Holding

Sales of electricity that involve inter‑State movement are inter‑State sales of goods and are outside the legislative competence of the states to tax under Articles 286 and 269, rendering the state levies unconstitutional.

Summary

The Supreme Court examined whether the sale of electricity by National Thermal Power Corporation Ltd. (NTPCL) to electricity boards in other states constituted an inter‑State sale and could be taxed by the states under their Electricity Duty Acts. It held that electricity is a "good" and that its generation, transmission and consumption occur almost simultaneously, making such transactions inter‑State sales of goods. Because inter‑State sales fall within the ambit of Entry 92A of List I and are barred by Articles 286 and 269 of the Constitution, state legislatures lack competence to levy tax on them. The Court also read down the definition of "consumer" in the state statutes to avoid ultra‑vires taxation. Consequently, the tax levied by Andhra Pradesh and Madhya Pradesh was declared unconstitutional, the appeal by the states was dismissed, and the writ petition filed by NTPCL was allowed.

Issues considered

The nature of electricity under tax law – whether it qualifies as "goods".
Whether the sale of electricity that involves inter‑State movement is an inter‑State sale within the meaning of the Central Sales Tax Act, 1956.
Whether the state legislatures can tax such inter‑State sales under the Andhra Pradesh Electricity Duty Act, 1939 and the Madhya Pradesh Electricity Duty Act, 1949.
The interpretation and interaction of Entry 53 and Entry 54 of List II with Entry 92A of List I of the Seventh Schedule.
Whether the definition of "consumer" in the state statutes is ultra vires Articles 286 and 269 of the Constitution.
Whether a claim of territorial nexus can validate state taxation of inter‑State electricity sales.

Legislation cited

Central Sales Tax Act, 1956s. Sec. 3, s. Sec. 6, s. Sec. 6 (as amended by Central Sales Tax (Amendment) Act, 1972)
Constitution of Indias. Art. 245, s. Art. 248, s. Art. 269(1)(2)(3), s. Art. 286(1)(2), s. Art. 287, s. Art. 288, s. Art. 366(12), s. Art. 366(29‑A)
Electricity Act, 1910s. Sec. 39
Madhya Pradesh Electricity Duty Act, 1949s. Sec. 2, s. Sec. 3

Subjects

inter‑State sale of electricitytaxation power of statesSeventh Schedule entriesCentral Sales Taxelectricity as goodsterritorial nexusArticles 286 and 269Sixth Amendmentconstitutional limitation

Judgment

A STA TE OF A.P.
v.
NATIONAL THERMAL POWER CORPORATION LTD. AND ORS.

APRIL 22, 2002

B [S.P. BHARUCHA CJ., R.C. LAHOTI, N. SANTOSH HEGDE,
RUMA PAL AND ARIJIT PASAYAT, JJ.]

Constitution of India, 1950:
c Article 245, 248, 269(l)(g) and (3), 286, 287, 288, Seventh Schedule
List I Entry 92A, List II Entries 53 and 54-Sale of electricity occasioning
inter-State movement of electricity-Levy of tax on-Competence of State
Legi:;/ature to enact law to levy tax-Held, electricity being goods shall be
subject to provisions of Entry 92A of List I-Such sale would amount to inter-
D State sale-Jn view ofprohibition by Articles 269 and 286 such Legislation is
beyond legislative competence of State-Legislation having extra territorial
operation can be enacted only by Parliament and not by S.'ate Legislature-
Articles 287 and 288 do not exclude applicability of other Articles where in
electricity has been dealt with as goods-Central Sales Tax Act, 1956-Section
53-Andhra Pradesh Electricity Duty Act, 1939-Section 3-MP. Electricity
E Duty Act, 1949-Section 2(b)-MP. Upkaar Andhiniyam, 1981-Section 3(1)-
Constitution (Sixth Amendment) Act, 1956.

7th Schedule-A piece of legislation need not necessarily fall within the
scope of one entry alone-More than one entry may overlap to cover the
F subject matter of a single piece of legislation.

7th Schedule-List I, Entry 92A, List II Entries 53 and 54-Entries
should be read together-But to the extent ofsale ofelectricity for consumption
outside the State, the electricity being goods, shall be subject to provisions of
Entry 92A of List I.

G Central Sales Tax Act, 1956-Section 3-Electricity-Sale of-Generation
of in one State-Consumption of in another State-Held, such sale on account
of instantaneous movement from one State to another would amount to inter-
State sale-Hence, would be inter-State trade squarely covered by the Act.

M.P. Electricity Duty Act, 1949-Section 2(a) 'Consumer'-Definition
H 278
STATE v. N.T.P.C. LTD. 279
of-Held, the definition has to be read down as including within it only such A
persons who receive the electricity for consumption or distribution for
consumption within the State-Otherwise the definition would be rendered
ultra vires Articles 286 and 269 of the Constitution read with Section 3 of
•
Central Sales Tax Act, 1956-MP. Upkaar Adhiniyam, 1981.

Doctrine: B
.. Doctrine of Reading Down-Applicability of
.. f
• The question for consideration in the present appeal was whether sales
of energy, by respondent-National Thermal Power Corporation Limited
(NTPq generated within the State of Andhra Pradesh and sold to several C
Electricity Boards situated outside the State pursuant to contracts of sales
oceasioning inter-State movement of electricity, attracted the incidence of
taxation under Section 3 of Andhra Pradesh Electricity Duty Act, 1939; and
whether the sale can be construed an inter-State sale or intra state sale.

The connected transferred petition wherein tax and cess was levied D
under M.P. Electricity Duty Act, 1949 and under Madhya Pradesh Upkar
Adhiniyam, 1981, also raised similar questions.

States contended that so far as sale of electricity is concerned, even if
such sale takes place in the course of inter-State trade or commerce, the State E
can legislate to tax such sale ifthat sale can be held to have taken place within
the territory of that State or if adequate territorial nexus is established between
the transaction and State Legislation; that omission to amend Entry 53 in
List II of 7th Schedule of the Constitution by not making it subject to the
provisions of Entry 92A of List I of 7th Schedule by Constitution's Sixth
Amendment was deliberate and, therefore, the restriction placed only in Entry F
54 by making it subject to the provisions of Entry 92A of List 3 should not
be read in Entry 53; and the subject of electricity since has been specifically
dealt with by Article 287 and 288 of the Constitution, therefore, by implieation
- articles other than 287 and 288 should not be read as dealing with electricity.

Dismissing the appeal and allowing the transferred petition, the Court G
HELD: l.l. Where sale of electricity takes place in the courses of inter-
state trade or commerce, the State cannot legislate to tax such sale. [302-B)

1.2. Electricity is dealt as goods, the property whereof, is that. the
production (generation), transmission, delivery and consumption are H
) -

280 SUPREME COURT REPORTS (2002] 3 S.C.R.

A simultaneous, almost instantaneous. Electricity as goods comes into existence
and is consumed simultaneously; the event of sale in the sense of transferring
property in the goods merely intervenes as step between generation and
consumption. In such a case when the generation takes place in one State
wherefrom it is supplied and it is received in another State where it is
B consumed, the entire transaction is one and can be nothing else excepting an
inter-State sale on account of instantaneous movement of goods from one State
to another occasioned by the sale or purchase of goods, squarely covered by
Section 3 of Central Sales Tax Act [304-F, G]

Commissioner ofSales Tax, Madhya Pradesh, Indore v. Madhya Pradesh
C Electricity Board, Jabalpur, [1969) 2 SCR 939 and Indian Aluminium Co. etc.
etc: v. State of Keral;i and Ors., [1966) 7 SCC 637, relied on.

Spens!ev v. Lancashire Ins. Co. 54 Wis. 433, 442, 11 NW 894, referred
to.

D Aiyar's Law Lexicon (Second Edition, 2000), referred to.

