Bharat Petroleum and Hindustan Petroleum Sold Mahanagar Gas’s Compressed Natural Gas Through Petrol Pumps; Supreme Court Treats Them as Commission Agents and Restores Service Tax Demand
Oil Companies Claimed Compressed Natural Gas Transactions Were Independent Sales; Supreme Court Finds Agency Relationship and Upholds Service Tax
Facts
Mahanagar Gas Limited (“MGL”) was engaged in manufacturing and distributing Compressed Natural Gas (“CNG”). It supplied natural gas through pipelines to various retail outlets, including petrol pumps owned by Bharat Petroleum Corporation Limited (“BPCL”) and Hindustan Petroleum Corporation Limited (“HPCL”).
MGL entered into an agreement with BPCL on 30 March 1998, which was subsequently renewed and amended. A similar agreement was entered into with HPCL on 1 June 1999.
Under these agreements:
- MGL installed and owned the compressors, dispensers, meters, storage tanks, pipelines and other equipment required for dispensing CNG.
- BPCL and HPCL provided the site, foundation, shed, electricity, water, utilities and trained manpower.
- MGL fixed the retail price of CNG and could revise it from time to time.
- BPCL and HPCL were required to sell CNG only at the price communicated by MGL.
- MGL calculated the quantity sold through meter readings and raised invoices after adjusting sales tax and the agreed commission or profit margin.
- BPCL and HPCL received commission or profit margin based on the actual quantity of CNG sold.
- Upon termination of the agreements, unsold CNG had to be returned to MGL or disposed of according to MGL’s directions.
The Service Tax Department alleged that BPCL and HPCL were providing marketing and sale-related services to MGL and were therefore liable to pay service tax under the category of “Business Auxiliary Service”.
For the periods between April 2005 and March 2011, show-cause notices were issued demanding service tax, interest and penalties. The adjudicating authority confirmed the demands, holding that the relationship was one of principal and agent.
CESTAT reversed that decision. It held that BPCL and HPCL had purchased CNG from MGL and resold it to customers on a principal-to-principal basis. According to CESTAT, the difference between the purchase price and retail price was a profit margin and not commission for providing a service.
The Commissioner of Service Tax challenged CESTAT’s decision before the Supreme Court.
Issues
- Whether MGL sold CNG to BPCL and HPCL for independent resale on a principal-to-principal basis.
- Whether BPCL and HPCL merely acted as MGL’s agents and facilitated the sale of MGL’s CNG to vehicle owners.
- Whether the commission or profit margin received by BPCL and HPCL was a trade discount arising from a sale or consideration for services rendered to MGL.
- Whether the activities of BPCL and HPCL were taxable as “Business Auxiliary Service” under Sections 65(19) and 65(105)(zzb) of the Finance Act, 1994.
Petitioner’s Arguments
Service Tax Department
The Department argued that the agreements expressly appointed BPCL and HPCL to open outlets and provide services for the sale of MGL’s CNG.
It contended that:
- BPCL and HPCL provided their sites, infrastructure, manpower and utilities for marketing and selling MGL’s CNG.
- MGL retained ownership and control over the CNG throughout the transaction.
- Neither the title in the CNG nor the risk attached to it passed to BPCL or HPCL.
- MGL fixed the retail price and controlled its revision.
- Unsold CNG remained under MGL’s control and had to be returned upon termination.
- The payment described as “commission/profit margin” was consideration for the services rendered by BPCL and HPCL.
- VAT invoices and the payment of sales tax could not override the true nature of the contractual relationship.
- CESTAT had wrongly treated the arrangement as a sale without examining the cumulative effect of the contractual clauses.
The Department further argued that the earlier decision involving Mahanagar Gas concerned the valuation of CNG for central excise purposes and did not decide whether service tax was payable on the commission received by BPCL and HPCL.
Respondent’s Arguments
BPCL and HPCL
BPCL and HPCL contended that MGL first sold CNG to them, after which they independently resold it to vehicle owners.
They relied on invoices, VAT declarations, meter readings and tax records to argue that:
- The transactions were genuine purchase-and-sale transactions.
- Property in the CNG passed from MGL to the oil companies before its further sale to consumers.
- The expression “commission” used in the agreements was a misnomer.
- The amount received was actually a trade discount or profit margin.
- The agreements operated on a principal-to-principal basis.
- Payment of interest for delayed remittance of invoice amounts supported the existence of a buyer-seller relationship.
- Their contractual obligations regarding infrastructure and equipment were mutually beneficial obligations and did not amount to providing services to MGL.
- Since the compression of natural gas amounted to manufacture, the exclusion for manufacturing activities under Section 65(19) was attracted.
Analysis of the Law
The Supreme Court examined the distinction between a contract of sale and a contract of agency.
Under Section 4 of the Sale of Goods Act, 1930, a sale requires the transfer of property or ownership in the goods from the seller to the buyer for a price. The buyer ordinarily obtains control over the goods and bears the corresponding risk of loss.
The Court explained that the decisive considerations in determining whether a transaction is a sale include:
- Whether ownership in the goods passes to the alleged buyer;
- Whether the buyer assumes the risk of loss;
- Whether the buyer has independent control over the goods;
- Whether the buyer can independently determine the resale price;
- Whether the remuneration is a genuine profit from resale or a prearranged commission; and
- Whether the supplier retains control over unsold goods.
