Commr.Of Service Tax,Chennai vs M/S Diebold Systems(P) Ltd.

2026 INSC 808


REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOS. 4708-4711 OF 2008

COMMISSIONER OF SERVICE TAX,
CHENNAI … APPELLANT(S)
VERSUS

M/S DIEBOLD SYSTEMS (P) LTD. ... RESPONDENT(S)

J U D G M E N T

PRASHANT KUMAR MISHRA, J.

1. The present Appeals lay challenge against the final order dated
28.11.2007 passed by the Customs, Excise and Service Tax Appellate
1
Tribunal, South Zonal Bench, Chennai , 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.
Signature Not Verified

Digitally signed by
NISHA KHULBEY
Date: 2026.08.06
15:33:52 IST
Reason:

1
For short, ‘CESTAT’
Civil Appeal Nos. 4708-4711 of 2008 Page 1 of 22

FACTUAL MATRIX
2. The respondent-assessee is engaged in the business of supplying
Automated Teller Machines (ATMs) to various banks. Pursuant to contracts
awarded by different banks, the respondent-assessee undertook the supply,
installation and commissioning of ATMs at the sites identified by the
respective banks. The contracts were executed on a turnkey basis under
which the respondent-assessee was responsible not merely for supplying the
ATMs but also for their installation and commissioning.
3. The controversy in the present Appeals relates to the levy of service tax
on 33% of the gross consideration received by the respondent-assessee from
the banks for the period from July 2003 to April 2006. According to the
Revenue Department, the said component represented consideration
attributable to installation and commissioning activities and was, therefore,
liable to service tax under the taxable category of "commissioning or
installation" under the Finance Act, 1994. The respondent-assessee, on the
other hand, maintained that the contracts were indivisible turnkey contracts
involving both the supply of goods and incidental installation and
commissioning and that no part of the consideration could be segregated and
subjected to service tax under the aforesaid taxable entry.
4. Proceeding on the basis that 33% of the gross consideration received by
the respondent-assessee represented the value of installation and
commissioning services, the Directorate General of Central Excise
Intelligence, Chennai Zonal Unit, issued Show Cause Notice No. 6/2005 dated
14.02.2005 proposing recovery of service tax amounting to Rs. 3,37,39,404/-
Civil Appeal Nos. 4708-4711 of 2008 Page 2 of 22

for the period from July 2003 to July 2004 together with interest and
penalties. Upon adjudication, the Commissioner of Service Tax, Chennai, by
Order-in-Original No. 03/2005 dated 23.12.2005, confirmed the entire
demand of service tax along with the applicable interest but declined to
impose penalties. While the respondent-assessee challenged the confirmation
of the demand before the CESTAT, the Revenue preferred an appeal limited to
the question of non-imposition of penalties.
5. While the above appeals were pending before CESTAT, a second Show
Cause Notice No. 5/2005 dated 21.10.2005 was thereafter issued in respect
of the subsequent period from 01.08.2004 to 31.07.2005 proposing recovery
of service tax and education cess aggregating to Rs. 4,68,22,103/- together
with interest and penalties. By Order-in-Original No. 04/2005 dated
23.12.2005, the Commissioner of Service Tax, Chennai confirmed service tax
and education cess to the extent of Rs. 4,27,95,344/-, directed payment of
interest under Section 75 of the Finance Act, 1994 and imposed penalty under
Section 76 thereof. The respondent-assessee questioned the said adjudication
order by preferring an appeal before the CESTAT.

6. The Revenue subsequently issued a third Show Cause Notice No.
52/2006 to respondent-assessee dated 17.10.2006 covering the period from
01.08.2005 to 30.04.2006 proposing recovery of service tax and education
cess amounting to Rs. 2,96,02,757/- together with interest and penalties. By
Order-in-Original No. 04/2007 dated 23.02.2007, the Commissioner of
Service Tax, Chennai confirmed the proposed demand, together with the
applicable interest and penalties, whereupon the respondent-assessee
Civil Appeal Nos. 4708-4711 of 2008 Page 3 of 22

preferred a further appeal before the CESTAT challenging the said
adjudication order.
7. Since all the appeals arose out of a common controversy concerning the
leviability of service tax on the activities undertaken by the respondent-
assessee under the turnkey contracts for supply, installation and
commissioning of ATMs, the CESTAT heard them together and disposed of
them by the impugned final order dated 28.11.2007. Upon an examination of
the terms and conditions governing the contracts entered into between the
respondent-assessee and the various banks, the CESTAT held that the
contracts were in the nature of indivisible turnkey contracts in which the
dominant object was the supply of ATMs, while installation and
commissioning constituted obligations merely incidental to the execution of
the contracts. The CESTAT observed that the contracts envisaged a single,
composite consideration for the execution of the entire work and did not
contemplate a separate or independent consideration for installation and
commissioning so as to render those activities exigible to service tax in
isolation.

