Introduction
The Hon’ble Supreme Court of India, in Commissioner of Service Tax, Mumbai v. M/s Bharat Petroleum Corporation Ltd. & Ors., C.A. No. 2471-2473 OF 2015 : 2026 INSC 723, decided on 20.07.2026, restored service tax demands exceeding ₹16 crore against Bharat Petroleum Corporation Ltd. (“BPCL“) and Hindustan Petroleum Corporation Ltd. (“HPCL“). The Hon’ble Court held that the two oil marketing companies, while distributing Compressed Natural Gas (“CNG“) supplied by Mahanagar Gas Limited (“MGL“) through their retail outlets, functioned as “commission agents” rendering “Business Auxiliary Service” under Section 65(19) read with Section 65(105) of the Finance Act, 1994, and were therefore liable to pay service tax on the margin retained by them.
Factual Background
MGL had entered into agreements dated 30.03.1998 and 01.06.1999 with BPCL and HPCL for the sale of CNG through the oil companies’ retail outlets in Mumbai. Under these arrangements, the two companies distributed CNG to consumers on MGL’s behalf and retained a commission or profit margin fixed periodically as per government directives, calculated on the actual quantity of CNG sold to end consumers.
The Service Tax Department took the view that BPCL and HPCL were not independent buyers and sellers of CNG but were acting as commission agents of MGL, and accordingly raised service tax demands aggregating over ₹16 crore for the period April 2005 to March 2011, classifying the activity as “Business Auxiliary Service.”
BPCL and HPCL resisted the demand, contending that the transactions were on a principal-to-principal basis, that title in the CNG passed to them upon supply, and that their sale to consumers attracted VAT rather than service tax. The Customs, Excise and Service Tax Appellate Tribunal (“CESTAT“) accepted this position and set aside the Revenue’s demand, prompting the Department to approach the Supreme Court in appeal.
Issue Before The Hon'ble Supreme Court
Whether the relationship between MGL and the respondent oil companies (BPCL/HPCL) under the distribution agreements was that of “buyer and seller,” attracting VAT, or that of “principal and agent,” attracting service tax as Business Auxiliary Service under the Finance Act, 1994?
Contentions Of The Parties
The Revenue, represented by the Additional Solicitor General, contended that under the terms of the agreements, no property in the CNG ever passed from MGL to BPCL/HPCL. The oil companies merely distributed CNG to consumers at a retail price fixed by MGL and received a commission calculated on the quantity actually sold, which was a classic indicator of an agency relationship rendering “Business Auxiliary Service.”
Counsel for the respondent corporations argued that the transactions were structured on a principal-to-principal basis, that VAT/sales tax had already been discharged on the sale of CNG to consumers, and that the profit margin earned did not amount to a “commission” for rendering any service. Reliance was placed on the earlier decision in K. Arumugam v. Union of India (2024), where the Hon’ble Supreme Court had held that lottery wholesalers purchasing and reselling lottery tickets on their own account were not liable to service tax.
Decision And Findings
The Hon’ble Supreme Court allowed the Revenue’s appeal, set aside the CESTAT order, and restored the service tax demand in its entirety.
The Hon’ble Court held that the decisive test to determine whether an arrangement constitutes a sale or an agency is the passing of property in goods from one party to another. Where dominion and title over the goods continue to vest in the supplier despite delivery, the arrangement remains one of agency, not sale. Examining the agreements, the Court found no clause indicating transfer of title in the CNG to BPCL/HPCL; the oil companies acted only as intermediaries dealing with the goods on MGL’s behalf and subject to MGL’s terms.
The Hon’ble Court observed that the respondent corporations were “recipients” of CNG supplied by MGL and not buyers who resold it, since MGL alone fixed the price charged to consumers and remained the seller throughout. The commission paid to BPCL/HPCL for facilitating and promoting the sale of CNG on MGL’s behalf brought their activity squarely within the definition of “commission agent” under Explanation (a) to Section 65(19) of the Finance Act, rendering it a taxable “Business Auxiliary Service” under Section 65(105).
The Hon’ble Court clarified that in that case the lottery wholesalers genuinely purchased and resold tickets on their own account with no element of promotion or marketing service rendered to the State. In contrast, BPCL and HPCL actively promoted and marketed the sale of CNG for MGL as its agents, which took their activity outside the scope of K. Arumugam and squarely within the ambit of taxable service.
Accordingly, the Hon’ble Court held that the adjudicating authority’s original order confirming the service tax demand was correct, and that CESTAT had erred in reversing it.
AMLEGALS Remarks
The ruling in Commissioner of Service Tax, Mumbai v. Bharat Petroleum Corporation Ltd. reaffirms that the characterisation of a commercial arrangement as “sale” or “agency” for tax purposes turns on the substance of the contractual terms particularly whether title and dominion over goods actually pass and not merely on the labels or invoicing structure adopted by the parties. Businesses operating through distribution or retail arrangements involving fixed retail prices, government-regulated margins, and third-party pricing control should closely examine whether such structures expose them to service tax liability as commission agents, in addition to VAT/GST already discharged on the underlying sale. The decision is also a reminder that historic disputes spanning several assessment years can be revived at the level of the Supreme Court even after relief has been granted by CESTAT, underscoring the importance of robust documentation of the true commercial relationship between principal and distributor at the time such agreements are executed.
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