The State cannot levy VAT on the inter-State sale of natural gas transported through common carrier pipelines.

Reliance Industries Limited (RIL), as part of an international consortium, extracts natural gas from the KG-D6 basin off the coast of Andhra Pradesh

Pursuant to Gas Sales and Purchase Agreements (GSPA), RIL delivers gas to buyers at Gadimoga, Andhra Pradesh, where title and risk pass

The gas is then transported through common carrier pipelines (RGTIL and GAIL) across several states to buyers' facilities in Uttar Pradesh (U.P.)

The U.P. tax authorities issued an assessment order on 11.06.2010, treating these transactions as intra-state sales (subject to U.P. VAT) on the grounds that the gas is a "fungible good" that becomes "ascertained" only upon delivery in U.P.

RIL challenged this in the Allahabad High Court, which quashed the assessment, ruling the transactions were inter-state sales

The State of Uttar Pradesh appealed to the Supreme Court.

1. Whether the subject transaction is in the nature of an "inter-state sale" or an "intra-state sale."

2. Whether the State of Uttar Pradesh had the jurisdiction or statutory right to impose VAT on the subject transaction.

The Court applied Article 269 of the Constitution, which vests the Union with the power to tax inter-state sales

Article 286, which prohibits States from taxing sales taking place "outside the State"

Section 3 of the Central Sales Tax (CST) Act, 1956, which deems a sale to be inter-state if it "occasions the movement of goods from one State to another"

Section 4, which fixes the situs of sale subject to Section 3

The Court followed State of Andhra Pradesh v. NTPC, establishing that a sale is inter-state if movement is an incident of the contract, regardless of where property passes

the 2016 amendment (Explanation 3 to Section 3 of the CST Act), interpreting it as a clarificatory provision that confirms gas transported via common carrier from one state to another remains an inter-state movement despite co-mingling

The Court noted that under the GSPA, the "delivery point" and transfer of title/risk occurred at Gadimoga, Andhra Pradesh

Even if the gas was co-mingled in a common carrier pipeline—a statutory requirement under the PNGRB Act—this did not alter the inter-state character of the sale

The Court clarified that Section 3 of the CST Act takes precedence over Section 4; thus, since the contract necessitated movement from Andhra Pradesh to U.P., it was an inter-state sale

The 2016 amendment to Section 3 (Explanation 3) was held to be retrospective in its clarificatory nature, confirming that fungibility in pipelines does not defeat the "inter-state" status

the State of U.P. was found to have acknowledged the inter-state nature by previously issuing "Form-C" declarations to the buyers

The Court rejected the State’s "Public Trust Doctrine" argument, holding that the doctrine concerns environmental resource management and cannot create taxing jurisdiction contrary to constitutional boundaries

The Court affirmed the High Court's ruling that the sale was concluded at Gadimoga and the subsequent movement was in the course of inter-state trade

The State of Uttar Pradesh was directed to maintain the refund of taxes realized in pursuance of the quashed assessment order