GST Not Applicable on Petrol Pump Dealer Margin: Post-Sale Rebate Is Not Service

By RAVINDRA KUMAR RASTOGI Goods and Services Tax Articles October 12, 2026

Summary: The article examines GST demands raised under Section 73 against petrol pump dealers in Uttar Pradesh by treating dealer margins and Enhanced Rebate Functionality (ERF) credit notes as consideration for taxable services at 18%. The author argues that the dealer purchases Motor Spirit and High Speed Diesel from oil marketing companies on a principal-to-principal basis, acquires ownership and bears commercial risk, making subsequent rebates adjustments to the purchase price rather than payments for independent services. The analysis relies on CBIC Circular No. 251/08/2025-GST, which distinguishes ordinary post-sale discounts from separately agreed promotional services, and Circular No. 178/10/2022-GST, which requires an identifiable agreement and consideration for a taxable obligation. The article distinguishes the Supreme Court’s July 2026 BPCL judgment concerning agency-based CNG distribution because ownership and risk remained with the principal in that arrangement. It also challenges shifting departmental allegations, reliance on undisclosed reports and adjudication beyond the show-cause notice under Section 75(7). The conclusion is that ordinary dealer margins and differential rebates cannot be taxed merely because they appear as separate income in accounting records, unless an independently identifiable taxable supply is established.

A Discount on Fuel Is Not a Fee for Service
GST on the dealer margin of petrol pumps: why a post-sale rebate on non GST goods is not consideration for a service

I. The problem on the ground
II. How the dealer margin works
III. Supply comes first: Section 7 and Schedule II
IV. What Circular No. 251/08/2025-GST settles
V. The BPCL judgment of July 2026, and why it does not apply
VI. "Differential dealer margin": a label in search of a supply
VII. Procedure: shifting cases and undisclosed reports
VIII. Conclusion
Sources

I. The problem on the ground

State Tax officers in Uttar Pradesh have begun raising Section 73 demands on retail outlet dealers of the oil marketing companies, treating the dealer margin as consideration for a service taxable at 18%. The submission of this article is that the demand rests on no supply at all, and that the Board’s own Circular No. 251/08/2025-GST answers the question against the department.

The pattern is uniform. The officer opens the dealer’s Profit and Loss Account, finds a head called “Dealer Margin” or “Rebate for ERF”, and proposes tax at 18% on the whole of it. The dealer sells only Motor Spirit and High Speed Diesel, goods outside the levy of GST, and has never issued an invoice to the oil company.

A recent first appellate order from the Banda division illustrates the point. A Kisan Seva Kendra dealer of Indian Oil received credit notes of about Rs. 3.64 lakh in F.Y. 2021-22. Tax of Rs. 65,486 with interest and penalty was confirmed, and the first appeal was dismissed. The amounts are small. The principle affects every petrol pump in the State.

II. How the dealer margin works

The dealer margin is the difference between the price at which the oil company sells fuel to the dealer and the retail selling price. A part of it is built into the invoice price; a part is passed after the sale through monthly credit notes, which Indian Oil titles “Rebate for ERF” (Enhanced Rebate Functionality).

The standard Indian Oil dealership agreement for Corporation owned sites leaves no doubt about who owns the fuel:

Clause 18(a): products are delivered “against prior payment” of the price.
Clause 16: “The property in the products shall pass from the corporation to the Dealer upon delivery”.
Clause 14: the dealer bears “all loss, contamination, damage or shortage” after delivery.
Clause 11: in dealings with customers the dealer “shall always be deemed to have acted as a Principal and not as an agent or on account of the corporation”.
Clause 27: the dealer is “allowed commission by the Corporation on the sale/supply of the products” at rates the Corporation fixes.

The credit note is adjusted against what the dealer owes for its next purchases. The dealer raises no invoice, and the oil company deducts no tax under Section 194H. The margin varies with sale volume and category of outlet: Indian Oil’s revision of 01.08.2017 put it at roughly 9% to 43% for MS and 11% to 59% for HSD, higher for low volume rural outlets. The retail selling price, which includes the margin, suffers VAT under the State law.