1.3. Tax on the sale or purchase of goods including electricity but
excluding newspapers shall fall within Entry 54 and shall be subject to
provisions of Entry 92A of List I. Taxes on the consumption or sale for
consumption of electricity within the meaning of Entry 53 must be
E consumption within the State and not beyond the territory of the State. Any
other sale of electricity shall continue to be subject to the limits provided by
Entry 54. Even purchase of electricity would be available for taxation which
it would not be if electricity was not includible in the meaning of term 'goods'.
A piece of legislation need not necessarily fall within the scope of one. entry
F alone; more than one entry may overlap to cover the subject matter of a single
piece of legislation. A bare consumption of electricity even by one who
generates the same may be liable to be taxed by reference to Entry 53 and if
the State Legislature may choose to impose tax on .consumption of electricity
by the one who generates it, such tax would not be deemed to be a tax
necessarily on manufacture or production or a duty of excise.
G [299-F, G, H; 300-A]

Jiyajee Rao Cotton Mills Ltd, Birlanagar, Gwalior v. State of Madhya
Pradesh, [1962) Supp. 1SCR282, followed.

1.4. A mere consumption of goods (other than electricity) not
H accompanied by purchase or sale would not be taxable under Entry 54 because
STATE v. N.T.P.C. LTD. 281

it does not provide for taxes on the consumption and Entry S3 does not speak A
of goods other than electricity. Thus entries S3 and 54 can be and must be
read together and to the extent ofsale of electricity for c,onsumption outside
the State, electricity being goods, shall also be subject to provisions of Entry
92A of List I. This is the best way of reading the two entries. [300-B, CJ

Calcutta Gas Co. Ltd v. The State of West Bengal and Ors., [1962) Suppl. B
3 SCR 1, referred to.

C.P. Motor Spirit Act re. AIR (1939) FC, 131, referred to.
,'(
1.S. The prohibition which is imposed by Article 286(1) of the
Constitution is independent of the legislative entries in Seventh Schedule. Bans C
imposed by Articles 286 and 269 on the taxation powers of the State are
independent and separate and must be got over before a State legislature can
impose tax on transactions of sale or purchase of goods. Such ban would
operate by its own force and irrespective of the language in which an Entry
in List II of Seventh Schedule has been couched. The dimension given to field D
of legislation by the language of an Entry in List-II Seventh Schedule shall
always remain subject to the limits of constitutional empowerment to legislate
_,... and can never afford to spill over the barriers created by the Constitution.
The power of State Legislature to enact law to levy tax by reference to List
II of the Seventh Schedule has two limitations: one, arising out of the entry
itself; and the other flowing from the restriction embodied in the Constitution. E
In view of Section 3 1>fthe Central Sales Tax, 1956 all that has to be seen is
whether the sale or purchase (a) occasions the movement of goods from one
State to another; or (b) is effected by a transfer of documents of title to the
goods during their movement from one State to another. If the transaction
of sale satisfies any one of the requirements it shall be deemed to be a sale or F
purchase of goods in the course of inter-state trade or commerce and by virtue
of Articles 269 and 286 of the Constitution the same shall be beyond the
legislative competence of a State to tax without regard to the fact whet(ler
such a prohibition is spelled out by the description of a legislative entry in
Seventh Schedule or not [302-C-H; 303-A)
G
Bengal Immunity Company Limited v. The State ofBihar and Ors., [19SS)
2 SCR 603 and Ram Narain Sons Ltd and Ors. v. Asstt. Commissioner o/Sales
Tax and Ors.• [19SS) 2 SCR 483, followed.

Tata Iron and Steel Co. Ltd Bombayv.S.R. Sarkar and Ors., (1961] l SCR
379 (at pages 387 and 388) and 20th Century Finance Corporation Ltd and H
282 SUPREME COURT REPORTS [2002] 3 S.C.R.

A Anr. v. State of Maharashtra, [2000) 6 sec, referred to.
1.6. Several entries in the three lists of Seventh Schedule are legislative
heads ~r fields of legislation and not the source of legislative empowerment.
Competence to legislate has to be traced to the Constitution. The division of
powers between Parliament and the State Legislatures to legislate by reference
B to territorial limits is defined by Article 245. The subject matters with respect
to which those powers can be exercised, are enumerated in the several entries
divided into three groups as three Lists of Seventh Schedule. Residuary powers
of legislation are also vested by Article 248 in the Parliament with respect to
any matter not enumerated in any of the lists in Seventh Schedule. This
C residuary power finds reflected in Entry 97 of List I. If an entry does not
spell out an exclusion from field of legislation discernible on its apparent
reading, the absence of exclusion cannot be read as enabling power to legislate
in the field not specifically excluded, more so, when there is available a specific
provision in the Constitution prohibiting such legislation. (303-B-H]

D The Calcutta Gas Co. Ltd v. The State of West Bengal and Ors., [1962)
Suppl. 3 SCR l, referred, to.

1.7. A legislation having extra territorial operation can be enacted only
by Parliament and not by any State Legislature; possibly the only exception
being one where extra territorial operation of a State legislation is sustainable
E on the ground of territorial nexus. Such territorial nexus, when pleaded, must
be sufficient and real and not illusory. In Entry 53, sale for consumption would
mean a sale for consumption within the State so as to bring a State Legislation
within the field of Entry 53. If sa.Ie and consumption were to take place in
different States, territorial nexus for the State, where the sale takes place,
F would be lost. Since in case of electricity the events of sale and consumption
are inseparable, any State legislation levying duty on sale of electricity by
artificially or fictionally assuming that the events of sale and consumption
have taken place in two States, would be vitiated because of extra territorial
operation of State legislation. [303-F-H; 304-A]

G Burmah Shell Oii Storage and Distributing Co. India Ltd v. The Belgaum
Borough Municipality, [1963] Suppl. 2 SCR 216 and 20th Century Finance
Corporation Ltd and Anr. v. State of Maharashtra, [2000] 6 SCC 12, referred
to.

1.8. The contention of the States that in case of inter-State sale of
H electricity, State has power to legislate such sale if territorial nexus is established
STATE v. N.T.P.C. LTD. 283
between the transaction and State legislation, runs counter to the scheme of A
constitutional provisions and specially the sixth Amendment. If such contention
is accepted, the State where the dealer supplying the electricity is located and
the electricity originates for sale, as also the States in which the purchaser of
electricity is located and it is delivered, shall both subject the electrical energy
to taxation, by relying on the theory of territorial nexus. Such multiple taxation B
would result in hampering free movement of electricity between the States and
therefore, would be prejudicial to freedom of trade, commerce and inter-co11rse
throughout the territory oflndia, and for the unity and integrity of the country.
•
That would give rise to the same situation which was sought to be remedied by
the Constitution and the Sixth Amendment. [306-A-C]
2.1. Sale in the course of inter-State trade has three essential ingredients C
(i) there must be a contract of sale, incorporating a stipulation, express or
implied regarding inter-State movement of goods; (ii) the goods must actually
move from one State to another, pursuant to such contract of sale; the sale
being the proximate cause of movement; and (iii) such movement of goods
must be from one State to another State where the sale concludes. It follows D
as a necessary corollary of these principles that a movement of goods which
takes place independently of a contract of sale would not fall within the
meaning of inter-State sale. Similarly, if the transaction of sale stands
completed within the State and the movement of goods takes place thereafter,
it would obviously be independently of the contract of sale and necessarily
by or on behalf of the purchaser alone and, therefore, the transaction would E
not be having an inter-State element. (300-H; 301-A, B, CJ

English Electric Company of India Ltd v. Deputy Commercial Tax Officer,
(1977] I SCR 631; Union of India v. K.G. Khosla and Co. ltd, (1979] 2 SCC
242, Mis. Sahney Steel and Press Works ltd and Anr. v. Commercial Tax Officer
and Ors., (1985] 4 SCC 173; Manganese Ore (India) Ltd v. The Regional Asstt. p
Commissioner of Sales Tax Jabalpur, (1976] 4 SCC 124 and Balabhagas
Hulaschandv. State ofOrissa, (1976] 2 SCC 44, referred to.

2.2. In the instant cases, contracts have been entered into between parties
to the transaction prior to generation of electricity. The inter-State movement G
of electricity is pursuant to contracts of sale. Such sales can be held only as
inter-State sales. Though it may be permissible to fix the sites of sale either
by appropriate State legislation or by Judge made law but none of the two
can artificially appoint a situs of sale so as to create territorial nexus attracting
applicability of tax legislation enacted by any State Legislature and tax on
inter-State sale in breach of Section 3 of the Central Sales Tax Act read with H
284 SUPREME COURT REPORTS [2002) 3 S.C.R.

