Supreme Court: Indivisible Turnkey Contracts Cannot Be Artificially Split to Levy Service Tax Without Statutory Authority
Case Name: Commissioner of Service Tax, Chennai v. M/s Diebold Systems (P) Ltd.
Date of Judgment: 06 August 2026
Citation: 2026 INSC 808
Bench: Justice Prashant Kumar Mishra and Justice Shree Chandrashekhar
Held: The Supreme Court held that an indivisible turnkey contract involving both supply of goods and rendition of services cannot be artificially split or “vivisected” to levy service tax on a notional service component unless the charging statute expressly authorises such segregation. A taxing liability must emanate from the charging provision itself; machinery or valuation provisions cannot create, enlarge or supply a charge that the legislature has not imposed.
The Court held that during the period July 2003 to April 2006, the Finance Act, 1994 contained no statutory authority permitting the Revenue to dissect an indivisible composite turnkey contract and separately tax its installation and commissioning component. Accordingly, the Revenue could not arbitrarily attribute 33% of the gross contractual consideration to “commissioning or installation” services under Section 65(105).
Summary: The respondent, M/s Diebold Systems (P) Ltd., was engaged in supplying Automated Teller Machines (ATMs) to various banks. Under contracts awarded by the banks, the company undertook the supply, installation and commissioning of ATMs at designated locations on a turnkey basis. The contracts did not merely contemplate the sale of ATMs but required delivery of fully functional machines after their installation and commissioning.
The Revenue sought to levy service tax on 33% of the gross consideration received under these contracts on the assumption that this portion represented consideration for installation and commissioning. Three show-cause notices covering different periods were issued, resulting in substantial demands of service tax, education cess, interest and, in certain proceedings, penalties. The first demand alone was approximately ₹3.37 crore; subsequent proceedings involved demands exceeding ₹4 crore and ₹2.96 crore respectively.
CESTAT set aside the demands. Examining the contractual arrangements, it found that they were indivisible turnkey contracts whose dominant commercial object was the supply of ATMs, with installation and commissioning being incidental obligations. There was one composite consideration for execution of the entire contractual obligation and no separate consideration was earmarked for installation or commissioning. CESTAT therefore held that, in the absence of statutory authority permitting such contracts to be split, the Revenue could not isolate the service component and subject it to service tax.
Affirming this approach, the Supreme Court stressed a fundamental principle of fiscal jurisprudence: there can be no tax by implication or expansive interpretation. The existence, extent and incidence of tax must be ascertainable from the language of the charging enactment. A valuation mechanism merely determines the measure of a tax that has already been validly imposed; it cannot itself create the taxable event.
The Court found that Diebold’s contracts had a single commercial objective—the delivery of fully functional ATMs at sites specified by the banks. Procurement, supply, transportation, installation, testing and commissioning were integral parts of that single obligation. Neither the contractual terms nor the conduct of the parties demonstrated that installation and commissioning had been separately contracted or independently remunerated.
The Court also explained the legal distinction between a service contract simpliciter and an indivisible composite contract. Where the dominant object is independently to provide a taxable service, service tax may apply even though some goods are incidentally consumed or supplied. Likewise, where legislation expressly provides for taxation of a composite contract and creates machinery for identifying the taxable service component, the levy may operate. But where goods, labour and services form part of a single indivisible transaction for consolidated consideration, the Revenue cannot artificially break the transaction into taxable components merely because one of its obligations resembles an independently taxable service.
The Court particularly rejected the Revenue’s attempt to assume that 33% of the contract value represented installation and commissioning services. There was no statutory basis for that percentage and no machinery under the then-existing Finance Act for isolating the service component in this manner. The Court held that no percentage, however scientifically determined, could itself confer jurisdiction upon the Revenue where the charging statute did not authorise the segregation in the first place.
Decision: The Supreme Court dismissed the Revenue’s appeals and affirmed CESTAT’s order dated 28 November 2007, holding that Diebold’s contracts for supply, installation and commissioning of ATMs were indivisible turnkey contracts executed for composite consideration. For the relevant period of July 2003 to April 2006, the Finance Act, 1994 did not authorise their vivisection to separately tax installation and commissioning under Section 65(105) Consequently, the Revenue’s attempt to impose service tax by notionally attributing 33% of the total contract value to installation and commissioning was legally unsustainable.