In a significant judgement, the Supreme Court on Friday dismissed a batch of pleas of the Uttar Pradesh government and ruled that the state cannot levy local Value Added Tax (VAT) on natural gas transported from Andhra Pradesh through common carrier pipelines.
A bench comprising justices J K Maheshwari and Atul S Chandurkar upheld the 2012 Allahabad High Court judgment which had quashed the state government’s assessment orders against Reliance Industries Limited (RIL) and other major buyers like Tata Chemicals and IFFCO.
It upheld the high court’s decision quashing Uttar Pradesh’s attempt to levy VAT on the interstate sale of natural gas supplied from the KG-D6 basin, holding that the transactions constituted interstate sales governed exclusively by the Central Sales Tax (CST) Act.
“We do not find any valid reason to interfere with the well-reasoned judgment of the High Court. It needs to be observed that High Court’s order is in line with the constitutional scheme and statutory mandate, which was not dispelled by the Appellant (state government) herein. Accordingly, the appeal is dismissed,” Justice Maheshwari, who authored a 94-page judgement for the bench, said.
Constitutional framework and federal balance
The verdict said India is a union of states and “reality is that all states are not endowed equally. There is stark disparity in the economic scenario among various states. Each state has its unique contributions and products. It is the free flow of trade and commerce that seeks to nullify some effects of inequality with just exceptions.”
It is observed that federating units would want to cut corners by instituting protectionist measures to augment their resources over others, the verdict said.
“It is in this context that the framers of the Constitution have laid down a road map to ensure that the Union government takes over fiscal policies touching upon inter-state or international trade and commerce. This avowed purpose, we are here to secure,” the verdict said.
It said the common thread, which runs along the Constitution, is that a unique balance is maintained in the demarcation of the powers to preserve the federation.
“The courts in India are given the responsibility to preserve this balance as envisaged by the framers of our Constitution. Any interference in balancing would be detrimental to the spirit of the Constitution,” it said.
Strict interpretation of tax law
Rejecting the pleas of the state government, it said interpretation of tax statute is to be done in a strict manner and the words have to be given their natural meaning without expanding the ambit or reducing the same.
“Moreover, we need to keep in mind that in the garb of interpretation, the judiciary cannot amend the provisions of the Constitution of India, which has been carefully drafted…,” it said.
Referring to the constitutional scheme, it said under Article 269(1) of the Constitution, the Centre has the competence to levy and collect tax on sale and purchase of goods in the course of inter-State trade or commerce.
“Article 286(1) of the Constitution further clarifies the position that the State legislature cannot impose a tax on supply of goods or services where the supply takes place outside the state,” it said.
Case details on KG-D6 gas supply
The case centered on natural gas extracted from the KG-D6 basin off the coast of Andhra Pradesh.
According to the Gas Sales and Purchase Agreements (GSPA), the “delivery point” where title and risk transferred to the buyers was at Gadimoga, Andhra Pradesh.
The gas was then transported through a network of pipelines across Gujarat and eventually into Uttar Pradesh.
The UP tax authorities said that because natural gas is a “fungible” good that gets co-mingled with gas from other sources in the pipeline, it remains “unascertained” until it is finally metered and appropriated at the buyers’ factories within Uttar Pradesh.
On this basis, the UP government claimed the transaction was a local or intra-state sale, making it liable for state VAT at a rate of 21 per cent.
Supreme Court rejects UP government’s interpretation
The top court rejected the state’s “technical” interpretation and held that a sale is deemed an “inter-state sale” under Section 3 of the Central Sales Tax (CST) Act if the contract of sale occasions the movement of goods from one state to another.
“The movement of gas was directly occasioned by the contract of sale… thereby satisfying all essential requirements of an inter-state sale,” it said.
The bench highlighted that the 2016 amendment to the CST Act was specifically intended to clarify that gas transported through common pipelines remains an inter-state sale despite co-mingling.
It said this amendment was “clarificatory” and “inserted by way of abundant caution”, meaning it applies to disputes even prior to 2016.