The Supreme Court has revived service tax demands exceeding ₹16 crore against Bharat Petroleum Corporation Ltd. (BPCL) and Hindustan Petroleum Corporation Ltd. (HPCL), ruling that the two oil companies functioned as commission agents while facilitating the sale of compressed natural gas (CNG) for Mahanagar Gas Ltd. (MGL).
A bench comprising Justice Aravind Kumar and Justice NV Anjaria held that the arrangement between MGL and the two petroleum companies was not a conventional sale and purchase of CNG. Instead, BPCL and HPCL acted as facilitators and promoters for MGL’s CNG sales through their retail outlets in Mumbai.
The Court found that the arrangement fell within the definition of a “commission agent” under the category of “Business Auxiliary Service” under Section 65(19) of the Finance Act.
The dispute centred on agreements under which BPCL and HPCL sold MGL’s CNG through their respective retail networks. The Service Tax Department argued that the oil companies were providing agency services to MGL and were therefore liable to pay service tax on the commission or profit margin they earned.
The companies disputed this position, maintaining that they purchased and sold the CNG on a principal-to-principal basis. According to their argument, the transactions involved the sale of goods and were therefore subject to VAT rather than service tax.
The tax demands, covering the period from April 2005 to March 2011, together exceeded ₹16 crore. The dispute reached the Supreme Court after the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) had earlier set aside the demand.
Allowing the Revenue’s appeal, the Supreme Court said the key question was whether ownership of the CNG had actually passed from MGL to BPCL and HPCL.
The Court said the agreements did not establish a conventional buyer-seller relationship in which title to the goods was transferred to the oil companies. Instead, MGL paid the companies a commission or profit margin based on the actual quantity of CNG sold to consumers on MGL’s behalf.
The judgment noted that the decisive factor in distinguishing a sale from an agency arrangement is the transfer of ownership in the goods. Where title passes to the buyer, the transaction is a sale. Where ownership remains with the principal and another party merely facilitates the transaction, the relationship is one of agency.
In this case, the Court concluded that BPCL and HPCL were operating as facilitators for MGL and promoting the sale of CNG on its behalf. Their entitlement to a commission for those services, the Court held, placed them within the statutory definition of commission agents.
The Supreme Court consequently held that the services provided by the two oil companies were taxable services and restored the service tax demands.
