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The Supreme Court has dismissed a batch of appeals filed by the Commissioner of Service Tax, Chennai, holding that indivisible turnkey contracts for the supply, installation, and commissioning of Automated Teller Machines (ATMs) could not be split to levy service tax on the installation component during the period prior to June 1, 2007. The Court upheld the Customs, Excise and Service Tax Appellate Tribunal's (CESTAT) decision in favour of M/s Diebold Systems (P) Ltd., finding that the Finance Act, 1994 did not permit such artificial segregation of composite contracts during the relevant period.
Background of the Case
The dispute arose from contracts awarded by several banks to M/s Diebold Systems (P) Ltd. for the supply, installation, and commissioning of ATMs. The company executed these assignments on a turnkey basis, meaning it was responsible for delivering fully functional ATMs at designated locations under a single contract and for a consolidated price.
The Service Tax Department took the view that 33% of the total contract value represented consideration for installation and commissioning services and sought to levy service tax on that portion for the period between July 2003 and April 2006. Three show cause notices were issued, resulting in substantial tax demands along with interest and penalties.
Diebold challenged these demands before the CESTAT, which held that the contracts were indivisible turnkey contracts and that no separate service tax could be imposed on the installation element alone. The Revenue then approached the Supreme Court.
Court's Observations
A Bench of Justice Prashant Kumar Mishra and Justice Shree Chandrashekhar examined whether the Finance Act, 1994 allowed the tax authorities to separate the service portion of a composite turnkey contract before the introduction of the specific "works contract service" category in 2007.
The Court observed that taxation must be supported by a clear charging provision and cannot be created through assumptions or administrative methods.
Explaining the legal position, the Bench observed,
"The liability to tax must flow from the charging statute itself. A taxing statute admits of neither intendment nor equity."
The judges noted that the contracts in question were designed to achieve a single commercial objective the delivery of fully operational ATMs. Every activity, including transportation, installation, testing, and commissioning, formed an integral part of one consolidated obligation. There was neither a separate contract nor an independent payment for installation services.
According to the Court, the Revenue's attempt to assign 33% of the contract value to installation work lacked statutory support because the Finance Act, 1994 did not contain any provision allowing authorities to dissect an indivisible composite contract for service tax purposes.
The Bench also relied on its earlier ruling in Commissioner, Central Excise and Customs, Kerala v. Larsen and Toubro Ltd., where it was held that prior to June 1, 2007, the law did not contain either the charging provision or the machinery necessary to tax indivisible composite works contracts.
The Court observed,
"The Revenue could not, by a process of administrative attribution or notional apportionment, create a taxable event where none existed under the charging provisions."
Decision
Affirming the CESTAT's reasoning, the Supreme Court held that the contracts executed by Diebold Systems were indivisible turnkey contracts involving a composite consideration and could not be artificially divided to levy service tax on the installation and commissioning component alone.
The Bench concluded that the Finance Act, 1994 did not authorise such segregation during the relevant period and that the Revenue's tax demands were therefore unsustainable.
Accordingly, the Court dismissed all the civil appeals filed by the Revenue and upheld the CESTAT's order in favour of the assessee.
Case Details
Case Title: Commissioner of Service Tax, Chennai v. M/s Diebold Systems (P) Ltd.
Case Number: Civil Appeal Nos. 4708–4711 of 2008
Judges: Justice Prashant Kumar Mishra and Justice Shree Chandrashekhar
Decision Date: August 6, 2026
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