Holding

Indivisible turnkey contracts with composite consideration cannot be vivisected to levy service tax on a notional "commissioning or installation" component under the Finance Act, 1994.

Summary

M/s Diebold Systems supplied ATMs to banks under turnkey contracts that included supply, installation and commissioning. The Revenue sought service tax on 33% of the contract value, treating that portion as consideration for "commissioning or installation" under s.65(105)(zzd) of the Finance Act, 1994. The CESTAT held the contracts were indivisible composite agreements with a single consolidated consideration and could not be vivisected to tax a notional service component. The Supreme Court examined the statutory scheme of the Finance Act, 1994 and held that, during the period July 2003‑April 2006, the Act did not empower the Revenue to split such contracts or levy tax on a portion of the consideration. It affirmed the CESTAT’s view that no part of the composite consideration was chargeable to service tax under the "commissioning or installation" entry. Consequently, the Court dismissed the appeals, upholding the CESTAT’s order.

Issues considered

Whether the turnkey contracts for supply, installation and commissioning of ATMs constitute indivisible composite contracts that could not be vivisected for service tax under the "commissioning or installation" category of the Finance Act, 1994.
Whether the CESTAT was justified in holding that no part of the composite consideration could be subjected to service tax as consideration for "commissioning or installation".

Legislation cited

Constitution (Forty‑sixth Amendment) Act, 1982
Constitution of India
Finance Act, 1994s. 65(105)(zzd), s. 66, s. 67
Finance Act, 2007s. 65(105)(zzzza)

Headnote

Issue for Consideration 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 purpose of levying service tax under the taxable category of “commissioning or installation” under the provisions of the Finance Act, 1994; whether the CESTAT was justified in holding that no part of the composite consideration received by the respondent- assessee under the aforesaid

Subjects

Installation and commissioning of ATMsIndivisible turnkey contractsComposite considerationService taxCommissioning or installationFinance Act 1994Works contract serviceFiscal jurisprudenceCharging provisionMachinery provisionsConstitutional amendment 46th

Judgment

[2026] 8 S.C.R. 453 : 2026 INSC 808

Commissioner of Service Tax, Chennai
v.
M/s Diebold Systems (P) Ltd.
(Civil Appeal No(s). 4708-4711 of 2008)
06 August 2026
[Prashant Kumar Mishra* and
Shree Chandrashekhar, JJ.]

Issue for Consideration
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; 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”.

Headnotes†
Finance Act, 1994 – s.65(105)(zzd) – “commissioning or
installation” – 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 Finance Act, 1994:
Held: CESTAT committed no error in setting aside the demands
confirmed by the Commissioner of Service Tax – 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
commissioning component under the taxable category of
“commissioning or installation” – In the absence of any statutory
* Author
454 [2026] 8 S.C.R.

Supreme Court Reports

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” u/s.65(105)
(zzd) of Finance Act, 1994 – Thus, the conclusion reached by
the CESTAT is in consonance with the statutory scheme of the
Finance Act, 1994 and the law subsequently declared by this
Court in Larsen and Toubro Limited – Impugned order passed
by the CESTAT calls for no interference. [Paras 40, 41]

Finance Act, 1994 – s.65 (105)(zzzza)) – “works contract
service”:
Held: Parliament, by introducing a distinct taxable entry (in form
of s.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 –
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. [Para 36]
Taxation of Composite Contracts – Constitutional and
statutory framework, discussed – Constitution (Forty-sixth
Amendment) Act, 1982 – Contract for the rendition of a
taxable service simpliciter vis-à-vis an indivisible composite
contract – Distinction between, stated. [Paras 25-31]

Finance Act, 1994 – s.65(105), 66, 67 – Statutory scheme –
Levy u/s.66 was attracted only where the activity in question
answered the description of a taxable service u/s.65(105),
whereafter s.67 operated only to determine the measure of tax:
Held: At the relevant time, service tax was levied u/s.66 on the
value of taxable services referred to in s.65(105) – The expression
“taxable service” was exhaustively defined by the legislature
[2026] 8 S.C.R. 455

Commissioner of Service Tax, Chennai v. M/s Diebold Systems (P) Ltd.

by enumerating distinct taxable entries u/s.65(105) of the Act –
One such entry was “commissioning or installation”, which
contemplated the rendition of a taxable service of “commissioning
or installation” as defined under the Finance Act, 1994 – s.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 u/s.66 was attracted only where the
activity in question answered the description of a taxable service
u/s.65(105), whereafter s.67 operated only to determine the
measure of tax – 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. [Paras 21, 22]

Tax/Taxation – Fiscal Jurisprudence – Liability to tax must
flow from the charging statute itself – Charging provision and
the machinery provisions must be construed harmoniously
however, the latter cannot be employed to supply what the
former does not enact:
Held: 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 – 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 does
not enact. [Para 20]
456 [2026] 8 S.C.R.

