States Cannot Levy Local VAT On Inter-State Sales Even If Sale Is Deemed To Occur Within The State: Supreme Court

The Supreme Court on Friday held that a state cannot impose its own Value-Added Tax (VAT) on a transaction that qualifies as an inter-state sale merely because the Central Sales Tax Act deems the sale to have taken place within that state for the limited purpose of identifying which state may collect tax.

A bench of Justice J.K. Maheshwari and Justice Atul S Chandurkar held that where the statutory provision defining an inter-state sale conflicts with the provision determining the deemed location of a sale, the former prevails.

Reading Sections 3 and 4 of the Central Sales Tax Act together, the court observed: “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. The State cannot tax it as a purely local (intra-State) sale under its general sales tax laws.”

It added, "Section 3 creates the taxable event (the inter-State sale), but Section 3 itself does not tell the government which State is entitled to collect the Central Sales Tax. For that, the Act relies on Section 4. The State in which the sale is deemed to have taken place “inside” (via the situs tests in Section 4) becomes the “appropriate State” empowered to levy and collect the Central Sales Tax on behalf of the Union government"

The ruling came in a dispute over Uttar Pradesh's attempt to levy VAT on Reliance Industries' sale of natural gas extracted from the KG-D6 basin off the Andhra Pradesh coast and supplied to industrial consumers in Uttar Pradesh, including fertilizer manufacturers.

Reliance's case was that its contracts provided for delivery at Gadimoga in Andhra Pradesh, where title and risk passed to buyers, after which the gas moved through pipeline infrastructure into Uttar Pradesh.

Uttar Pradesh argued that the gas remained fungible and unascertained while moving through the common pipeline network and became identifiable only upon delivery to end buyers in the state. It contended that contractual clauses fixing the delivery point could not determine tax liability and that the transactions effectively concluded in Uttar Pradesh.

Reliance argued that the movement of gas across state borders was directly caused by the sale contracts, making the transactions inter-state sales governed by the central tax framework.

Drawing from settled Supreme Court precedent, including Oil India Ltd. v. Superintendent of Taxes and Union of India v. K.G. Khosla & Co.,on what constitutes an inter-state sale, the bench observed the key question is whether the movement of goods from one state to another was the direct result of a contract of sale. 

If the sale itself occasions such movement, the transaction falls within the inter-state tax framework, regardless of where the goods are ultimately received or where the sale is notionally deemed to have occurred.

Clarifying the statutory scheme, the court said Section 3 of the Central Sales Tax Act defines the taxable event of an inter-state sale, while Section 4 determines which state may collect the central levy.

The court said the constitutional framework does not permit overlapping tax claims.

“It is clear that the Constitution of India maintains principle of exclusivity in allocating various taxations to either the Parliament or to the State legislature. Corollary to aforesaid principle is that, the construction of the taxing entry which may lead to over-lapping must be eschewed. This Court has to give primacy to this about purpose and ensure that taxation do not overlap and thereby avoiding double taxation"

With these findings, the Supreme Court dismissed the Uttar Pradesh government's appeals and upheld the Allahabad High Court's ruling that the transactions were inter-state sales not liable to value-added tax under the state's local tax law.