Distributor Acting As Commission Agent Amounts To Business Auxiliary Service U/S 65 Finance Act: Supreme Court Restores ₹16 Cr Service Tax Demand Against BPCL, HPCL

The Court was hearing appeals filed by the Commissioner of Service Tax, Mumbai, against a CESTAT order which had set aside service tax demands confirmed against Bharat Petroleum Corporation Limited and Hindustan Petroleum Corporation Limited in relation to CNG distribution from outlets owned by the corporations.

A Bench of Justice Aravind Kumar and Justice N.V. Anjaria held that the corporations facilitated and promoted the sale of CNG for MGL, while MGL retained control, price fixation, title and risk over the goods. The Bench observed:

The Bench observed: “The respondent Corporations are the commission agents rendering the services to the appellant in distributing CNG acting on the basis of terms and conditions of the Agreement, of course, they are free to perform the task which they are entrusted with by the appellant-principal as per the terms of the Agreements. They do the business as facilitator and promote to sell CNG for the appellant. The respondent Corporations may be enjoying certain ‘powers’ but they do not have the authority to override the principal–appellant and to hold the goods with any titular authority.”

The Bench further added: “The agent Corporations provide promotional services for marketing and sale of goods belonging to the MGL. Their activity stands squarely covered under Section 65(19) as “Business Auxiliary Service”. MGL is the customer of services provided by the respondent Corporations and facilitated by such services, MGL sells the goods-CNG as marketed and promoted by the respondent Corporations to the vehicle owners as per the arrangement in the Agreements”.

Advocate Gurmeet Singh Makker appeared for the Commissioner of Service Tax, Mumbai, while Advocate M.H. Patil appeared for the respondent corporations.

Background

MGL was engaged in manufacturing and distributing CNG. It received natural gas from GAIL and transported it through gas grids to retail outlets, including those of BPCL and HPCL. MGL installed compressors, dispensers, meters and related equipment at such outlets, where natural gas was compressed into CNG and supplied to vehicle users.

The Department alleged that BPCL and HPCL were providing site, manpower and other facilities for the sale of CNG as vehicular fuel and were receiving commission/profit margin from MGL. On that basis, it treated their activity as Business Auxiliary Service under Section 65(19) read with Section 65(105)(zzb) of the Finance Act, 1994.

The Department demanded Rs. 7,20,78,037 from BPCL for April 2005 to March 2010 and Rs. 1,40,03,174 for April 2010 to March 2011. Similar demands of Rs. 6,86,65,245 and Rs. 1,21,11,933 were raised against HPCL for corresponding periods, with interest and penalty.

The adjudicating authority held that the arrangement was principal-agent in nature and confirmed the demand. CESTAT reversed the order, holding that BPCL and HPCL were buying CNG from MGL and selling it to consumers, and that the margin could not be treated as commission.

Court’s Observations

The Court framed the central issue as whether the activities of BPCL and HPCL in relation to sale of CNG through their outlets fell within Business Auxiliary Service.

The Court noted: “The core issue that surfaces for consideration is whether the transaction between the respondent- Corporations and MGL in supply of CNG was in the capacity of ‘Seller and Buyer’, in other words whether MGL was a seller of CNG which goods used to be purchased by the respondent-Corporations to sell through their outlets to the ultimate consumers. Or whether the respondent-Corporations were only service providers to facilitate MGL to sell goods as CNG through their outlets to the consumers/the vehicle owners.”

The Court said the agreements between MGL and the corporations were the “acid test” to determine whether the arrangement was an outright sale or principal-agent relationship.

The Court examined Section 65(19) of the Finance Act, which included services in relation to the promotion, marketing or sale of goods belonging to a client, provision of service on behalf of a client, and incidental or auxiliary services, including services as a commission agent.

It reproduced the statutory definition of “commission agent”, which includes a person acting on behalf of another who causes the sale or purchase of goods, collects payment, guarantees collection or undertakes activities relating to such sale or purchase. On applying that definition, the Court held that BPCL and HPCL were covered by the expression.

