Supreme Court of India· 06 August 2026
When did the Finance Act, 1994 first acquire a charging provision and machinery to tax the service element of an indivisible composite works contract?
COMMISSIONER OF SERVICE TAX, CHENNAI v. M/S DIEBOLD SYSTEMS (P) LTD
2026 INSC 808
Coram: Prashant Kumar Mishra; Shree Chandrashekhar
Answer
Only with effect from 01.06.2007, when the Finance Act, 2007 inserted the "works contract service" entry under Section 65(105)(zzzza) together with its own valuation mechanism; before that date no such charge or machinery existed.
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 30The aforesaid principle has now received authoritative recognition in Commissioner, Central Excise and Customs, Kerala vs. Larsen and Toubro Limited[^5], wherein a Division Bench of this Court after undertaking an exhaustive examination of the constitutional history, the scheme of the Finance Act, 1994 and the evolution of service tax legislation, held that the taxable entries existing prior to the introduction of "works contract service" with effect from 01.06.2007 (via Finance Act, 2007) contemplated only service contracts simpliciter and not indivisible composite works contracts. It was categorically held that the Finance Act, 1994, as it stood prior to the introduction of the specific taxable entry (in form of Section 65(105)(zzzza)) relating to works contracts, contained neither the charging provision nor the machinery necessary to levy and assess service tax on indivisible composite works contracts. Consequently, this Court held that such contracts could not be vivisected and subjected to service tax under pre-existing taxable categories merely because they incidentally involved the rendition of one or more services.[^6]
Paragraph 31Of equal significance is the reasoning adopted by this Court in Larsen and Toubro Limited (supra) that the subsequent introduction of a distinct taxable entry relating to "works contract service" with effect from 01.06.2007 (via Finance Act, 2007) constitutes a clear legislative recognition that the existing taxable entries were insufficient to encompass indivisible composite works contracts. The introduction of a specific charging provision (in form of Section 65(105)(zzzza)), accompanied by a detailed valuation mechanism for determining the service element of such contracts, was not merely clarificatory in nature but represented a substantive legislative measure to bring within the service tax net a class of transactions which had hitherto remained outside the scope of the charging provisions. This legislative development reinforces the conclusion that, during the period with which the present appeal is concerned, no authority existed in law to vivisect an indivisible turnkey contract and levy service tax upon a notional portion thereof.
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 IndiaOne judgment a day. That's the whole habit.
Read the full text of COMMISSIONER OF SERVICE TAX, CHENNAI v. M/S DIEBOLD SYSTEMS (P) LTD — and get the Supreme Court's output as a five-minute daily read, with plain-language headnotes and the questions each judgment settles.
Create my free accountFree forever plan · 30 seconds · data stays in India
Open the full judgment →