The proposed site is a triangular block of land zoned general rural at the corner of Bennett Street and the road reserve for the future Lord Street extension.
The application was first rejected at the council's March 18 meeting, but the State Administrative Tribunal (SAT) took the decision on review so councillors could reconsider.
The site is next to two homes and opposite Pinelli Estate winery.
The homeowners argued the service station would exacerbate traffic issues and cause odour, noise and light emissions.
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READ NOWSpeakers representing the applicant said the rapid growth of Caversham warranted the need for a service station, while the increased setbacks and added vegetative screening would take care of the amenity concerns.
Councillors disagreed with the applicants and the majority voted to support a motion from Cr David Lucas to refuse the proposal due to its potential adverse impact on residential lots and impact on the prevailing rural amenity.
A review has already been set with SAT on July 22.