 Oil and Natural Gas Industry in India is classified into three segments-

 Upstream - deals with the extraction and production of petroleum and natural gas. The key
players in this sector are ONGC, OIC and Crain energy etc.
 Midstream – deals with processing, transportation of petroleum and natural gas.
 Downstream – deals with refining, processing, distribution, sale and marketing of petroleum and
natural gas. The frontrunners in this sector are Indian Oil Corporation, Hindustan Petroleum and
Bharat Petroleum etc.

The downstream segment in India is regulated by the Petroleum and Natural Gas Regulatory
Board (PNGRB) which was constituted under and also stems its authority from the PNGRB Act,
2006.1 Chapter IV of the Act (sections 14-23) deals with registration and authorization. It
empowers the Board to grant registration certificates and due authorization to entities which are
willing to market petroleum products and natural gas or want to establish storage facilities and
operate terminals for the same.

Important Regulations-

 The PNGRB (Authorizing Entities to Lay, Build, Operate or Expand petroleum and petroleum
products pipelines) Regulations, 2010.2
 The PNGRB (Technical Standards & Specifications including Safety Standards on Petroleum
and Petroleum Products Pipeline) Regulations, 2016.3
 The PNGRB (Guiding Principles for declaring or authorizing petroleum & petroleum products
pipelines as common carrier or contract carrier) Regulation, 2012.4
 The PNGRB (Technical Standards & Specifications including Safety standards for Retail
Outlets dispensing Petroleum, Auto LPG, CNG) Regulations, 2018.5

 Base Oil – Nomenclature for lubrication grade oils which are produced from refining crude oil
or through chemical synthesis. Base oils are used to manufacture products including lubricating
greases, motor oil and metal processing fluids. Different products require different compositions
and properties in the oil.

The American Petroleum Institute6 has subcategorized different types of base oils-

1
http://petroleum.nic.in/sites/default/files/regbill_0.pdf
2
https://www.pngrb.gov.in/OurRegulation/pdf/Gazette-Regulation/English/GSR722(E).pdf
3
https://www.pngrb.gov.in/OurRegulation/pdf/Gazette-Regulation/English/Retail_Outlets_English.pdf
4
https://www.pngrb.gov.in/OurRegulation/pdf/Gazette-Regulation/English/5july2012-english.pdf
5
https://www.pngrb.gov.in/OurRegulation/pdf/Gazette-Regulation/English/Retail_Outlets_English.pdf
6
https://www.api.org/~/media/Files/Certification/Engine-Oil-Diesel/Publications/AnnEREV121916%20issued
%20010317.pdf
 Group I - It usually consists of conventional petroleum base oils
Group II – It is a better grade of petroleum base oil, which may be partially produced by Hydro
cracking. All impurities will be removed from the oil leading to clearer color.
Group III- It is the best grade of petroleum base oil, since they are fully produced by Hydro
cracking, Hydroisomerization, and Hydro treating, which make these oils purer. This group may
be described as Synthetic technology oils or Hydro-Cracked Synthetic oil. However, some oil
companies may call their products under this group as synthetic oil.
Group IV- It consists of synthetic oils made of Poly-alpha-olefins.
Group V - Any type of base oil other than mentioned in the previously defined groups. They
include, among others, naphthenic oils and polyesters.
The first three categories of base oil are all related to petroleum.

 Petroleum – Sec 2 (m) of The Oil Industry Development Act, 1974 defines “petroleum
products” as any commodity made from petroleum or natural gas and includes refined crude
oil, processed crude petroleum, residuum from crude petroleum cracking stock, uncracked fuel
oil, fuel oil, treated crude oil residuum, casing head gasoline, natural gas gasoline, naphtha,
distillate gasoline, kerosene, bitumen, asphalt and tar, waste oil, blended gasoline, lubricating oil,
blends or mixture of oil with one or more liquid products or by products derived from oil or gas
and blends or mixtures of two or more liquid products or by-products derived from oil
condensate and gas or petroleum hydrocarbons not specified hereinbefore.
The above definition expressly mentions refined crude oil to be a part of the petroleum familia
and it is pertinent to note that since base oil is produced from refining crude oil, the same should
fall within the ambit of the above definition.
Moreover, Para 2(f) of The Petroleum Product (Supply & Distribution) Order, 1972
included light diesel oil as well as base oil to be a part of the petroleum products but the same
was repealed after the issuance of Petroleum Products (Maintenance of Production,
Storage and Supply) Order, 1999.7 However, even the latter has defined petroleum products to
mean crude oil or any product manufactured out of crude oil or from another petroleum product
including Aviation Turbine Oil, Motor Spirit, High Speed Diesel or an LPG distributorship or a
Kerosene dealership. This order was issued by the Central government in exercise of the powers
under Section 3 of The Essential Commodities Act, 1955 in order to regulate production, storage,
and supply of petroleum products in interest of sustaining public life, economy and protecting
consumer interest.

7
http://www.tn.gov.in/rti/proactive/cfcp/control_orders_part4_manual3/petroleum_natural_gas_order.pdf
 Use of base oil as an alternative fuel/diesel – Various blends of base oil has been reportedly
used as an alternative fuel especially in public transportation vehicles and trucks. Studies and
tests have been conducted to ascertain their probable impacts on exhaust emissions and other
relevant considerations.8

 Position under Motor Vehicles Act – Sec 52 deals with Alteration of Motor Vehicles –

Sec 52 (1) - No owner of a motor vehicle shall so alter the vehicle that the particulars contained
in the certificate of registration are at variance with those originally specified by the
manufacturer: Provided that where the owner of a motor vehicle makes modification of the
engine, or any part thereof, of a vehicle for facilitating its operation by different type of fuel
or source of energy including battery, compressed natural gas, solar power, liquid
petroleum gas or any other fuel or source of energy, by fitment of a conversion kit, such
modification shall be carried out subject to such conditions as may be prescribed:

Provided further that the Central Government may prescribe specifications, conditions for
approval, retrofitment and other related matters for such conversion kits:

Provided also that the Central Government may grant exemption for alteration of vehicles in a
manner other than specified above, for any specific purpose.