8. Referring to the statutory scheme governing the levy of service tax
during the relevant period and placing reliance upon the principle enunciated
in its earlier decision of Daelim Industrial Co. Ltd. vs. Commissioner of
2
Central Excise, Vadodara , the CESTAT took the view that, in the absence

2
2003 SCC OnLine CESTAT 418 (Upheld by the Supreme Court in Commnr. of Central
Excise, Vadodara vs. M/S Daelim Industrial Co. Ltd , SLP(C) No. 24294/2003 by order
dated 02.08.2004 )
Civil Appeal Nos. 4708-4711 of 2008 Page 4 of 22

of an express charging mechanism under the Finance Act, 1994 authorising
the vivisection of such indivisible contracts, no part of the composite
consideration could be artificially segregated and brought to tax under the
taxable category of "commissioning or installation". The CESTAT held that the
activities undertaken by the respondent-assessee in executing the turnkey
contracts were inextricably connected with, and incidental to, the supply of
the ATMs and, therefore, could not be treated as constituting an independent
taxable service.
9. On the aforesaid reasoning, the CESTAT set aside 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, allowed the appeals preferred by the respondent-assessee and, as a
necessary consequence, dismissed the Revenue's appeal questioning the
Commissioner's decision not to impose penalties.
10. It is the correctness of the aforesaid view taken by the CESTAT that falls
for consideration in the present Appeals.
SUBMISSIONS OF PARTIES
11. Learned counsel for the appellant-Revenue argues that CESTAT has
committed a manifest error in holding that respondent-assessee was not liable
to service tax under the taxable category of "commissioning or installation"
under Section 65(105)(zzd) of the Finance Act, 1994. According to the learned
counsel, the contracts entered into between the respondent-assessee and
Civil Appeal Nos. 4708-4711 of 2008 Page 5 of 22

various banks unmistakably involved the rendering of installation and
commissioning services in addition to the supply of ATMs. The mere
circumstance that the contracts were executed on a turnkey basis or that a
composite consideration was stipulated thereunder could not efface the
independent taxable character of the installation and commissioning
activities undertaken by the respondent.
12. Learned counsel for the appellant-Revenue contended that the Finance
Act, 1994 envisaged taxation of specified services irrespective of the form in
which the contract was structured. The installation and commissioning
activities undertaken by the respondent-assessee squarely fell within the
statutory definition of "commissioning or installation" and were, therefore,
independently exigible to service tax. It was urged that the appellant-Revenue
had rightly subjected only 33% of the gross contractual consideration to
service tax, representing the value attributable to the installation and
commissioning component.
13. Lastly, learned counsel further submitted that the CESTAT erred in
placing reliance upon the decision in Daelim Industrial Co. Ltd. (supra) and
in applying the ratio thereof to the facts of the present case. According to the
learned counsel for the appellant, the said decision was distinguishable on
facts and did not lay down an absolute proposition that every turnkey contract
was immune from service tax.
Civil Appeal Nos. 4708-4711 of 2008 Page 6 of 22

