The Supreme Court has ruled that Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL) acted as agents of Mahanagar Gas Limited (MGL) while selling CNG at their outlets, and not as independent buyers. This means both oil companies are liable to pay service tax on the commission they received from MGL, running into several crores of rupees.
A bench of Justice Aravind Kumar and Justice N.V. Anjaria set aside a 2014 order of the CESTAT, Mumbai, which had earlier let the oil corporations off the hook. The top court restored the original tax demand orders passed by the Commissioner of Customs, Mumbai, back in 2012.
Background of the Case
MGL manufactures CNG using natural gas sourced from GAIL, and this gas is compressed at various outlets across Mumbai and Thane, including those owned by BPCL and HPCL. Under agreements signed in 1998 and 1999, MGL supplied CNG through equipment it owned and installed at these outlets, while the oil companies provided the site, staff and infrastructure.
The tax department's intelligence wing found that BPCL and HPCL were receiving a "commission" or "profit margin" from MGL based on the quantity of CNG sold, and treated this as consideration for "Business Auxiliary Service" - a taxable service under the Finance Act, 1994. Show-cause notices were issued demanding tax running into crores for periods between 2005 and 2011.
The Commissioner (TAR), Mumbai confirmed these demands in 2012, holding that the relationship between MGL and the two corporations was one of principal and agent, not seller and buyer. However, CESTAT overturned this finding in 2014, holding that BPCL and HPCL were simply buying CNG from MGL and reselling it - a straightforward purchase-and-sale transaction that falls outside the service tax net.
Court's Observations
The Supreme Court disagreed with CESTAT's reasoning. Justice Anjaria, writing the judgment, examined the agreements clause by clause and found that ownership of CNG never actually passed from MGL to the oil corporations.
The bench noted that MGL retained control over pricing, equipment, and even the unsold stock. On termination of the agreement, any unused CNG had to be returned to MGL — a fact the Court called a strong indicator against a genuine sale.
The bench observed that the essence of a sale is transfer of ownership for a price, whereas in an agency, the person handling the goods does so on behalf of the principal and is paid for services rendered, not for buying and reselling.
The Court also pointed to Clause 8.4 of the agreements, which specifically used the word "commission" for payments to BPCL and HPCL. It held that this commission was tied to actual quantities sold and adjusted through invoices - a pattern consistent with agency, not trade discount.
The judgment further held that the oil corporations' role was essentially that of a facilitator - providing land, manpower, and infrastructure so that MGL could sell CNG to vehicle owners, while MGL retained the risk, ownership and pricing control throughout.
Decision
The Supreme Court held that BPCL and HPCL rendered "Business Auxiliary Service" to MGL and are therefore liable to pay service tax on the commission received. It set aside CESTAT's 2014 order and restored the original 2012 orders passed by the Commissioner of Customs (TAR), Mumbai, confirming the service tax demand along with interest and penalties.
All the appeals filed by the Commissioner of Service Tax, Mumbai were allowed.
Case Details:
Case Title: Commissioner of Service Tax Mumbai vs. M/s Bharat Petroleum Corporation Ltd. Etc.
Case Number: Civil Appeal Nos. 2471-2473 of 2015
Judge: Justice Aravind Kumar and Justice N.V. Anjaria
Decision Date: July 20, 2026