A Articles 286(2) and 269(1) and (3) of the Constitution. No State legislation,
nor any stipulation in any contract, can fix the situs of sale within the State
or artificially define the completion of sale in such a way as to convert an
inter-State sale into an intra-State sale or create a territorial nexus to tax an
inter-State sale unless permitted by an appropriate central legislation.
(304-H; 305-A, B; 305-C-D)
B
3. The contention that subject of electricity has been specifically dealt
with by Articles 287 and 288 of the Constitution and so, by implication, articles
other than Articles 287 and 288 should be read as not dealing with electricity,
can not be accepted Articles 287 and 288 make some provisions for electricity
C and water or electricity in the special context dealt with by those Articles and
do not exclude applicability of other Articles to electricity where electricity
has been dealt with as goods. (306-D, E)

4. The definition of consumer under M.P. Electricity Duty Act, 1949
and under M.P. Upkar Adhiniyam, 1981 shall have to be read down as
D including within its only such person who receive the electricity for
consumption or distribution for consumption within the State. Without such
reading down, the definition of consumer would be rendered ultra vires of
Articles 286 and 269 of the Constitution read with Section 3 of the Central
..
Sales Tax Act, 1956. [305-E, F)

E CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3112 of
1990.

From the Judgment and Order dated 11.4.1990 of the Andhra Pradesh
High Court in W. P. No. 8488 of 1987.

F WITH

T.C. (C) No. 3 of 1998

Soli J. Sorabjee, Attorney General, Harish N. Salve, Solicitor General,
K. Amareswari, G.L. Sanghi, K.K. Venugopal, C.S. Vaidyanathan, T.L.V.
G Iyer, Ranjit Kumar, A.S. Nambiar, R. Madhavi Latha, K. Subba Rao, T.V.
Ratnam, Manish Singhvi, S.K. Dhingra, Prakash Shrivastava, S.K. Agnihotri,
Ms. Malini Poduval, Ms. Lansinglu Rongmei, Ms. Indu Malhotra, Vikas
Mehta, Ms. Pooja Vij. Sidharth Bhatnagar, Mrs. Meenakshi Sakhardande,
Ms. Aprajita Singh, Sidhartha Chouwdhury, Sidharth Goswami, Ms. Gayatri
Goswami, Preetesh Kapoor, Krishnan Venugopal, Varun Goswami, S.N. Terdo,
H V.G. Pragasam, ~s. Santha Vasudevan, P.K. Manohar, A.S. Basme, Sanjay
STATE v. N.T.P.C. LTD. [R.C. LAHOTI, J.] 285
........ K. Visen and Manoj K. Mishtra, for the appearing parties . A
Tue Judgment of the Court was delivered by

R.C. LAHOTr, J. Tue High Court of Andhra Pradesh at Hyderabad
has, by its impugned judgment dated April I I, I 990, allowed the writ petition
filed by the respondent National Thermal Power Corporation Ltd. (hereinafter B
'NTPCL', for short) and declared that the levy of duty by the State of Andhra
Pradesh on the sales of electrical energy generated by the Corporation-
y respondent No. I at its thermal power station set up at Rarnagundam, within
• the State of Andhra Pradesh, and sold to the Electricity Boards of Karnataka,
Kerala, Tamil Nadu and the State of Goa in pursuance of contracts of sales
occasioning inter-State movement of electricity is incompetent and outside c
the power of State Legislature. Consequently, the tax levied and collected has
also been held to be without authority of law, hence liable to be refunded in
accordance with law. On a prayer made by the learned Advocate General on
behalf of the State of Andhra Pradesh, the High Court certified that the case
involves a substantial question of law as to the interpretation of Constitution D
under Article 132. Tue appeal has been filed pursuant to the certificate so
granted by the High Court. On 4.10.1991, a bench of two learned Judges
... directed the appeal to be placed for hearing before a Constitution Bench, as
~

required by Clause (3) of Article 145 of the Constitution.

At a point of time when this Court was seized of the appeal filed by E
the state of Andhra Pradesh, NTPCL moved a petition under Article 139A of
the Constitution seeking withdrawal of Writ Petition No. 1941 of 1996 NTPCL
v. State of Madhya Pradesh and Ors pending in the High Court of Madhya
Pradesh at Jabalpur to this Court. The prayer was allowed vide order dated
13.10.1997 and on receipt of the records from High Court of Madhya Pradesh
_, { the same has been registered here as T-C-3/1998.
F

The State of Madhya Pradesh and newly formed State of Chhattisgarh
• with effect from 1.11.2000, during the pendency of the petition were noticed
and the parties thereto have been heard analogously with the hearing in C.A.
No. 3112/1990. However, for convenience sake we will refer to States of
G
Madhya Pradesh and Chhattisgarh as State of M.P. only as admittedly until
the formation of new State the two power stations in question were situated
therein only.

Facts in C.A. No.311211990

Andhra Pradesh Electricity Duty Act, 1939 provides for levy of duty on
H
286 SUPREME COURT REPORTS (2002) 3 S.C.R.
x_
A certain sales and consumption of electricity by licensees in the State of Andhra
Pradesh. The definition of the term 'licensee' specifically includes the National
Thermal Power Corporation (respondent No. I) or any other Corporation
engaged in the business of supplying energy. Section 3 of the Act is the
charging section, the relevant part whereof reads as under:-

B "3. Levy of a duty in certain sales of electrical energy.-{1) Save as
otherwise provided in sub-section (2), every licensee in the State of
Andhra Pradesh shall pay every month to the State Government in
the prescribed manner, a duty calculated at the rate of four paise per '.
"""f"

unit of energy, on and in respect of all sales of energy, except sales
c to the Government of India for consumption by that Government or
sales to the Government of India or a railway company operating any
railway for consumption in the construction, maintenance or operation
of that railway effected by the licensee during the previous month, at
a price of more than twelve paise per unit and on and in respect of
all energy which was consumed by the licensee during the previous
D month for purposes other than those connected with the construction,
maintenance and operation of his electrical undertaking and which, if
)..
sold to a private consumer under like conditions, would have fetched ...
a price of more than twelve paise per unit.

Provided that no duty under this sub-section shall be payable on
E and in respect of sale of energy effected:-
(a) by the Andhra Pradesh State Electricity Board to any other
licensee;
(b) by the National Thermal Power Corporation to the Andhra Pradesh
F State Electricity Board." -.,_ '<...

A bare reading of the provision shows that duty is leviable at the
prescribed rate on 'all sales of energy' effected by the licensee during the ~

previous month at a price of more than 12 paise per unit. Duty is also
leviable on all energy consumed by the licensee. There are certain categories
G of sales and consumption saved and excluded from what would otherwise
have been dutiable .. However, in the present case, we are not concerned with '
those exclusions, nor with levy of duty on consumption. The limited question
arising for our consideration is - whether sales of energy by NTPCL, the ;A
respondent No. I, to several Electricity Boards situated outside the State of
Andhra Pradesh and to the State of Goa, attract the incidence of taxation ..
H
under Section 3 of the Act.
STATE v. N.T.P.C. LTD. [R.C. LAHOTI, J.] 287
According to the facts found by the High Court, NTPCL, a Government A
Company, wholly owned by the Government of India, has set up several
super thermal power stations in different parts of the country normally located
... near coal-pit heads. One such super thermal power station is set up in
Ramagundam in Karimnagar District of the State of Andhra Pradesh. There
are various transmission lines and sub-stations through which the power B
generated at Ramagundam station is transmitted to the purchasers. The power
generated is fed into the southern grid and is made available to the several
State Electricity Boards and the State of Goa. These facts are not in controversy
and sufficient to be taken note of for the purpose of this appeal. During the
course of hearing, by reference to certain documents, it was sought to be
pointed out where the meters are located - within the State of M.P. or within C
the territories of buyer states or at both the places, by reference to reading
whereof the quantum of energy sold, exported or imported is fixed and the
price calculated. We do not propose to state the facts and contending
__, submissions in that regard in details as it is unnecessary.
-1
The controversy centres mainly around the question as to under which D
entry Andhra Pradesh Electricity Duty Act, 1939 is covered and whether the
sales of electricity by NTPCL, the respondent No. I, to the Electricity Boards
situated outside the State of Andhra Pradesh and to the State of Goa, can be
construed as inter-State sale or intra-State sale.