14. Per contra , learned counsel for respondent-assessee supported the
impugned order of CESTAT, arguing that that the contracts entered into with
the various banks were indivisible turnkey contracts for the supply,
installation and commissioning of ATMs, executed for a single consolidated
consideration. The installation and commissioning activities were merely
incidental to, and inseparable from, the principal obligation of supplying fully
functional ATMs and did not constitute an independent taxable service.
15. Learned counsel for respondent-assessee further submitted that during
the relevant period from July 2003 to April 2006, the Finance Act, 1994 did
not contain any charging provision authorising the vivisection of an indivisible
composite contract so as to isolate and tax the service element embedded
therein. Therefore, according to learned counsel, the Revenue's attempt to levy
service tax on an assumed 33% of the composite consideration was, therefore,
wholly without statutory authority.
16. Learned counsel for the respondent-assessee also pointed out that it
had discharged sales tax/Value Added Tax on the entire value of the contracts
and that no separate consideration had ever been stipulated or received
towards installation and commissioning.
17. Lastly, learned counsel for respondent-assessee submits that CESTAT
correctly relied upon principles laid down in Daelim Industrial Co. Ltd.
(supra) and had rightly concluded that, in the absence of any statutory
provision authorising the artificial splitting of composite contracts, no service
Civil Appeal Nos. 4708-4711 of 2008 Page 7 of 22

tax could be levied under the taxable category of "commissioning or
installation" under Section 65(105)(zzd) of the Finance Act, 1994.
ANALYSIS
18. In the backdrop of the aforesaid facts and the rival contentions urged
on behalf of the parties, the following questions arise for the consideration of
this Court:
a) Whether the turnkey contracts entered into by the respondent-
assessee with various banks for the supply, installation and
commissioning of ATMs constitute indivisible composite contracts
which, during the relevant period, were incapable of being vivisected
for the purpose of levying service tax under the taxable category of
"commissioning or installation" under the provisions of the Finance
Act, 1994?
b) Whether the CESTAT was justified in holding that no part of the
composite consideration received by the respondent-assessee under
the aforesaid turnkey contracts could be subjected to service tax as
consideration for "commissioning or installation"?
19. The controversy arising in the present Appeals lies within a narrow
compass. The question is not whether the respondent-assessee undertook the
installation and commissioning of ATMs pursuant to the contracts entered
into with various banks. That factual position is undisputed. The controversy,
rather, concerns the true nature of the contracts entered into by the
respondent-assessee and whether, having regard to the provisions of the
Finance Act, 1994 as they stood during the relevant period from July 2003 to
Civil Appeal Nos. 4708-4711 of 2008 Page 8 of 22

April 2006, the Revenue was legally justified in artificially segregating a part
of the composite consideration received under such contracts and subjecting
the same to service tax under the taxable category of "commissioning or
installation".
20. The answer to the aforesaid question, in our considered view, must
necessarily be found in the statutory framework governing the levy of service
tax during the relevant period. It is a settled principle of fiscal jurisprudence
that the liability to tax must flow from the charging statute itself. A taxing
statute admits of neither intendment nor equity. The existence, extent and
incidence of a tax must be discernible from the language employed by the
legislature, and no tax can be imposed by implication or by an expansive
construction of the charging provision. Equally well settled is the principle
that machinery or valuation provisions facilitate the computation of a tax
validly imposed and they do not create or enlarge the charge itself. The
charging provision and the machinery provisions must therefore be construed
harmoniously, but the latter cannot be employed to supply what the former
3
does not enact. [See: Shiv Steels vs. State of Assam and Others ]

21. At the relevant time, service tax was levied under Section 66 of the
Finance Act, 1994 on the value of taxable services referred to in Section
65(105) of the Act. The expression "taxable service" was exhaustively defined
by the legislature by enumerating distinct taxable entries under Section
65(105) of the Act. One such entry was "commissioning or installation", which

3
2025 SCC OnLine SC 2006 at Para 14
Civil Appeal Nos. 4708-4711 of 2008 Page 9 of 22

contemplated the rendition of a taxable service of “commissioning or
installation” as defined under the Finance Act, 1994. Section 67 prescribed
the manner in which the value of such taxable service was to be determined.
A plain reading of the statutory scheme thus discloses that the levy under
Section 66 was attracted only where the activity in question answered the
description of a taxable service under Section 65(105), whereafter Section 67
operated only to determine the measure of tax.
22. The legislative distinction between the charging provision and the
machinery for valuation assumes particular significance in the context of
composite commercial transactions involving both the transfer of property in
goods and the rendition of services. While the Finance Act, 1994 undoubtedly
authorised the levy of service tax on specified taxable services, the statute,
during the period relevant to the present appeal, did not contain any express
provision authorising the dissection or vivisection of an indivisible composite
turnkey contract so as to extract and tax one of its constituent elements in
isolation. Unless the charging provisions themselves contemplated such an
exercise, the Revenue could not, by adopting a method of valuation or by
attributing a notional percentage of the total consideration to a particular
activity, create a taxable event which the statute itself had not recognised.
23. It is in the aforesaid statutory backdrop that the nature of the contracts
executed by the respondent-assessee assumes determinative significance.
The factual findings recorded by the CESTAT, upon an examination of the
contractual terms, reveal that the respondent-assessee was entrusted with
turnkey contracts for the supply, installation and commissioning of ATMs.
Civil Appeal Nos. 4708-4711 of 2008 Page 10 of 22

