Oil Companies Acting As Agents To Sell CNG On Behalf Of Gas Suppliers Liable For Service Tax: Supreme Court

"In light of the delineation, the respondent Corporations which act as marketing promoters can claim the status of agents only. As buying and selling does not take place... any other relationship between the parties except that of 'Principal and Agent', stands ruled out," Supreme Court of India, in a significant ruling dated July 20, 2026, held that oil marketing companies selling Compressed Natural Gas (CNG) through their retail outlets on behalf of gas manufacturers act as "commission agents" and are liable to pay service tax under "Business Auxiliary Service". A bench comprising Justice Aravind Kumar and Justice N.V. Anjaria ruled that the relationship between the parties was of a principal and an agent, noting that the oil companies never acquired title or ownership over the gas they sold.

The dispute arose after the service tax department issued show-cause notices to Bharat Petroleum Corporation Ltd. (BPCL) and Hindustan Petroleum Corporation Ltd. (HPCL). The department demanded service tax on the commission they received from Mahanagar Gas Limited (MGL) for providing the site, manpower, and infrastructure to sell CNG at their petrol pumps. While the adjudicating authority confirmed the service tax demand, the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) set it aside, holding that the transaction was a "principal-to-principal" sale of goods and did not involve any taxable service.

The primary question before the court was whether the transaction between the oil marketing companies and MGL for the supply of CNG was a principal-to-principal sale of goods. The court was also called upon to determine whether the activities of the oil companies fell within the purview of "Business Auxiliary Service" under Section 65(19) read with Section 65(105)(zzb) of the Finance Act, 1994.

Distinction Between Sale And Agency

The Supreme Court examined the fundamental legal distinction between a contract of sale and a contract of agency to determine the true nature of the agreement. Relying on the precedent set in Sri Tirumala Venkateswara Timber and Bamboo vs. Commercial Tax Officer, the bench emphasized that the essence of a sale is the transfer of title to the goods for a price. Conversely, the court observed that an agent is authorized to sell goods on behalf of the principal without acquiring ownership of the property.

Title In Goods Never Passed To Oil Companies

Analyzing the specific agreements between MGL and the oil companies, the court noted that MGL installed the equipment, retained control over the supply, and bore the risk for any loss of goods. The bench observed that the right over unsold stock remained solely with MGL upon the termination of the contract. The court stated that "all the terms and conditions of the Agreement taken together in their operation invariably suggest that the title or ownership in the goods did not pass at any point of time to the respondent Corporations."

Companies Acted As Mere Facilitators

The bench held that BPCL and HPCL acted merely as facilitators, providing the site and manpower to smoothen the sale of MGL's CNG to ultimate vehicle owners. Emphasizing the nature of the service, the court clarified that a facilitator cannot be a buyer, as it acts strictly on behalf of the supplier-principal. The judges observed that "the whole status of the respondent-Corporations becomes that of a facilitator, who by providing different kind of agreed upon services, arrange and smoothen the sale."

Remuneration Was Commission, Not Trade Discount

The respondent corporations had argued that the amount received was a trade discount, which is typical in principal-to-principal sale transactions. Rejecting this contention, the Supreme Court referred to Future Gaming Solutions (P) Ltd., noting that the remuneration was expressly termed as a commission in the contract. The bench observed that the invoices were raised by MGL after adjusting the commission amount, cementing the fact that it was payment for rendering agency services.

Activity Covered Under Business Auxiliary Service

The court firmly concluded that the activities of the oil marketing companies squarely fell within the definition of "Business Auxiliary Service" under Section 65(19) of the Finance Act, 1994. Since the companies provided promotional services for marketing and selling goods belonging to MGL, the court held that they operated as commission agents. The bench clarified that MGL is the customer of the services provided by the oil companies, rendering the activity a taxable service.

The Supreme Court allowed the appeals, setting aside the impugned order of the CESTAT and restoring the orders of the adjudicating authority. The court firmly concluded that the respondent corporations cannot escape the payment of service tax, directing that the department is entitled to enforce the service tax demands as originally adjudicated.

Date of Decision: 20 July 2026