Authority: Supreme Court of India, Civil Appellate Jurisdiction

Order Date: 06 August 2026

Case Overview

  • Appeals Nos. 4708‑4711 of 2008 were filed by the Commissioner of Service Tax, Chennai (appellant) against M/s Diebold Systems (P) Ltd. (respondent).
  • The dispute concerned the levy of service tax on 33% of the gross consideration received by Diebold for supplying, installing and commissioning Automated Teller Machines (ATMs) to banks for the period July 2003 to April 2006.
  • The Revenue issued three Show‑Cause Notices: No. 6/2005 (14‑02‑2005) demanding Rs 3,37,39,404; No. 5/2005 (21‑10‑2005) demanding Rs 4,68,22,103; and No. 52/2006 (17‑10‑2006) demanding Rs 2,96,02,757, each with interest and penalties.
  • The Commissioner of Service Tax confirmed the demands through Order‑in‑Original Nos. 03/2005, 04/2005 (both dated 23‑12‑2005) and No. 04/2007 (dated 23‑02‑2007). The Revenue appealed only on the question of non‑imposition of penalties.
  • All appeals were consolidated before the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), South Zonal Bench, Chennai. CESTAT held that the contracts were indivisible turnkey contracts where installation and commissioning were merely incidental to the supply of ATMs and therefore not separately taxable under the “commissioning or installation” entry of Section 65(105)(zzd), Finance Act 1994.
  • CESTAT set aside the three orders‑in‑original, allowed Diebold’s appeals, and dismissed the Revenue’s appeal on penalties.
  • The Revenue contended that 33% of the consideration represented the value of installation and commissioning services and should be taxed. It relied on the statutory definition of “commissioning or installation” and argued that the Finance Act taxed such services irrespective of contract form.
  • Diebold argued that the contracts were composite, with a single consolidated consideration, and that the Finance Act 1994 did not contain a charging provision permitting the vivisection of such contracts for tax purposes.
  • The Supreme Court examined the statutory framework of the Finance Act 1994, the distinction between charging provisions (Section 66) and valuation provisions (Section 67), and the principle that tax liability must flow from the charging statute itself.
  • The Court referenced earlier jurisprudence: Daelim Industrial Co. Ltd. vs. Commissioner of Central Excise (2003), State of Madras vs. Gannon Dunkerley & Co. (1958), and the more recent Commissioner, Central Excise and Customs, Kerala vs. Larsen & Toubro Ltd. (2016), which clarified that before the introduction of the “works contract service” entry (effective 01‑06‑2007), the Finance Act 1994 did not authorize taxation of indivisible composite contracts.
  • The Court held that the Finance Act 1994, during the relevant period, lacked any express provision to vivisect a turnkey contract and tax the installation/commissioning component. Consequently, the Revenue could not levy service tax by attributing a notional 33% share.
  • The Court also rejected the Revenue’s reliance on a notional percentage, noting that neither the charging nor the valuation provisions provided a mechanism for such allocation.
  • The judgment affirmed that the CESTAT had correctly applied the legal principles and that no service tax liability or penalties were payable by Diebold.

Final Outcome

  • The Supreme Court dismissed the appeals, upheld the CESTAT order dated 28‑11‑2007, and confirmed that no service tax is payable on the installation and commissioning component of the ATM turnkey contracts for the period July 2003‑April 2006.

Topics: Service Tax, Turnkey Contracts, Tax Law