The contracts envisaged a single commercial objective, namely, the delivery of
fully functional ATMs at the designated sites of the banks. The obligations
undertaken by the respondent-assessee including procurement, supply,
transportation, installation, testing and commissioning were all integral
components of the execution of that singular contractual obligation. The
consideration stipulated under the contracts was likewise composite in nature
and was payable for the execution of the turnkey project as a whole. There
was no separate bargain for installation or commissioning independent of the
supply of the ATMs, nor was there any distinct consideration earmarked for
such activities.
24. The Revenue nevertheless sought to subject 33% of the gross
consideration received by the respondent-assessee to service tax by treating
that portion as representing the value of "commissioning or installation". The
very premise underlying the Revenue's case is that the contracts, though
admittedly composite in character, were capable of being split into separate
components for the purpose of taxation. It is, therefore, this assumption of
statutory authority to vivisect an indivisible turnkey contract which falls for
our examination.
25. Before adverting to the rival submissions on the merits of the
controversy, it would be apposite to notice the legal principles governing the
taxation of composite contracts under the constitutional and statutory
framework. The controversy in the present appeal cannot be resolved merely
by reference to the nomenclature of the taxable entry or the activities actually
undertaken by the respondent-assessee. Rather, the issue must be examined
Civil Appeal Nos. 4708-4711 of 2008 Page 11 of 22

in the light of the nature of the transaction sought to be taxed, the scope of
the charging provisions under the Finance Act, 1994 and the constitutional
limitations governing the taxation of composite contracts.
26. The jurisprudence relating to composite contracts traces its origin to
the decision of the Constitution Bench in State of Madras vs. Gannon
4
Dunkerley & Co. (Madras) Ltd. , wherein this Court held that a building or
works contract, in its classical form, is one entire and indivisible contract
comprising multiple obligations, including the supply of goods, labour and
services. Such a contract was held not to amount to a contract of sale in the
conventional legal sense, since there existed neither an agreement to sell the
materials as such nor a transfer of property in goods independent of the
execution of the works contract. Consequently, it was held that, under the
constitutional scheme then prevailing, the State Legislature lacked
competence to isolate the value of materials incorporated in the execution of
an indivisible works contract and subject the same to sales tax as though it
constituted a separate contract of sale. This principle formed the bedrock of
the law governing composite contracts and recognised the essential unity and
indivisibility of such transactions.
27. The constitutional position was subsequently altered by the
Constitution (Forty-sixth Amendment) Act, 1982, whereby Article 366(29A)
was inserted in the Constitution to enlarge the legislative competence of the
States in respect of specified composite transactions, including the transfer

4
1958 SCC OnLine SC 100
Civil Appeal Nos. 4708-4711 of 2008 Page 12 of 22

of property in goods involved in the execution of works contracts. By creating
a legal fiction, Article 366(29A)(b) enabled the value of goods involved in an
indivisible works contract to be treated as a deemed sale and thereby brought
within the taxing power of the States. Significantly, however, the
constitutional amendment did not convert an indivisible works contract into
separate and independent contracts in law. It merely authorised the
segregation of the goods component for the limited purpose of imposing sales
tax or value added tax, leaving the composite nature of the contract otherwise
remained intact.
28. The above constitutional position assumes considerable significance
while construing the provisions of the Finance Act, 1994. Unlike the
constitutional amendment empowering the States to tax the deemed sale
element in a composite works contract, the Finance Act, 1994, during the
period relevant to the present appeal, contained no corresponding provision
authorising the Revenue to segregate and tax the service element of an
indivisible composite contract under the existing taxable entries. The charging
provision under Section 66 of the Finance Act, 1994 merely levied service tax
on the taxable services enumerated under Section 65(105). Equally, Section
67 prescribed only the mode for determining the value of a taxable service
once the charge itself was attracted. Neither provision, either expressly or by
necessary implication, authorised the vivisection of an indivisible turnkey
contract for the purpose of identifying and taxing one of its constituent
elements in isolation.
Civil Appeal Nos. 4708-4711 of 2008 Page 13 of 22

