Commission agent or buyer? Supreme Court clarifies the sale-vs-service distinction in CNG distribution arrangements
Summary: The Supreme Court in Commissioner of Service Tax, Mumbai vs. M/s Bharat Petroleum Corporation Ltd. & Anr. [2026 INSC 723] examined whether CNG supplied by Mahanagar Gas Limited (“MGL”) through BPCL and HPCL retail outlets represented a sale of goods on a principal-to-principal basis or services rendered by the oil marketing companies to MGL. The dispute concerned “Business Auxiliary Service” under Section 65(19) read with Section 65(105)(zzb) of the Finance Act, 1994. Analysing the contractual arrangement and principles distinguishing a contract of sale from agency, the Court found that MGL retained control over CNG supply, fixed and monitored prices, installed and maintained equipment at its own cost and retained dominion over unused stock. There was consequently no passing of title in CNG to BPCL or HPCL, whose role was that of facilitators providing services on behalf of MGL. Applying the substance of the arrangement rather than contractual nomenclature, the Supreme Court set aside the CESTAT order and restored service tax demands of Rs. 8,60,31,211/- against BPCL and Rs. 8,07,77,178/- against HPCL, aggregating approximately Rs. 16.69 crore. The ruling reiterates that characterisation as “Principal-to-Principal” cannot override the actual rights, obligations, title and control created by an agreement.
Introduction:
The appeal was filed in Commissioner of Service Tax, Mumbai vs. M/s Bharat Petroleum Corporation Ltd. & Anr. [2026 INSC 723], by Commissioner of Service Tax, Mumbai (hereinafter referred to as “Appellant”) against the common order dated 04.06.2014 passed by Customs, Excise & Service Tax Appellate Tribunal (“CESTAT”), West Zonal Bench, Mumbai which was preferred by M/s Bharat Petroleum Corporation Limited (“BPCL”) and M/s Hindustan Petroleum Corporation Limited (“HPCL”) – (hereinafter collectively referred to the “Respondents”) in which CESTAT allowed the appeal and set aside the Order-in-Original (“OIO”) passed by Commissioner of Customs (TAR), Mumbai confirming the demand toward service tax against the Respondents.
Facts
Mahanagar Gas Limited (“MGL”) has been receiving natural gas from Gas Authority of India Limited (“GAIL”) and was engaged in manufacturing and distributing Compressed Natural Gas (“CNG”), for which it was paying central excise duty, to various retail outlets including those of Respondents situated across Mumbai, Thane, etc. The case of the Department is that it is providing taxable services, such as “Business Auxiliary Service,” within the scope and ambit of Section 65(19), read with Section 65(105)(zzb), of the Finance Act, 1994, as the equipment such as MGL installed compressors on the premises, it determined the price charged in the bills and entire sale proceeds are remitted back to it. They had been providing the site and manpower for sale of CNG as vehicular fuel and received commission/profit margin on the actual quantity of CNG sold. Two Demand Notices were issued to both Respondent-Companies, each, with Rs. 8,60,31,211/- to BPCL and Rs. 8,07,77,178/- to HPCL, totally Rs. 16.69 crore.
