State Taxation Cannot Override Union Power

The Supreme Court dismissed the appeals arising from the Uttar Pradesh commercial tax assessment on transactions connected with the KG-D6 petroleum block. The High Court had already quashed the assessment order dated 11 June 2010, along with consequential notices and orders, and had directed refund of the tax collected. The Supreme Court found no reason to interfere.

The dispute arose from the State’s attempt to levy tax on transactions linked to the production sharing arrangement for the offshore KG-D6 block. The respondent was engaged in extracting and refining petroleum and petro-chemical products. The Court traced the background to the New Exploration and Licensing Policy, the international consortium formed for the block, and the Production Sharing Contract entered into with the Government of India.

The central issue was one of constitutional competence. The Court emphasised that the Constitution creates a fiscal structure in which the Union controls policy touching inter-State or international trade and commerce. It held that the State could not use its taxing power to burden an inter-State transaction when that field had been exclusively reserved to the Union.

The judgment also discussed the doctrine of public trust in the context of natural resources. The Court accepted that the doctrine imposes affirmative duties on the State as trustee for present and future generations. But it drew a clear boundary, holding that the doctrine concerns resource management and governance, not the creation of taxing jurisdiction. It cannot be used to justify multiple taxation by a State on a single inter-State transaction where the Constitution does not confer that power.

On that reasoning, the Court agreed with the High Court that the assessment order and all consequential actions could not stand. Civil Appeal No. 3910 of 2016 was dismissed, and the connected appeals in Civil Appeal Nos. 3913, 3914 and 3915 of 2016 were also dismissed.

Practical takeaway: State taxing powers cannot be expanded through public trust arguments when the Constitution has reserved the field to the Union.