29. It is in this context that the distinction between a contract for the
rendition of a taxable service simpliciter and an indivisible composite contract
assumes decisive importance. A contract whose dominant object is the
provision of a taxable service may undoubtedly attract service tax even though
certain goods or materials are consumed or incidentally supplied in the course
of its performance. Equally, where the statute specifically provides for the
taxation of composite contracts and prescribes an appropriate machinery for
determining the service component, the levy may validly operate upon such
transactions. However, where the contract is one entire and indivisible,
embodying obligations relating to the transfer of property in goods together
with labour and services for a single consolidated consideration, the Revenue
cannot, in the absence of statutory authority, artificially split the transaction
into separate taxable components merely because one part of the contractual
obligations answers the description of an existing taxable service.
30. The aforesaid principle has now received authoritative recognition in
Commissioner, Central Excise and Customs, Kerala vs. Larsen and
5
Toubro Limited , wherein a Division Bench of this Court after undertaking
an exhaustive examination of the constitutional history, the scheme of the
Finance Act, 1994 and the evolution of service tax legislation, held that the
taxable entries existing prior to the introduction of "works contract service"
with effect from 01.06.2007 (via Finance Act, 2007) contemplated only service
contracts simpliciter and not indivisible composite works contracts. It was
categorically held that the Finance Act, 1994, as it stood prior to the

5
(2016) 1 SCC 170
Civil Appeal Nos. 4708-4711 of 2008 Page 14 of 22

introduction of the specific taxable entry (in form of Section 65(105)(zzzza))
relating to works contracts, contained neither the charging provision nor the
machinery necessary to levy and assess service tax on indivisible composite
works contracts. Consequently, this Court held that such contracts could not
be vivisected and subjected to service tax under pre-existing taxable
categories merely because they incidentally involved the rendition of one or
6
more services.
31. Of equal significance is the reasoning adopted by this Court in Larsen
and Toubro Limited (supra) that the subsequent introduction of a distinct
taxable entry relating to "works contract service" with effect from 01.06.2007
(via Finance Act, 2007) constitutes a clear legislative recognition that the
existing taxable entries were insufficient to encompass indivisible composite
works contracts. The introduction of a specific charging provision (in form of
Section 65(105)(zzzza)), accompanied by a detailed valuation mechanism for
determining the service element of such contracts, was not merely
clarificatory in nature but represented a substantive legislative measure to
bring within the service tax net a class of transactions which had hitherto
remained outside the scope of the charging provisions. This legislative
development reinforces the conclusion that, during the period with which the
present appeal is concerned, no authority existed in law to vivisect an
indivisible turnkey contract and levy service tax upon a notional portion
thereof.

6
Ibid at Para 42.
Civil Appeal Nos. 4708-4711 of 2008 Page 15 of 22

32. Applying the aforesaid principles to the facts of the present case, we
find ourselves in agreement with the ultimate conclusion reached by the
CESTAT. The contracts entered into by the respondent-assessee with various
banks were, in substance and in form, turnkey contracts for the supply,
installation and commissioning of ATMs. The contractual obligations
undertaken by the respondent-assessee were not divisible into independent
promises giving rise to separate and distinct commercial transactions. The
installation and commissioning of the ATMs did not constitute an end in
themselves but were integral incidents of the respondent's overarching
obligation to supply fully functional ATMs at the designated sites of the
respective banks. The consideration stipulated under the contracts was
likewise composite and payable for the execution of the turnkey project as a
whole. Neither the contractual terms nor the manner in which the parties
conducted themselves indicates that the installation and commissioning
activities were separately contracted for or separately remunerated.
33. The Revenue, however, seeks to sustain the levy by contending that
notwithstanding the composite character of the contracts, the respondent-
assessee rendered a taxable service of "commissioning or installation" within
the meaning of Section 65(105)(zzd) of the Finance Act, 1994 and that 33% of
the gross consideration received under the contracts represented the value
attributable to such service. We are unable to accept the said submission.
The argument advanced on behalf of the Revenue, if accepted, necessarily
presupposes that the Finance Act, 1994 authorised the Revenue to first split
an indivisible turnkey contract into its constituent elements, identify a
Civil Appeal Nos. 4708-4711 of 2008 Page 16 of 22

