Supreme Court holds BPCL, HPCL CNG outlets are MGL's agents, liable to service tax
A Bench of Justices Aravind Kumar and N.V. Anjaria held that BPCL and HPCL sold CNG as agents of Mahanagar Gas, making their commission taxable as Business Auxiliary Service.
The Supreme Court has held that Bharat Petroleum Corporation Ltd. and Hindustan Petroleum Corporation Ltd. acted as agents of Mahanagar Gas Ltd. when selling Compressed Natural Gas through their outlets, and that the commission they received attracts service tax under the head “Business Auxiliary Service”. Deciding appeals filed by the Commissioner of Service Tax, Mumbai, a Bench of Justices Aravind Kumar and N.V. Anjaria set aside a 4 June 2014 order of the Customs, Excise & Service Tax Appellate Tribunal, West Zonal Bench, Mumbai, which had ruled that the transactions were sales on a principal-to-principal basis. The Court restored the Orders-in-Original dated 16 August 2012 passed by the Commissioner of Customs (TAR), Mumbai, which had confirmed the tax demand. The central question was whether title in the CNG ever passed to the Corporations. The Court found it did not.
How the CNG dispute reached the Court
MGL manufactured and distributed CNG, receiving natural gas from GAIL and compressing it at outlets, including those owned by BPCL and HPCL, in and around Mumbai. The compressors, dispensers and meters were installed by MGL. MGL paid central excise duty on the CNG so manufactured.
MGL entered into agreements with BPCL on 30 March 1998 and with HPCL on 1 June 1999, later renewed and amended. Based on intelligence from the Director General of Central Excise Intelligence, the Department alleged that the Corporations provided site and manpower for the sale of CNG and received a commission or profit margin per kilogram sold from MGL.
Show-cause notices followed. BPCL faced a demand of Rs. 7,20,78,037 for April 2005 to March 2010 and Rs. 1,40,03,174 for April 2010 to March 2011. HPCL faced Rs. 6,86,65,245 for the earlier period and Rs. 1,21,11,933 for the later one. The Commissioner (TAR), Mumbai confirmed these demands, holding the relationship was principal-to-agent.
CESTAT reversed. It reasoned that the Corporations bought goods from MGL, which discharged VAT on the sale, and that a fixed retail sale price did not turn the profit margin into commission. The Department appealed to the Supreme Court under Section 35L(b) of the Central Excise Act read with Section 83 of the Finance Act.
What the Court held on sale versus agency
The Court framed the core issue as whether the supply of CNG by MGL to the Corporations was as seller and buyer, or whether the Corporations were only service providers facilitating MGL's sale to consumers. It treated the agreements as the “acid test” for the jural relationship.
Drawing on Section 4 of the Sale of Goods Act, 1930, the Court held that the essence of a sale is transfer of the general property in goods for a price, with risk passing to the buyer. On agency, it referred to Section 182 of the Contract Act, 1872, and to Future Gaming Solutions (P) Ltd., noting that control by the principal is a defining characteristic and that an agent sells goods as the property of the principal, not as his own.
Analysing the agreement clauses in totality, the Court found several decisive features. The Corporations were appointed to open outlets and provide services such as sheds, foundations, electricity, water and trained staff. The retail price was fixed and revised by MGL under Clause 2.4. All equipment remained the absolute property of MGL. Risk did not pass to the Corporations. On termination, unsold CNG had to be returned to MGL or disposed of at its direction.
The Court held that when risk does not transfer, title also does not. The Corporations, it said, acted as facilitators without “real and effectual dominion over the goods”. It described their status as that of an agency, adding that “a facilitator cannot be a buyer”.
Commission, not trade discount
Clause 8.4 expressly provided that in consideration of services provided, MGL would pay the Corporations a commission or profit margin per kilogram of CNG actually sold. The Court held this stipulation, read with the rest of the agreement, showed a principal-agent relationship and remuneration for agency services.
The Corporations argued that the payment was a trade discount, not commission. Relying on Union of India v. Bombay Tyre International Ltd., the Court explained that trade discount is relevant where the sale is on a principal-to-principal basis, which it found was not the case here. It held the word “commission” carried its true sense, being payment to an agent.
Precedent on stock retention and pricing
The Court applied M/s Snow White Industrial Corporation, Madras v. Collector of Central Excise, Madras, where the clause requiring unsold stock to be returned pointed to agency rather than outright sale. It found the same feature present, as domain over CNG stock remained with MGL.
It also relied on Hafiz Din Mohd. Haji Abdulla v. State of Maharashtra, where similar clauses on price fixation, fixed remuneration and remittance after sale established a principal-agent relationship. The label used by parties, the Court reiterated, was not decisive.
On the distinction between agent and buyer for resale, the Court cited Future Gaming Solutions: where a commission is paid on resale, the person is likely an agent, whereas a party taking a profit on resale is a seller.
Within the definition of Business Auxiliary Service
The Court referred to K. Arumugam v. Union of India, where lottery tickets were held not to be “goods”, so their sale did not attract Business Auxiliary Service. Distinguishing it, the Court held that where a party acts as promoter and marketing agent, the relationship is principal and agent.
The Corporations, it found, provided promotional services for marketing and sale of CNG belonging to MGL, squarely covered by Section 65(19) as Business Auxiliary Service. They fell within the definition of “commission agent” in the Explanation, and their services were taxable under Section 65(105)(zzb).
Order
The Court held that the Corporations could not escape payment of service tax and that the adjudicating authority's determination was proper. It set aside the CESTAT common order dated 4 June 2014 and restored the Orders-in-Original dated 16 August 2012 passed by the Commissioner of Customs (TAR), Mumbai. The appellant was held entitled to enforce the service tax demand as adjudicated. All appeals were allowed, and pending interlocutory applications were disposed of.