[(1A) A manufacturer of a motor vehicle shall on the direction issued by the Central
Government, alter or retrofit safety equipment, or any other equipment in accordance with such
standards and specifications as may be specified by the Central Government.

(2) Notwithstanding anything contained in sub-section (1), a State Government may, by

notification in the Official Gazette, authorise, subject to such conditions as may be specified in
the notification, and permit any person owning not less than ten transport vehicles to alter any
vehicle owned by him so as to replace the engine thereof with engine of the same make and type,
without the approval of registering authority.
(3) Where any alteration has been made in motor vehicle without the approval of registering
authority or by reason of replacement of its engine without such approval under sub-section (2),
the owner of the vehicle shall, within fourteen days of the making of the alteration, report the
alteration to the registering authority within whose jurisdiction he resides and shall forward the
certificate of registration to that authority together with the prescribed fee in order that
particulars of registration may be entered therein.

8
https://www.sciencedirect.com/science/article/pii/S0378382015301090;
https://www.researchgate.net/publication/263127954_Assessment_of_chemical_content_of_base_oil_blends_us
ed_as_alternative_diesel_fuel_for_environmental_safety
 (4) A registering authority other than the original registering authority making any such entry
shall communicate the details of the entry to the original registering authority.

(5) Subject to the provisions made under sub-sections (1), (2), (3) and (4), no person holding a
vehicle under a hire-purchase agreement shall make any alteration to the vehicle except with the
written consent of the registered owner.
 Sale and purchase of fuel in Gujarat –
In 2018, the Gujarat government scrapped the requirement to obtain a permit for purchase or sale
of petrol or diesel in the state. Dealers need not seek permission of the Food and Civil Supplies
and Consumer Affairs Department under the Essential Commodities Procurement Storage
and Distribution Order-1981 for purchase, storage and sale of petrol and diesel. However,
those who want to set up a petrol pump, will have to obtain permission of the Petroleum and
Explosive Safety Department as per the existing rules. Furthermore, the dealers will also have to
maintain records of procurement and distribution under the Essential Commodities Dealers
(Regulation) Order-1977.9

 Judgment – In Commissioner of Income Tax vs. Caltex (India) Ltd.,10 the question arose
whether the mineral base oil after being blended with different additives and chemicals to form a
lubricating oil will be deemed to be mineral base oil or the resultant lubricating oil would be
rendered different from such mineral oil.

Facts - This is a reference under section 256(1) of the Income Tax Act, 1961, and it is
made at the instance of the Revenue. The reference concerns the assessment years 1967-68 to
1972-73. The main business of the assessee was the distribution of petroleum products, it was
also engaged in the blending of various grades of lubricating oil. In regard to the activity of
blending, the assessee claimed that it was priority industry and was covered by the provisions of
sections 80E and 80-I and section 33(1)(b)(B)(i) of the Income Tax Act, 1961. The Income Tax
Appellate Tribunal, however, upheld the assessee's contention in further appeal. It was found as a
fact that the assessee acquired imported or locally procured straight mineral base oil and pumped
it through a blending machine at certain specified temperatures along with certain additives, in
the form of some 18 chemicals and different dyes, various vegetable-based oils and silicones in
required proportions. The end-product was the lubricating oil, in different grades which,
according to the assessee, was mineral oil for the purposes of the said item.

Issue - Whether, on the facts and in the circumstances of the case, the finding that the assessee is
engaged in priority industry and as such is entitled to relief under section 80E/80-I and to higher
development rebate under section 33(1)(b)(B)(i) is in law justified ?

9
https://www.business-standard.com/article/economy-policy/from-now-dealers-won-t-need-govt-nod-for-sale-
purchase-of-fuel-in-gujarat-118102401363_1.html
10
[1989]177ITR239(Bom).
 Contentions - It was contended by Mr. Jetley, learned counsel for the Revenue, that the
expression "mineral oil" in the said item (3) must be read in the context of the other articles set
out therein and should not be given an extended meaning so as to cover lubricating oil. On the
other hand, it was contended by Mr. Munim, on behalf of the assessee, that lubricating oil was
commonly understood to be a mineral oil and it, therefore, fell within the said item (3).

Decision - The items mentioned in item (3) of the lists in the Fifth and Sixth Schedules
(which were applicable at different times) are minerals or metallic ores of stone, all available
within or on the surface of the earth. The said item (93) must be held to cover only the stated
articles and not what may be made by using them, whether by manufacture or processing or
blending. The fact found show that the assessee blended straight mineral base oil with some 18
chemicals beside different dyes, vegetable based oils and silicones. The assessee's end-product
was, therefore, not mineral oil, as extracted or refined. It was not a mixture of hydrocarbons. It
did not, therefore, fall within the meaning of the expression 'mineral oil' as used in the said item
(3). (ii) The finding that the assessee is engaged in a priority industry and as such is entitled to
relief under s. 80-E/I and to higher development rebate under s.33(1)(b)(B)(2) is in law not,
therefore, justified.

 The Bharat Stage IV Norms have specified a threshold for sulphur emissions in case of heavy
duty commercial vehicles which generally run on diesel. Moreover, the proposed Stage VI norms
plan on reducing these emissions by 80%. However, in our case it would be difficult to ascertain
the amount of sulphur released on oxidation of base oil as it has several variants/grades and
blends. Lastly, there is no mention regarding usage of base oil as fuel in these standard norms.