and cannot be used to permit multiple State taxation of a single inter-State sale.

Final Outcome and Directions

• Civil Appeal No. 3910 of 2016 dismissed; the High Court's judgment was held to be in line with the constitutional scheme and statutory mandate (para 89).
• Civil Appeal Nos. 3913, 3914 and 3915 of 2016 (against Tata Chemicals, Kribhco Shyam Fertilizers and Indian Farmers Fertilizers Cooperative) dismissed for the same reasons (para 90).
• The High Court's order thus stands: the assessment order dated 11.06.2010 and all consequential orders and notices are quashed, and the State must refund the tax realised under that order (paras 19, 89).

Legal Principle Laid Down

Where a contract of sale occasions the movement of goods from one State to another, the sale is an inter-State sale under Section 3 of the CST Act, and the destination State cannot levy its own sales tax or VAT on it, even if the goods are unascertained, co-mingled in a common carrier pipeline, re-metered or processed in that State. Section 4 of the CST Act is subject to Section 3, and Explanation 3 to Section 3, for gas carried through a common carrier pipeline, is clarificatory and operates from the date the main provision came into force (paras 66, 71, 76, 83–86).

Precedents Relied Upon

• Bengal Immunity Co. Ltd. v. State of Bihar, (1955) 1 SCC 763 (seven-Judge Bench) – Considered – reconsideration of United Motors and the history leading to the Sixth Amendment. Discussed at paras 54–55.
• State of Bombay v. United Motors (India) Ltd., (1953) 1 SCC 514 – Referred to – earlier view on Article 286 later reconsidered in Bengal Immunity. Discussed at paras 52–54.
• Jindal Stainless Limited v. State of Haryana, (2017) 12 SCC 1 (nine-Judge Bench) – Relied upon – constitutional limits on the power to tax under Article 265. Discussed at paras 37, 45.
• Sedco Forex International Drill. Inc. v. CIT, (2005) 12 SCC 717 – Relied upon – a clarificatory Explanation is read into the main provision from its inception. Discussed at para 65.
• Sree Sankaracharya University of Sanskrit v. Dr. Manu, (2023) 19 SCC 30 – Relied upon – tests for a clarificatory provision. Discussed at para 66.
• State of Andhra Pradesh v. National Thermal Power Corporation, (2002) 5 SCC 203 and Hyderabad Engineering Industries v. State of A.P., (2011) 4 SCC 705 – Relied upon – essentials of an inter-State sale. Discussed at paras 74–75.
• Tata Iron and Steel Co. Limited v. S.R. Sarkar, 1960 SCC OnLine SC 106 (Constitution Bench) – Relied upon – Section 3 prevails over Section 4 of the CST Act. Discussed at para 83.
• Manganese Ore (India) Ltd. v. Regional Assistant Commissioner of Sales Tax, (1976) 4 SCC 124 – Relied upon – no distinction between ascertained and unascertained goods for Section 3(a). Discussed at para 84.
• Peoples Natural Gas Co. v. Public Service Commission, 270 U.S. 550 (1926) – Relied upon – co-mingling after passing of title does not relocate the sale. Discussed at para 85.
• M.C. Mehta v. Kamal Nath, (1997) 1 SCC 388 and Intellectuals Forum, Tirupathi v. State of A.P., AIR 2006 SC 1350 – Explained – scope of the public trust doctrine. Discussed at para 88.
• State of Gujarat v. Gas Authority of India Limited (Gujarat High Court, SCA No. 12980 of 2007) – Distinguished – GAIL was the seller there. Discussed at para 87.

Important Paragraphs of the Judgment

Verbatim extracts from the judgment. For the full text, refer to the judgment PDF below.

Para 64: "Such clarification was added as Explanation 3 to Section 3 of CST Act by way of abundant caution and as can be gathered, the legislative intent was not to alter the existing understanding of Section 3 of the CST Act with respect to transportation of gas through common carrier."

Para 66: "The amendment to Section 3 of CST Act by way of Explanation 3 does not effectively alter its scope, rather simply reflects the statutory intent to clarify inter-state transactions."

Para 71: "On conjoint reading, it is seen that, even if a sale is technically deemed to have taken place “inside” a particular State under the situs tests of Section 4(2), if that sale simultaneously occasions the movement of goods across State borders, Section 3 takes precedence."

Para 83: "Having recognised inter-State sale by providing Form-C to the buyer, it is not appropriate for the State of Uttar Pradesh to approbate and reprobate in characterizing the nature of transaction."

Para 85: "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."

Para 88: "The doctrine, in its avowed purpose, imposes affirmative duties upon the State as trustee; it does not and cannot serve as an instrument to override the constitutional scheme of legislative competence or to create taxing jurisdiction where the Constitution has not conferred any."

Practical Impact of the Ruling

• For gas producers and pipeline buyers: Where the contract fixes delivery, title and risk at a point in the producing State and the gas then moves to another State, the sale is an inter-State sale liable only to Central Sales Tax (paras 82, 85).
• For destination States: Co-mingling, re-metering or processing in the State does not give it a right to levy VAT, and a State that issued Form-C cannot later take a contrary stand (paras 83, 85–86).
• For pre-2016 assessments: Explanation 3 to Section 3 of the CST Act applies to earlier periods, so the prospective-only argument is no longer open (paras 64, 66).
• For tax practitioners: The judgment restates that Section 4 is subject to Section 3, that State VAT exclusions reflect constitutional limits, and that the public trust doctrine is not a source of taxing power (paras 71–72, 88).
• For foreign investors: The Court stressed that stable fiscal law is part of the rule of law in matters involving international consortiums (para 25).

FAQs on VAT on Inter-State Sale of Natural Gas

1. What did the Supreme Court decide in State of U.P. v. Reliance Industries?

It held that RIL's sale of KG-D6 gas to buyers in Uttar Pradesh was an inter-State sale, so Uttar Pradesh could not levy VAT, and it dismissed the State's appeals (paras 82, 89–90).

2. Where did the sale of gas take place?

At the delivery point at Gadimoga in Andhra Pradesh, where the gas was metered and title and risk passed to the buyers under the GSPA (paras 82, 85).

3. Does co-mingling of gas in a common carrier pipeline change the nature of the sale?

No. Co-mingling is a statutory incident of open-access transport, and later re-metering or processing at Auraiya does not create a fresh sale in Uttar Pradesh (paras 85–86).

4. Is Explanation 3 to Section 3 of the CST Act retrospective?

Yes. The Court held it is clarificatory, added by way of abundant caution, and is read as effective from the date the main provision came into force (paras 64, 66).

5. Can Section 4 of the CST Act be used to treat the sale as within the State?

No. Section 4 is subject to Section 3; once the sale occasions inter-State movement, Section 4 cannot be applied to make it intra-State (paras 71, 83).

Keywords: 2026 INSC 491, State of U.P. v. Reliance Industries, KG-D6 gas, inter-State sale, Section 3 CST Act, Explanation 3 Section 3, common carrier pipeline, co-mingling of gas, Section 4 CST Act, U.P. VAT Act 2008, Section 7 VAT Act, Form-C, Article 269, Article 286, Entry 54 List II, public trust doctrine, Gadimoga, Justice J.K. Maheshwari, Justice Atul S. Chandurkar, Supreme Court reportable judgment

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Judgment PDF: 2026 INSC 491 – State of Uttar Pradesh & Ors. v. Reliance Industries Limited & Ors. (Civil Appeal No. 3910 of 2016) – Download Judgment PDF

Source: Supreme Court of India (official website).