Facts in T-C-3198
E

The relevant facts of this writ petition are briefly set out in what follows.
The erstwhile Central Provinces and Berar Legislative Assembly enacted the
CP and Berar Electricity Duty Act, 1949 which having been adapted in the
State of Madhya Pradesh has come to be known as M.P. Electricity Duty Act, p
1949 and extends to the whole of Madhya Pradesh. The Preamble to the Act,
as amended by Madhya Pradesh Legislature, provides that it is an Act for the
levy of duty on sale or consumption of electrical energy. The expression
"distributor of electrical energy" is defined in Clause (b) of Section 2 to
specifically include therein the National Thermal Power Corporation. Section
3 provides that every distributor of electrical energy and every producer G
shall, subject to certain exceptions, pay every month to the State Government
a duty calculated at the rates specified in the table appended thereto on the
units of electrical energy sold or supplied to a consumer or consumed by
himself for his own purposes or for purposes of his township or colony
during the preceding month. The table appended to Section 3 prescribes H
')_..

288 SUPREME COURT REPORTS [2002] 3 S.C.R.

A different rates of duty depending on the purpose for which electrical energy x....
is sold, supplied or consumed, the details whereof are not relevant for our
purpose. There is yet another legislation, namely, the Madhya Pradesh Upkar
Adhiniyam 1981 (No. I of 1982) which provides for levy of certain cesses. ... ..
Sub-section (I) of Section 3 thereof provides that every distributor of electrical
energy shall pay to the State Government an energy development cess at the
B rate of certain paise per unit on the total units of electrical energy sold or
supplied to a consumer or c;onsumed by himself or his employees during any
month. NTPCL has two power projects located in the State of Madhya Pradesh -.,
(i) Korba Super Thermal Power Station at Pragati Nagar, District Bilaspur, "'
known as Korba Station (presently in the State of Chhattisgarh) and (ii)
c Vindhyachal Super Thermal Power Station situated at Vindhya Nagar, Oistrict
Sidhi of Madhya Pradesh known as Vindhyachal Station. The electricity
generated by it at these two stations, is fed into Northern grid and supplied
to several States outside the State of Madhya Pradesh pursuant to contracts
entered into between the parties, that is, the seller and the buyers. On ·
30. I 1.1994, the Chief Engineer (Electricity Duty) and Chief Electrical L-\-
D Inspector, Government of Madhya Pradesh issued a letter annexed by a
tabulated statement raising a demand of Rs. 2,74,01,59,535/28 paise for the
,A
period commencing October, 1984 and expiring March, I996. The demand .....
is on account of electricity duty at the rate of 2 paise per unit and cess at the
rate of 1 paise per unit calculated on the units sold to Electricity Boards of
E other States.

In the counter-affidavit on behalf of the States of Madhya Pradesh and
Chhattisgarh reliance has been placed on the definition of 'consumer' engrafted
into the M.P. Electricity Duty Act, I949 by M.P. Act No. 46 of I984 with
effect from I. I 0.1984 which reads as under:-
F "Consumer" means any person who receives electrical energy sold r"'
or supplied by a distributor of electrical energy or a producer and
includes a person receiving electrical energy in bulk for onward ~
distribution.

By the same amendment "distributor of electrical energy" was defined
G so as to include therein NTPCL, as already stated. It is admitted by the States
of M.P. and Chhattisgarh that the power generated at the two power stations
is sold and supplied to various electricity boards/electricity departments situated :A
in other States but as the generating stations are located in the State of
Madhya Pradesh the sale is not an inter-State sale. The situs of sale is within
H the State of M.P. Transaction of sale is complete in the State of M.P. and the
STATE v. N.T.P.C.LTD. [R.C.LAHOTI,J.) 289
buyers carry the electricity to their respective States when property in electricity A
sold has already passed to them. Reliance has been placed on the several
clauses of the bulk power supply agreement entered into between NTPCL
and buyers, one of which entered into between NTPCL and Western Region
Electricity Board (WREB) having its office at Andheri East, Bombay, has
been filed and quoted in the counter affidavit, according to which (a) Metering B
is within the State of M.P.; (b) Transmission Joss from Madhya Pradesh to
the Home State of the buyer is to the account of the buyer; (c) Wheeling loss
\' from Madhya Pradesh to the Home State of the buyer to the account of the
" buyer; (d) Transmission charges for transmission from Madhya Pradesh to
the Home State of the buyer to the account of the buyer; (e) Wheeling
charges from Madhya Pradesh to the Home State of the buyer to the account C
of the buyer; (f) Delivery of WREB in Madhya Pradesh; (g) NTPCL ceases
to have control over the electrical energy once it is delivered to WREB
within State of M.P.; (h) Payment made by the Bulk Beneficiaries is in
respect of quantum of electrical energy supplied/delivered at metering point
in State of M.P. Similar are the agreements entered into with other outside-
State buyers. D
...
.. It is not disputed that the power generated at the above said two stations
is fed into transmission system of Power Grid Corporation of India Limited
and the transmission systems of other bulk power beneficiaries wherefrom
the buyers draw the power purchased by them. Great emphasis was laid on E
the fact that the points for metering are installed within the State of Madhya
Pradesh. It was submitted that the transaction under scrutiny in the case of
State of M.P. is different from the one under scrutiny in the case of State of
Andhra Pradesh.

Relevant Provisions

We proceed to notice the relevant provisions of the Constitution and
other statutory provisions.

Changes of far reaching implications were made in the Constitution by
the Constitution (Sixth Amendment) Act, 1956 with effect from September G
11, 1956. To enable a convenient comparative reading, we set out the
provisions as under:-

"246. Subject-matter of laws made by Parliament and by the
Legislatures of States.-(1) Notwithstanding anything in clauses (2)
H
,.

290 SUPREME COURT REPORTS [2002] 3 S.C.R.

A and (3), Parliament has exclusive power to make laws with respect to
any of the matters enumerated in List I in the Seventh Schedule (in
this Constitution referred to as the "Union List").

(2) Notwithstanding anything in clause (3), Parliament and, subject
to clause (1), the Legislature of any State also, have power to
B make laws with respect to any of the matters enumerated in List
III in the Seventh Schedule (in this Constitution referred to as the •
"Concurrent List'').
-...,
...
(3) Subject to clauses (I) and (2), the Legislature of any State has
exclusive power to make laws for. such State or any part thereof
c with respect to any of the matters enumerated in List II in the
Seventh Schedule (in this Constitution referred to as the 'State
List').

(4) Parliament has power to make laws with respect to any matter for
D any part of the territory of India not included in a State
notwithstanding tflat such matter is a matter enumerated in the
State List." ~
+-
Seventh Schedule .....
List I - Union List
E
xxx xxx xxx 92A. Taxes on the sale or purchase
of goods other than newspapers,
where such sale or purchase takes
place in the course of inter-State
trade or commerce. (inserted by
F Sixth Amendment) "~· ~
List II - State· List

Entry 52

G Taxes on the entry of goods into a local area for consumption, use or
sale therein.

Entry 53

Taxes on the consumption or sale of electricity.
H
STATE v. N.T.P.C. LTD. [R.C. LAHOTI, J.) 291
Entry 54: A

(Before Sixth Amendment) (After Sixth Amendment)

54. Taxes on the sale or purchase 54. Taxes on the sale or
of goods other than newspapers purchase of goods other than
newspapers, subject to the B
provisions of entry 92Aof List I.
r
Before 11.9.56 After 11.9.56

269. The following duties and 269.(l)The following duties and taxes C
Taxes levied taxes shall be levied Taxes levied shall be levied and
and collected and collected by the and collected collected by the
by the Union Government of by the Union Government oflndia but
but assigned India but shall be but assigned to
shall be assigned to the
to the States the States
assigned to the States in the manner D
States in the manner provided in clause (2),
provided in clause namely :-
(2), namely :-

(a) duties in respect of (a) duties in respect of succession to E
succession to property other property other than agricultural
than agricultural land; land;

(b) estate duty in respect of (b) estate duty in respect of
property other than property other than agricultural
agricultural land; land; F
(c) terminal taxes on goods or (c) terminal taxes on goods or passn-
passengers carried by gers carried by railway, sea or
railway, sea or air. air;

(d) taxes on railway fares and (d) taxes on railway fares and G
freights; freights;

(e) taxes other than stamp duties (e) taxes other than stamp duties on
on transactions in stock- transactions in stock-exchange
exchanges and future markets; and future markets;
H
292 SUPREME COURT REPORTS (2002) 3 S.C.R.