The Court examined the meaning of sale under Section 4 of the Sale of Goods Act, 1930 and contrasted it with agency under Section 182 of the Contract Act, 1872. It relied on Sri Tirumala Venkateswara Timber and Bamboo v. Commercial Tax Officer (1968), State of Madras v. Gannon Dunkerley & Co. (1958), Future Gaming Solutions (P) Ltd. v. Union of India (2025), Bharti Cellular Limited v. CIT (2024), and other precedents.

The Court then referred to the principle that the true relationship must be gathered from the contract as a whole and not merely from labels used by the parties.

The Court analysed several clauses of the MGL agreements with BPCL and HPCL. It noted that MGL appointed the corporations to open outlets for sale of CNG, required them to perform functions and provide services, fixed retail price, installed equipment, retained inspection rights, and controlled safety and supply requirements.

The Court observed: “The whole status of the respondent-Corporations becomes that of a facilitator, who by providing different kind of agreed upon services, arrange and smoothen the sale by MGL to the vehicle owners. The respondent-Corporations acted in the process, in capacity of an agency without any real and effectual dominion over the goods. Their task was to promote the sale on behalf of MGL and make the marketing of goods convenient. A facilitator cannot be a buyer. It only acts on behalf of supplier-principal to become an agent.”

On price control, the Court noted that BPCL and HPCL had no independent authority to fix price.

The Bench held: “The fixation of price and monitoring thereof was in the hands of MGL. The respondent Corporations were enjoined under the Agreements to sell CNG at the price fixed by MGL. Clause 2.4 mentioned that the retail price of CNG shall be fixed by MGL and that the respondent Corporations shall sell the goods only at such price communicated by MGL from time to time.”

The Court treated retention of control and title as decisive. It noted that MGL remained responsible for supply, retained control over equipment, and upon termination, unsold CNG had to be returned to MGL or disposed of as per MGL’s directions.

The Court held: “One of the important indicators of the fact that there is no passing of title in goods in favour of the respondent Corporations is the retention of right over the stocks. While the responsibility to supply the goods-CNG in adequate quantity rests on MGL, CNG never becomes the property of the respondents in view of the terms of the Agreement.”

It further stated: “All the terms and conditions of the Agreement taken together in their operation invariably suggest that the title or ownership in the goods did not pass at any point of time to the respondent Corporations. MGL continued to hold the title over the goods for all procedural and practical purposes.”

BPCL and HPCL contended that the amount described as commission/profit margin was actually a trade discount. The Court rejected this submission, distinguishing trade discount and commission, and referring to Union of India v. Bombay Tyre International Ltd. (2005) and Future Gaming Solutions (2025).

The Court observed: “There may be a spacious argument that the nomenclature as ‘commission’ would not be determinative, however, in the instant case, read in conjunction with other stipulations in the Agreements and the nature of the Agreements considered in wholesome manner which are for providing services and for marketing and promotion of sale, the stipulation of commission in Clause 4 in the nature of remuneration paid to the agent rendering services by the Principal. It, in no other way, could be construed. The word ‘commission’ here has the intake of its true sense.”

It added that trade discount is relevant where the sale is on a principal-to-principal basis, “which is indeed not the case here.”

The Supreme Court held that CESTAT erred in treating the arrangement as a purchase and sale merely because VAT/sales tax was paid or invoices were raised. It held that the adjudicating authority had correctly determined that BPCL and HPCL were providing taxable services.

The Court concluded: “The respondent Corporations cannot escape the payment of service tax. The view taken by the adjudicating authority in determining the amounts payable towards service tax by the respondent Corporations, and the reasons recorded therefor, were eminently proper. The order of CESTAT reversing the same cannot stand valid.”

Conclusion

The Supreme Court allowed the appeals filed by the Commissioner of Service Tax, Mumbai. It set aside CESTAT’s common order and restored the Orders-in-Original passed by the Commissioner of Customs (TAR), Mumbai.

The Court held that the Commissioner was entitled to enforce the adjudicated service tax demand against BPCL and HPCL.

Cause Title: Commissioner of Service Tax Mumbai v. M/s Bharat Petroleum Corporation Ltd. Etc. (Neutral Citation: 2026 INSC 723)

Appearances

Appellant: Gurmeet Singh Makker, AOR

Respondents: M.H. Patil, Sandeep Narain, Manasi Patil and Kanak Malik, Advocates, with M/s. S. Narain & Co., AOR

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