Authority: Supreme Court of India, Civil Appellate Jurisdiction

Order Date: 20 July 2026

Case Overview

  • The Commissioner of Service Tax (Mumbai) filed Civil Appeals Nos. 2471‑2473 of 2015 under Section 35L(b) of the Central Excise Act, 1944 and Section 83 of the Finance Act, 1994, challenging the common order dated 04‑06‑2014 passed by the Customs, Excise & Service Tax Appellate Tribunal (West Zonal Bench, Mumbai) which had allowed the appeals of M/s Bharat Petroleum Corporation Ltd (BPCL) and M/s Hindustan Petroleum Corporation Ltd (HPCL).
  • The original Orders‑in‑Original dated 16‑08‑2012 (Nos. 03‑04 and 05‑06/ST/SB/2012‑13) of the Commissioner (TAR), Mumbai, had confirmed a service‑tax demand on the respondents for the period 01‑04‑2005 to 31‑03‑2011, on the ground that the activities of BPCL and HPCL in relation to the sale of compressed natural gas (CNG) supplied by Mahanagar Gas Ltd (MGL) constituted “Business Auxiliary Service” under Section 65(19) read with Section 65(105)(zzb) of the Finance Act.
  • The Department’s demand was based on show‑cause notices dated 18‑10‑2010 (BPCL) and 18‑10‑2010 (HPCL) for the period 2005‑10, amounting to Rs 7,20,78,037 for BPCL and Rs 6,86,65,245 for HPCL. Subsequent notices dated 19‑10‑2011 (BPCL) and 04‑10‑2011 (HPCL) sought additional amounts of Rs 1,40,03,174 and Rs 1,21,11,933 respectively as interest and penalty for the period 2010‑11.
  • The dispute centred on whether the respondents were merely purchasers of CNG (a principal‑to‑principal transaction) or whether they acted as agents providing ancillary services to MGL, thereby attracting service tax as “Business Auxiliary Service”.
  • Key factual matrix:
  • MGL manufactures CNG, receives natural gas from GAIL, installs compressors, storage tanks and meters at BPCL/HPCL outlets, and supplies CNG to those outlets.
  • Agreements were executed on 30‑03‑1998 (BPCL) and 01‑06‑1999 (HPCL), renewed on 10‑06‑2004 and amended on 21‑11‑2008. The agreements contain clauses on (i) appointment of the corporations to open outlets, (ii) provision of site, shed, canopy and utilities by the corporations, (iii) MGL’s ownership of all equipment, (iv) retail price of CNG fixed solely by MGL, (v) commission/profit‑margin payable by MGL to the corporations (Clause 8.4), (vi) indemnity, exclusivity, inspection rights, and termination provisions.
  • The corporations received a commission per kilogram of CNG sold; the commission rate was revised over time (e.g., Rs 1.40 per kg from Jan 2006).
  • The corporations were required to furnish monthly forecasts of CNG requirements, allow MGL’s officers to inspect equipment, and could not claim ownership of the equipment.
  • The Department argued that the corporations provided “Business Auxiliary Service” – promotion, marketing, site provision, and commission‑agent activities – and therefore were liable to register for service tax, determine the correct value of the service, and pay tax, interest and penalty.
  • CESTAT, however, held that the transactions were on a principal‑to‑principal basis, that the corporations bought CNG from MGL and resold it at the retail price fixed by MGL, and that the commission was merely a discount; consequently, no service tax was payable.
  • The appellant (Commissioner of Service Tax) submitted that the agreements expressly contemplated a commission for services, that title and risk in the CNG never passed to the corporations, that price fixation and risk remained with MGL, and that the corporations acted as “commission agents” within the meaning of Section 65(19) and the explanatory notes.
  • The respondents countered that the agreements reflected a sale of goods, that the commission was a trade discount, that title passed at the point of sale, and relied on several precedents (e.g., Future Gaming Solutions, Kafila Hospitality, Union of India v. Future Gaming Solutions).

Final Outcome

  • The Supreme Court held that the totality of the agreements demonstrates a principal‑agent relationship: MGL retained ownership, price control, risk, and the corporations merely provided site, manpower, and ancillary services for a commission.
  • Accordingly, the services rendered by BPCL and HPCL fall within the definition of “Business Auxiliary Service” and are taxable under Section 65(19) and Section 65(105)(zzb) of the Finance Act.
  • The Court set aside the common CESTAT order dated 04‑06‑2014, restored the Orders‑in‑Original dated 16‑08‑2012, and directed that the service‑tax demand (including interest and penalties) be enforced against the respondents.
  • All three appeals were allowed. Any pending interlocutory applications were deemed not to survive the disposal of the appeals.

Topics: Service Tax, Business Auxiliary Service, CNG Distribution