A (f) taxes on the sale or purchase (f) taxes on the sale or purchase
of newspapers and on of newspapers and on
advertise-ments published advertise-ments published
therein. therein.

(g) taxes on the sale or purchase
B of goods other than
newspapers, where such sale or
purchase takes place in the
course of inter-State trade or "1
commerce.
c (h) taxes on the consignment of
goods (whether the
consignment is to the person
making it or to any other
person), where such
D consignment takes place in the
course of inter-State trade or
commerce;

(2) The net proceeds in any (2) The net proceeds in any financial
financial year of any such duty or year of any such duty or tax, except
E tax, except in so far as those in so far as those proceeds represent
proceeds represent proceeds proceeds attributable to Union
· attributable to States specified in territories shall not form part of the
Part C of the first Schedule, shall Consolidated Fund oflndia, but shall
not form part of the Consolidated be assigned to the States within
F Fund of India, but shall be which that duty or tax is leviable in
assigned to the States within that year, and shall be distributed
which that duty or tax is leviable among those States in accordance
in that year, and shall be with such principles of distribution
distributed among those States in as may be formulated by Parliament
accordance with such principles of by law.
G distribution as may be formulated
by Parliament by law. (3) Parliament may be law formulate
principles for determining when a
sale or purchase of or consignment
of goods takes place in the course
of inter-State trade or commerce.
H
STATE v. N.T.P.C. LTD. [R.C. LAHOTI, J.] 293

Before 11.9.56. After 11.9.56. A
286. (I) No law of a State shall 286. (I) No law of a State shall
impose or authorise the imposition impose, or authorize the imposition
of, a tax on the sale or purchase of of, a tax on the sale or purchase of
goods where such sale or purchase goods where such sale or purchase
takes place takes place B
(a) (b)(a) outside the State; or (b)(b) (a) outside the State; or (b) in the
in the course of the import of the course of the import of the goods
goods into, or export of the goods into, or export of the goods out of,
out of, the territory of India. the territory of India.
c
Explanation-For the purposes of • • • • •
sub-clause (a), a sale or purchase
shall be deemed to have taken place
in the State in which the goods have
actually been delivered as a direct D
result of such sale or purchase for
the purpose of consumption in that
State, notwithstanding the fact that
under the general law relating to sale
of goods the property in the goods
has by reason of such sale or E
purchase passed in another State.

(2)Except in so far as Parliament (2) Parliament may by law formulate
may by law otherwise provide, no principles for determining when a
law of a State shall impose, or sale or purchase of goods takes place F
authorise the imposition of, a tax on in any of the ways mentioned in
the sale or purchase of any goods clause (I).
where such sale or purchase takes
place in the course of inter-State
trade or commerce:
G

Provided that the President may by
order direct that any tax on the sale
or purchase of goods which was
being lawfully levied by the H
294 SUPREME COURT REPORTS [2002] 3 · S.C.R.

A Government of any State
immediately before the
commencement of this Constitution
shall, notwithstanding that the ....
imposition of such tax is contrary to
B the provisions 6f this clause,
oontinue to be levied until the thirty-
first day of March, 1951. ..
(3)No law made by the Legislature (3) Any law of a State shall, in so far
of a State imposing, or authorizing as it imposes, or authorizes the
C the imposition of, a tax on the sale imposition of,. _
or purchase of any such goods as
have been declared by Parliament by (a) a tax on the sale or purchase of
law to be essential for the life of the goods declared by Parliament by
col1lmunity shall have effect unless law to be of special importance in
it has been reserved for the inter-State trade or commerce; or
D consideration of the President and
(b) a tax on the sale or purchase of
has received his assent.
goods, being a tax of the nature
referred to in sub-clause (b), sub-
clause ( c) or sub-clause (d) of
clause (29A) of Article 366,
E
be subject to such restrictions and
conditions in regard to the system of
levy, rates and other incidents of the
tax as Parliament may be law specify.

F Out of the several changes introduced by the Constitution (Sixth
Amendment) Act, only a few are relevant and material for our purpose. In
Article 269, Sub-Clause (g) was added in clause (I) and a new Clause (3)
was added. The Forty-Sixth Amendment substituted the words 'sale or
purchase of, or consignment of, goods' in place of 'sale or purchase of
G goods' as was occurring in Clause (3) inserted by Sixth Amend.ment. Such
Forty Sixth Amendment has no relevance for the present controversy. In
Article 286 subsequent to the Sixth Amendment, Clause (3) has been brought
in the present form by Forty -Sixth Amendment which again is not relevant
for the present controversy. What is relevant for our purpose is the deleting ·
of former explanation appended to Clause (1) and substitution of Clause (2)
H in the present form in Article 286 by Sixth Amendment.
STATE v. N.T.P.C. LTD. [R.C. LAHOTI, J.] 295
As to the several relevant entries quoted hereinabove, it may be noted A
that Entry 92A in List-I of Seventh Schedule was added by Sixth Amendment.
Entry 54 in List-II in the present form was substituted by Sixth Amendment.
Entries 52 and 53 in List-II remain unaffected by Sixth Amendment.

The Central Sales Tax Act, 1956 was enacted to formulate principles
for determining-when a sale or purchase of goods takes place in the course B
of inter-state trade or commerce or outside a State or in the course of import
into or export from India, to provide for the levy, collection and distribution
of taxes on sale of goods in the course of inter-State trade or commerce etc.,
as the Preamble to the Act states. Clause (d) of Section 2 -:lefines 'goods'
(unless the context otherwise requires) to include all materials, articles, C
commodities and all other kinds of moveable properties, but not including
newspapers, actionable claims, stocks, shares and securities. Section 3 of the
Act, placed in Chapter II thereof, provides as under:-

"CHAPTER II
D
!'ORMULATION OF PRINCIPLES FOR
DETERMINING WHEN A SALE OR PURCHASE
OF GOODS TAKES PLACE IN THE COURSE OF
INTER-STATE TRADE OR COMMERCE OR
OUTSIDE A STATE OR IN THE COURSE OF
IMPORT OR EXPORT E
3. When is a sale or purchase of goods said to take place in the
course of inter-State trade or commerce - A sale or purchase of
goods shall be deemed to take place in the course of inter-State trade
or commerce if the sale or purchase_

(a) occasions the movement of goods from one State to another; or F
(b) is effected by a transfer of documents of title to the goods during
their movement from one State to another.

Explanation !.-Where goods are delivered to a carrier or other
bailee for transmission, the movement of the goods shall, for the G
purposes of clause (b ), be deemed to commence at the time of such
delivery and terminate at the time when delivery is taken from such
carrier or bailee.

Explanation 2.-Where the movement of goods commences and
terminates in the same State it shall not be deemed to be a movement H
296 SUPREME COURT REPORTS [2002) 3 S.C.R.

A of goods from one State to another by reason merely of the fact that
in the course of such movement the goods pass through the territory
of any other State."

