Business Auxiliary Service or Sale of Goods? Supreme Court Settles Taxability of CNG Distribution Through Oil Marketing Companies

Case Name: Commissioner of Service Tax, Mumbai v. M/s Bharat Petroleum Corporation Ltd. & Ors.

Date of Judgment: 20 July 2026

Citation: 2026 INSC 723

Bench: Justice Aravind Kumar & Justice N. V. Anjaria

Held: The Supreme Court held that the arrangement between Mahanagar Gas Limited (MGL) and BPCL/HPCL was not a principal-to-principal sale transaction, but a principal-agent relationship. BPCL and HPCL merely facilitated the sale of CNG on behalf of MGL, without acquiring ownership or title in the goods. Since they promoted and marketed MGL’s goods as commission agents, their activities fell squarely within the definition of “Business Auxiliary Service” under Sections 65(19) and 65(105)(zzb) of the Finance Act, 1994, making them liable to pay service tax on the commission/profit margin received from MGL. The Court accordingly set aside the CESTAT judgment and restored the service tax demands confirmed by the adjudicating authority.

Summary: The appeals arose from a dispute concerning the taxability of services rendered by Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL) in connection with the retail sale of Compressed Natural Gas (CNG) supplied by Mahanagar Gas Limited (MGL) through the petroleum outlets of BPCL and HPCL.

The Revenue contended that BPCL and HPCL merely acted as facilitators by providing retail outlets, manpower, infrastructure, billing assistance, and other support services for the sale of CNG belonging to MGL. Since they received a commission/profit margin linked to the quantity of CNG sold, the Department classified the activity as Business Auxiliary Service, attracting service tax.

BPCL and HPCL, however, argued that the transactions were genuine sales of CNG from MGL to them on a principal-to-principal basis. They asserted that the commission represented only a trade discount, that VAT had been paid on the transactions, and that they independently sold the CNG to consumers.

The Supreme Court undertook an exhaustive examination of the contractual agreements executed between MGL and the respondent corporations. It analysed the provisions of the Sale of Goods Act, 1930, the Indian Contract Act, 1872, and the Finance Act, 1994, together with leading judicial precedents governing the distinction between a sale and an agency relationship.

The Court held that ownership and title in the CNG never passed from MGL to BPCL or HPCL. MGL retained complete control over pricing, equipment, inventory, supply, inspection, and termination of the arrangement. The respondent corporations merely facilitated sales strictly in accordance with MGL’s directions and received commission for their services. The contractual clauses consistently demonstrated that MGL remained the owner of the goods while BPCL and HPCL functioned as commission agents promoting and marketing MGL’s products.

Rejecting the CESTAT’s reasoning that the transactions constituted sales, the Supreme Court ruled that the substance of the arrangement—not the terminology used by the parties—must determine its legal character. Since the respondent corporations acted on behalf of MGL in marketing and selling CNG, their services were taxable as Business Auxiliary Service, thereby attracting service tax liability.

Decision: The Supreme Court allowed all the appeals, set aside the common judgment of the CESTAT, restored the Orders-in-Original confirming the service tax demands against BPCL and HPCL, and held that the Department was entitled to recover the service tax, interest, and consequential liabilities in accordance with law.