The Supreme Court has held that indivisible turnkey contracts for supply, installation and commissioning of Automated Teller Machines (ATMs) could not be artificially split to levy service tax on the installation and commissioning component during the period July 2003 to April 2006.
The bench of Justice Prashant Kumar Mishra and Justice Shree Chandrashekhar dismissed the Revenue’s appeals and affirmed the decision of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chennai, which had earlier set aside the service-tax demands raised against M/s Diebold Systems Pvt. Ltd.
The issue raised was whether the Revenue could isolate 33% of the consideration received under composite ATM supply contracts and treat that portion as consideration for taxable “commissioning or installation” services under the Finance Act, 1994.
Buy Now: 50+ Supreme Court Judgments – July 2026
The Petitioner/assessee was engaged in supplying ATMs to various banks. Under contracts awarded by the banks, the company was responsible not only for supplying the ATM machines but also for their transportation, installation, testing and commissioning at locations specified by the banks.
The contracts were executed on a turnkey basis, with the ultimate contractual objective being delivery of fully functional ATMs. The consideration payable by the banks was composite and there was no separate consideration earmarked for installation or commissioning.
The dispute arose when the Service Tax Department took the view that 33% of the gross contractual consideration represented the value of installation and commissioning activities. According to the Department, this component was liable to service tax under the taxable category of “commissioning or installation” under the Finance Act, 1994.
The assessee, however, argued that the contracts were indivisible turnkey contracts involving both supply of goods and incidental installation and commissioning. Since there was a single consolidated consideration and no separately contracted installation service, the assessee contended that the Revenue could not artificially segregate a portion of the consideration and impose service tax on it.
The Department issued multiple show cause notices covering different periods.
The first Show Cause Notice dated February 14, 2005, proposed recovery of ₹3.37 crore in service tax for the period July 2003 to July 2004, along with interest and penalties. The Commissioner of Service Tax confirmed the entire demand, although penalties were not imposed at that stage.
A second notice, dated October 21, 2005, covered the period August 1, 2004 to July 31, 2005 and proposed recovery of service tax and education cess aggregating to ₹4.68 crore. The Commissioner ultimately confirmed service tax and education cess of approximately ₹4.28 crore, along with interest and penalty under Section 76 of the Finance Act, 1994.
The Department subsequently issued a third Show Cause Notice dated October 17, 2006, covering August 1, 2005 to April 30, 2006, proposing recovery of approximately ₹2.96 crore towards service tax and education cess, besides interest and penalties. The Commissioner confirmed the demand through an order dated February 23, 2007.
The assessee challenged the adjudication orders before CESTAT. Since all the appeals involved the same central issue concerning taxation of ATM turnkey contracts, CESTAT considered them together.
After examining the contractual terms, CESTAT found that the agreements were indivisible turnkey contracts whose dominant object was the supply of ATMs. Installation and commissioning were treated as incidental obligations necessary for fulfilling the overall contractual objective.
The Tribunal noted that the contracts contemplated a single composite consideration and did not provide for any independent consideration for installation or commissioning. Consequently, it held that the Revenue could not artificially separate those activities and tax them independently.
CESTAT also relied upon the principle laid down in Daelim Industrial Co. Ltd. v. Commissioner of Central Excise, Vadodara, holding that in the absence of an express statutory mechanism permitting the vivisection of an indivisible composite contract, the service element could not be artificially extracted from the composite consideration for taxation.
The department argued before the Supreme Court that the contracts clearly involved installation and commissioning services in addition to supply of ATMs. According to the Department, the fact that the contracts were structured as turnkey contracts and provided for composite consideration could not eliminate the independent taxable character of the installation and commissioning activities.
The Revenue also contended that the Finance Act, 1994 authorised taxation of specified services irrespective of how the underlying commercial contract was structured. It argued that installation and commissioning fell squarely within the statutory taxable category and that taxing 33% of the consideration represented a legitimate method of identifying the service component.
The Department further argued that CESTAT had wrongly relied on Daelim Industrial, contending that the decision should not be treated as establishing that every turnkey contract was outside the service-tax regime.
The assessee maintained that the contracts were indivisible turnkey arrangements for supplying fully functional ATMs for a single consolidated consideration.
According to the assessee, installation and commissioning did not constitute independent commercial transactions but were merely incidental and inseparable components of the obligation to supply fully functional machines.
The assessee also pointed out that, during the relevant period from July 2003 to April 2006, the Finance Act, 1994 did not contain a charging provision authorising the Revenue to split an indivisible composite contract and independently tax the embedded service component.
It was further submitted that the assessee had discharged sales tax/VAT on the entire contract value and had neither stipulated nor received any separate consideration for installation and commissioning.
The Supreme Court framed the central question as whether the turnkey contracts for supply, installation and commissioning of ATMs were indivisible composite contracts incapable of being vivisected for service-tax purposes during the relevant period.
The Court clarified that there was no dispute that the assessee actually installed and commissioned the ATMs. The real question was the legal character of the contracts and whether the Finance Act, 1994, as it stood between July 2003 and April 2006, authorised the Revenue to artificially segregate part of the composite consideration and tax it as “commissioning or installation”.