notional service component therefrom and thereafter levy service tax upon
such component under the existing taxable entry. As noticed hereinabove,
neither the charging provisions contained in Sections 65 and 66 nor the
valuation provisions contained in Section 67 of the Finance Act, 1994
conferred any such authority during the relevant period. The assumption that
an indivisible contract could first be vivisected and only thereafter subjected
to service tax begs the very question which the statute required to be
answered. In the absence of an express legislative mandate permitting such
segregation under the Finance Act, 1994, the Revenue could not, by a process
of administrative attribution or notional apportionment, create a taxable event
where none existed under the charging provisions of the Act during the
relevant period.
34. We also find no statutory foundation for the Revenue's attribution of
33% of the gross contractual consideration as representing the value of
"commissioning or installation". The determination of such percentage does
not emerge from the charging provisions of the Finance Act, 1994. Nor does
the statute, as it stood during the relevant period, prescribe any machinery
for isolating the service element of an indivisible turnkey contract by
allocating a fixed percentage of the composite consideration thereto. The
absence of a legislatively sanctioned mechanism for such segregation
assumes particular significance in the field of taxation, where both the charge
and the measure of tax must have clear statutory authority. A fiscal liability
as held in Shiv Steels (supra) cannot rest upon a notional or assumed
apportionment unsupported by the charging enactment. Unless the Finance
Civil Appeal Nos. 4708-4711 of 2008 Page 17 of 22

Act, 1994 authorised the segregation of the service element embedded in an
indivisible composite contract, no percentage, however scientifically
determined, could confer jurisdiction upon the Revenue to levy service tax.
The existence of a valid charging provision must precede the determination of
value and it cannot be derived from the valuation exercise itself. In this regard,
the observations of this Court in Larsen and Toubro Limited that
(supra)
the Finance Act, 1994, prior to 01.06.2007, contained neither the charge nor
the machinery to levy and assess service tax on indivisible composite works
contracts apply with full force to the controversy before us.
35. Equally unpersuasive is the contention that because the respondent-
assessee in fact undertook installation and commissioning activities, the
contracts must necessarily fall within the taxable category of "commissioning
or installation" under Section 65(105)(zzd) of Finance Act, 1994. Such an
approach isolates one facet of a composite commercial transaction while
disregarding the legal character of the transaction as a whole. As this Court
has explained in Larsen and Toubro Limited (supra) , the taxable entries
existing prior to 01.06.2007 contemplated service contracts simpliciter and
not indivisible composite contracts embodying elements of both transfer of
property in goods and rendition of services. The mere circumstance that one
of the obligations undertaken under a composite contract answers the
description of an existing taxable service cannot, in the absence of statutory
authority, justify the fragmentation of the contract and the taxation of that
obligation in isolation.
Civil Appeal Nos. 4708-4711 of 2008 Page 18 of 22

36. The legislative developments subsequent to the period in question
furnish further support to the above conclusion. Parliament, by introducing
a distinct taxable entry (in form of Section 65(105)(zzzza)) relating to "works
contract service" with effect from 01.06.2007 (via Finance Act, 2007),
simultaneously enacted an appropriate valuation mechanism and
composition scheme specifically designed to ascertain and tax only the service
element embedded in composite works contracts. As explained in Larsen and
Toubro Limited (supra) , this legislative intervention was not an idle exercise,
rather it reflected a conscious recognition that the existing taxable entries
(under the Finance Act, 1994) did not themselves provide either the charge or
the machinery necessary for taxing indivisible composite contracts. Had the
Revenue's interpretation been correct, the introduction of a separate taxable
category together with an elaborate statutory machinery for valuation would
have been largely otiose.
37. We are, therefore, of the considered view that the contracts executed by
the respondent-assessee cannot be artificially disintegrated so as to subject a
notional portion of the composite consideration to service tax under the
taxable category of "commissioning or installation". During the period from
July 2003 to April 2006, the Finance Act, 1994 did not authorise the
vivisection of such indivisible turnkey contracts, nor did it provide the
machinery necessary for identifying and assessing the service element
embedded therein. Such authorisation came to be only introduced on
01.06.2007 (via Finance Act, 2007) in form of Section 65(105)(zzzza).
Therefore, we are of the view that the demand raised by the Revenue proceeds
Civil Appeal Nos. 4708-4711 of 2008 Page 19 of 22