Court’s Analysis
The question to be addressed was whether the CNG sale agreement was of the nature of a sale of goods or a service provided by Respondent to MGL, and whether the activities would be covered under the definition of “Business Auxiliary Services”. The Respondent contended that the agreement with MGL was on a “Principal-to-Principal” basis rather than a “Principal-Agent” relationship as asserted by the Department. The Supreme Court analysed Section 4 of the Sales of Goods Act, 1930 along with its own judgment in Sri Tirumala Venkateswara Timber and Bamboo vs. Commercial Tax Officer, Rajahmundry, (1968) 21 STC 312, which itself referred to its Judgment in State of Madras vs. Gannon Dunkerley & Co. (Madras) Ltd. (1958) 9 STC 353. It highlighted that a Contract of Sale is the transfer of title to the goods for the price paid or promised to be paid. In contrast, the essence of Agency under the Contract Act, 1872, it analysed, while relying on the Judgment of Union of India v. Future Gaming Solutions (P) Ltd, (2025) 5 SCC 601, and Bharti Cellular Limited v. CIT, (2004) 8 SCC 608, is the delivery of goods to a person who is to sell them but as property of the principal who is the owner of the goods. The Court analysed the provision of the agreement between MGL and Respondents at length and observed that the agreement was meant to provide services to the consumers on behalf of the MGL as enumerated in Clause 4, and the whole status of the BPCL and HPCL is that of a facilitator. Additionally, the control of supply of CNG till the vehicle owner remained with the MGL along with fixation of price and monitoring thereof; it installed the equipment at its own cost and covered the costs of repair. Consequently, there was no passing of title in goods in the favour of the respondents under the Agreement, and in case of termination, all unused stocks shall be returned or disposed of as per directions of MGL, which is an important facet of agency as held in M/s Snow White Industrial Corporation, Madras v. Collector of Central Excise, Madras, (1989) 3 SCC 351. Thus, the Court set aside the impugned common order of the CESTAT, West Zonal Branch, Mumbai and held that the Respondents have to pay the service tax and the Appellant is entitled to enforce the demand as adjudicated.
Impact of the Judgement
The impact of the judgement lies in the court’s reiteration that the legal relationship between the parties must be determined by the substance of the arrangement rather than the nomenclature adopted in the agreement. The Bench was categorical that the agreements had to be read “in total and collectively” and that “it is not the form but the substance of the conditions” which governs the outcome.
The arrangement between MGL and BPCL/HPCL is not an isolated one; City Gas Distribution (“CGD”) entities such as Indraprastha Gas Limited, Gujarat Gas Limited, and MGL itself together account for the bulk India’s CNG retailing, and rely on public sector oil marketing companies to host their compression equipment at existing retail outlets, with the outlet operator functioning as a facilitator for supply and sale rather than as an independent buyer. The Court’s reasoning may accordingly have direct implications for any retail outlet operator operating under a comparable structured agreement. Significantly, the judgment may also carry implications for the VAT/sales tax treatment of such arrangements. Since the Court has held that title in the goods did not pass to BPCL and HPCL, outlet operators similarly placed could no longer sustain a claim to have purchased and resold the goods for VAT purposes, and may accordingly face reassessment of input tax credit or VAT deduction claimed on that premise for the relevant period. The precedential value of this test is likely to inform the characterisation of distribution agreements beyond the petroleum sector as well, where the supplier retains a comparable degree of dominion and title over the goods; thus, it transcends its immediate factual context, offering enduring guidance on the distinction between sale and agency in distribution-based commercial models.
Conclusion
The Supreme Court’s ruling serves as a distinction between a Contract of Sale and a Contract of Agency in distribution-based commercial models. The judgment reinforces the well-settled principle that the nomenclature adopted by contracting parties, i.e., “Principal-to-Principal” or “Purchaser,” cannot override the true substance of the arrangement. The court’s reliance on established precedents, including M/s Snow White Industrial Corporation (supra), further strengthen the position that retention of control over pricing, supply, and unsold stock are decisive indicators of an agency relationship.
For BPCL and HPCL, the demands totalling approximately ₹16.69 crore, once set aside by CESTAT, now stand restored. The judgment’s significance, however, lies less in this specific figure than in the doctrinal clarity it brings to a question that had, until now, produced inconsistent answers across tribunals applying near-identical facts. By privileging substance over form, and returning the inquiry to the presence or absence of title, risk, and control rather than to whatever nomenclature the agreement happened to adopt, the Court has narrowed the room for parties to secure a favourable classification through drafting alone. In doing so, the judgment stands as a considered restatement of first principles governing the sale-agency distinction, one that will likely be invoked for the proposition that “it is not the form but the substance of the conditions” governing a distribution arrangement that determines its true legal character.
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The article is c0-authored with Miss Kirti Kasat – 3rd Year B.A., LL.B. (Hons.) Student at Institute of Law, Nirma University.