III. Supply comes first: Section 7 and Schedule II

Tax under Section 9 attaches only to a supply, and a supply of service needs something done by the dealer for the oil company in return for consideration. Here the flow is the other way. The dealer buys, pays, owns and resells; the credit note reduces what it paid. Nothing passes from the dealer to the oil company.

The department’s answer has been Schedule II, para 5(e): “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act”. The dealer, it is said, agrees to keep a low volume pump running. But Schedule II does not create a supply. Section 7(1A) reads:

“where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II.”

Schedule II only classifies what Section 7(1) has already made a supply. And para 5(e) needs an agreement under which the payment is for the act or the forbearance itself. The Board said so in Circular No. 178/10/2022-GST dated 03.08.2022, para 7:

“There has to be an express or implied agreement; oral or written, to do or abstain from doing something against payment of consideration for doing or abstaining from such act, for a taxable supply to exist.”

“An agreement to do an act or abstain from doing an act or to tolerate an act or a situation cannot be imagined or presumed to exist just because there is a flow of money from one party to another.”

No dealership agreement contains a promise to keep a low volume outlet open in return for the credit notes. The duty to run the outlet comes from the dealership itself, under which the dealer buys as principal. A price concession cannot be turned into a fee by naming an act the dealer was already bound to do.

IV. What Circular No. 251/08/2025-GST settles

Circular No. 251/08/2025-GST dated 12.09.2025, issued under Section 168, answers the exact question at Sl. No. 3: whether a post-sale discount from a manufacturer to a dealer is consideration for promoting the sale of the goods. Its answer is no:

“When dealers receive such post-sale discounts, they may engage in promotional activities to boost sales. However, these activities ultimately enhance the sale of goods that the dealers themselves own, thereby increasing their own revenue. In this context, the discount merely reduces the sale price of the goods and is not linked to any independent service rendered to the manufacturer. Therefore, it is clarified that post-sale discounts offered by manufacturers to dealers in such cases shall not be treated as consideration for a separate transaction of supply of services.”

The only exception is narrow:

“However, GST would be leviable in cases where a dealer undertakes specific sales promotional activities, such as advertising campaigns, co-branding, customization services, special sales drives, exhibition arrangements, or customer support services, etc., only when such services are explicitly stated in the agreement with a clearly defined consideration payable for such a supply.”

A dealership agreement does oblige the dealer to keep staff and to give free air, water and first aid to customers. Those duties are owed to the motorist, and no consideration is fixed for them. The exception is not met.

Two objections are raised in the field. The first is that Section 15(3) does not apply to non GST goods. That misreads Sl. No. 3, which is not about valuation at all; it asks whether a separate service exists. If a post-sale discount on taxable goods is no consideration for a service, a discount on goods outside GST cannot become one. The second is that the circular is later than the period in dispute. A clarification applies to the past, and in Suchitra Components Ltd. v. CCE, Guntur, 2007 (208) ELT 321 (SC), the Supreme Court held that “a beneficial circular has to be applied retrospectively while oppresive circular has to be applied prospectively.” The circular binds the officers: CCE, Bolpur v. Ratan Melting & Wire Industries, (2008) 13 SCC 1, para 6.

V. The BPCL judgment of July 2026, and why it does not apply

The department will now cite Commissioner of Service Tax, Mumbai v. Bharat Petroleum Corporation Ltd., Civil Appeal Nos. 2471 to 2473 of 2015, decided on 20.07.2026, 2026 LiveLaw (SC) 698. There the Supreme Court held that BPCL and HPCL, dispensing CNG of Mahanagar Gas at their outlets, were its agents, and that their commission was taxable as Business Auxiliary Service.

The judgment turned on title. The Court said in para 10:

“Dominion over property and continuance thereof is a litmus test.”

“If the title in the goods does not pass, it would be conclusive factor to suggest that the arrangement is one of agency, even though the goods may have been delivered.”