By contrast, under Section 182 of the Indian Contract Act, 1872, an agent acts on behalf of the principal in dealings with third parties. The principal ordinarily exercises control over the agent, and the agent accounts to the principal for the transaction and receives remuneration or commission.
Section 65(19) of the Finance Act, 1994 included within “Business Auxiliary Service” activities relating to the promotion, marketing or sale of goods belonging to a client. It expressly included services provided by a commission agent.
The Court emphasised that the true legal relationship must be determined from the cumulative substance of the agreement. The terminology or labels chosen by the parties—including expressions such as “sale”, “profit margin” or “principal-to-principal”—cannot override the actual rights and obligations created by the agreement.
Precedent Analysis
The Supreme Court considered the following important precedents:
- Sri Tirumala Venkateswara Timber and Bamboo v. Commercial Tax Officer: The distinction between sale and agency depends on whether title in the goods passes to the recipient. The true relationship must be gathered from the entire contract and not merely its terminology.
- Future Gaming Solutions (P) Ltd. v. Union of India: A person earning an independent profit on resale is more likely to be a buyer, while a person receiving a prearranged commission for effecting sales is more likely to be an agent.
- Bharti Cellular Limited v. CIT: Agency involves a triangular relationship between the principal, agent and third party. Important indicators include the principal’s control, a fiduciary relationship, the agent’s obligation to account and the payment of remuneration.
- Snow White Industrial Corporation v. Collector of Central Excise: A clause requiring unsold stock to be returned to the supplier strongly indicates that ownership remains with the supplier and that the recipient acts as an agent.
- Hafiz Din Mohammad Haji Abdulla v. State of Maharashtra: Price control by the supplier, payment of fixed commission and the supplier’s continued rights over unsold stock are indicators of a principal-agent relationship.
- Bhopal Sugar Industries Ltd. v. Sales Tax Officer: An agent who receives delivery of goods does not become their owner and sells them as the property of the principal.
- Union of India v. Bombay Tyre International Ltd.: A trade discount presupposes an underlying sale transaction and must form part of the established terms or practice of trade.
- K. Arumugam v. Union of India: Activities involving promotion or marketing of goods belonging to another person may fall within “Business Auxiliary Service” where the person acts as a marketing agent.
The Court found that these principles supported the Department’s case that BPCL and HPCL were MGL’s agents.
Court’s Reasoning
The Supreme Court held that the agreements, when read as a whole, did not transfer ownership of CNG to BPCL or HPCL.
The following factors were decisive:
- MGL expressly appointed BPCL and HPCL to open outlets and provide services for selling CNG.
- MGL owned, installed and maintained the compressors, dispensers, meters, storage tanks and pipelines.
- MGL exclusively fixed and revised the retail price.
- BPCL and HPCL were required to sell CNG only at the price prescribed by MGL.
- MGL retained inspection rights and monitored the quantity sold through meter readings.
- The responsibility concerning the quantity and deficiency of CNG remained with MGL.
- The risk relating to CNG did not pass to BPCL or HPCL.
- Upon termination, unsold CNG had to be returned to MGL or dealt with according to its directions.
- BPCL and HPCL received a predetermined commission or profit margin based on the actual quantity sold.
- The oil companies provided their outlets, infrastructure, utilities and trained staff to facilitate MGL’s sale of CNG to vehicle owners.
These conditions showed that BPCL and HPCL did not acquire complete ownership or dominion over the CNG. They could not independently deal with it as their own property.
The Court rejected the argument that the commission was a trade discount. A trade discount can arise only in a genuine sale transaction. Since there was no transfer of ownership, the predetermined payment linked to the quantity sold was remuneration for agency services.
The payment of VAT and issuance of invoices were not conclusive. The substantive contractual arrangement demonstrated that MGL remained the owner and seller of CNG, while BPCL and HPCL acted as facilitators and commission agents.
Accordingly, their activities constituted promotion, marketing and sale of goods belonging to MGL and fell squarely within “Business Auxiliary Service”.
Conclusion
The Supreme Court held that BPCL and HPCL were commission agents of MGL and not independent purchasers of CNG.
Their services in providing outlets, infrastructure, utilities and manpower for the sale of MGL’s CNG were taxable as “Business Auxiliary Service” under the Finance Act, 1994.
The Court:
- Allowed the Service Tax Department’s appeals;
- Set aside CESTAT’s common order dated 4 June 2014;
- Restored the Orders-in-Original dated 16 August 2012; and
- Permitted the Department to enforce the adjudicated service-tax demands against BPCL and HPCL.
Case Details
Case: Commissioner of Service Tax, Mumbai v. M/s Bharat Petroleum Corporation Ltd. Etc., 2026 INSC 723
Court: Supreme Court of India
Case Number: Civil Appeal Nos. 2471–2473 of 2015
Judge: Justice Aravind Kumar and Justice N.V. Anjaria
Date: 20 July 2026
Result: Appeals allowed; CESTAT order set aside and service-tax demands against BPCL and HPCL restored.
