No Charge, No Tax: Supreme Court Rejects Service Tax on 33% of Diebold's ATM Turnkey Contracts

Case at a glance: The Supreme Court has upheld a CESTAT ruling that Diebold's turnkey contracts for supply, installation and commissioning of ATMs were indivisible, and that the Revenue could not carve out 33% of the consideration and tax it as “commissioning or installation” service for July 2003 to April 2006, before works contract service became taxable.

Diebold supplied ATMs to banks under turnkey contracts covering supply, installation and commissioning, for a single consideration on which VAT was paid. The Revenue treated 33% of the gross consideration as consideration for commissioning or installation service and issued three show cause notices for July 2003 to April 2006, proposing Rs 3,37,39,404, Rs 4,68,22,103 and Rs 2,96,02,757 respectively. The adjudicating authorities confirmed the demands, with penalties in two of them.

On 28 November 2007 the CESTAT, Chennai allowed the assessee's appeals, holding the contracts indivisible with the supply of ATMs as the dominant object, and dismissed the Revenue's appeal on penalties.

The Key Question Before the Court

Before 1 June 2007, could the Revenue split an indivisible turnkey contract and levy service tax on an assumed share attributable to installation?

Charging Provision Before Valuation

The Court held that a tax must be clearly authorised by the charging provision and that valuation cannot create or enlarge the charge, citing Shiv Steels v. State of Assam. Section 66 taxed only services listed in Section 65(105), and Section 67 dealt only with value. “A taxing statute admits of neither intendment nor equity.”

Tracing Gannon Dunkerley, (1958) 04 SC CK 0008 and Article 366(29A)(b), the Court noted that the deemed-sale split was limited to sales tax. Following Commissioner v. Larsen and Toubro, (2015) 08 SC CK 0110, (2016) 1 SCC 170, pre-2007 entries covered service contracts simpliciter, not composite contracts, as confirmed by the later introduction of works contract service. The 33% attribution had no statutory basis; “no percentage, however scientifically determined, could confer jurisdiction upon the Revenue to levy service tax.”

What the Court Actually Held

• The turnkey contracts were indivisible composite contracts.
• The Revenue could not artificially split them to tax commissioning or installation before works contract service was introduced.
• The CESTAT order dated 28 November 2007 was upheld.
• The Revenue's appeals were dismissed.

Why This Judgment Matters

• It applies Larsen and Toubro to turnkey equipment supply contracts.
• It reinforces that valuation rules cannot supply a missing charge.
• It closes long-pending service tax disputes on pre-2007 composite contracts.

What Should Advocates Take Away From the Judgment?

For Assessees

• Show a single, indivisible consideration and the dominant supply object.
• Rely on Larsen and Toubro for periods before 1 June 2007.

For the Revenue

• Identify a clear charging entry before computing value.
• Avoid notional percentage splits without statutory basis.

Key Takeaways

Frequently Asked Questions

33% of the gross consideration under the ATM turnkey contracts, as commissioning or installation service.

There was no charging provision for composite contracts before works contract service was introduced, and valuation cannot create a charge.

No. It upheld the Tribunal's order and dismissed the appeals.

Conclusion

Read the full judgment on CourtKutchehry: View judgment →