Supreme Court BPCL HPCL CNG case: The Supreme Court has ruled that Bharat Petroleum Corporation Ltd. (BPCL) and Hindustan Petroleum Corporation Ltd. (HPCL) were acting as commission agents while selling Compressed Natural Gas (CNG) supplied by Mahanagar Gas Ltd. (MGL) through their retail outlets.
In a significant ruling concerning the taxability of CNG dispensing arrangements, the Supreme Court set aside the 2014 decision of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) and restored the service tax demands raised against BPCL and HPCL.
The judgment was delivered in Commissioner of Service Tax, Mumbai v. M/s Bharat Petroleum Corporation Ltd. & Anr., reported as 2026 INSC 723, in Civil Appeal Nos. 2471–2473 of 2015.
The judgment was delivered by a bench comprising Justice Aravind Kumar and Justice N.V. Anjaria on July 20, 2026.
Supreme Court’s key finding in BPCL-HPCL CNG case
The central question before the Supreme Court was whether BPCL and HPCL were purchasing CNG from MGL and subsequently reselling it to consumers, or whether they were providing services to MGL as agents for the sale of CNG.
The Court held that the overall contractual arrangement pointed towards a principal-agent relationship, rather than a principal-to-principal sale.
The Court examined the agreements between MGL and the two oil marketing companies and looked beyond the terminology used by the parties. According to the judgment, the substance of the contractual arrangement had to be considered to determine the actual legal relationship between the parties.
Why Supreme Court treated BPCL and HPCL as commission agents
MGL supplied CNG to retail outlets operated by BPCL and HPCL. MGL also installed equipment required for compression and dispensing of natural gas.
The oil companies provided facilities such as the retail site, shed, canopy, utilities and manpower required for dispensing CNG to customers.
The Revenue Department had argued that these activities amounted to marketing and sales promotion services performed on behalf of MGL.
The original adjudicating authority had found that BPCL and HPCL were acting as agents of MGL and that the services fell within the definition of Business Auxiliary Service under Section 65(19), read with Section 65(105)(zzb), of the Finance Act, 1994.
MGL retained control over CNG
One of the important factors considered by the Supreme Court was the extent of control retained by MGL over the CNG.
The material before the Court indicated that ownership and control over the natural gas and CNG remained with MGL until the gas was finally dispensed to consumers.
The retail outlets did not have an independent claim over the CNG stock. This aspect supported the Revenue’s case that the oil companies were facilitating sales on behalf of MGL rather than purchasing the gas for their own account.
The Supreme Court also examined provisions relating to MGL’s inspection rights, control over the dispensing arrangements and the obligations imposed on BPCL and HPCL under the agreements.
Fixed CNG price was another important factor
The pricing mechanism also played an important role in the Court’s analysis.
MGL determined the retail selling price of CNG. BPCL and HPCL did not have independent freedom to determine the price at which CNG was sold to consumers.
The Court considered this pricing control, along with other contractual provisions, while determining the true nature of the relationship.
The Supreme Court emphasised that merely describing an arrangement as a “sale” or referring to it as “principal-to-principal” would not settle the legal character of the transaction. The entire agreement and the conduct of the parties had to be examined.
Commission was not treated as trade discount
A major point of dispute was the amount received by BPCL and HPCL for every kilogram of CNG sold.
The companies argued that the amount represented a trade discount or profit margin arising from a principal-to-principal sale.
The Supreme Court rejected this interpretation.
The Court noted that the agreements specifically provided for payment of a commission or profit margin linked to the quantity of CNG sold to consumers. In the Court’s view, the payment represented remuneration for the services performed by BPCL and HPCL as agents of MGL.
The Court further explained that a trade discount operates in a principal-to-principal sale. Since the arrangement in the present case was found to be one of agency, the payment could not be treated as an ordinary trade discount.
VAT payment did not decide the issue
CESTAT had earlier relied substantially on the fact that VAT or sales tax was being paid on the CNG transactions.
It had concluded that BPCL and HPCL were purchasing CNG from MGL and subsequently selling it to customers, and therefore there was no separate service being provided to MGL.
The Supreme Court, however, examined the contractual relationship as a whole instead of treating the tax treatment or invoices as conclusive evidence of a sale.
The Court’s approach was that the legal character of the arrangement depends on the substance of the rights and obligations created between the parties.
Business Auxiliary Service under Finance Act
The dispute arose under the service tax regime that existed before the introduction of the comprehensive Goods and Services Tax system.
The Revenue alleged that BPCL and HPCL were providing Business Auxiliary Service to MGL by promoting and facilitating the sale of MGL’s CNG.
The Supreme Court agreed with this position.
The activities performed by the oil companies, including providing infrastructure and manpower and facilitating the dispensing of MGL’s CNG to customers, were considered part of the services performed for MGL.
The Court therefore held that the arrangement fell within the relevant provisions of Section 65(19) read with Section 65(105)(zzb) of the Finance Act, 1994.
CESTAT order set aside
CESTAT had allowed the appeals filed by BPCL and HPCL in 2014 and had set aside the service tax demands confirmed by the adjudicating authority.
The Supreme Court disagreed with that conclusion.
The Court allowed the appeals filed by the Commissioner of Service Tax, Mumbai and set aside the CESTAT decision.
As a result, the original orders confirming the service tax demands against BPCL and HPCL were restored.
What the Supreme Court ruling means
The judgment highlights an important principle for determining whether a commercial arrangement amounts to a sale of goods or an agency/service relationship.
According to the Supreme Court’s reasoning, the description used in an agreement is not by itself decisive. Courts can examine factors such as:
- Who retains ownership of the goods;
- Who bears the commercial risk;
- Who determines the selling price;
- Whether the intermediary has control over the goods;
- Whether remuneration is linked to sales;
- Whether the intermediary receives a commission;
- Who ultimately controls the transaction with customers; and
- The overall terms and substance of the agreement.
In the BPCL and HPCL case, the combined effect of these factors led the Supreme Court to conclude that MGL remained the principal and the oil companies functioned as agents for the sale of CNG.
Supreme Court BPCL HPCL CNG case: Key takeaways
| Issue | Supreme Court’s finding |
|---|---|
| Nature of arrangement | Principal-agent relationship |
| CNG supplier | Mahanagar Gas Ltd. |
| Retail outlets | BPCL and HPCL outlets |
| Price control | MGL |
| Remuneration | Commission/profit margin linked to CNG sales |
| Ownership/control of CNG | Retained by MGL until final dispensing |
| Nature of activity | Business Auxiliary Service |
| CESTAT order | Set aside |
| Original service tax demands | Restored |
Final ruling
The Supreme Court’s decision in Commissioner of Service Tax, Mumbai v. M/s Bharat Petroleum Corporation Ltd. & Anr. (2026 INSC 723) establishes that the CNG dispensing arrangement between MGL and BPCL/HPCL was not merely a conventional buyer-seller transaction.
After examining the agreements, pricing mechanism, ownership, control over CNG and the commission structure, the Court concluded that BPCL and HPCL were providing agency-related services to MGL.
The Court consequently restored the service tax demands that had earlier been confirmed by the adjudicating authority and subsequently overturned by CESTAT.
The judgment therefore turns on the substance of the contractual relationship rather than the labels attached to the transaction.
