Supreme Court of India· 06 August 2026

What did the Constitution (Forty-sixth Amendment) Act, 1982 change about the taxation of composite works contracts?

COMMISSIONER OF SERVICE TAX, CHENNAI v. M/S DIEBOLD SYSTEMS (P) LTD

2026 INSC 808
Coram: Prashant Kumar Mishra; Shree Chandrashekhar

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Answer

Article 366(29A)(b) created a legal fiction letting States treat the goods component of an indivisible works contract as a deemed sale for sales tax/VAT purposes only; it did not convert the contract into separate contracts in law and had no counterpart authorising service tax on the service element under the Finance Act, 1994.

Headnote

Finance Act, 1994 — s.65(105)(zzd) — s.66 — s.67 — Commissioning or installation — Indivisible turnkey contracts — Vivisection of composite consideration — Finance Act, 1994 — Charging provision — Machinery cannot enlarge the charge — Held: A tax charge must flow from the charging provision itself, not machinery or valuation. Sections 66 and 67 of the Finance Act, 1994 could not together manufacture a taxable event the statute itself did not create. (¶20, 21) Finance Act, 1994 — s.65(105)(zzd) — Indivisible turnkey contracts — No power to vivisect pre-2007 — Held further: During the relevant period, the Finance Act, 1994 had no provision letting an indivisible turnkey contract be split so one activity could be taxed in isolation. That power arrived only with the "works contract service" entry inserted from 01.06.2007. (¶22, 28, 30) Finance Act, 1994 — s.65(105)(zzd) — ATM supply contracts — Composite consideration not separable — Held further: The respondent's turnkey contracts for supplying, installing and commissioning ATMs carried one composite consideration, with no separate bargain for installation or commissioning. Revenue's attribution of 33% of that consideration to "commissioning or installation" therefore had no statutory foundation. Appeals dismissed. (¶23, 32, 34, 41)

In the Court's own words

Paragraph 27The 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.

Paragraph 28The 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.

Acts & Sections

s.65(105)(zzd) Finance Act, 1994s.66 Finance Act, 1994s.67 Finance Act, 1994s.65(105)(zzzza) Finance Act, 1994Article 366(29A)(b) Constitution of India

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Also decided in this judgment

Under the Finance Act, 1994, could the Revenue tax a notional percentage of a composite contract's consideration as "commissioning or installation" without an express charging provision authorising the split?When did the Finance Act, 1994 first acquire a charging provision and machinery to tax the service element of an indivisible composite works contract?What is the legal distinction between a contract for a taxable service simpliciter and an indivisible composite contract, for service tax purposes?In Commissioner, Central Excise and Customs, Kerala v. Larsen and Toubro Limited, did the pre-01.06.2007 taxable entries under the Finance Act, 1994 cover indivisible composite works contracts?Why could the Revenue not sustain its levy merely because the respondent-assessee in fact undertook installation and commissioning activities under the turnkey contracts?

Plain-language answer prepared by the LexStreak Editorial Desk — verify against the judgment. Source: Supreme Court of India. Corrections