Supreme Court of India· 06 August 2026

What is the legal distinction between a contract for a taxable service simpliciter and an indivisible composite contract, for service tax purposes?

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

A contract whose dominant object is a taxable service attracts service tax even if some goods are incidentally supplied, but where the contract is one entire and indivisible transaction for a single consolidated consideration, the Revenue cannot split it into separate taxable components merely because one obligation answers the description of an existing taxable service.

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 29It 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 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.

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