BPCL and HPCL believed they were simply buying and reselling CNG at their fuel outlets, just like any other fuel. The Supreme Court holds that because Mahanagar Gas Ltd retained ownership, pricing control, and reclaim rights over the gas and equipment, the 'commission' the oil companies received was payment for agency services, making it liable to service tax.
If a company sells its product through another business's outlets, and pays that business a 'commission' or 'margin' per unit sold, is that arrangement a sale or a taxable service?
It depends entirely on the substance of the contract between them, not on what the parties choose to call it. The Supreme Court has clarified that the key question is whether ownership (title) of the goods actually passes to the outlet operator. If the supplier keeps ownership of the equipment used to produce or dispense the goods, unilaterally fixes and can change the selling price, bears the risk if something goes wrong with the goods, and can reclaim any unsold stock if the arrangement ends, then no real 'sale' has taken place — the outlet operator is acting as the supplier's agent, providing marketing and facilitation services in exchange for a commission. In that situation, the outlet operator is providing a taxable 'Business Auxiliary Service' and must pay service tax (or its current GST equivalent) on the commission received. On the other hand, if the outlet operator genuinely buys the goods outright — taking on ownership, risk, and pricing freedom — and independently resells them, that is an ordinary sale, and no service tax arises on the profit margin. Simply calling a payment a 'trade discount' instead of a 'commission' does not change this analysis if the rest of the contract points to an agency relationship rather than a genuine sale.
Understanding the Legal Principles
What makes a transaction a 'sale'
- —There must be an agreement to transfer ownership (property) in goods for a price
- —Ownership must actually pass from the seller to the buyer
- —The buyer, not the seller, then bears the risk and has full control over the goods
What makes a relationship an 'agency' instead
- —The supplier (principal) retains ownership of the goods or the equipment used to handle them
- —The supplier controls or fixes the price at which the goods are sold
- —The person handling the goods (the agent) is paid a commission based on the volume sold, rather than earning a resale profit as an owner would
- —Unsold stock, on termination, goes back to the supplier rather than remaining the outlet operator's property
Why the label used in the contract isn't decisive
- —Calling a payment a 'commission', 'trade discount', or 'margin' does not by itself determine its tax treatment
- —Courts look at the entire contract, including ownership, pricing, risk, and termination clauses, to determine the real relationship between the parties
Key Legal Provisions
Finance Act, 1994
- —Section 65(19) — definition of 'Business Auxiliary Service'
- —Section 65(105)(zzb) — definition of taxable service in relation to Business Auxiliary Service
Sale of Goods Act, 1930
- —Section 4 — definition of a contract of sale and when property passes
Indian Contract Act, 1872
- —Sections 182 to 188 — definition and scope of agency
Lawyer Essential For
- —Reviewing existing distribution, franchise, or outlet agreements for potential service tax/GST exposure
- —Responding to a show-cause notice alleging 'Business Auxiliary Service' or similar deemed-service liability
- —Structuring new supply or distribution agreements to clearly establish a genuine sale (or, alternatively, a clear agency) relationship
You Can Handle With Support
- —Reviewing routine invoicing and VAT/GST documentation to understand how a distribution arrangement has been treated in practice
Success Mantras
- "What you call the payment matters less than who really owns the goods."
- "If the supplier can fix your price and reclaim unsold stock, you may be an agent, not a buyer."
- "Substance beats labels — courts read the whole contract, not just the word 'sale' or 'commission'."
Practical Guidance
Businesses distributing or reselling another company's products through their own outlets
- —Review your distribution agreement to see who owns the equipment, who fixes the price, and what happens to unsold stock if the agreement ends
- —If your agreement uses the word 'commission' or describes payments as being 'for services', get tax advice on whether service tax/GST may apply, even if you have always treated the arrangement as a straightforward purchase and resale
Suppliers structuring distribution networks
- —Decide clearly whether you want a genuine sale relationship (transferring ownership, price-setting freedom, and risk to the distributor) or an agency relationship (retaining these), since mixing features of both can create tax uncertainty
- —Ensure the contract's actual terms match the intended relationship, rather than relying on labels like 'Principal-to-Principal' or 'trade discount'
Helplines & Resources
- —CBIC Mitra Helpdesk (Central Board of Indirect Taxes and Customs) Toll-Free Number: 1800-425-0232
- —GST Help Desk Toll-Free Number: 1800-103-4786
This is a general explanation of the law based on this judgment and is not legal advice for any specific situation. Businesses with similar distribution or franchise arrangements should consult a tax professional or lawyer to assess their own specific contracts.