The Supreme Court emphasised a fundamental principle of fiscal jurisprudence: tax liability must flow from the charging statute itself.
The Court observed that a taxing statute cannot impose liability merely on the basis of equity, implication or an expansive interpretation of the charging provision. The existence and extent of a tax must be ascertainable from the language used by the legislature.
The Court further distinguished between a charging provision and a machinery or valuation provision. While valuation provisions facilitate computation of a tax that has already been validly imposed, they cannot create or enlarge the underlying charge.
At the relevant time, service tax was imposed under Section 66 of the Finance Act, 1994 on taxable services enumerated under Section 65(105).
“Commissioning or installation” was one of the taxable categories. Section 67 dealt with determination of the value of taxable services.
However, the Supreme Court held that the statutory scheme did not contain any provision authorising the dissection or vivisection of an indivisible composite turnkey contract in order to extract and tax one constituent element.
Therefore, a valuation mechanism could not be used to create a taxable event that was not recognised by the charging provisions themselves.
On examining the nature of the contracts, the Supreme Court agreed with CESTAT that they were turnkey contracts directed towards a single commercial objective — delivery of fully functional ATMs at the designated bank sites.
The contractual obligations included procurement, supply, transportation, installation, testing and commissioning. According to the Court, these activities were integral components of the single contractual obligation.
Importantly, the consideration was composite and payable for the turnkey project as a whole. There was no separate bargain for installation or commissioning and no distinct consideration earmarked for those activities.
The Supreme Court rejected the Revenue’s approach of treating 33% of the gross consideration as the value of commissioning or installation.
The Court found no statutory foundation for this percentage. The Finance Act, 1994 did not prescribe a mechanism for isolating the service element of an indivisible turnkey contract by assigning a fixed percentage of the composite consideration.
The Court stressed that a fiscal liability cannot rest upon a notional or assumed apportionment unsupported by the charging enactment. The existence of a valid charging provision must precede valuation; the valuation exercise itself cannot create the charge.
A significant part of the Supreme Court’s reasoning was based on its earlier decision in Commissioner, Central Excise and Customs, Kerala v. Larsen and Toubro Limited.
The Court noted that Larsen and Toubro had examined the scheme of the Finance Act, 1994 and held that the taxable entries existing before the introduction of the specific “works contract service” category contemplated service contracts simpliciter, rather than indivisible composite works contracts.
The Supreme Court observed that the introduction of a separate taxable entry for “works contract service” with effect from June 1, 2007, through the Finance Act, 2007, was accompanied by a specific valuation mechanism designed to determine the service component of composite works contracts.
According to the Court, this legislative development demonstrated that the earlier provisions did not themselves contain the necessary statutory charge and machinery to tax indivisible composite contracts.
The Court attached considerable importance to the fact that Parliament subsequently introduced Section 65(105)(zzzza) with effect from June 1, 2007, specifically dealing with “works contract service”.
The new provision was accompanied by a valuation mechanism and composition scheme for determining the service element embedded in composite works contracts.
The Supreme Court held that this was not merely a clarificatory exercise. Rather, it represented a substantive legislative intervention intended to bring a previously uncovered class of transactions within the service-tax net.
Consequently, the Revenue could not rely upon the later legislative framework to justify a demand for the earlier period when the statutory mechanism for such taxation did not exist.
The Supreme Court rejected the argument that because the assessee actually performed installation and commissioning, those activities automatically became taxable services.
The Court held that the analysis could not be based merely on identifying an activity that independently resembled a taxable service. Instead, the legal character of the entire transaction had to be examined.
Where installation and commissioning were integral and inseparable obligations under an indivisible turnkey contract, the Revenue could not isolate those activities and impose service tax without statutory authority permitting such fragmentation.
The Supreme Court concluded that CESTAT had correctly appreciated the nature of the contracts and had reached the correct result.
Although CESTAT’s order pre-dated the Supreme Court’s authoritative decision in Larsen and Toubro, the Supreme Court held that the Tribunal’s reasoning was fully consistent with the legal position subsequently declared by the Court.
The CESTAT had correctly found that the contracts were indivisible turnkey contracts, that installation and commissioning were integral incidents of those contracts, and that the composite consideration could not be artificially split for service-tax purposes.
The Supreme Court held that the decisive question was not whether Diebold had performed installation and commissioning, but whether those activities were provided as independent taxable services under separate contracts or were merely integral obligations forming part of indivisible turnkey contracts.
Since the contracts were composite and involved a single consolidated consideration, the Revenue lacked statutory authority to isolate one component and impose service tax on it during the relevant period.
The Court therefore held that the CESTAT committed no error in setting aside the service-tax demands. During July 2003 to April 2006, the Finance Act, 1994 did not authorise the Revenue to vivisect such indivisible turnkey contracts and tax the installation and commissioning component under Section 65(105)(zzd).
Accordingly, the Supreme Court dismissed Civil Appeal and declined to interfere with CESTAT’s order.
Membership Required to Access Case Details & Order Copy
To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.
