The Supreme Court has held that Bharat Petroleum Corporation Ltd. (BPCL) and Hindustan Petroleum Corporation Ltd. (HPCL) are liable to pay service tax on the commission earned from facilitating the sale of Compressed Natural Gas (CNG) for Mahanagar Gas Ltd. (MGL).
The bench of Justice Aravind Kumar and Justice N.V. Anjaria ruled that the arrangement constituted a “Business Auxiliary Service” under the Finance Act, 1994, and not a principal-to-principal sale of goods.
The appeals were filed by the Commissioner of Service Tax, Mumbai, setting aside the 2014 decision of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), which had earlier ruled in favour of BPCL and HPCL.
The Court restored the Orders-in-Original confirming the service tax demand against the oil marketing companies.
The dispute arose out of agreements entered into by MGL with BPCL and HPCL for the sale of CNG through the latter’s petrol pump outlets across Mumbai and surrounding areas. Under these arrangements, MGL installed compressors, dispensers and other equipment at the retail outlets, while BPCL and HPCL provided the site, manpower, infrastructure and operational support for dispensing CNG to consumers.
The Service Tax Department alleged that the oil companies were not purchasing CNG from MGL for resale. Instead, they were acting as agents promoting and facilitating the sale of MGL’s CNG to end consumers and were receiving a commission or profit margin for these services. Consequently, the Department sought to levy service tax under the category of “Business Auxiliary Service.”
The adjudicating authority accepted the Department’s stand and confirmed substantial service tax demands along with interest and penalties. However, CESTAT later held that the transactions were conducted on a principal-to-principal basis, treating the margin earned by BPCL and HPCL as a trade discount rather than commission, thereby setting aside the tax demands.
The Supreme Court undertook an extensive examination of the agreements between MGL and the oil companies to determine whether they reflected a sale of goods or an agency arrangement.
The Court observed that several contractual provisions clearly indicated that ownership and control over the CNG remained with MGL throughout the transaction. MGL fixed the retail selling price, retained ownership of the dispensing equipment, controlled safety procedures, monitored stock through joint meter readings, and possessed the authority to inspect and supervise the outlets.
Importantly, the Court noted that upon termination of the agreements, all unsold CNG was required to be returned to MGL, demonstrating that title in the goods never passed to BPCL or HPCL. These features, according to the Court, were inconsistent with an outright sale and instead established a principal-agent relationship.
Rejecting the argument that the commission represented merely a trade discount, the Court emphasised that the agreements expressly described the payment as consideration for services rendered by the oil companies.
The Bench found that BPCL and HPCL were responsible for providing infrastructure, manpower, operational assistance and customer interface for selling MGL’s CNG. Since these activities directly facilitated the marketing and sale of goods belonging to MGL, they squarely fell within the statutory definition of “Business Auxiliary Service” under Section 65(19) of the Finance Act, 1994.
The judgment contains an elaborate discussion on the legal distinction between a contract of sale and a contract of agency.
Referring to the Sale of Goods Act, the Indian Contract Act and earlier Supreme Court precedents, the Court observed that a sale necessarily involves transfer of ownership in the goods, transfer of risk and payment of price. By contrast, an agency relationship exists where one person acts on behalf of another, subject to the principal’s control, and receives remuneration for facilitating transactions with third parties.
Applying these principles, the Court concluded that BPCL and HPCL never acquired ownership of the CNG. Instead, they merely acted as commission agents facilitating sales on behalf of MGL while MGL retained effective control over the goods and pricing.
The Supreme Court held that CESTAT had erred in treating the arrangement as a principal-to-principal sale merely because VAT had been paid and invoices had been issued in the course of transactions. The Bench observed that the overall contractual framework clearly established an agency relationship, making the services taxable under the Finance Act.
The Court held that the respondent corporations were covered within the statutory definition of “commission agent” and that the commission received by them constituted consideration for taxable services.
The Supreme Court restored the adjudication orders confirming the service tax demands against BPCL and HPCL. It held that the respondent corporations were liable to pay service tax on the commission earned for facilitating the sale of MGL’s CNG and that the Department was entitled to enforce the demands as adjudicated.
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