Supreme Court: No Service Tax on Indivisible Turnkey ATM Contracts Prior to 1 June 2007

The Supreme Court has ruled that service tax cannot be levied on indivisible turnkey contracts for ATMs prior to 1 June 2007. The court found that the Finance Act at the time did not allow the tax authorities to artificially separate the installation and commissioning services from the overall contract. This decision upholds the principle that composite contracts are not subject to service tax unless specifically provided for, which only became possible with the introduction of 'Works Contract Service' in 2007.

The dispute arose when the Service Tax Department sought to levy service tax on 33% of the gross consideration received by M/s Diebold Systems Pvt. Ltd., treating that portion as consideration for installation and commissioning services. The assessee contended that the contracts were indivisible turnkey contracts executed for a single consolidated consideration, with installation and commissioning being merely incidental to the supply of ATMs.

Affirming the CESTAT's decision, the Supreme Court held that during the period July 2003 to April 2006, the Finance Act, 1994 contained neither a charging provision nor a valuation mechanism permitting the Revenue to artificially segregate the service component of an indivisible composite contract. A taxing statute must clearly authorize the levy, and tax cannot be imposed through administrative apportionment or by assigning a notional percentage of the contract value.

The Court relied on its landmark decision in Commissioner, Central Excise & Customs v. Larsen & Toubro Ltd., reiterating that composite works/turnkey contracts were not taxable under the pre-existing service tax entries before the introduction of "Works Contract Service" with effect from 1 June 2007.

Accordingly, the Supreme Court dismissed the Revenue's appeals and upheld the CESTAT's order setting aside the service tax demands.

Key Takeaway

For the period prior to 1 June 2007, the Revenue cannot vivisect an indivisible turnkey/composite contract and levy service tax on the installation or commissioning portion by attributing a notional percentage of the contract value. Such taxation became legally possible only after the introduction of the specific "Works Contract Service" provisions under the Finance Act, 2007.

This AI-generated summary is for informational purposes only. Please view attached original judgment for the complete text and authoritative interpretation.