The Supreme Court has held that a sale of natural gas under the GSPA, where the contract required delivery at Gadimoga in Andhra Pradesh, where title and risk passed at that delivery point, and where the movement of gas from Andhra Pradesh to Uttar Pradesh occurred pursuant to that contract, is a sale in the course of inter-State trade or commerce within Section 3(a) of the Central Sales Tax Act, 1956. The Court clarified that once the transaction falls within Section 3 of the CST Act, Section 4 of the CST Act, being subject to Section 3, cannot be invoked to treat the sale as an intra-State sale on the basis of ascertainment, appropriation, situs, co-mingling, re-metering, or later processing in another State.
Explanation 3 to Section 3 of the CST Act, inserted in 2016 for gas transported through a common carrier pipeline, is clarificatory and reflects the pre-existing legal position. Therefore, co-mingling and fungibility of gas in a common carrier pipeline do not alter the inter-State character of the sale. Accordingly, the Apex Court concluded that State of Uttar Pradesh had no jurisdiction or statutory right to levy VAT on the subject transactions, as taxation of such inter-State sales lies exclusively within the constitutional and statutory domain of the Union under Articles 269 and 286 read with the CST Act.
A Two-Judge Bench comprising Justice J.K. Maheshwari and Justice Atul S. Chandurkar placed the dispute in the constitutional framework of fiscal federalism and emphasized that the Constitution creates mutually exclusive taxing fields for the Union and the States. It held that Articles 269 and 286, read with Entry 92-A of List I and Entry 54 of List II, reserve taxation of inter-State sales to Parliament and bar States from taxing transactions that are in the course of inter-State trade or commerce.
The Bench observed that situs of sale is irrelevant to the inter-State character of the transaction and that a State cannot, by legislative device or otherwise, convert an inter-State sale into an intra-State sale. On the statutory scheme, the Bench held that Section 3 of the CST Act defines when a sale takes place in the course of inter-State trade or commerce and that Section 4 is expressly subject to Section 3. Therefore, if a sale occasions movement of goods from one State to another, Section 3 prevails and the transaction cannot be treated as a local sale merely by invoking situs rules under Section 4.
The Bench specifically held that Explanation 3 inserted in Section 3 of the CST Act in 2016 regarding gas transported through a common carrier pipeline is clarificatory and not substantive. Relying on the Office Memorandum dated July 21, 2015 and principles governing explanatory amendments, it held that the amendment merely formalised the pre-existing legal position that co-mingled and fungible gas transported through a common carrier from one State to another continues to constitute movement of goods from one State to another.
Applying the contractual terms, the Bench agreed with the High Court that the Delivery Point under the GSPA was Gadimoga, Andhra Pradesh, where gas was measured and where title and risk passed to the buyer. It held that Reliance’s role as seller concluded when gas was handed over at Gadimoga to the buyer’s designee/transporter, and that the subsequent transportation under the GTA was only carriage on behalf of the buyer without any transfer of title to the transporter.
The Bench rejected the State’s contention that co-mingling in a common pipeline rendered the goods unascertained or shifted the situs of sale to Uttar Pradesh. It held that transportation through open access pipelines and any co-mingling or processing were merely incidents of transportation and did not alter the inter-State character of the sale already concluded at Gadimoga. The statutory obligation under the PNGRB regime to maintain common carriers could not be used to deny the benefit of Section 3 of the CST Act.
The Bench also noted that Uttar Pradesh had issued Form-C to the buyers under Section 8(4) of the CST Act and Rule 12 of the CST Rules, thereby acknowledging the transactions as inter-State sales. Having done so, the State could not approbate and reprobate by later asserting that the same transactions were intra-State sales liable to VAT.
Briefly, the appeals arose from the Allahabad High Court judgment dated September 07, 2012, by which the High Court quashed the Uttar Pradesh VAT assessment order and all consequential proceedings against Reliance Industries Limited and directed refund of tax realised by the State of Uttar Pradesh. The dispute concerned levy of VAT by Uttar Pradesh on sales of natural gas supplied by Reliance from KG-D6 basin to buyers in Uttar Pradesh under Gas Sales and Purchase Agreements.
Reliance Industries Limited was part of an international consortium with Niko Limited and later BP Exploration (Alpha) Limited for exploration and production from block KG-DWN-98-3 under the New Exploration and Licensing Policy, 1999. A Production Sharing Contract dated April 12, 2000 was executed between the Government of India and the consortium. Under the contractual framework, title in petroleum remained with the Government until it passed in terms of the PSC, and Reliance acted as operator on behalf of the consortium.
Under the PSC and the Gas Utilization Policy, Reliance was permitted to extract and sell natural gas to allocated customers. It entered into GSPAs with buyers, including buyers in Uttar Pradesh. The GSPA defined the “Delivery Point” as the outlet flange of the seller’s delivery facilities at Gadimoga near Kakinada, Andhra Pradesh; provided that gas would be sold and delivered at the Delivery Point; stated that title and risk passed to the buyer at the Delivery Point upon delivery; and placed tax liability connected with purchase of gas on the buyer.
Separate Gas Transportation Agreements were entered into by the buyers with RGTIL and GAIL for transportation of gas from Gadimoga to their facilities. The gas was extracted offshore, brought to Gadimoga in Andhra Pradesh, measured there, thereafter transported through RGTIL’s pipeline from Gadimoga to Hazira in Gujarat, and then through GAIL’s pipeline from Hazira to Auraiya in Uttar Pradesh, from where purchasers took delivery for use in their plants.
Uttar Pradesh first passed an ex parte provisional assessment order under Section 25 of the Uttar Pradesh Value Added Tax Act, 2008 for the period April 2009 to November 2009. After remand by the Trade Tax Tribunal, a fresh assessment order again fixed liability at 21 percent, which was challenged before the High Court, and the High Court held the transaction to be an inter-State sale and set aside the assessment.
Case Distinguished:
State of Gujarat v. Gas Authority of India Limited [SCA No. 12980 of 2007]
Appearances:
Dinesh Dwivedi, Sr. Adv., Bhakti Vardhan Singh, AOR, Vikas Singh Jangra, Adv., Nishant Singh, Adv., Narendra Pandey, Adv., Sauvik Singh, Adv., J Tarun Kumar, Adv., Ankit Khatri, Adv., for Appellants
Dr. Abhishek Manu Singhvi, Sr. Adv., K.R. Sasiprabhu, AOR, Shubhranshu Padhi, Adv., Ashwin M. Dave, Adv., Ketan Dave, Adv., Rishit Badiani, Adv., Avishkar Singhvi, Adv., Vishnu Sharma A.S., Adv., Nidhiram Sharma, Adv., Pranav Giri, Adv., Yashrath Misra, adv., Tushar Bhardwaj, Adv., Naveen Kumar, AOR, Nidhi Mohan Parashar, AOR, Shailendra Swarup, AOR, Kavin Gulati, Sr. Adv., Ruby Singh Ahuja, Adv., Ravneet Kaur Malik, Adv., Devang Kumar, Adv., Abhyuday Mishra, Adv., M/S. Karanjawala & Co., AOR, Dr. N. Visakamurthy, AOR, Devina Sehgal, AOR, Sahil Bhalaik, AOR, for Respondents
