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

Civil Appeal · 2026 INSC 808Decided 6 Aug 2026
Civil Appeal Nos. 4708-4711 of 2008
Justice Prashant Kumar Mishra · Justice Shree Chandrashekhar

Background

Diebold Systems supplied, installed and commissioned ATMs for banks under turnkey contracts for a single composite price. The Revenue treated 33% of the total consideration received (for the period July 2003 to April 2006) as attributable to "installation and commissioning" and demanded service tax on that portion, issuing three show-cause notices totalling over Rs. 11 crore. The Tribunal (CESTAT) had ruled in the assessee's favour, holding the contracts were indivisible turnkey contracts that could not be artificially split for taxation, and the Revenue appealed to the Supreme Court.

Decision Breakdown

The Supreme Court upheld the Tribunal, holding that during the relevant period (before the "works contract service" entry was introduced on 1 June 2007), the Finance Act, 1994 contained neither a charging provision nor a valuation mechanism authorising the Revenue to carve out and tax a notional service component of an indivisible turnkey contract executed for one composite price. Relying on the Constitution Bench ruling in Gannon Dunkerley and the later decision in Larsen & Toubro, the Court held that a taxing statute must expressly authorise vivisection of a composite contract before any part of it can be isolated and taxed; the Revenue's attribution of "33%" to installation had no statutory basis. The introduction of a specific "works contract service" entry with its own valuation machinery in 2007 confirmed that no such power existed earlier.

Lesson Learnt

Tax cannot be levied by administrative guesswork or a notional percentage: a taxing authority can only tax what a specific charging provision actually authorises, and an indivisible composite contract cannot be split into taxable components unless the law expressly permits it.

Official source (sci.gov.in)View Judgment (PDF)

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