At this juncture it would be appropriate to have a view of the legislative
history. Explanation to clause (1) of Article 286 generated some controversy
B which led to the constitution of a larger Bench (7-Judge strength) in The
Bengal Immunity Company Limited v. The State of Bihar and Ors., (1955] 2
SCR 603. The larger bench ruled by majority that an inter-State sale or
purchase continues to be so irrespective of the State where the sale can be
held to be located under the general Jaw or by the fiction created by the
C explanation appended to clause (1) of Article 286. The situs of a sale or
purchase is wholly irrelevant so far as its inter-State character is concerned.
The larger bench further ruled that until Parliament by law made in exercise
of the powers vested in it by clause (2) of Article 286 provides otherwise, no
State can impose or authorize the imposition of any tax on sale or purchases
of goods when any sales or purchases take place in the course of inter-State
D trade or commerce. To put in other words, it was held that explanation to
Article 286(1) as it existed prior to the Sixth Amendment could not be applied
for the purpose of interpreting clause (2) of Article 286.
'
The issue attracted the attention of Taxation Enquiry Commission 1953-
54 (TEC, for short). In its report, Volume III, Chapter 4, vide para 30, the
E Commission observed, inter alia, that Clause (I) of Article 286 links the
sales-tax to one of tbe two parties, viz., the consumer and lays down that no
State shall levy tax on a sale which results in delivery' for consumption in
another State. While making recommendations for consideration of future
policy regarding sales tax, it opined that the system should contain provisions
F whereby certain constitutional restrictions on the States and certain powers of
levy and control by the Union are introduced. The TEC observed that the
Constitution, in effect, divides sales of goods in India into (a) goods delivered
for consumption in particular States and (b) other sales, which dichotomy is
imperfect from the point of view of tax administration. It suggested division,
both useful and effective, of all sales of goods into two, namely (a) those in
G the course of inter-State trade and commerce, and (b) those not in the course
of such trade and commerce; while the former should be the sphere of the
Union and the latter in the sphere of the States. It appears that so far as the
electricity duty is concerned, though the subject was separately dealt with by
the report, in the then circumstances the TEC did not comprehend inter-State
H sale of electricity and, therefore, did not make any recommendation specifically
STATE v. N.T.P.C. LTD. [R.C. LAHOTI, J.] 297
in that regard. However, that does not make any difference. A
Pursuant to the recommendations made by the Taxation Enquiry
Commission the Parliament incorporated certain amendments in the
Constitution by enacting the Constitution (Sixth Amendment) Act, 1956 which
we have already noticed briefly.
B
We have very briefly stated the legislative history for it has been noticed
in details in a recent Constitution Bench decision of this Court in 20th Century
Finance Corporation Ltd. and Anr. v. State of Maharashtra, [2000] 6 SCC
• 12 and earlier in Shiv Dutt Rai Fateh Chand etc. v. Union of India and Anr.,
[1983] 3 sec 529, and therefore, we have deemed it not necessary to repeat C
or re-state the same in details. The Central Sales Tax Act, 1956 was enacted
by the Parliament as authorized by the Constitution. We have already
reproduced Section 3 of the CST Act hereinabove. By Section 6 of the Act
the Central Government was empowered to levy tax on all sales of goods
effected by a dealer in the course of inter-State trade or commerce. However,
by the Central Sales Tax (Amendment) Act, 1972, which came into force D
with effect from 1.4.1973, the language of Section 6 was suitably amended
so as to confine the levy of tax under Section 6 on all sales "of goods other
than electrical energy". The Statement of Objects and Reasons for this
amendment was so stated "Exemption from Central Sales-Tax Act on inter-
State sales of electrical energy is now dependent on the exemption from tax
by a State Government on local sales of electrical energy. It is now proposed E
to provide specifically that inter-State sale of electrical energy would not be
liable to Central sales tax." (see Gazette of India Extraordinary Part II, at
page 522). The purpose behind referring to this amendment and the SOR is
that in the understanding of the Parliament also the inter-State sale of electrical
energy was liable to central sales-tax under Section 6 of the Act and but for F
the amendment such tax was capable of being levied by the Central
Government.

Electricity, what it is

• Before we deal with the constitutional aspects let us first state what
electricity is, as understood in law, and what are its relevant characteristics.
G

It is settled with the pronouncement of this Court in Commissioner of Sales
Tax, Madhya Pradesh. Indore v. Madhya Pradesh Electricity Board, Jabalpur,
[1969] 2 SCR 939 that electricity is goods. The definition of goods as given
in Article 366 (12) of the Constitution was considered by this Court and it
was held that the definition in terms is very wide according to which "goods" H
-·

298 SUPREME £0URT REPORTS [2002) 3 S.C.R.

A means all kinds of moveable property. The term "moveable property" when
considered with reference to "goods" as defined for the purpose of sales-tax
cannot be taken in a narrow sense and merely because electrical energy is not
tangible or cannot be moved or touched like, for instance, a piece of wood
or a book it cannot cease to be moveable property when it has all the attributes
of such property. It is capable of abstraction, consumption and use which if
B done dishonestly is punishable under Section 39 of the Indian Electricity Act,
1910. If there can be sale and purchase of electrical energy like any other
moveable object, this Court held that there was no difficulty in holding that
electric energy was intended to be covered by the definition of "goods".
However, A.N. Grover, J. speaking for three-Judge Bench of this Court went
C on to observe that electric energy "can be transmitted, transferred, delivered,
stored, possessed etc. in the same way as any other moveable property". In
this observation we agree with Grover, J. on all other characteristics of electric
energy except that it can be 'stored' and to the extent that electric energy can
be 'stored', the observation must be held to be erroneous or by oversight.
D The science and technology till this day l).ave not been able to evolve any
methodology by which electric energy can be preserved or stored.

Another significant characteristic of electric energy is that its generation
or production coincides almost instantaneously with its consumption. To quote
from Aiyar's Law Lexicon (Second Edition, 2000) - 'Electricity in physics
E is "the name given to the cause of a series of phenomena exhibited by
various substances, and also to the phenomena themselves." Its true nature is
not understood. Imperial Diet. (quoted in Spens/ey v. Lancashire Ins. Co., 54
Wis. 433, 442, 11NW894, where the court, quoting from the same authority,
said, "We are totally ignorant of the nature of this cause whether it be a
material agent or merely a property of matter. But as some hypothesis is
F necessary for explaining the phenomena observed, it has been assumed to be
a highly subtle, imponderable fluid, identical with lightning, which pervades
the pores of all bodies, and is capable of motion from one body to another.'
This characteristic quality of electric energy was judicially noticed in Indian
Aluminium Co. etc. etc. v. State of Kera/a and Ors., [1996] 7 SCC 637. Vide
G para 25 this Court has noted, "Continuity of supply and consumption starts
from the moment the electrical energy passes through the meters and sale
simultaneously takes place as soon as meter reading is recorded. All the three
steps or phases (i.e. sale, supply and consumption) take place without any
hiatus. It is true that from the place of generating electricity, the electricity
is supplied to the sub-station installed at the units of the consumers through
H electrical higher-tension transformers and from there electricity is supplied to
STATE v. N.T.P.C. LTD. [R.C. LAHOTI, I.] 299
- the meter. But the moment electricity is supplied through the meter, A
consumption and sale simultaneously take place." .........."as soon as the
electrical energy is supplied to the consumers and is transmitted through the
meter, consumption takes place simultaneously with the supply. There is no
hiatus in its operation. Simultaneously sale also takes place." These properties
of electricity as goods are of immense relevance as we would state hereafter. B
List U, Entries 53 and 54, how to be read:

We now come to the question on the interpretation of Entry 53 in List
II of Seventh Schedule. It provides for taxes on the consumption or sale of
electricity. The word 'sale' as occurring in Entry 52 came up for the C
consideration of this Court in Burmah Shell Oil Storage & Distributing Co.
India Ltd v. The Belgaum Borough Municipality (1963] Supp. 2 SCR 216.
It was held that the act of sale is merely the means for putting the goods in
the way of use or consumption. It is an earlier stage, the ultimate destination
of the goods being "use or consumption". We feel that the same meaning
should be assigned to the word 'sale' in Entry 53. This is for a fortiorari D
reason in the context of electricity as there can be nc sale of electricity
excepting by its consumption, for it can neither be preserved nor stored. It
is this property of electricity which persuaded this Court in Indian Aluminium
Co. etc 's case (supra) to hold that in the context of electricity, the word
'supply' should be interpreted to include sale or consumption of electricity. E
Entry 53 should therefore be read as 'taxes on the consumption or sale for
consumption of electricity'.

With these two things in mind, namely, that electricity is goods, and
that sale of electricity has to be construed and read as sale for consumption
_,, "f' within the meaning of Entry 53, the conflict, if any, between Entry 53 and F
Entry 54 ceases to exist and the two can be harmonized and read together.
Because electricity is goods it is covered in Entry 54 also. It is not disputed
that duty on electricity is tax. Tax on the sale or purchase of goods including
electricity but excluding newspapers shall fall within Entry 54 and shall be
subject to provisions of Entry 92A of List I. Taxes on the consumption or G
sale for consumption of electricity within the meaning of Entry 53 must be
consumption within the State and not beyond the territory of the State. Any
other sale of electricity shall continue to be subject to the limits provided by
Entry 54. Even purchase of electricity would be available for taxation which
it would not be if electricity was not includible in the meaning of term
'goods'. A piece of legislation need not necessarily fall within the scope of H
300 SUPREME COURT REPORTS [2002] 3 S.C.R.

