Commissioner of Service Tax Vs Diebold Systems (P) Ltd. (Supreme Court of India)
Supreme Court: Indivisible Turnkey Contracts Cannot Be Vivisected to Levy Service Tax on Installation & Commissioning Prior to 1 June 2007
The Supreme Court dismissed the Revenue’s appeals and held that indivisible turnkey contracts for the supply, installation and commissioning of ATMs could not be artificially split to levy service tax on the installation and commissioning component during the period prior to 1 June 2007. The Court affirmed the CESTAT’s decision setting aside the service tax demands raised against Diebold Systems Pvt. Ltd.
The Revenue had sought to levy service tax on 33% of the gross contractual consideration, contending that it represented the value attributable to installation and commissioning services under the Finance Act, 1994. The assessee argued that the contracts with banks were single, indivisible turnkey contracts involving the supply of ATMs along with incidental installation and commissioning for one composite price, with no separate consideration earmarked for the service element.
The Court held that, prior to the introduction of “Works Contract Service” with effect from 1 June 2007, the Finance Act, 1994 contained neither a charging provision nor a valuation mechanism authorising the vivisection of composite contracts to isolate and tax the service component. A taxing statute must expressly authorise both the charge and the machinery for its computation, and the Revenue cannot create a taxable event by notionally allocating a percentage of a composite consideration.
Relying on Commissioner v. Larsen & Toubro Ltd., the Supreme Court reiterated that the pre-1 June 2007 taxable entries applied only to service contracts simpliciter and not to indivisible composite works contracts. The subsequent introduction of a separate taxable category for works contract services reinforced the legislative recognition that the earlier law did not permit taxation of the service element embedded in composite contracts.
Applying these principles, the Court found that the respondent’s obligations of procurement, supply, transportation, installation, testing and commissioning were integral parts of a single commercial objective, namely, delivering fully functional ATMs. Since there was no separate bargain or consideration for installation and commissioning, the Revenue was not entitled to levy service tax by attributing 33% of the contract value to those activities.
Accordingly, the Supreme Court upheld the CESTAT’s order, holding that the Finance Act, 1994 did not authorise the artificial segregation of installation and commissioning services from an indivisible turnkey contract prior to 1 June 2007, and dismissed the Revenue’s appeals.
Cases Discussed
- Shiv Steels vs. State of Assam and Others (SC),2025 SCC OnLine SC 2006
- Commissioner, Central Excise and Customs, Kerala vs. Larsen and Toubro Limited (SC),(2016) 1 SCC 170
- of Central Excise, Vadodara vs. M/S Daelim Industrial Co. Ltd. (SC),SLP(C) No. 24294/2003 by order dated 02.08.2004
- Daelim Industrial Co. Ltd. vs. Commissioner of Central Excise, Vadodara (CESTAT),2003 SCC OnLine CESTAT 418
- State of Madras vs. Gannon Dunkerley & Co. (Madras) Ltd. (SC),1958 SCC OnLine SC 100
FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER
1. The present Appeals lay challenge against the final order dated 28.11.2007 passed by the Customs, Excise and Service Tax Appellate Tribunal, South Zonal Bench, Chennai1, whereby the CESTAT, by common order, allowed the appeals preferred by the respondent-assessee, M/s Diebold Systems Pvt. Ltd., set aside the Orders-in-Original passed by the Commissioner of Service Tax, Chennai, and consequently dismissed the appeal preferred by the Revenue. The impugned order arose out of Order-in-Original Nos. 03/2005 and 04/2005, both dated 23.12.2005, and Order-in-Original No. 04/2007 dated 23.02.2007 passed by the Commissioner of Service Tax, Chennai.