on a legal premise which is inconsistent with the statutory framework as
subsequently explained and authoritatively settled by this Court in Larsen
and Toubro Limited (supra).
38. The conclusion reached by us also finds reflection in the reasoning
adopted by the CESTAT in the impugned order. The CESTAT correctly
appreciated that the contracts executed by the respondent-assessee were
indivisible turnkey contracts providing for a composite consideration and that
the installation and commissioning obligations were merely integral incidents
of the execution of the contracts as a whole. In arriving at the said conclusion,
CESTAT drew support from the principle enunciated by it in Daelim
Industrial Co. Ltd. (supra) namely, that in the absence of statutory authority
an indivisible turnkey contract could not be artificially vivisected for the
purpose of levying service tax under the taxable entries then in force.
Proceeding on that basis, CESTAT held that no part of the consideration
received under such composite contracts could be subjected to service tax
under the taxable category of "commissioning or installation". Though
rendered prior to the authoritative pronouncement of this Court in Larsen
and Toubro Limited (supra) , CESTAT’s approach is entirely consistent with
the legal position subsequently declared by this Court, namely, that the
Finance Act, 1994, prior to the introduction of "works contract service" with
effect from 01.06.2007, contemplated taxation only of service contracts
simpliciter and not indivisible composite works contracts. The impugned
order of CESTAT, therefore, warrants affirmation on this independent legal
basis.
Civil Appeal Nos. 4708-4711 of 2008 Page 20 of 22

39. The Revenue has consistently urged that since the respondent-assessee
admittedly undertook the installation and commissioning of ATMs, the
contracts necessarily fall within the taxable category of "commissioning or
installation". We are unable to accede to the said submission. The controversy
does not turn upon the mere existence of installation and commissioning
activities. Rather, the determinative question is whether such activities were
rendered as an independent taxable service under a separate service contract
or merely constituted integral and inseparable obligations undertaken in the
course of executing an indivisible turnkey contract. Once it is found, as we
have held, that the respondent's contracts were indivisible composite
contracts executed for a single consolidated consideration, the Revenue
cannot isolate one constituent obligation thereof and subject it to service tax
in the absence of a charging provision authorising such vivisection. This
conclusion is wholly consistent with the law declared by this Court in Larsen
and Toubro Limited (supra) , which held that the pre-01.06.2007 taxable
entries contemplated service contracts simpliciter and not indivisible
composite works contracts.

40. Tested on the touchstone of the aforesaid principles, we are satisfied
that the CESTAT committed no error in setting aside the demands confirmed
by the Commissioner of Service Tax, Chennai. The respondent-assessee
executed indivisible turnkey contracts involving the supply, installation and
commissioning of ATMs for a composite consideration. During the period from
July 2003 to April 2006, the Finance Act, 1994 did not authorise the
vivisection of such contracts so as to isolate and tax the installation and
Civil Appeal Nos. 4708-4711 of 2008 Page 21 of 22

commissioning component under the taxable category of "commissioning or
installation". In the absence of any statutory authority permitting the artificial
segregation of the installation and commissioning component from the
composite transaction, the Revenue was not entitled to levy service tax by
attributing a notional percentage of the total contractual consideration to the
taxable category of "commissioning or installation" under Section 65(105)(zzd)
of Finance Act, 1994. The conclusion reached by the CESTAT is thus in
consonance with the statutory scheme of the Finance Act, 1994 and the law
subsequently declared by this Court in Larsen and Toubro Limited (supra) .
CONCLUSION
41. In light of our aforesaid discussion and for the reasons above, the
impugned order dated 28.11.2007 passed by the CESTAT calls for no
interference. Consequently, the Appeals are dismissed .

………………………………………J.
(PRASHANT KUMAR MISHRA)



………………………………………J.
(SHREE CHANDRASHEKHAR)

NEW DELHI;
AUGUST 06, 2026.




Civil Appeal Nos. 4708-4711 of 2008 Page 22 of 22