BPCL, HPCL must pay service tax on commission from CNG sales: Supreme Court

The Supreme Court has held that Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL) are liable to pay service tax on the commission received from Mahanagar Gas Limited (MGL) for selling compressed natural gas (CNG) through their fuel outlets. [Commissioner of Service Tax Vs Bharat Petrol].

A Bench of Justices Aravind Kumar and NV Anjaria ruled that the oil companies were providing “business auxiliary services” to MGL under Section 65(19) of the Finance Act, 1994.

The ruling revives service tax demands of approximately ₹16.69 crore against the two public sector undertakings for the period between April 2005 and March 2011. Interest and penalties were also imposed.

“The respondent Corporations cannot escape the payment of service tax. The view taken by the adjudicating authority in determining the amounts payable towards service tax by the respondent Corporations, and the reasons recorded therefor, were eminently proper,” the Court said.

The dispute concerned agreements under which MGL supplied CNG through outlets owned by BPCL and HPCL in Mumbai, Thane and other areas.

MGL installed the compressors, storage tanks, dispensers, meters, pipelines and other equipment required for selling CNG. BPCL and HPCL provided the site, infrastructure, electricity, water and trained personnel.

The service tax department maintained that the companies were facilitating the sale and marketing of MGL’s CNG in return for a commission or profit margin. It consequently classified the activity as a business auxiliary service.

The Court agreed with this position. It found that MGL retained control over the CNG throughout the transaction. MGL fixed and revised the retail price, retained ownership of the equipment, monitored supply and carried the risk associated with the goods.

Further, any unused stock had to be returned to MGL or disposed of according to its directions upon termination of the agreements.

“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 by MGL to the vehicle owners,” the judgment said.

The Court added that title or ownership over the CNG never passed to BPCL or HPCL. The companies, therefore, did not purchase CNG from MGL and resell it to motorists. Instead, they acted as MGL’s commission agents.

The Bench rejected the companies’ argument that the profit margin paid by MGL was a trade discount. It held that the payment was linked to the quantity of CNG sold and constituted remuneration for agency services.

The tax department had demanded ₹8.61 crore from BPCL and ₹8.08 crore from HPCL. The Customs, Excise and Service Tax Appellate Tribunal had set aside these demands in June 2014 after holding that the transactions were sales conducted on a principal-to-principal basis.

The Supreme Court overturned that ruling and restored the adjudicating authority’s orders confirming the tax demands.

Additional Solicitor General Raghavendra P Shankar along with advocates Gurmeet Singh Makker, Karan Lahiri, Bhuvan Kapoor, Ishan Sharma and Pallavi Mishra appeared for Commissioner of Service Tax.

Advocates MH Patil, Sandeep Narain, Manasi Patil and Viraj Reshamwalla, instructed by S Narain & Co. represented BPCL and HPCL.

[Read Judgment]