Supreme Court Holds BPCL, HPCL Liable For ₹16.6 Crore Service Tax For Marketing MGL's CNG

The Supreme Court on Monday held that Bharat Petroleum Corporation Ltd. (BPCL) and Hindustan Petroleum Corporation Ltd. (HPCL) are liable to pay more than ₹16.6 crore in service tax for facilitating the sale of Mahanagar Gas Ltd.'s (MGL) compressed natural gas (CNG).

It ruled that the two public sector oil companies rendered Business Auxiliary Service to MGL by promoting and marketing its CNG, instead of purchasing and reselling the fuel.

"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," the court held.

A division bench of Justice Aravind Kumar and Justice NV Anjari delivered the judgment while allowing appeals filed by the Commissioner of Service Tax, Mumbai.

The appeals arose from a Customs, Excise and Service Tax Appellate Tribunal (CESTAT) order that had set aside service tax demands against BPCL and HPCL. The tribunal had held that the transactions between the parties were sales on a principal-to-principal basis.

The dispute stemmed from agreements executed between MGL and BPCL on March 30, 1998, and between MGL and HPCL on June 1, 1999. Under the agreements, MGL supplied CNG through retail outlets operated by BPCL and HPCL.

MGL installed compressors, dispensers, and other equipment at the outlets. BPCL and HPCL, in turn, provided the sites, infrastructure, and manpower needed to dispense CNG to consumers.

Following an investigation, the department alleged that BPCL and HPCL were receiving commission for facilitating the sale of MGL's CNG. It issued show cause notices demanding service tax aggregating more than ₹16.6 crore. The adjudicating authority confirmed the demands after holding that the respondents had rendered taxable services to MGL.

CESTAT, however, set aside the demands. It accepted the companies' contention that they had purchased CNG from MGL and resold it after paying VAT.

Before the Supreme Court, the Revenue argued that the agreements unmistakably created an agency relationship. It submitted that MGL retained ownership of the CNG at every stage of the transaction.

It also fixed the retail price and exercised complete operational control over the sale. According to the Revenue, BPCL and HPCL merely provided infrastructure, manpower, and operational support for marketing and selling the gas. The commission paid to them was consideration for those services.

BPCL and HPCL argued that they purchased CNG from MGL and sold it to consumers as independent buyers. They contended that VAT invoices demonstrated genuine sale transactions. They further argued that the commission referred to in the agreements was actually a trade discount. The respondents also submitted that compression of natural gas amounted to manufacture, taking the activity outside the ambit of service tax.

Examining the agreements, the Supreme Court held that the decisive factor was whether ownership of the goods passed from MGL to BPCL and HPCL.

The court observed, "...the clinching consideration as to whether the relationship which exists is that of 'Buyer and Seller' or the relationship of 'Principal and Agent' is created, would be the element of passing of property in goods from one party to another. It would become decisive as to whether the property in goods or title over goods is retained or travels to another party. If the property passes, it will become contract of sale. If the title in the goods does not pass, it would be conclusive factor to suggest that the arrangement is one of agency, even though the goods may have been delivered. Dominion over property and continuance thereof is a litmus test. In a sale transaction, the buyer becomes owner of the property and the seller ceases to have any vestige of title left in the property."

Applying that test, the bench found that ownership of the CNG never passed to BPCL or HPCL. MGL retained ownership throughout the transaction. It also fixed the retail price, owned the dispensing equipment and supervised the operations.

The court observed, "The Agreements dated 30.03.1998 and 01.06.1999 between the parties in the present case do suggest that the supply of CNG by the appellant did not involve passing of property to the other side, namely BPCL/HPCL, who act only in capacity of agents to deal with the goods to be supplied to the consumers as middlemen acting on behalf of the appellant and by obeying the terms and conditions prescribed by the appellant. It would be seen that no clause or condition of the contract is indicative of an element of passing of property in favour of the respondent corporations."

The court consequently rejected the respondents' contention that they were independent purchasers of the gas.

It observed, "The respondent Corporations are not the buyers. MGL is not the seller. MGL sells CNG through the agency of respondent Corporations to the vehicle users, at a price charged which is fixed by MGL. The relationship born out is that of 'Principal and Agent'. The respondent Corporations do not buy CNG and do not resell the same. The respondent Corporations are the 'recipients' of the goods-CNG supplied by MGL."

Having concluded that the relationship was one of principal and agent, the court held that the commission paid to BPCL and HPCL was consideration for taxable services.

It 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."

It added, "The commission is paid to the respondent Corporations for rendering such services. The respondent Corporations are covered within the ambit of 'commission agent' as per Explanation (a) of the definition. The services rendered by the respondent Corporations are 'taxable services' as defined and understood in Section 65(105) of the Finance Act."

Allowing the Revenue's appeals, the Supreme Court restored the adjudicating authority's orders confirming the service tax demands against BPCL and HPCL.

It held that CESTAT had erred in treating the arrangement as a sale.

The agreements and the conduct of the parties clearly established that BPCL and HPCL acted only as commission agents promoting and facilitating the sale of MGL's CNG.

For Appellant: Gurmeet Singh Makker, AOR

For Respondent(s): Advocates M. H. Patil, Sandeep Narain, Manasi Patil, Kanak Malik, S. Narain & Co