On the facts the Court found that title and risk never left Mahanagar Gas and that the corporations paid over the sale proceeds net of commission. It also recognised, in para 9.1.2, where a trade discount belongs:

“The concept of trade discount is relevant where the sale is on “Principal-to-Principal” basis, which is indeed not the case here.”

A petrol pump dealer stands at the opposite end of that test. It pays the price before delivery, property passes on delivery, all loss after delivery is its own, and it sells as principal. On the BPCL test itself the arrangement is a sale, and the rebate is the trade discount the Court described. The word “commission” in the agreement does not alter this. In Bhopal Sugar Industries Ltd. v. STO, Bhopal, (1977) 3 SCC 147, the Supreme Court held:

“Thus the mere formal description of a person as an agent or buyer is not conclusive, unless the context shows that the parties clearly intended ‘to treat a buyer as a buyer and not as an agent.”

VI. “Differential dealer margin”: a label in search of a supply

The newest form of the demand calls the receipt a “differential dealer margin”, paid for continuing a dealership despite low sales. On the department’s own material, it is only the slab wise part of the dealer margin itself, worked out per kilolitre bought and sold.

The Banda case shows how the description kept moving while the amount stayed the same:

Stage	What the receipt was called	The service said to be supplied
Show cause notice	Dealer margin, rebate, incentive, commission	Promoting sale of petroleum products, maintaining ERF
Adjudication order	Rebate for ERF under dealer margin; then “differential dealer margin”	Agreeing to continue a low volume dealership (Schedule II, para 5(e))
Departmental report in appeal	Dealers’ margin	Not closing the pump; investing in it
First appellate order	Dealer margin as indirect income	“Better services” to the oil company, measured by “ratings”

Four theories for one receipt mean that no supply has been identified. The adjudication order itself recorded that the margin goes down as sale volume goes up. That is how a price for goods behaves, not a fee for an act. The differential margin has the same character as the normal margin, which is part of the price of non GST goods and has never been taxed under GST.

VII. Procedure: shifting cases and undisclosed reports

Even where the merits are contested, these demands fail on procedure. Section 75(7) bars confirmation of a demand on grounds other than those in the notice. In Commissioner of Customs, Mumbai v. Toyo Engineering India Ltd., (2006) 7 SCC 592, the Supreme Court put it in one line:

“The Department cannot travel beyond the show-cause notice.”

The Schedule II theory, internet material and a press release, introduced for the first time in the adjudication order, are outside the notice. So is a “better services” finding made in appeal.

Appellate authorities have also begun calling for a report from the adjudicating officer and deciding the appeal on it without giving the dealer a copy. That was condemned seventy years ago in Dhakeswari Cotton Mills Ltd. v. CIT, AIR 1955 SC 65, where the Supreme Court faulted the Tribunal because:

“Firstly, it did not disclose to the assessee what information had been supplied to it by the departmental representative. Next, it did not give any opportunity to the company to rebut the material furnished to it by him”

The burden is also misplaced when a dealer is asked to prove that its receipt is “tax free”. The onus to show that a transaction is taxable lies on the Revenue: Hindustan Ferodo Ltd. v. Collector of Central Excise, Bombay, (1997) 2 SCC 677.

VIII. Conclusion

The dealer margin, in whatever form it reaches the dealer, is part of the price of fuel the dealer has bought and paid for. It is not a fee for any act done for the oil company. Section 7(1A) keeps Schedule II from creating a supply that Section 7(1) does not recognise, Circular No. 251/08/2025-GST settles that a post-sale discount is not consideration for a service, and the BPCL judgment, read for its own test of title, confirms that a principal to principal sale carries a trade discount and not a commission for agency.

The practical course for a dealer facing such a notice is plain. Place the dealership agreement on record, with the clauses on prior payment, passing of property and risk. File the credit notes showing the per kilolitre working, the Form 26AS showing no Section 194H deduction, and the ledger showing adjustment against purchases. Insist on Circular No. 251/08/2025-GST, and object to any ground or report not put to you. The question deserves an authoritative answer from the GST Appellate Tribunal, and the first appeals now reaching it give the Tribunal that opportunity.