A one entry alone; more than one entry may overlap to cover the subject-matter
of a single piece of legislation. A bare consumption of electric energy even
by one who generates the same may be liable to be taxed by reference to
Entry 53 and ifthe State Legislature may choose to impose tax on consumption
of electricity by the one who generates it, such tax would not be deemed to
be a tax necessarily on manufacture or production or a duty of excise, as held
B by Constitution Bench in Jiyajeerao Cotton Mills Ltd., Birlanagar, Gwalior
v. State of Madhya Pradesh, [1962] Supp: 1 SCR 282. A mere consumption
of goods (other than electricity), not accompanied by purchase or sale would
not be taxable under Entry 54 because it does not provide for taxes on the
consumption and Entry 53 does not speak of goods other than electricity.
C Thus in substance Entries 53 and 54 can be and must be read together and
to the extent of sale of electricity for consumption outside the State, the ·
electricity being goods, shall also be subject to provisions of Entry 92A of
List I. This, in our opinion, is the best way ofreading the two entries. In C.P.
Motor Spirit Act re., AIR 1939 FC 131, it was held that two entries in the
lists may overlap and sometimes may also app~ar to be in direct conflict with
D each other. It is then the duty of this Court to reconcile the entries and bring
about harmony between. them. The Court should strive at searching for
~easonable and practical construction to seek reconciliation and give effect to
all of them. If reconciliation proves impossible the overriding power of Union
Legislature operates and prevails. Gwyer, C.J. observed" A grant of the power.
E in general terms, standing by itself, would no doubt be construed in the wider
sense; but it may be qualified by other express provisions in the same
enactment, by the implication of the context, and even by considerations
arising out of what appears to be the general scheme of the Act." And again
he said, " .. ,... an endeavour must be made to solve it, as the Judicial Committee
have said, by having recourse to the context and scheme of the Act, and a 1-- ""--
F reconciliation attempted between two apparently conflicting jurisdictions by
reading the two entries together and by interpreting, and, where necessary,
modifying the language of the one by that of the other. If needed such a
reconciliation should prove impossible, then and only then, will the non-
obstante clause operate and the federal power prevail." In Calcutta Gas Co.
G Ltd. v. The State of West Bengal and Ors., [1962] Supp 3 SCR 1, the
Constitution Bench has held that the same mies of construction apply for the
purpose of harmonizing an apparent conflict between two entries in the same
list.
What is inter-State sale?
H It is well settled by a catena of decisions of this Court that a sale in the
STATE v. N.T.P.C. LTD. [R.C. LAHOTI, J.] 301
course of inter-State trade has three essential ingredients: (i) there must be a A
contract of sale, incorporating a stipulation, express or implied, regarding
inter-State movement of goods; (ii) the goods must actually move from one
State to another, pursuant to such contract of sale; the sale being the proximate
cause of movement; and (iii) such movement of goods must be from one
State to another State where the sale concludes. It follows as a necessary
corollary of these principles that a movement of goods which takes place B
independently of a contract of sale would not fall within the meaning of
inter-State sale. In other words, if there is no contract of sale preceding the
., r movement of goods, obviously the movement cannot be attributed to the
contract of sale. Similarly, if tbe transaction of sale stands completed within
the State and the movement of goods takes place thereafter, it would obviously C
be independently of the contract of sale and necessarily by or on behalf of
the purchaser alone and, therefore, the transaction would not be having an

- inter-State element. Precedents are legion; we may briefly refer to some of
them. In English Electric Company of India Ltd v. Deputy Commercial Tax
Officer, [1977] l SCR 631, this Court held that when the movement of the
goods from one State to another is an incident of the contract it is a sale in D
the course of inter-State sale and it does not matter which is the State in
which the property passes. What is decisive is whether the sale is one which
occasions the movement of goods from one State to another. In Union of
India v. K.G. Khosla and Co. Ltd, [1979] 2 SCC 242, it was observed !hat
a sale would be an inter-State sale even if the contract of sale does not itself E
provide for the movement of goods from one State to another provided,
however, that such movement was the result of a covenant in the contract of
sale or was an incident of the contract. Similar view was expressed in Mis.
Sahney Steel and Press Works Ltd and Anr. v. Commercial Tax Officer and
Ors.. [1985] 4 SCC 173. In Manganese Ore (India) Ltd v. The Regional
Assistant Commissioner of Sales-tax, Jabalpur, [1976] 4 SCC 124, after F

- referring to Balabhagas Hulaschand v. State ofOrissa, [1976] 2 SCC 44, it
was observed that so far as Section 3 (a) of the C.S.T. Act is concerned there
is no distinction between unascertained or future goods and goods which are
already in existence, if at the time when the sale takes place these goods have
come into actual existence. G
Effect of Entry-53, List-II, having remained unamended

Having seen the properties of electricity as goods and what is inter-
State sale, let us examine the effect of Entry 53, List II, having been left
unamended by Sixth Amendment from another angle. Sixth Amendment did H
302 SUPREME COURT REPORTS (2002) 3 S.C.R.
l=
A not touch Entry 53 in List-II and so the contents of Entry 53 were not ~-
expressly made subject to the provisions of Entry 92 A of List I and arguments
were advanced, with emphasis, on behalf of the States of Atidhra Pradesh 3nd
Madhya Pradesh contending that such omission was deliberate and therefore
the restriction which has been placed only in Entry 54 by making it subject
to the provisions of Entry 92A of List I should not be read in Entry 53. It
B was submitted that so far as sale of electricity is concerned even if such sale
takes place in the course of inter-51:ate trade or commerce the State can
legislate to tax such sale if the sale can be held to have taken place within
the territory of that State or if adequate territorial nexus is established between
the transaction and State legislation. For the several reasons stated hereinafter
C such a plea cannot be countenanced.

The prohibition which is imposed by Article 2·86(1) of the Constitution
is independent of the legislative entries in Seventh Schedule. After the decision
of larger Bench in Bengal Immunity Company Limited (supra) and Constituti~n
Bench decision in Ram Narain Sons Ltd and Ors. v. Asst. Commissioner of
D Sales Tax and Ors., (1955] 2 SCR 483, there is no manner of doubt that the
bans imposed by Articles 286 and 269 on the taxation powers of the State are
independent and separate and must be got over before a State legislature can
impose tax on transactions of sale or purchase of goods. Needless to say,
such ban would operate by its own force and irrespective of the language in
E which an Entry in List-II of Seventh Schedule has been couched. The
dimension given to field of legislation by the language of an Entry in List·
II Seventh Schedule shall always remain subject to the limits of constitutional
empowerment to legislate and can never afford to spillover the barriers created
by the Constitution. The power of State legislature to enact law to levy tax
by reference to List II of the Seventh Schedule has two limitations : one,
F arising out of the entry itself; and the other, flowing from the restriction
embodied in the Constitution. It was held in Tata Iron and Steel Co. Ltd
Bombay v. S.R. Sarkar and Ors., (1961] l SCR 379 (at pages 387 and 388)
that field of taxation on sale or purchase taking place in the course of inter·
State trade or commerce has been excluded from the competence of the State
G Legislature. In 20th Century Finance Corporation Limited (supra) the
Constitution Bench (majority) made it clear that the situs of the sale or
purchase is wholly immaterial as regards the inter-State trade or commerce.
In view of Section 3 of the Central Sales Tax, 1956 all that has to be seen
is whether the sale or purchase (a) occasions the movement of goods from
one State to another; or (b) is effected by a 'transfer of documents of title to
H the goods d\lring their movement from one State to another. If the transaction
- STATE v. N.T.P.C. LTD. [R.C. LAHOTI, J.]

of sale satisfies any one of the two requirements it shall be deemed to be a
sale or purchase of goods in the course of inter-State trade or commerce and
by virtue of Articles 269 and 286 of the Constitution the same shall be
beyond the legislative competence of a State to tax without regard to the fact
303
A

whether such a prohibition is spelled out by the description of a legislative
entry in Seventh Schedule or not.
B
It is well settled, and hardly needs any authority to support the
proposition, that several entries in the three lists of Seventh Schedule are
r legislative heads or fields of legislation and not the source of legislative
empowerment. [To wit, .see The Calcutta Gas Co. Ltd. v. The State of West
Bengal and Ors., (supra). Competence to legislate has to be traced to the C
Constitution. The division of powers between Parliament and the State
Legislatures to legislate by reference to territorial limits is defined by Article
245. The subject-matters with respect to which those powers can be exercised
are enumerated in the several entries divided into three groups as three Lists
of Seventh Schedule. Residuary powers of legislation are also vested by
Article 248 in the Parliament with respect to any matter not enumerated in D
any of the lists in Seventh Schedule. This residuary power finds reflected in
Entry 97 of List I. If an Entry does not spell out an exclusion from field of
legislation discernible on its apparent reading, the absence of exclusion cannot
be read as enabling power to legislate in the field not specifically excluded,
more so, when there is available a specific provision in the Constitution E
prohibiting such legislation.