Supreme Court Reports

Case Law Cited
Shiv Steels v. State of Assam and Others [2025] 9 SCR 1069 :
2025 SCC OnLine SC 2006; Commissioner, Central Excise and
Customs, Kerala v. Larsen and Toubro Limited [2015] 8 SCR
1046 : (2016) 1 SCC 170 – relied on.
State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. [1959]
1 SCR 379 : 1958 SCC OnLine SC 100 – referred to.
Daelim Industrial Co. Ltd. v. Commissioner of Central Excise,
Vadodara, 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) – referred to.

List of Acts
Finance Act, 1994; Constitution (Forty-sixth Amendment) Act,
1982; Constitution of India; Finance Act, 2007.

List of Keywords
Installation and commissioning of ATMs; Indivisible turnkey
contracts; Composite consideration; Installation and commissioning
obligations; Section 65(105)(zzd) of Finance Act, 1994;
“commissioning or installation”; Indivisible composite contracts;
Single consolidated consideration; One constituent obligation
cannot be isolated; Levy of service tax; Absence of charging
provision authorising vivisection; Artificial segregation of installation
and commissioning component; Composite transaction; Contract
for rendition of a taxable service simpliciter; An indivisible
composite contract; Fiscal jurisprudence; Taxing statute; Charging
provision; Machinery provisions; Section 66 of the Finance Act,
1994; “taxable service”; Composite Contracts; Section 65(105)
(zzzza); “works contract service”.

Case Arising From
CIVIL APPELLATE JURISDICTION: Civil Appeal No(s).
4708-4711 of 2008
From the Judgment and Order dated 28.11.2007 of the Customs,
Excise and Service Tax Appellate Tribunal, South Zonal Bench,
Chennai in AN Nos. 126, 130, 149 of 2006 and AN Nos. 74 of
2007 and FO Nos. 6, 7, 8, and 9 of 2008
[2026] 8 S.C.R. 457

Commissioner of Service Tax, Chennai v. M/s Diebold Systems (P) Ltd.

Appearances for Parties
Adv. for the Appellant(s):
Gurmeet Singh Makker.
Advs. for the Respondent(s):
Ms. Charanya Lakshmikumaran, Ms. Nitum Jain, Ms. Neha
Choudhary, Ms. Medha Sinha, Swastik Mishra, Yashovardhan
Singh, Adithya Nair, L Badri Narayanan, M. P. Devanath,
Ms. Ananya Gupta.

Judgment / Order of the Supreme Court

Judgment

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
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.

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.

1 For short, ‘CESTAT’
458 [2026] 8 S.C.R.

Supreme Court Reports

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/- 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.
[2026] 8 S.C.R. 459

Commissioner of Service Tax, Chennai v. M/s Diebold Systems (P) Ltd.

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 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 Central Excise, Vadodara2, the CESTAT took
the view that, in the absence 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

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)
460 [2026] 8 S.C.R.

Supreme Court Reports

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 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
[2026] 8 S.C.R. 461

Commissioner of Service Tax, Chennai v. M/s Diebold Systems (P) Ltd.

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.
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 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
462 [2026] 8 S.C.R.

Supreme Court Reports

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 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 does not enact. [See: Shiv Steels vs. State
of Assam and Others3]

3 2025 SCC OnLine SC 2006 at Para 14
[2026] 8 S.C.R. 463

Commissioner of Service Tax, Chennai v. M/s Diebold Systems (P) Ltd.

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 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. 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
464 [2026] 8 S.C.R.

Supreme Court Reports

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 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 Dunkerley & Co. (Madras) Ltd.4, 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

4 1958 SCC OnLine SC 100
[2026] 8 S.C.R. 465

Commissioner of Service Tax, Chennai v. M/s Diebold Systems (P) Ltd.

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 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.
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
466 [2026] 8 S.C.R.

Supreme Court Reports

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 Toubro Limited5, 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
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 more services.6
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)),

5 (2016) 1 SCC 170
6 Ibid at Para 42.
[2026] 8 S.C.R. 467

Commissioner of Service Tax, Chennai v. M/s Diebold Systems (P) Ltd.

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.
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 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
468 [2026] 8 S.C.R.

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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 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
(supra) that 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
[2026] 8 S.C.R. 469

Commissioner of Service Tax, Chennai v. M/s Diebold Systems (P) Ltd.

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.
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 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).
470 [2026] 8 S.C.R.

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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.
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
[2026] 8 S.C.R. 471

Commissioner of Service Tax, Chennai v. M/s Diebold Systems (P) Ltd.

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 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.

Result of the case: Appeals dismissed.

†
Headnotes prepared by: Divya Pandey