It is by reference to the ambit or limits of territory by which the
legislative powers veste:I in Parliament and the State Legislatures are divided
in Article 245. Generally speaking, a legislation having extra territorial
operation can be enacted only by Parliament and not by any State Legislature; F
possibly the only exception being one where extra territorial operation of a
State legislation is sustainable on the ground of territorial nexus. Such territorial
nexus, when pleaded, must be sufficient and real and not illusory. In Burmah
Shell Oil Storage & Distributing Co. India Ltd (supra), which we have
noticed, it was held that sale for use or consumption would mean the goods
being brought inside the area for sale to an ultimate consumer, i.e. the one G
who consumes. In Entry 53, 'sale for consumption' (the meaning which we
have placed on the word 'sale') would mean a sale for consumption within
the State so as to bring a State Legislation within the field of Entry 53. If sale
and consumption were to take place in different States, territorial nexus for
the State, where the sale takes place, would be lost. We have already noticed H
304 SUPREME COURT RJ?PORTS [2002] 3 S.C.R.

A that in case of electricity the events of sale and consumption are inseparable.
Any State legislation levying duty on sale of electricity, by artificially or
fictionally assuming that the events of sale and consumption have taken place
in two States, would be vitiated because of extra territorial operation of State ...
legislation.

B In 20th Century Finance Corporation's case, the Constitution Bench
by reference to the .definition of "tax on the sale or purchase of goods"
(which too has been inserted as clause (29-A) in Article 366 by Sixth
Amendment) opined that the situs of sale can be fixed either by the appropriate 1
legislature or by Judge made law and no settled principles for determining
C situs of sale can be laid down. Further, the State legislature cannot by law, .•
treat sales outside the State and sales in the course of import as "sales within
the State" by fixing the situs of sales within its State in the definition of sale,
as it is within the exclusive domain of the appropriate legislature, i.e.
Parliament to fix the location of sale by creating legal fiction or otherwise.
The, majority has clearly opined that the State where the goods are delivered
D in the transaction of inter-State sale, cannot levy a tax on the basis that one
of the events in the C?hain has taken place within the State; so also where the
goods are in existence and available for the transfer of right to use, there also
that State cannot exercise power to tax merely because the goods are located
in that State. Then it was observed that in case where goods are not in
E existence or where there is an oral or implied transfer of the right to use the
goods, such transactions may be effected by the delivery of the goods in
which case the taxable event would be on the delivery of goods. However, rI
we are dealing with the case of electricity as goods, the property whereof, as
we have already noted, is that the production (generation), transmission,
delivery and consumption are simultaneous, almost instantaneous. Electricity
F as goods comes into existence and is consumed simultaneously; the event of
sale in the sense of transferring property in the goods merely intervenes as
a step between generation and consumption. In such a case when the generation
takes place in one State wherefrom it is supplied and it is received in another
State where it is consumed, the entire transaction is one and can be nothing
G else excepting an inter-State sale on account of instantaneous movement of
goods from one State to another occasioned by the sale or purchase of goods,
squarely covered by Section 3 of C.S.T. Act.

Sale of electricity by NTPCL

H In both the cases before us, contracts have been entered into between
STATE v. N.T.P.C. LTD. [R.C. LAHOTI, J.] 305
parties to the transaction, that is, the sellers and the buyers (in other States) A
prior to the generation of electricity. The NTPCL generates electricity and
pursuant to these contracts supplies the same from its power stations situated
in the States of A.P. or M.P. to the buyers in other States where it is received
and consumed. There is no hiatus between generation, sale, supply,
transmission, delivery and consumption. The inter-State movement of B
electricity is pursuant to contracts of sale. Such sales can be held only as
inter-State sales.

Though it may be permissible to fix the situs of sale either by
appropriate State legislation or by Judge made law as held by the majority
opinion in 20th Century Finance Corporation case, we would like to clarify C
that none of the two can artificially appoint a situs of sale so as to create
territorial nexus attracting applicability of tax legislation enacted by any State
Legislature and tax an inter-State sale in breach of Section 3 of the CST Act
read with Articles 286 (2) and 269(1) and (3) of the Constitution. No State
leg;•!ation, nor any stipulation in any·contract, can fix the situs of sale within
the State or artificially define the completion of sale in such a way as to D
convert an inter-State sale into an intra-State sale or create a territorial nexus
to tax an inter-State sale unless permitted by an appropriate central legislation.
But this is exactly what the definition of 'consumer' in Clause (2)(a) of the
. M.P. Electricity Duty Act, 1949 has done. The defmition of consumer has
been artificially extended to include any person who receives electrical energy E
(without regard to its consumption) and also to include a person who, receiving
the electrical energy in bulk, forwards it onwards for distribution, (without
regard to the fact whether it transmitted outside the State and whether the
electricity is or is not consumed within the State). The same defmition has
been adopted in M.P. Upkar Adhiniyam, 1981. This defmition of consumer
shall have to be read down as including within it only such persons who F
receive the electricity for consumption or distribution for consumption within
the State. Without such reading down, the defmition of 'consumer' would be
rendered ultra vires of Articles 286 and 269 of the Constitution read with
Section 3 of the Central Sales Tax Act, 1956.

Consequences on free flow of trade
G

Yet another reason why we cannot accept the line of reasoning advanced
on behalf of the States of Andhra Pradesh and Madhya Pradesh is that the
same runs counter to the scheme of constitutional provisions and specially
the Sixth Amendment. As has been found by the Division Bench of Andhra H
306 SUPREME COURT REPORTS [2002] 3 S.C.R.

A Pradesh High Court in its impugned judgment, if the reasoning suggested on
behalf of the State of A.P. was accepted, the State where the dealer supplying
the electricity is located and the electricity originates for sale, as also the
States in which the purchaser of electricity is located and it is delivered, shall
both subject the electrical energy to taxation, by relying on the theory of
.
B territorial nexus. Such a situation would be the one which was obtaining in
the country with respect to sales tax prior to coming into force of the
Constitution and which led to complications and difficulties in administration
of sales tax legislation and therefore, was taken care of by the Sixth
Amendment. Such multiple taxation would result in hampering free movement
of electricity between the States, and therefore, would be prejudicial to freedom
C of trade, commerce and intercourse throughout the territory of India, and for
the unity and integrity of the country. That would give rise to the same
situation which was sought to be remedied by the Constitution and the Sixth
Amendment.

On behalf of the States of A.P. and M.P ., it was submitted that subject
D of electricity has been specifically dealt with by Articles 287 and 288 of the
Constitution and by implication the Articles, other than 287 and 288, should
be read as not dealing with electricity. This submission is stated only to be
rejected. These articles make some provisions for electricity and water or
electricity in the special context dealt with by those articles and do not
E exclude applicability of other articles where electricity has been dealt with as
goods.

For the foregoing reasons, we are of the opinion that no fault can be
found with the judgment of the Andhra Pradesh High Court which is affirmed
and Civil Appeal No. 3112 of 1990 is dismissed with costs. Civil Writ Petition
p T:C. No. 3 of 1998 is allowed with costs and the demand raised by the Chief
Electrical (Electricity Duty) and Chief Electrical Inspector, Government of
M.P. vide its letter dated 30.11.1995 is directed to be quashed.

K.K.T. Appeal dismissed and Petition allowed.